y
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended quarterly period ended December 30, 20172023
ORor
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 001-36161
THE CONTAINER STORE GROUP, INC.
(Exact name of registrant as specified in its charter)
| | | |
Delaware | | | 26-0565401 |
(State or other jurisdiction of incorporation or organization) | | | ( |
| | | | ||
500 Freeport Parkway, Coppell, TX | | | 75019 | ||
( | | | (Zip | ||
Registrant’s telephone number, in the United States, including area code, is: (972) code: (972) 538-6000
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | TCS | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes ☑ No ☐
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ☑ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | |
Large accelerated filer | Accelerated filer | Non-accelerated filer | |
Smaller reporting company | Emerging growth company☐ |
| |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. þ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No þ☑
The registrant had 48,328,84051,611,770 shares of its common stock outstanding as of February 2, 2018.2024.
TABLE OF CONTENTS
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| Unaudited consolidated balance sheets as of December 30, 2023, April 1, 2023, and December 31, 2022 | 3 |
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Management’s discussion and analysis of financial condition and results of operations | 21 | |
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36 | ||
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37 | ||
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38 |
2
PART I. | FINANCIAL INFORMATION | |
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Item 1. | Financial | |
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The Container Store Group, Inc.
Consolidated balance sheets
| | | | | | | | | | |
| | December 30, | | April 1, | | December 31, | | |||
(In thousands) |
| 2023 |
| 2023 |
| 2022 |
| |||
Assets | | (unaudited) | | | | | (unaudited) | | ||
Current assets: | | | | | | | | | | |
Cash | | $ | 16,007 | | $ | 6,958 | | $ | 5,760 | |
Accounts receivable, net | |
| 27,489 | |
| 25,870 | |
| 30,790 | |
Inventory | |
| 163,090 | |
| 170,637 | |
| 190,307 | |
Prepaid expenses | |
| 15,515 | |
| 14,989 | |
| 15,596 | |
Income taxes receivable | | | 1,235 | | | 858 | | | 1,357 | |
Other current assets | |
| 10,343 | |
| 10,914 | |
| 9,941 | |
Total current assets | |
| 233,679 | |
| 230,226 | |
| 253,751 | |
Noncurrent assets: | | | | | | | | | | |
Property and equipment, net | |
| 159,879 | |
| 158,702 | |
| 152,282 | |
Noncurrent operating lease right-of-use assets | | | 340,883 | | | 347,959 | | | 357,607 | |
Goodwill | |
| — | |
| 23,447 | |
| 221,159 | |
Trade names | |
| 222,285 | |
| 221,278 | |
| 221,046 | |
Deferred financing costs, net | |
| 110 | |
| 150 | |
| 163 | |
Noncurrent deferred tax assets, net | |
| 352 | |
| 568 | |
| 690 | |
Other assets | |
| 3,589 | |
| 2,844 | |
| 2,323 | |
Total noncurrent assets | |
| 727,098 | |
| 754,948 | |
| 955,270 | |
Total assets | | $ | 960,777 | | $ | 985,174 | | $ | 1,209,021 | |
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|
| December 30, |
| April 1, |
| December 31, |
|
|
| 2017 |
| 2017 |
| 2016 |
|
(In thousands) |
| (unaudited) |
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| (unaudited) |
|
Assets |
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Current assets: |
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Cash |
| $22,653 |
| $10,736 |
| $18,491 |
|
Accounts receivable, net |
| 29,548 |
| 27,476 |
| 31,344 |
|
Inventory |
| 110,391 |
| 103,120 |
| 109,009 |
|
Prepaid expenses |
| 11,668 |
| 10,550 |
| 10,815 |
|
Income taxes receivable |
| 1,450 |
| 16 |
| - |
|
Other current assets |
| 10,338 |
| 10,787 |
| 12,319 |
|
Total current assets |
| 186,048 |
| 162,685 |
| 181,978 |
|
Noncurrent assets: |
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Property and equipment, net |
| 160,836 |
| 165,498 |
| 166,428 |
|
Goodwill |
| 202,815 |
| 202,815 |
| 202,815 |
|
Trade names |
| 230,379 |
| 226,685 |
| 226,050 |
|
Deferred financing costs, net |
| 329 |
| 320 |
| 343 |
|
Noncurrent deferred tax assets, net |
| 2,308 |
| 2,139 |
| 1,080 |
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Other assets |
| 1,684 |
| 1,692 |
| 1,420 |
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Total noncurrent assets |
| 598,351 |
| 599,149 |
| 598,136 |
|
Total assets |
| $784,399 |
| $761,834 |
| $780,114 |
|
See accompanying notes.
3
The Container Store Group, Inc.
Consolidated balance sheets (continued)
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|
| December 30, |
| April 1, |
| December 31, |
|
|
| 2017 |
| 2017 |
| 2016 |
|
(In thousands, except share and per share amounts) |
| (unaudited) |
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| (unaudited) |
|
Liabilities and shareholders’ equity |
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Current liabilities: |
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Accounts payable |
| $53,757 |
| $44,762 |
| $49,057 |
|
Accrued liabilities |
| 73,539 |
| 60,107 |
| 64,552 |
|
Current portion of long-term debt (see Note 3 for amounts due to related party) |
| 9,465 |
| 5,445 |
| 5,390 |
|
Income taxes payable |
| 1,690 |
| 2,738 |
| 4,156 |
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Total current liabilities |
| 138,451 |
| 113,052 |
| 123,155 |
|
Noncurrent liabilities: |
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Long-term debt (see Note 3 for amounts due to related party) |
| 304,638 |
| 312,026 |
| 332,900 |
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Noncurrent deferred tax liabilities, net |
| 56,706 |
| 80,679 |
| 79,672 |
|
Deferred rent and other long-term liabilities |
| 32,941 |
| 34,287 |
| 33,020 |
|
Total noncurrent liabilities |
| 394,285 |
| 426,992 |
| 445,592 |
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Total liabilities |
| 532,736 |
| 540,044 |
| 568,747 |
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Commitments and contingencies (Note 6) |
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Shareholders’ equity: |
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Common stock, $0.01 par value, 250,000,000 shares authorized; 48,072,187 shares issued at December 30, 2017; 48,045,114 shares issued at April 1, 2017; 48,003,359 shares issued at December 31, 2016 |
| 481 |
| 480 |
| 480 |
|
Additional paid-in capital |
| 860,827 |
| 859,102 |
| 858,460 |
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Accumulated other comprehensive loss |
| (14,323 | ) | (22,643 | ) | (24,047 | ) |
Retained deficit |
| (595,322 | ) | (615,149 | ) | (623,526 | ) |
Total shareholders’ equity |
| 251,663 |
| 221,790 |
| 211,367 |
|
Total liabilities and shareholders’ equity |
| $784,399 |
| $761,834 |
| $780,114 |
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|
| December 30, |
| April 1, |
| December 31, |
| |||
(In thousands, except share and per share amounts) |
| 2023 |
| 2023 |
| 2022 |
| |||
Liabilities and shareholders’ equity | | (unaudited) | | | | | (unaudited) | | ||
Current liabilities: | | | | | | | | | | |
Accounts payable | | $ | 49,325 | | $ | 52,637 | | $ | 57,704 | |
Accrued liabilities | |
| 72,587 | |
| 74,673 | |
| 75,338 | |
Current borrowings on revolving lines of credit | |
| 3,300 | |
| 2,423 | |
| 8,131 | |
Current portion of long-term debt | |
| 2,068 | |
| 2,063 | |
| 2,061 | |
Current operating lease liabilities | | | 62,525 | | | 57,201 | | | 58,309 | |
Income taxes payable | |
| 2,994 | |
| 1,318 | |
| 276 | |
Total current liabilities | |
| 192,799 | |
| 190,315 | |
| 201,819 | |
Noncurrent liabilities: | | | | | | | | | | |
Long-term debt | |
| 179,288 | |
| 163,385 | |
| 178,416 | |
Noncurrent operating lease liabilities | | | 315,327 | | | 314,100 | | | 322,243 | |
Noncurrent deferred tax liabilities, net | |
| 42,746 | |
| 49,338 | |
| 50,050 | |
Other long-term liabilities | |
| 5,731 | |
| 5,851 | |
| 6,983 | |
Total noncurrent liabilities | |
| 543,092 | |
| 532,674 | |
| 557,692 | |
Total liabilities | |
| 735,891 | |
| 722,989 | |
| 759,511 | |
Commitments and contingencies (Note 7) | | | | | | | | | | |
Shareholders’ equity: | | | | | | | | | | |
Common stock, $0.01 par value, 250,000,000 shares authorized; 49,591,111 shares issued at December 30, 2023; 49,181,562 shares issued at April 1, 2023; 49,164,862 shares issued at December 31, 2022 | |
| 496 | |
| 492 | |
| 492 | |
Additional paid-in capital | |
| 873,664 | |
| 872,204 | |
| 871,384 | |
Accumulated other comprehensive loss | |
| (29,351) | |
| (32,509) | |
| (33,614) | |
Retained deficit | |
| (619,923) | |
| (578,002) | |
| (388,752) | |
Total shareholders’ equity | |
| 224,886 | |
| 262,185 | |
| 449,510 | |
Total liabilities and shareholders’ equity | | $ | 960,777 | | $ | 985,174 | | $ | 1,209,021 | |
See accompanying notes.
4
The Container Store Group, Inc.
Consolidated statements of operations
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| | Thirteen Weeks Ended | | Thirty-Nine Weeks Ended | |
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| | December 30, | | December 31, | | December 30, | | December 31, | |
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(In thousands, except share and per share amounts) (unaudited) |
| 2023 |
| 2022 |
| 2023 |
| 2022 | | | ||||
Net sales | | $ | 214,899 | | $ | 252,236 | | $ | 641,742 | | $ | 787,542 | | |
Cost of sales (excluding depreciation and amortization) | |
| 89,682 | |
| 108,795 | |
| 275,308 | |
| 339,583 | | |
Gross profit | |
| 125,217 | |
| 143,441 | |
| 366,434 | |
| 447,959 | | |
Selling, general, and administrative expenses (excluding depreciation and amortization) | |
| 111,820 | |
| 121,540 | |
| 332,471 | |
| 362,104 | | |
Impairment charges | | | — | | | — | | | 23,447 | | | — | | |
Stock-based compensation | |
| 515 | |
| 825 | |
| 1,605 | |
| 2,562 | | |
Pre-opening costs | |
| 849 | |
| 430 | |
| 1,583 | |
| 1,049 | | |
Depreciation and amortization | |
| 11,532 | |
| 9,952 | |
| 32,427 | |
| 28,507 | | |
Other expenses | |
| 130 | |
| — | |
| 2,589 | |
| — | | |
Loss on disposal of assets | |
| — | |
| 10 | |
| 221 | |
| 91 | | |
Income (loss) from operations | |
| 371 | |
| 10,684 | |
| (27,909) | |
| 53,646 | | |
Interest expense, net | |
| 5,151 | |
| 4,389 | |
| 15,356 | |
| 11,395 | | |
(Loss) income before taxes | | | (4,780) | |
| 6,295 | | | (43,265) | |
| 42,251 | | |
Provision (benefit) for income taxes | |
| 1,651 | |
| 2,127 | |
| (1,344) | |
| 11,857 | | |
Net (loss) income | | $ | (6,431) | | $ | 4,168 | | $ | (41,921) | | $ | 30,394 | | |
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Net (loss) income per common share — basic | | $ | (0.13) | | $ | 0.08 | | $ | (0.85) | | $ | 0.61 | | |
Net (loss) income per common share — diluted | | $ | (0.13) | | $ | 0.08 | | $ | (0.85) | | $ | 0.61 | | |
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Weighted-average common shares — basic | | | 49,591,111 | | | 49,263,122 | | | 49,435,182 | | | 49,661,209 | | |
Weighted-average common shares — diluted | |
| 49,591,111 | |
| 49,452,980 | |
| 49,435,182 | |
| 50,024,589 | | |
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|
| Thirteen Weeks Ended |
| Thirty-Nine Weeks Ended |
| ||||
|
| December 30, |
| December 31, |
| December 30, |
| December 31, |
|
(In thousands, except share and per share amounts) (unaudited) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Net sales |
| $222,986 |
| $216,380 |
| $624,464 |
| $598,888 |
|
Cost of sales (excluding depreciation and amortization) |
| 92,425 |
| 90,678 |
| 263,919 |
| 250,136 |
|
Gross profit |
| 130,561 |
| 125,702 |
| 360,545 |
| 348,752 |
|
Selling, general, and administrative expenses (excluding depreciation and amortization) |
| 103,894 |
| 100,206 |
| 306,866 |
| 288,037 |
|
Stock-based compensation |
| 585 |
| 599 |
| 1,589 |
| 1,355 |
|
Pre-opening costs |
| 1,872 |
| 2,918 |
| 4,676 |
| 6,558 |
|
Depreciation and amortization |
| 9,477 |
| 9,236 |
| 28,524 |
| 28,061 |
|
Other expenses |
| 751 |
| 182 |
| 4,908 |
| 839 |
|
Loss on disposal of assets |
| 83 |
| - |
| 236 |
| 41 |
|
Income from operations |
| 13,899 |
| 12,561 |
| 13,746 |
| 23,861 |
|
Interest expense |
| 7,300 |
| 4,119 |
| 17,398 |
| 12,434 |
|
Loss on extinguishment of debt |
| - |
| - |
| 2,369 |
| - |
|
Income (loss) before taxes |
| 6,599 |
| 8,442 |
| (6,021 | ) | 11,427 |
|
(Benefit) provision for income taxes |
| (21,780 | ) | 3,350 |
| (25,848 | ) | 4,851 |
|
Net income |
| $28,379 |
| $5,092 |
| $19,827 |
| $6,576 |
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Net income per common share - basic and diluted |
| $0.59 |
| $0.11 |
| $0.41 |
| $0.14 |
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Weighted-average common shares - basic |
| 48,067,754 |
| 47,999,535 |
| 48,057,974 |
| 47,992,652 |
|
Weighted-average common shares - diluted |
| 48,167,882 |
| 48,022,499 |
| 48,128,682 |
| 48,002,495 |
|
See accompanying notes.
5
The Container Store Group, Inc.
Consolidated statements of comprehensive (loss) income (loss)
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| | | | | | | | | | | ||||
| | Thirteen Weeks Ended | | Thirty-Nine Weeks Ended | | | ||||||||
| | December 30, | | December 31, | | December 30, | | December 31, | | | ||||
(In thousands) (unaudited) |
| 2023 |
| 2022 |
| 2023 |
| 2022 |
|
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Net (loss) income | | $ | (6,431) | | $ | 4,168 | | $ | (41,921) | | $ | 30,394 | | |
Unrealized (loss) on financial instruments, net of tax provision (benefit) of $0, ($6), $0 and ($25) | |
| — | |
| (18) | |
| — | |
| (51) | | |
Pension liability adjustment | |
| (119) | |
| (140) | |
| (45) | |
| 252 | | |
Foreign currency translation adjustment | |
| 6,508 | |
| 4,995 | |
| 3,203 | |
| (6,371) | | |
Comprehensive (loss) income | | $ | (42) | | $ | 9,005 | | $ | (38,763) | | $ | 24,224 | | |
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|
| Thirteen Weeks Ended |
| Thirty-Nine Weeks Ended |
| ||||
|
| December 30, |
| December 31, |
| December 30, |
| December 31, |
|
(In thousands) (unaudited) |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Net income |
| $28,379 |
| $5,092 |
| $19,827 |
| $6,576 |
|
Unrealized (loss) gain on financial instruments, net of tax (benefit) provision of $(595), $(391), $951, and $(407) |
| (713 | ) | (610) |
| 1,687 |
| (636 | ) |
Pension liability adjustment |
| 5 |
| 71 |
| (175 | ) | 146 |
|
Foreign currency translation adjustment |
| 480 |
| (4,296) |
| 6,808 |
| (7,721 | ) |
Comprehensive income (loss) |
| $28,151 |
| $257 |
| $28,147 |
| $(1,635 | ) |
See accompanying notes.
6
The Container Store Group, Inc.s
Consolidated statements of cash flows
| | | | | | | | |
| | Thirty-Nine Weeks Ended | | | ||||
| | December 30, | | December 31, | | | ||
(In thousands) (unaudited) |
| 2023 |
| 2022 |
|
| ||
Operating activities | | | | | | | | |
Net (loss) income | | $ | (41,921) | | $ | 30,394 | | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 32,427 | |
| 28,507 | | |
Stock-based compensation | | | 1,605 | |
| 2,562 | | |
Impairment charges | | | 23,447 | |
| — | | |
Loss (gain) on disposal of assets | | | 221 | |
| 91 | | |
Deferred tax (benefit) expense | | | (6,619) | |
| (1,018) | | |
Non-cash interest | | | 1,413 | |
| 1,413 | | |
Other | | | 5 | |
| 855 | | |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (904) | |
| (2,955) | | |
Inventory | | | 8,585 | |
| 511 | | |
Prepaid expenses and other assets | | | (1,111) | |
| (3,303) | | |
Accounts payable and accrued liabilities | | | (4,622) | |
| (33,126) | | |
Net change in lease assets and liabilities | | | 13,641 | | | 607 | | |
Income taxes | | | 1,329 | |
| (5,539) | | |
Other noncurrent liabilities | | | (823) | |
| (143) | | |
Net cash provided by operating activities | | | 26,673 | | | 18,856 | | |
| | | | | | | | |
Investing activities | | | | | | | | |
Additions to property and equipment | | | (33,376) | |
| (46,558) | | |
Investments in non-qualified plan trust | | | (220) | | | (1,049) | | |
Proceeds from non-qualified plan trust redemptions | | | 642 | | | 811 | | |
Proceeds from sale of property and equipment | | | 1 | |
| 36 | | |
Net cash used in investing activities | | | (32,953) | |
| (46,760) | | |
| | | | | | | | |
Financing activities | | | | | | | | |
Borrowings on revolving lines of credit | | | 54,492 | |
| 64,790 | | |
Payments on revolving lines of credit | | | (53,733) | |
| (58,243) | | |
Borrowings on long-term debt | | | 31,000 | |
| 35,000 | | |
Payments on long-term debt | | | (16,550) | | | (16,572) | | |
Repurchases of common stock | | | — | | | (5,000) | | |
Payment of taxes with shares withheld upon restricted stock vesting | | | (144) | | | (712) | | |
Proceeds from the exercise of stock options | | | — | |
| 340 | | |
Net cash provided by financing activities | | | 15,065 | |
| 19,603 | | |
| | | | | | | | |
Effect of exchange rate changes on cash | | | 264 | |
| (191) | | |
| | | | | | | | |
Net increase (decrease) in cash | | | 9,049 | |
| (8,492) | | |
Cash at beginning of fiscal period | | | 6,958 | |
| 14,252 | | |
Cash at end of fiscal period | | $ | 16,007 | | $ | 5,760 | | |
| | | | | | | | |
Supplemental information: | | | | | | | | |
Purchases of property and equipment (included in accounts payable) | | $ | 2,416 | | $ | 4,873 | | |
Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 71,319 | | $ | 67,625 | | |
Additions to right-of-use assets in exchange for operating lease liabilities | | $ | 35,501 | | $ | 49,056 | | |
See accompanying notes.
7
The Container Store Group, Inc.
Consolidated statements of cash flowsshareholders’ equity
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Accumulated | | | | | |||||
| | | | | | | | | Additional | | other | | | | Total | |||||
(In thousands, except share amounts) | | Par | | Common stock | | paid-in | | comprehensive | | Retained | | shareholders’ | ||||||||
(unaudited) |
| value |
| Shares |
| Amount |
| capital |
| loss |
| deficit |
| equity | ||||||
Balance at April 1, 2023 | | $ | 0.01 |
| 49,181,562 | | $ | 492 | | $ | 872,204 | | $ | (32,509) | | $ | (578,002) | | $ | 262,185 |
Net loss | | | |
| — | |
| — |
|
| — | |
| — | |
| (11,837) |
|
| (11,837) |
Stock-based compensation | | | |
| — | |
| — |
|
| 474 | |
| — | |
| — |
|
| 474 |
Vesting of restricted stock awards | | | | | 209,320 | | | 2 | | | (2) | | | — | | | — | | | — |
Taxes related to net share settlement of restricted stock awards | | | | | — | | | — | | | (140) | | | — | | | — | | | (140) |
Foreign currency translation adjustment | | | |
| — | |
| — |
|
| — | |
| (1,663) | |
| — |
|
| (1,663) |
Pension liability adjustment | | | |
| — | |
| — |
|
| — | |
| 59 | |
| — |
|
| 59 |
Balance at July 1, 2023 | | $ | 0.01 |
| 49,390,882 | | $ | 494 |
| $ | 872,536 | | $ | (34,113) | | $ | (589,839) |
| $ | 249,078 |
Net loss | | | | | — | | | — | | | — | | | — | | | (23,653) | | | (23,653) |
Stock-based compensation | | | | | — | | | — | | | 615 | | | — | | | — | | | 615 |
Vesting of restricted stock awards | | | | | 200,229 | | | 2 | | | (2) | | | — | | | — | | | — |
Foreign currency translation adjustment | | | | | — | | | — | | | — | | | (1,642) | | | — | | | (1,642) |
Pension liability adjustment | | | | | — | | | — | | | — | | | 15 | | | — | | | 15 |
Balance at September 30, 2023 | | $ | 0.01 | | 49,591,111 | | $ | 496 | | $ | 873,149 | | $ | (35,740) | | $ | (613,492) | | $ | 224,413 |
Net loss | | | | | — | | | — | | | — | | | — | | | (6,431) | | | (6,431) |
Stock-based compensation | | | | | — | | | — | | | 515 | | | — | | | — | | | 515 |
Foreign currency translation adjustment | | | | | — | | | — | | | — | | | 6,508 | | | — | | | 6,508 |
Pension liability adjustment | | | | | — | | | — | | | — | | | (119) | | | — | | | (119) |
Balance at December 30, 2023 | | $ | 0.01 | | 49,591,111 | | $ | 496 | | $ | 873,664 | | $ | (29,351) | | $ | (619,923) | | $ | 224,886 |
|
|
|
|
|
|
|
| Thirty-Nine Weeks Ended |
| ||
|
| December 30, |
| December 31, |
|
(In thousands) (unaudited) |
| 2017 |
| 2016 |
|
Operating activities |
|
|
|
|
|
Net income |
| $19,827 |
| $6,576 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
Depreciation and amortization |
| 28,524 |
| 28,061 |
|
Stock-based compensation |
| 1,589 |
| 1,355 |
|
Loss on disposal of property and equipment |
| 236 |
| 41 |
|
Loss on extinguishment of debt |
| 2,369 |
| - |
|
Deferred tax benefit |
| (27,255 | ) | (1,044 | ) |
Noncash interest |
| 1,905 |
| 1,441 |
|
Other |
| 326 |
| (135 | ) |
Changes in operating assets and liabilities: |
|
|
|
|
|
Accounts receivable |
| (727 | ) | (9,843 | ) |
Inventory |
| (2,665 | ) | (25,686 | ) |
Prepaid expenses and other assets |
| 233 |
| 2,932 |
|
Accounts payable and accrued liabilities |
| 19,627 |
| 19,882 |
|
Income taxes |
| (2,461 | ) | 5,089 |
|
Other noncurrent liabilities |
| (2,136 | ) | (4,794 | ) |
Net cash provided by operating activities |
| 39,392 |
| 23,875 |
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
Additions to property and equipment |
| (20,101 | ) | (21,010 | ) |
Proceeds from sale of property and equipment |
| 19 |
| 7 |
|
Net cash used in investing activities |
| (20,082 | ) | (21,003 | ) |
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
Borrowings on revolving lines of credit |
| 47,054 |
| 43,135 |
|
Payments on revolving lines of credit |
| (47,054 | ) | (46,653 | ) |
Borrowings on long-term debt |
| 335,000 |
| 30,000 |
|
Payments on long-term debt |
| (331,885 | ) | (19,121 | ) |
Payment of taxes with shares withheld upon restricted stock vesting |
| (39 | ) | - |
|
Payment of debt issuance costs |
| (11,246 | ) | - |
|
Net cash (used in) provided by financing activities |
| (8,170 | ) | 7,361 |
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
| 777 |
| (551 | ) |
Net increase in cash |
| 11,917 |
| 9,682 |
|
Cash at beginning of period |
| 10,736 |
| 8,809 |
|
Cash at end of period |
| $22,653 |
| $18,491 |
|
|
|
|
|
|
|
Supplemental information for non-cash investing and financing activities: |
|
|
|
|
|
Purchases of property and equipment (included in accounts payable) |
| $894 |
| $304 |
|
Capital lease obligation incurred |
| $178 |
| $658 |
|
|
|
|
|
|
|
8
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | | | | Additional | | other | | | | | Total | |||
(In thousands, except share amounts) | | | Par | | Common stock | | paid-in | | comprehensive | | Retained | | shareholders’ | |||||||
(unaudited) |
| | value |
| Shares |
| | Amount |
| capital |
| loss |
| deficit |
| equity | ||||
Balance at April 2, 2022 | | $ | 0.01 |
| 49,635,447 | | $ | 496 | | $ | 874,190 | | $ | (27,444) | | $ | (419,146) | | $ | 428,096 |
Net income | | | |
| — | |
| — |
|
| — | |
| — | |
| 10,479 | |
| 10,479 |
Stock-based compensation | | | |
| — | |
| — |
|
| 1,201 | |
| — | |
| — | |
| 1,201 |
Stock options exercised | | | | | 73,594 | | | 1 | | | 339 | | | — | | | — | | | 340 |
Vesting of restricted stock awards | | | | | 232,295 | | | 2 | | | (2) | | | — | | | — | | | — |
Taxes related to net share settlement of restricted stock awards | | | | | — | | | — | | | (712) | | | — | | | — | | | (712) |
Foreign currency translation adjustment | | | |
| — | |
| — | |
| — | |
| (5,898) | |
| — | |
| (5,898) |
Unrealized gain on financial instruments, net of $39 tax benefit | | | |
| — | |
| — | |
| — | |
| (113) | |
| — | |
| (113) |
Pension liability adjustment | | | |
| — | |
| — | |
| — | |
| 214 | |
| — | |
| 214 |
Balance at July 2, 2022 | | $ | 0.01 |
| 49,941,336 | | $ | 499 | | $ | 875,016 | | $ | (33,241) | | $ | (408,667) | | $ | 433,607 |
Net income | | | |
| — | |
| — | |
| — | |
| — | |
| 15,747 | |
| 15,747 |
Stock-based compensation | | | |
| — | |
| — | |
| 536 | |
| — | |
| — | |
| 536 |
Vesting of restricted stock awards | | | | | 163,493 | |
| 2 | |
| (2) | |
| — | |
| — | |
| — |
Foreign currency translation adjustment | | | | | — | |
| — | |
| — | |
| (5,468) | |
| — | |
| (5,468) |
Unrealized gain on financial instruments, net of $20 tax provision | | | | | — | |
| — | |
| — | |
| 80 | |
| — | |
| 80 |
Pension liability adjustment | | | | | — | |
| — | |
| — | |
| 178 | |
| — | |
| 178 |
Balance at October 1, 2022 | | $ | 0.01 | | 50,104,829 | | $ | 501 | | $ | 875,550 | | $ | (38,451) | | $ | (392,920) | | $ | 444,680 |
Net income | | | | | — | |
| — | |
| — | |
| — | |
| 4,168 | |
| 4,168 |
Stock-based compensation | | | | | — | |
| — | |
| 825 | |
| — | |
| — | |
| 825 |
Foreign currency translation adjustment | | | | | — | |
| — | |
| — | |
| 4,995 | |
| — | |
| 4,995 |
Unrealized gain on financial instruments, net of $6 tax benefit | | | | | — | |
| — | |
| — | |
| (18) | |
| — | |
| (18) |
Pension liability adjustment | | | | | — | |
| — | | | — | | | (140) | | | — | | | (140) |
Repurchases of common stock | | | | | (939,967) | | | (9) | |
| (4,991) | |
| — | |
| — | |
| (5,000) |
Balance at December 31, 2022 | | $ | 0.01 | | 49,164,862 | |
| 492 | |
| 871,384 | |
| (33,614) | |
| (388,752) | |
| 449,510 |
See accompanying notes.
9
The Container Store Group, Inc.
Notes to consolidated financial statements (unaudited)
(In thousands, except share amounts and unless
otherwise stated)
December 30, 20172023
1.Description of business and basis of presentation
These financial statements should be read in conjunction with the financial statement disclosures in our Annual Report on Form 10-K for the fiscal year ended April 1, 2017,2023, filed with the Securities and Exchange Commission (“SEC”) on June 1, 2017.May 26, 2023 (the “2022 Annual Report on Form 10-K”). The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). We use the same accounting policies in preparing quarterly and annual financial statements. All adjustments necessary for a fair presentation of quarterly operating results are reflected herein and are of a normal, recurring nature. Certain items in these consolidated financial statements have been reclassified to conform to the current period presentation.
All references herein to “fiscal 2023” refer to the 52-week fiscal year ending March 30, 2024, and “fiscal 2022” refer to the 52-week fiscal year ended April 1, 2023.
Description of business
Our operations consist of two reportable segments:
The Container Store, Inc. (“TCS”): The Container Store, Inc. was founded in 1978 in Dallas, Texas, as a retailer with a mission to provide customers with storage and organization solutions to accomplish their projects through an assortment of innovative products and unparalleled customer service. In 2007, The Container Store, Inc. was sold to The Container Store Group, Inc. (the “Company”), a holding company, of which a majority stake was purchased by Leonard Green and Partners, L.P. (“LGP”), with the remainder held by certain employees of The Container Store, Inc. On November 6, 2013, the Company completed itsthe initial public offering (the “IPO”). As, of its common stock at which time LGP held a controlling interest in the Company as the majority shareholder. During fiscal 2020, LGP sold some of the common stock of the Company, reducing their ownership to less than 50% of the Company’s outstanding common stock. Although LGP is no longer the majority shareholder, LGP retains controlling interest incontinues to have significant influence over the Company.
Today, TCS includes The Container Store Custom Spaces (“Custom Spaces”) consisting of our elfa® Classic, elfa® Décor, Avera® and Preston® systems, which are wholly-owned and manufactured by TCS.Custom Spaces includes metal-based and wood-based custom space products and in-home installation services. Our vision is to deepen our relationship with our customers, expand our reach and strengthen our capabilities, all while transforming lives through the power of organization.
The Container Store, Inc. consists of our retail stores, website and call center (which includes business sales), as well as our in-home services business. As of December 30, 2017, The Container Store, Inc. operates 902023, we operated 100 stores with an average size of approximately 25,00024,000 square feet (19,000(18,000 selling square feet) in 3234 states and the District of Columbia. The Container Store, Inc. also offers all of its products directly to its customers, including business-to-business customers, through its website, responsive mobile site and app, call center.center, in-home design specialists and in-home design organizers. We operate the C Studio manufacturing facility in Elmhurst, Illinois, which designs and manufactures the Company’s premium wood-based custom space product offering, and is included in the TCS reportable segment.
Elfa: The Container Store, Inc.’s wholly-owned Swedish subsidiary, Elfa International AB (“Elfa”), designs and manufactures component-based shelving and drawer systems and made-to-measure sliding doors.doors that are customizable for any area of the home. elfa® branded products are sold exclusively in the United States in The Container Store retail stores, website and call center, and Elfa sells to various retailers on a wholesale basis in approximately 30 countries around the world, with a concentration in the Nordic region of Europe.
10
Seasonality
The Company’s business is moderately seasonalOur unique offering of organizing solutions, custom spaces, and in-home services makes us less susceptible to holiday season shopping patterns than many retailers. Our quarterly results fluctuate, depending upon a variety of factors, including our product offerings, promotional events, store openings, the weather, remodeling or relocations, shifts in naturethe timing of holidays, timing of delivery of orders, competitive factors and therefore, thegeneral economic conditions, including economic downturns as a result of unforeseen events such as pandemics, inflation, and supply chain disruptions, among other things. Accordingly, our results of operations for the thirty-nine weeks ended December 30, 2017 are not necessarily indicativemay fluctuate on a seasonal and quarterly basis, relative to corresponding periods in prior years. In addition, we may take certain pricing or marketing actions that could have a disproportionate effect on our business, financial condition and results of the operating results for the full year. The Company has historically realized a higher portion of net sales, operating income, and cash flows from operations in the fourth fiscala particular quarter attributable primarily to the timing and impact of Our Annual elfa® Sale, which traditionally starts on or about December 24 and runs into February.selling season.
Recent accounting pronouncements
In February 2016,November 2023, the Financial Accounting StandardStandards Board (“FASB”)(FASB) issued Accounting Standards Update (“ASU”) 2016-02,ASU 2023-07, LeasesSegment Reporting (Topic 842),280): Improvements to revise lease accounting guidance.Reportable Segment Disclosures, which is intended to improve the disclosures about a public entity’s reportable segments and address requests from investors for additional, more detailed information about a reportable segment’s expenses. The amendments in this update requires most leases to be recorded on the balance sheet as a lease liability, with a corresponding right-of-use asset, whereas these leases currently have an off-balance sheet classification. ASU 2016-02 must be applied on a modified retrospective basis and isare effective for fiscal years beginning after December 15, 2018,2023, and interim periods within thosefiscal years with early adoption permitted. The Company currently intends to adopt this standard in the first quarter of fiscal 2019. The Company is
still evaluating the impact of implementation of this standard on its financial statements, but expects that adoption will have a material impact to the Company’s total assets and liabilities given the Company has a significant number of operating leases not currently recognized on its balance sheet.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, an updated standard on revenue recognition. ASU 2014-09 provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using IFRS and GAAP. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the Company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. The Company has identified certain impacts to our accounting for gift cards given away for promotional or marketing purposes. Under current GAAP, the value of promotional gift cards are recorded as selling, general, and administrative expense. The new standard requires these types of gift cards to be accounted for as a reduction of revenue (i.e. a discount). Additionally, ASU 2014-09 will disallow the capitalization of direct-response advertising costs which will impact the timing of recognition of certain advertising production and distribution costs. This standard is effective for reporting periods beginning after December 15, 2017, including interim2024. Early adoption is permitted. A public entity should apply the amendments in this update retrospectively to all prior periods within that fiscal year, with early adoption permitted for interim and annual periods beginning after December 15, 2016. The Company currently intends to adopt this standardpresented in the first quarter of fiscal 2018 and the Company has elected to use the modified-retrospective approach for implementation of the standard. Overall, the Company doesfinancial statements. We do not expectanticipate that the adoption of ASU 2014-09 to have a material impact on the financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which outlined new provisions intended to simplify various aspects related to accounting for share-based payments, including income tax consequences, forfeitures, and classification in the statement of cash flows. Under the new guidance, an entitythis update will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement when the awards vest or are settled. This standard was effective for and adopted by the Company in the first quarter of fiscal 2017 and the Company now recognizes all income tax effects of share-based payments in the income statement on a prospective basis. The Company elected to continue to estimate forfeitures expected to occur to determine the amount of share-based compensation cost to recognize in each period, as permitted by ASU 2016-09. The adoption of ASU 2016-09 did not result in a material impact to the Company’sour financial statements.position, results of operations or cash flows.
In October 2016,December 2023, the FASB issued ASU 2016-16,2023-09, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than InventoryImprovements to Income Tax Disclosures, , which requires entitiesis intended to recognize theaddress investor requests for more transparency about income tax effects of intercompany sales and transfers of assets, other than inventory, in the period in which the transfer occurs. This is a change from current GAAP, which requires entitiesinformation through improvements to defer the income tax effectsdisclosures primarily related to the rate reconciliation and income taxes paid information, as well certain other amendments to improve the effectiveness of intercompany transfers of assets until the asset has been sold to an outside party or otherwise recognized (i.e. depreciated, amortized, impaired). The income tax effects of intercompany sales and transfers of inventory will continue to be deferred until the inventory is sold to an outside party. disclosures. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, with early2024, for all public business entities. Early adoption permitted.is permitted for annual financial statements that have not yet been issued or made available for issuance. The Company does not expectamendments in this standard to have a material impact on its financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which provides guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test under ASC Topic 350. Under the new guidance, an entityupdate should perform goodwill impairment testing by comparing the fair value of a reporting unit with its carrying amount. If the reporting unit’s carrying amount exceeds its fair value, an entity should recognize an impairment charge based on that difference, limited to the total amount of goodwill allocated to that reporting unit. The Company elected to
early adopt this standard in the third quarter of fiscal 2017be applied on a prospective basis. Thebasis, however, retrospective application is permitted. We do not anticipate that the adoption of ASU 2017-04 did notthis update will result in a material impact to the Company’sour financial statements.position, results of operations or cash flows.
In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost2. Goodwill and Net Periodic Postretirement Benefit Cost, which provides guidance that requires an employer to present the service cost component separate from the other components of net periodic benefit cost. trade names
The update requires that employers present the service cost componentestimated goodwill and trade name fair values are computed using estimates as of the net periodic benefitmeasurement date, which is defined as the first day of the fiscal fourth quarter or as of an interim assessment date. The Company makes estimates and assumptions about sales, gross margins, selling, general and administrative percentages and profit margins, based on budgets and forecasts, business plans, economic projections, anticipated future cash flows, and marketplace data. Assumptions are also made for varying perpetual growth rates for periods beyond the long-term business plan period and our estimated weighted average cost of capital. There are inherent uncertainties related to these factors and management’s judgment in applying these factors. Another estimate using different, but still reasonable, assumptions could produce different results.
Due to certain indicators identified during the second quarter of fiscal 2023, we completed an interim assessment of our goodwill balance as of September 30, 2023 in accordance with the Financial Accounting Standard Board Accounting Standards Codification (ASC) Topic 350, Intangibles – Goodwill and other,to identify if the fair value of the reporting unit’s goodwill was less than its carrying value. In connection with our interim assessment, we determined there was an impairment of goodwill in the same income statement line itemTCS reporting unit and recorded a non-cash goodwill impairment charge of $23,447. The charges were primarily the result of continued macroeconomic impacts on our business which led to a decline in customer demand.
We also completed an interim quantitative assessment of our trade names balance as other employee compensation costs arising from services rendered by participating employees during the period. The other components of the net periodic benefit cost are required to be presented separately from the line item that includes service cost and outsideSeptember 30, 2023 in accordance with ASC 350 which did not result in an impairment. As of the subtotalDecember 30, 2023, we conducted a qualitative assessment of income from operations. If a separate line item is not used, the line item usedour trade names balance in the income statement must be disclosed. In addition, only the service cost component is eligible for capitalizationaccordance with ASC 350, which resulted in assets. This ASU will be applied retrospectively and is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company does not expect this standard to have a material impact on its financial statements.no indicators of impairment.
11
| | | | | | | |
|
| Goodwill |
| Trade names |
| ||
Balance at April 1, 2023 | | | | | | | |
Gross balance | |
| 428,811 | | | 252,812 | |
Accumulated impairment charges | |
| (405,364) | | | (31,534) | |
Total, net | | $ | 23,447 | | $ | 221,278 | |
Foreign currency translation adjustments in the thirty-nine weeks ended December 30, 2023 | | | — | | | 1,007 | |
Balance at December 30, 2023 | | | | | | | |
Gross balance | |
| 428,811 | | | 253,819 | |
Fiscal 2023 impairment charges | | | (23,447) | | | — | |
Accumulated impairment charges | |
| (405,364) | | | (31,534) | |
Total, net | | $ | — | | $ | 222,285 | |
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when modification accounting should be applied for changes to terms or conditions of a share-based payment award. This ASU will be applied prospectively and is effective for fiscal years beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. The Company does not expect this standard to have a material impact on its financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which is intended to improve and simplify hedge accounting and improve the disclosures of hedging arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of adopting the new standard on its financial statements.
2.3. Detail of certain balance sheet accounts
|
| December 30, |
| April 1, |
| December 31, |
|
|
| 2017 |
| 2017 |
| 2016 |
|
Inventory: |
|
|
|
|
|
|
|
Finished goods |
| $104,714 |
| $98,438 |
| $104,374 |
|
Raw materials |
| 5,139 |
| 4,183 |
| 4,288 |
|
Work in progress |
| 538 |
| 499 |
| 347 |
|
|
| $110,391 |
| $103,120 |
| $109,009 |
|
|
|
|
|
|
|
|
|
Accrued liabilities: |
|
|
|
|
|
|
|
Accrued payroll, benefits, and bonuses |
| $26,526 |
| $20,897 |
| $21,859 |
|
Unearned revenue |
| 10,197 |
| 7,708 |
| 8,651 |
|
Accrued transaction and property tax |
| 12,621 |
| 11,086 |
| 11,203 |
|
Gift cards and store credits outstanding |
| 9,984 |
| 9,229 |
| 10,147 |
|
Accrued lease liabilities |
| 6,329 |
| 4,767 |
| 4,815 |
|
Accrued interest |
| 156 |
| 143 |
| 194 |
|
Other accrued liabilities |
| 7,726 |
| 6,277 |
| 7,683 |
|
|
| $73,539 |
| $60,107 |
| $64,552 |
|
| | | | | | | | | |
| | December 30, | | April 1, | | December 31, | |||
|
| 2023 |
| 2023 |
| 2022 | |||
Accounts receivable, net: | | | | | | | | | |
Trade receivables, net | | $ | 13,863 | | $ | 18,269 | | $ | 16,656 |
Credit card receivables | |
| 10,971 | |
| 6,165 | |
| 11,309 |
Other receivables | |
| 2,655 | |
| 1,436 | |
| 2,825 |
| | $ | 27,489 | | $ | 25,870 | | $ | 30,790 |
Inventory: | | | | | | | | | |
Finished goods | | $ | 153,305 | | $ | 160,108 | | $ | 179,984 |
Raw materials | |
| 8,500 | |
| 9,289 | |
| 9,120 |
Work in progress | |
| 1,285 | |
| 1,240 | |
| 1,203 |
| | $ | 163,090 | | $ | 170,637 | | $ | 190,307 |
Accrued liabilities: | | | | | | | | | |
Accrued payroll, benefits and bonuses | | $ | 17,038 | | $ | 24,224 | | $ | 17,979 |
Unearned revenue | | | 17,531 | | | 15,700 | | | 18,830 |
Accrued transaction and property tax | | | 14,240 | | | 14,072 | | | 15,346 |
Gift cards and store credits outstanding | | | 13,980 | | | 13,002 | | | 13,924 |
Accrued sales returns | | | 2,788 | | | 3,366 | | | 4,302 |
Accrued interest | | | 166 | | | 189 | | | 348 |
Other accrued liabilities | | | 6,844 | | | 4,120 | | | 4,609 |
| | $ | 72,587 | | $ | 74,673 | | $ | 75,338 |
3. Long-term debt
Contract balances as a result of transactions with customers primarily consist of trade receivables included in accounts receivable, net, unearned revenue, and revolving lines of credit
On August 18, 2017,gift cards and store credits outstanding included in accrued liabilities in the Company entered into a fourth amendment (the “Term Loan Amendment”) to the Credit Agreement datedCompany’s consolidated balance sheets. Unearned revenue was $15,700 as of April 6, 2012 (“Senior Secured Term Loan Facility”).1, 2023, and $14,397 was subsequently recognized into revenue for the thirty-nine weeks ended December 30, 2023. Gift cards and store credits outstanding was $13,002 as of April 1, 2023, and $3,139 was subsequently recognized into revenue for the thirty-nine weeks ended December 30, 2023. See Note 10 for disaggregated revenue disclosures.
4. Leases
We conduct all of our U.S. operations from leased facilities that include our support center, distribution centers, manufacturing facilities, and 100 store locations. The fourth amendment amendedsupport center, distribution centers, manufacturing facilities, and stores are leased under operating leases that generally expire over the Senior Secured Term Loan Facilitynext 1 to among15 years. We also lease computer hardware under operating leases that generally expire over the next few years. In most cases, management expects that in the normal course of business, leases will be renewed or replaced by other things, (i) extend the maturity date of the loans under the Senior Secured Term Loan Facility to August 18, 2021, (ii) add a maximum leverage covenant of 5.0:1.0 which steps down by 0.25x on June 30 of each year commencing on June 30, 2018, (iii) increase the applicable interest rate margin to 7.00% for LIBOR loans and 6.00% for base rate loans, (iv) reduce the aggregate principal amount of the Senior Secured Term Loan Facility to $300,000, (v) increase principal amortization to 2.5% per annum, (vi) require a 3.0% upfront fee on the aggregate principal amount of the Senior Secured Term Loan Facility, and (vii) impose a 1% premium if a voluntary prepayment is made from the proceeds of a repricing transaction within 12 months after August 18, 2017.
On August 18, 2017, theleases. The Company also entered into a fourth amendment (the “Revolving Amendment”) to the Revolving Credit Facility,has finance leases at our Elfa segment which among other things, extended the maturity date of the loans under the Revolving Credit Facility to the earlier of (i) August 18, 2022 and (ii) May 18, 2021 if any portion of the Senior Secured Term Loan Facility remains outstandingare immaterial.
12
Lease expense on such date and the maturity date of the Senior Secured Term Loan Facilityoperating leases is not extended.
In connection with the closing of the Term Loan Amendment and the Revolving Amendment, the Company borrowed a net amount of $20,000 on the Revolving Credit Facility. In addition, the Company recorded a loss on extinguishment of debt of $2,369 in the thirteen weeks ended September 30, 2017 associated with the Term Loan Amendment and the Revolving Amendment.
The Company capitalizes certain costs associated with issuance of various debt instruments. These deferred financing costs are amortized to interest expense on a straight-line method, which is materially consistent with the effective interest method,basis over the termsterm of the related debt agreements. Inlease, commencing on the thirteen weeks ended September 30, 2017,date the Company capitalized $9,640takes possession of fees associatedthe leased property and is recorded in selling, general and administrative expenses (“SG&A”).
We consider lease payments that cannot be predicted with the Term Loan Amendment reasonable certainty upon lease commencement to be variable lease payments, which are recorded as incurred each period and are excluded from our calculation of lease liabilities. Our variable lease payments include lease payments that will be amortized through August 18, 2021 and $57are based on a percentage of fees associated with the Revolving Amendment that will be amortized through May 18, 2021.sales.
Long-term debt and revolving lines of credit consistUpon lease commencement, we recognize the lease liability measured at the present value of the following:
|
|
|
|
|
|
|
|
|
| December 30, |
| April 1, |
| December 31, |
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2017 |
| 2016 |
|
Senior secured term loan facility |
| $296,250 |
| $316,760 |
| $317,666 |
|
2014 Elfa term loan facility |
| 2,569 |
| 3,358 |
| 3,634 |
|
Obligations under capital leases |
| 865 |
| 901 |
| 974 |
|
Other loans |
| 49 |
| 119 |
| 140 |
|
Revolving credit facility |
| 25,000 |
| - |
| 20,000 |
|
Total debt |
| 324,733 |
| 321,138 |
| 342,414 |
|
Less current portion |
| (9,465 | ) | (5,445 | ) | (5,390 | ) |
Less deferred financing costs (1) |
| (10,630 | ) | (3,667 | ) | (4,124 | ) |
Total long-term debt |
| $304,638 |
| $312,026 |
| $332,900 |
|
(1)Represents deferred financingfixed future minimum lease payments. We have elected the practical expedient to not separate lease and non-lease components. Therefore, lease payments included in the measurement of the lease liability include all fixed payments in the lease arrangement. We record a right-of-use asset for an amount equal to the lease liability, increased for any prepaid lease costs relatedand initial direct costs and reduced by any lease incentives. We remeasure the lease liability and right-of-use asset when a change to our Senior Secured Term Loan Facility, which are presented net of long-term debtfuture minimum lease payments occurs. Key assumptions and judgments included in the consolidated balance sheet.determination of the lease liability include the discount rate applied to present value of the future lease payments and the exercise of renewal options.
UnderMany of our leases contain renewal options. The option periods are generally not included in the Term Loan Amendment,lease term used to measure our lease liabilities and right-of-use assets upon commencement as exercise of the Companyoptions is now requirednot reasonably certain. We remeasure the lease liability and right-of-use asset when we are reasonably certain to make quarterly principal repaymentsexercise a renewal option.
Discount Rate
Our leases do not provide information about the rate implicit in the lease. Therefore, we utilize an incremental borrowing rate to calculate the present value of $1,875 through June 20, 2021, withour future lease obligations. The incremental borrowing rate represents the rate of interest we would have to pay on a balloon paymentcollateralized borrowing, for an amount equal to the lease payments, over a similar term and in a similar economic environment.
The components of lease costs for the thirteen and thirty-nine weeks ended December 30, 2023 and December 31, 2022 were as follows:
| | | | | | | | | | | | |
| | | Thirteen Weeks Ended | | | Thirty-Nine Weeks Ended | ||||||
| | | December 30, 2023 | | | December 31, 2022 | | | December 30, 2023 | | | December 31, 2022 |
Operating lease costs | | $ | 23,572 | | $ | 22,868 | | $ | 70,385 | | $ | 68,043 |
Variable lease costs | |
| 182 | |
| 335 | |
| 553 | |
| 1,084 |
Total lease costs | | $ | 23,754 | | $ | 23,203 | | $ | 70,938 | | $ | 69,127 |
We do not have sublease income and do not recognize lease assets or liabilities for short-term leases, defined as operating leases with initial terms of less than 12 months. Our short-term lease costs were not material for the thirteen and thirty-nine weeks ended December 30, 2023 and December 31, 2022.
Weighted average remaining balance due on August 18, 2021.operating lease term and incremental borrowing rate as of December 30, 2023 and December 31, 2022 were as follows:
| | | | | |
| | Thirty-Nine Weeks Ended | |||
| | December 30, 2023 | | December 31, 2022 | |
Weighted average remaining lease term (years) | | 6.1 | | 6.6 | |
Weighted average incremental borrowing rate | | 10.0 | % | 10.6 | % |
13
Related Party Debt
On August 18, 2017, Green Credit Investors, L.P. funded $20,000 of the $300,000 Senior Secured Term Loan Facility based on the same terms, including interest rates, repayment terms, and collateral, as all other lenders. Green Credit Investors, L.P. is a related party due to its affiliation with LGP, the majority shareholder of the outstanding common stock of the Company. As of December 30, 2017, the principal amount due to Green Credit Investors, L.P. is $11,800, of which $299 is classified2023, future minimum lease payments under our operating lease liabilities were as current.follows:
| | | |
|
| Operating leases (1) | |
Within 1 year (remaining) | | $ | 23,345 |
2 years | |
| 95,461 |
3 years | |
| 87,237 |
4 years | |
| 77,459 |
5 years | |
| 65,383 |
Thereafter | |
| 155,593 |
Total lease payments | | $ | 504,478 |
Less amount representing interest | | | 126,626 |
Total lease liability | | $ | 377,852 |
Less current lease liability | | | 62,525 |
Total noncurrent lease liability | | $ | 315,327 |
(1) Operating lease payments exclude approximately $64,177 of legally binding minimum lease payments for eight leases signed but not yet commenced. |
4.5. Net (loss) income per common share
Basic net (loss) income per common share is computed as net (loss) income divided by the weighted-average number of common shares for the period. Diluted netNet (loss) income per common share - diluted is computed as net (loss) income divided by the weighted-average number of common shares for the period plus common stock equivalents consisting of shares subject to stock-based awards with exercise prices less than or equal to the average market price of the Company’s common stock for the period, to the extent their inclusion would be dilutive. Potentially dilutive securities are excluded from the computation of diluted net (loss) income per common share - diluted if their effect is anti-dilutive.
The following is a reconciliation of net (loss) income and the number of shares used in the basic and diluted net (loss) income per common share calculations:
|
| Thirteen Weeks Ended |
| Thirty-Nine Weeks Ended |
| ||||||||||||||||||
|
| December 30, |
| December 31, |
| December 30, |
| December 31, |
| ||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
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| | | | | | | | | | | | | | ||||||||||
| | Thirteen Weeks Ended | | Thirty-Nine Weeks Ended | |
| |||||||||||||||||
| | December 30, | | December 31, | | December 30, | | December 31, | |
| |||||||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| ||||||||||||||
Numerator: |
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | |
Net income |
| $28,379 |
| $5,092 |
| $19,827 |
| $6,576 |
| ||||||||||||||
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|
|
|
|
|
|
|
| ||||||||||||||
Net (loss) income | | $ | (6,431) | | $ | 4,168 | | $ | (41,921) | | $ | 30,394 | | ||||||||||
Denominator: |
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | |
Weighted-average common shares — basic |
| 48,067,754 |
| 47,999,535 |
| 48,057,974 |
| 47,992,652 |
| |
| 49,591,111 | |
| 49,263,122 | |
| 49,435,182 | |
| 49,661,209 | | |
Nonvested restricted stock awards and other dilutive securities | | | — | | | 189,858 | | | — | | | 363,380 | | ||||||||||
Weighted-average common shares — diluted |
| 48,167,882 |
| 48,022,499 |
| 48,128,682 |
| 48,002,495 |
| | | 49,591,111 | | | 49,452,980 | | | 49,435,182 | | | 50,024,589 | | |
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Net income per common share - basic and diluted |
| $0.59 |
| $0.11 |
| $0.41 |
| $0.14 |
| ||||||||||||||
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| ||||||||||||||
| | | | | | | | | | | | | | ||||||||||
Net (loss) income per common share — basic | | $ | (0.13) | | $ | 0.08 | | $ | (0.85) | | $ | 0.61 | | ||||||||||
Net (loss) income per common share — diluted | | $ | (0.13) | | $ | 0.08 | | $ | (0.85) | | $ | 0.61 | | ||||||||||
Antidilutive securities not included: |
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | |
Stock options outstanding |
| 3,157,843 |
| 3,001,940 |
| 3,016,359 |
| 2,954,043 |
| |
| 781,849 | |
| 1,555,286 | | | 1,379,009 | |
| 1,481,921 | | |
Nonvested restricted stock awards |
| 42,541 |
| - |
| 40,643 |
| - |
| | | 513,847 | | | 432,344 | | | 683,236 | | | 405,011 | | |
5.6. Income taxes
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act made numerous changes to federal corporate tax law, including reducing the U.S. federal corporate tax rate from 35% to 21%, requiring companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and allowingprovision for the immediate expensing of qualified property purchases, among others. As of December 30, 2017, the Company had not completed the accounting for the tax effects of enactment of the Tax Act; however, a reasonable estimate of the effects on our existing deferred tax balances has been recorded as a provisional amountincome taxes in our consolidated financial statements. The Company has not been able to reasonably estimate the one-time transition tax on the earnings of foreign subsidiaries and continues to account for foreign earnings based on the provisions of the tax laws that were in effect immediately prior to the enactment of the Tax Act. Pursuant to Staff Accounting Bulletin No. 118, the Company’s measurement period for implementing the accounting changes required by the Tax Act will close before December 22, 2018 and the Company anticipates completing the accounting under ASC Topic 740, Income Taxes, in a subsequent reporting period within the measurement period.
Provisional amounts for remeasurement of deferred tax balances
Deferred tax balances were remeasured based on the rates at which they are expected to reverse in the future, generally 21% pursuant to the Tax Act. However, the Company is still analyzing certain aspects of the Tax Act and refining the calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. In the thirteen weeks ended December 30, 2017,2023 was $1,651 as compared to a provisional benefitprovision of $24,253 was recognized related to the remeasurement of the Company’s deferred tax balances, which is included as a component of (benefit) provision for income taxes on the consolidated statement of operations.
One-time transition tax on earnings of foreign subsidiaries
The one-time transition tax is based on accumulated earnings and profits (“E&P”) from our 1999 acquisition of Elfa for which U.S. income taxes were previously deferred. The Company has not made sufficient progress on the E&P and foreign tax pool analysis for its foreign subsidiaries to reasonably estimate the effects of the one-time transition tax and, therefore, provisional amounts have not been recorded. The Company does not have all the necessary information available, prepared or analyzed as it relates to how Elfa’s intercompany and restructuring transactions impact E&P and the tax pools. In addition, the foreign cash balance at the end of the fiscal year (March 31, 2018) is unknown. Because the transition tax is based$2,127 in part on the amount of earnings and profits held in cash and other specified assets as measured as of March 31, 2018, we are unable to determine a reasonable estimate of the transition tax. The Company continued to apply ASC 740 based on the provisions of the tax laws that were in effect immediately prior to the enactment of the Tax Act. No deferred taxes have been recorded because the Company has determined these amounts are indefinitely reinvested.
Effective tax rate
In the thirteen weeks ended December 30, 2017, the Company revised its estimated annual31, 2022. The effective tax rate to reflect a change in the federal statutory rate from 35% to 21% as a result of the Tax Act. The rate change is administratively effective for fiscal 2017, using a blended rate for the annual period. As a result, the blended statutory rate for fiscal 2017 is 31.5%.
The Company’s effective income tax rate for the thirteen weeks ended December 30, 20172023 was -330.1%(34.5)%, as compared to 39.7% for33.8% in the thirteen weeks ended December 31, 2016. 2022. During the thirteen weeks ended December 30, 20172023, the effective tax rate fell belowwas lower than the blendedU.S. statutory rate of 31.5%21%, primarily due to the estimatedtax impact of discrete items related to share-based compensation on a pre-tax loss. In the Tax Act, which was primarily driven by the remeasurement of deferred tax balances. During the thirteen weeks ended
14
December 31, 2016,2022, the effective tax rate rose above the U.S. statutory rate of 35%21% primarily due to earnings mix between domesticU.S. state income taxes, and foreign jurisdictions.the impact of the global intangible low-taxed ("GILTI") provision on a pre-tax income.
The Company’sbenefit for income taxes in the thirty-nine weeks ended December 30, 2023 was ($1,344) as compared to a provision of $11,857 in the thirty-nine weeks ended December 31, 2022. The effective income tax rate for the thirty-nine weeks ended December 30, 20172023 was 429.3%3.1%, as compared to 42.5% for28.1% in the thirty-nine weeks ended December 31, 2016. 2022. During the thirty-nine weeks ended December 30, 20172023, the effective tax rate was lower than the U.S. statutory rate of 21%, primarily due to the tax impact of goodwill impairment and discrete items related to share-based compensation on a pre-tax loss. In the thirty-nine weeks ended December 31, 2022, the effective tax rate rose above the blendedU.S. statutory rate of 31.5%21% primarily due to U.S. state income taxes, and the estimated impact of the Tax Act, which was primarily driven by the remeasurement of deferred tax balances. During the thirty-nine weeks ended December 31, 2016, the effective tax rate rose above the statutory rate of 35% due to earnings mix between domestic and foreign jurisdictions coupled with our worldwide net income position.GILTI provision on a pre-tax income.
6.7. Commitments and contingencies
In connection with insurance policies and other contracts, the Company has outstanding standby letters of credit totaling $4,023$3,829 as of December 30, 2017.2023.
The Company is subject to ordinary litigation and routine reviews by regulatory bodies that are incidental to its business. The Company has recorded accruals with respect to these matters, where appropriate, which are reflected in the Company's unaudited condensed consolidated financial statements. For some matters, a liability is not probable or the amount cannot be reasonably estimated and therefore an accrual has not been made. No material amounts were accrued at December 30, 2023, April 1, 2023, or December 31, 2022 pertaining to legal proceedings or other contingencies.
Rashon Hayes v. The Container Store, Inc.
The Company was named as a defendant in a putative class action and representative action was filed on February 10, 2020 in Santa Clara Superior Court by Rashon Hayes (“Plaintiff”), a former, hourly-paid employee of TCS who was employed from April 2019 to June 2019. The First Amended Complaint was filed on August 3, 2020 and alleges eleven causes of action: (1) unpaid overtime, (2) unpaid meal period premiums, (3) unpaid rest period premiums, (4) unpaid minimum wages, (5) final wages not timely paid, (6) wages not timely paid during employment, (7) non-compliant wage statements, (8) failure to keep requisite payroll records, (9) unreimbursed business noneexpenses, (10) violation of which is expectedCalifornia Business and Professions Code section 17200, and (11) violation of the California Private Attorneys General Act. The lawsuit seeks restitution of unpaid wages for plaintiff and other class members, pre-judgement interest, appointment of class administrator, and attorney's fees and costs. TCS denies the allegations and will continue to defend the case. The parties are currently engaged in the discovery process and have agreed to participate in a mediation on February 21, 2024.
Based on information currently available, the Company does not believe that its pending legal matters, either on an individual basis or in the aggregate, will have a material adverse effect on the Company’s consolidated financial condition,statements as a whole. However, litigation and other legal matters involve an element of uncertainty. Adverse decisions and settlements, including any required changes to the Company's business, or other developments in such matters could affect our operating results of operations,in future periods or cash flows on an individual basisresult in a liability or inother amounts material to the aggregate.Company's annual consolidated financial statements.
15
7.8. Accumulated other comprehensive loss
Accumulated other comprehensive loss (“AOCL”) consists of changes in our foreign currency forward contracts, pension liability adjustment, and foreign currency translation. The components of AOCL, net of tax, are shown below for the thirty-nine weeks ended December 30, 2017:
|
| Foreign |
| Pension |
| Foreign |
| Total |
|
Balance at April 1, 2017 |
| $(155 | ) | $(1,444 | ) | $(21,044 | ) | $(22,643 | ) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) before reclassifications, net of tax |
| 1,650 |
| (175 | ) | 6,808 |
| 8,283 |
|
Amounts reclassified to earnings, net of tax |
| 37 |
| - |
| - |
| 37 |
|
Net current period other comprehensive income (loss) |
| 1,687 |
| (175 | ) | 6,808 |
| 8,320 |
|
|
|
|
|
|
|
|
|
|
|
Balance at December 30, 2017 |
| $1,532 |
| $(1,619 | ) | $(14,236 | ) | $(14,323 | ) |
Amounts reclassified from AOCL to earnings for the foreign currency forward contracts category are generally included in cost of sales in the Company’s consolidated statements of operations. For a description of the Company’s use of foreign currency forward contracts, refer to Note 8.
8. Foreign currency forward contracts
The Company’s international operations and purchases of inventory products from foreign suppliers are subject to certain opportunities and risks, including foreign currency fluctuations. In the TCS segment, we utilize foreign currency forward contracts in Swedish krona to stabilize our retail gross margins and to protect our domestic operations from downward currency exposure by hedging purchases of inventory from our wholly-owned subsidiary, Elfa. Forward contracts in the TCS segment are designated as cash flow hedges, as defined by ASC 815. In the Elfa segment, we utilize foreign currency forward contracts to hedge purchases, primarily of raw materials, that are transacted in currencies other than Swedish krona, which is the functional currency of Elfa. Forward contracts in the Elfa segment are economic hedges and are not designated as cash flow hedges as defined by ASC 815.
During the thirty-nine weeks ended December 30, 2017 and December 31, 2016, the TCS segment used forward contracts for 100% and 75% of inventory purchases in Swedish krona, respectively. During the thirty-nine weeks ended December 30, 2017 and December 31, 2016, the Elfa segment used forward contracts to purchase U.S. dollars in the amount of $1,648 and $3,195, which represented 27% and 61% of the Elfa segment’s U.S. dollar purchases, respectively. Generally, the Company’s foreign currency forward contracts have terms from 1 to 12 months and require the Company to exchange currencies at agreed-upon rates at settlement.2023:
| | | | | | | | | |
| | | | | | | | | |
| | Pension | | Foreign | | | | ||
| | liability | | currency | | | | ||
|
| adjustment |
| translation |
| Total | |||
Balance at April 1, 2023 | | $ | (1,117) | | $ | (31,392) | | $ | (32,509) |
| | | | | | | | | |
Other comprehensive (loss) income before reclassifications, net of tax | | | (45) | | | 3,203 | | | 3,158 |
Amounts reclassified to earnings, net of tax | | | — | | | — | | | — |
Net current period other comprehensive (loss) income | |
| (45) | |
| 3,203 | |
| 3,158 |
| | | | | | | | | |
Balance at December 30, 2023 | | $ | (1,162) | | $ | (28,189) | | $ | (29,351) |
| | | | | | | | | |
The counterparties to the contracts consist of a limited number of major domestic and international financial institutions. The Company does not hold or enter into financial instruments for trading or speculative purposes. The Company records its foreign currency forward contracts on a gross basis and generally does not require collateral from these counterparties because it does not expect any losses from credit exposure.
The Company records all foreign currency forward contracts on its consolidated balance sheet at fair value. The Company accounts for its foreign currency hedging instruments in the TCS segment as cash flow hedges, as defined. Changes in the fair value of the foreign currency hedging instruments that are considered to be effective, as defined, are recorded in other comprehensive income (loss) until the hedged item (inventory) is sold to the customer, at which
time the deferred gain or loss is recognized through cost of sales. Any portion of a change in the foreign currency hedge instrument’s fair value that is considered to be ineffective, as defined, or that the Company has elected to exclude from its measurement of effectiveness, is immediately recorded in earnings as cost of sales. The Company assessed the effectiveness of the foreign currency hedge instruments and determined the foreign currency hedge instruments were highly effective during the thirty-nine weeks ended December 30, 2017 and December 31, 2016. Forward contracts not designated as hedges in the Elfa segment are adjusted to fair value as selling, general, and administrative expenses on the consolidated statements of operations. During the thirty-nine weeks ended December 30, 2017, the Company recognized a net loss of $182 associated with the change in fair value of forward contracts not designated as hedging instruments.
The Company had a $1,532 gain in accumulated other comprehensive loss related to foreign currency hedge instruments at December 30, 2017. The entire $1,532 represents an unrealized gain for settled foreign currency hedge instruments related to inventory on hand as of December 30, 2017. The Company expects the unrealized gain of $1,532, net of taxes, to be reclassified into earnings over the next 12 months as the underlying inventory is sold to the end customer.
The change in fair value of the Company’s foreign currency hedge instruments that qualify as cash flow hedges and are included in accumulated other comprehensive loss, net of taxes, are presented in Note 7 of these financial statements.
9. Fair value measurements
Under GAAP, the Company is required to a) measure certain assets and liabilities at fair value orand b) disclose the fair values of certain assets and liabilities recorded at cost. Accounting standards define fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. Fair value is calculated assuming the transaction occurs in the principal or most advantageous market for the asset or liability and includes consideration of non-performance risk and credit risk of both parties. Accounting standards pertaining to fair value establish a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value. These tiers include:
| ● | Level 1—Valuation inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. |
· Level 1—Valuation inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
| ● | Level 2—Valuation inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| ● | Level 3—Valuation inputs are unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are determined using model-based techniques that include option pricing models, discounted cash flow models and similar techniques. |
· Level 2—Valuation inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
· Level 3—Valuation inputs are unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are determined using model-based techniques that include option pricing models, discounted cash flow models and similar techniques.
As of December 30, 2017,2023, April 1, 20172023 and December 31, 2016,2022, the Company held certain items that are required to be measured at fair value on a recurring basis. These items are included in the nonqualifiednon-qualified retirement plan, and foreign currency forward contracts. The nonqualified retirement planwhich consists of investments purchased by employee contributions to retirement savings accounts. The Company’s foreign currency hedging instruments consist of over-the-counter (OTC) contracts, which are not traded on a public exchange. See Note 8 for further information on the Company’s hedging activities.
The fair valuesvalue amount of the nonqualifiednon-qualified retirement plan is measured using the net asset value per share practical expedient, and foreign currency forward contracts are determined based ontherefore, is not classified in the market approach which utilizes inputs that are readily available in public markets or can be derived from information available in publicly quoted markets for comparable assets. Therefore, the Company has categorized
these items as Level 2.fair value hierarchy. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of contracts it holds.
16
The following items are measured at fair value on a recurring basis, subject to the disclosure requirements of ASC 820, Fair Value Measurements:
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|
| December 30, |
| April 1, |
| December 31, |
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| | | | | | | | | | | | | |||||||||||
| | | | December 30, | | April 1, | | December 31, | | ||||||||||||||
Description |
|
|
| Balance Sheet Location |
| 2017 |
| 2017 |
| 2016 |
|
| Balance Sheet Location |
| 2023 |
| 2023 |
| 2022 |
| |||
Assets |
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|
|
|
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|
| | | | | | | | | | | | |
Nonqualified retirement plan (1) |
| N/A |
| Other current assets |
| $5,782 |
| $5,092 |
| $4,735 |
| ||||||||||||
Foreign currency forward contracts |
| Level 2 |
| Other current assets |
| - |
| 841 |
| 274 |
| ||||||||||||
Nonqualified retirement plan |
| Other current assets | | $ | 3,798 | | $ | 3,743 | | $ | 3,526 | | |||||||||||
Total assets |
|
|
|
|
| $5,782 |
| $5,933 |
| $5,009 |
| | | | $ | 3,798 | | $ | 3,743 | | $ | 3,526 | |
(1)The fair value amount of the nonqualified retirement plan is measured at fair value using the net asset value per share practical expedient, and therefore, is not classified in the fair value hierarchy.
The fair value of long-term debt was estimated using quoted prices as well as recent transactions for similar types of borrowing arrangements (level(Level 2 valuations). As of December 30, 2017,2023, April 1, 20172023 and December 31, 2016,2022, the estimated fair value of the Company’s long-term debt, including current maturities, was $313,068, $295,005, and $308,463, respectively.as follows:
| | | | | | | | | | |
| | December 30, | | April 1, | | December 31, | | |||
|
| 2023 |
| 2023 |
| 2022 |
| |||
Senior secured term loan facility | | $ | 149,240 | | $ | 153,915 | | $ | 153,135 | |
Revolving credit facility | |
| 21,000 | |
| 5,000 | |
| 20,000 | |
2019 Elfa revolving facilities | | | 3,300 | | | 2,423 | | | 8,131 | |
Obligations under finance leases | | | 171 | | | 136 | | | 123 | |
Total fair value of debt | | $ | 173,711 | | $ | 161,474 | | $ | 181,389 | |
10. Segment reporting
The Company’s reportable segments were determined on the same basis as how management evaluates performance internally by the Chief Operating Decision Maker (“CODM”). The Company has determined that the Chief Executive Officer is the CODM and the Company’s two reportable segments consist of TCS and Elfa. The TCS segment includes the Company’s retail stores, website and call center, as well as in-home services. We operate the installationC Studio manufacturing facility in Elmhurst, Illinois, which designs and organization services business.manufactures the Company’s premium wood-based custom space product offering. We determined that TCS and C Studio have similar economic characteristics and meet the aggregation criteria set forth in ASC 280, Segment Reporting. Therefore, we have combined these two operating segments into the TCS reportable segment.
The Elfa segment includes the manufacturing business that produces the elfa®elfa® brand products that are sold domestically exclusively through the TCS segment, as well as on a wholesale basis in approximately 30 countries around the world, with a concentration in the Nordic region of Europe. The intersegment sales in the Elfa column represent elfa®elfa® product sales to the TCS segment. These sales and the related gross margin on merchandise recorded in TCS inventory balances at the end of the period are eliminated for consolidation purposes in the Eliminations column. The net sales to third parties in the Elfa column represent sales to customers outside of the United States.
The Company has determined that adjusted earnings before interest, tax, depreciation, and amortization (“Adjusted EBITDA”) is the profit or loss measure that the CODM uses to make resource allocation decisions and evaluate segment performance.
Adjusted EBITDA assists management in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect our core operations and, therefore, are not included in measuring segment performance. Adjusted EBITDA is calculated in accordance with the Senior Secured Term Loan Facility and the Revolving Credit Facility and we define Adjusted EBITDA as net income (loss) before interest, taxes, depreciation and amortization, certain non cashnon-cash items, and other adjustments that we do not consider in our evaluation of ongoing operating performance from period to period.
17
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended December 30, 2017 |
| TCS |
| Elfa |
| Eliminations |
| Total |
|
Net sales to third parties |
| $203,881 |
| $19,105 |
| $- |
| $222,986 |
|
Intersegment sales |
| - |
| 23,495 |
| (23,495 | ) | - |
|
Adjusted EBITDA |
| 22,550 |
| 6,374 |
| (3,363 | ) | 25,561 |
|
Interest expense, net |
| 7,232 |
| 68 |
| - |
| 7,300 |
|
Assets (1) |
| 673,489 |
| 116,779 |
| (5,869 | ) | 784,399 |
|
| | | | | | | | | | | | |
Thirteen Weeks Ended December 30, 2023 |
| TCS |
| Elfa |
| Eliminations |
| Total | ||||
Net sales to third parties | | $ | 202,485 | | $ | 12,414 | | $ | — | | $ | 214,899 |
Intersegment sales | |
| — | |
| 21,207 | |
| (21,207) | |
| — |
Adjusted EBITDA | |
| 10,704 | |
| 3,879 | |
| (1,788) | |
| 12,795 |
Interest expense, net | | | 5,112 | | | 39 | | | — | | | 5,151 |
Assets (1) | | | 868,239 | | | 101,308 | | | (8,770) | | | 960,777 |
|
|
|
|
|
|
|
|
|
| ||||||||||||
Thirteen Weeks Ended December 31, 2016 |
| TCS |
| Elfa |
| Eliminations |
| Total |
| ||||||||||||
| | | | | | | | | | | | | |||||||||
Thirteen Weeks Ended December 31, 2022 |
| TCS |
| Elfa |
| Eliminations |
| Total | |||||||||||||
Net sales to third parties |
| $199,087 |
| $17,293 |
| $- |
| $216,380 |
| | $ | 239,271 | | $ | 12,965 | | $ | — | | $ | 252,236 |
Intersegment sales |
| - |
| 20,160 |
| (20,160 | ) | - |
| | | — | | | 19,083 | | | (19,083) | | | — |
Adjusted EBITDA |
| 22,333 |
| 4,968 |
| (1,983 | ) | 25,318 |
| | | 22,086 | | | 3,970 | | | (3,895) | | | 22,161 |
Interest expense, net |
| 4,080 |
| 39 |
| - |
| 4,119 |
| | | 4,265 | | | 124 | | | — | | | 4,389 |
Assets (1) |
| 680,287 |
| 105,008 |
| (5,181 | ) | 780,114 |
| | | 1,261,798 | | | 119,176 | | | (171,953) | | | 1,209,021 |
|
|
|
|
|
|
|
|
|
| ||||||||||||
Thirty-Nine Weeks Ended December 30, 2017 |
| TCS |
| Elfa |
| Eliminations |
| Total |
| ||||||||||||
| | | | | | | | | | | | | |||||||||
Thirty-Nine Weeks Ended December 30, 2023 |
| TCS |
| Elfa |
| Eliminations |
| Total | |||||||||||||
Net sales to third parties |
| $573,261 |
| $51,203 |
| $- |
| $624,464 |
| | $ | 606,137 | | $ | 35,605 | | $ | — | | $ | 641,742 |
Intersegment sales |
| - |
| 46,036 |
| (46,036 | ) | - |
| |
| — | |
| 43,800 | |
| (43,800) | |
| — |
Adjusted EBITDA |
| 51,760 |
| 10,965 |
| (4,218 | ) | 58,507 |
| |
| 25,756 | |
| 7,167 | |
| (182) | |
| 32,741 |
Interest expense, net |
| 17,189 |
| 209 |
| - |
| 17,398 |
| | | 15,139 | | | 217 | | | — | | | 15,356 |
Assets (1) |
| 673,489 |
| 116,779 |
| (5,869 | ) | 784,399 |
| | | 868,239 | | | 101,308 | | | (8,770) | | | 960,777 |
|
|
|
|
|
|
|
|
|
| ||||||||||||
Thirty-Nine Weeks Ended December 31, 2016 |
| TCS |
| Elfa |
| Eliminations |
| Total |
| ||||||||||||
| | | | | | | | | | | | | |||||||||
Thirty-Nine Weeks Ended December 31, 2022 |
| TCS |
| Elfa |
| Eliminations |
| Total | |||||||||||||
Net sales to third parties |
| $549,423 |
| $49,465 |
| $- |
| $598,888 |
| | $ | 745,914 | | $ | 41,628 | | $ | — | | $ | 787,542 |
Intersegment sales |
| - |
| 41,982 |
| (41,982 | ) | - |
| | | — | | | 50,792 | | | (50,792) | | | — |
Adjusted EBITDA |
| 53,485 |
| 9,454 |
| (3,289 | ) | 59,650 |
| | | 82,071 | | | 10,123 | | | (5,934) | | | 86,260 |
Interest expense, net |
| 12,283 |
| 151 |
| - |
| 12,434 |
| | | 11,025 | | | 370 | | | — | | | 11,395 |
Assets (1) |
| 680,287 |
| 105,008 |
| (5,181 | ) | 780,114 |
| | | 1,261,798 | | | 119,176 | | | (171,953) | | | 1,209,021 |
| | | | | | | | | | | | |
| (1) | Tangible assets in the Elfa column are located outside of the United States. |
(1)Tangible assets in the Elfa column are located outside of the United States.18
(2)The TCS segment includes a net benefit of $3.9 million related to amended and restated employment agreements entered into with key executives during the first quarter of fiscal 2016, leading to a reversal of accrued deferred compensation associated with the original employment agreements.
A reconciliation of Adjusted EBITDA by segment to (loss) income before taxes to Adjusted EBITDA is set forth below:
|
| Thirteen Weeks Ended |
| Thirty-Nine Weeks Ended |
| ||||
|
| December 30, |
| December 31, |
| December 30, |
| December 31, |
|
Adjusted EBITDA by segment: |
|
|
|
|
|
|
|
|
|
TCS |
| $22,550 |
| $22,333 |
| $51,760 |
| $53,485 |
|
Elfa |
| 6,374 |
| 4,968 |
| 10,965 |
| 9,454 |
|
Eliminations |
| (3,363 | ) | (1,983 | ) | (4,218 | ) | (3,289 | ) |
Total Adjusted EBITDA |
| 25,561 |
| 25,318 |
| 58,507 |
| 59,650 |
|
Depreciation and amortization |
| (9,477 | ) | (9,236 | ) | (28,524 | ) | (28,061 | ) |
Interest expense, net |
| (7,300 | ) | (4,119 | ) | (17,398 | ) | (12,434 | ) |
Pre-opening costs (a) |
| (1,872 | ) | (2,918 | ) | (4,676 | ) | (6,558 | ) |
Non-cash rent (b) |
| 714 |
| 298 |
| 1,451 |
| 970 |
|
Stock-based compensation (c) |
| (585 | ) | (599 | ) | (1,589 | ) | (1,355 | ) |
Loss on extinguishment of debt (d) |
| - |
| - |
| (2,369 | ) | - |
|
Foreign exchange gains (losses) (e) |
| 360 |
| (53 | ) | 306 |
| 211 |
|
Optimization Plan implementation charges (f) |
| (422 | ) | - |
| (10,742 | ) | - |
|
Elfa manufacturing facility closure (g) |
| (335 | ) | - |
| (852 | ) | - |
|
Other adjustments (h) |
| (45 | ) | (249 | ) | (135 | ) | (996 | ) |
Income (loss) before taxes |
| $6,599 |
| $8,442 |
| $(6,021 | ) | $11,427 |
|
| | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | | Thirty-Nine Weeks Ended | | |||||||
|
| December 30, |
| December 31, |
| December 30, |
| December 31, |
| ||||
| | | 2023 | | | 2022 | | 2023 | | 2022 | | ||
(Loss) income before taxes | | $ | (4,780) | | $ | 6,295 | | $ | (43,265) | | $ | 42,251 | |
Add: | |
| | | | | |
| | | | | |
Depreciation and amortization | |
| 11,532 | |
| 9,952 | |
| 32,427 | |
| 28,507 | |
Interest expense, net | |
| 5,151 | |
| 4,389 | |
| 15,356 | |
| 11,395 | |
Pre-opening costs (a) | |
| 849 | |
| 430 | |
| 1,583 | |
| 1,049 | |
Non-cash lease expense (b) | |
| (573) | |
| 232 | |
| (902) | |
| 403 | |
Impairment charges (c) | | | — | | | — | | | 23,447 | | | — | |
Stock-based compensation (d) | |
| 515 | |
| 825 | |
| 1,605 | |
| 2,562 | |
Foreign exchange losses (gains) (e) | |
| (29) | |
| 38 | |
| (102) | |
| 30 | |
Acquisition-related costs (f) | | | — | | | — | | | — | | | 63 | |
Severance charges (g) | | | — | | | — | | | 2,462 | | | — | |
Elfa restructuring (h) | | | 130 | | | — | | | 130 | | | — | |
Adjusted EBITDA | | $ | 12,795 | | $ | 22,161 | | $ | 32,741 | | $ | 86,260 | |
(a) Non-capital expenditures associated with opening new stores and relocating stores, including rent, marketing expenses, travel and relocation costs, and training costs. We adjust for these costs to facilitate comparisons of our performance from period to period.
(b) Reflects the extent to which our annual GAAP rent expense has been above or below our cash rent payment due to lease accounting adjustments. The adjustment varies depending on the average age of our lease portfolio (weighted for size), as our GAAP rent expense on younger leases typically exceeds our cash cost, while our GAAP rent expense on older leases is typically less than our cash cost.
(c) Non-cash charges related to stock-based compensation programs, which vary from period to period depending on volume and vesting timing of awards. We adjust for these charges to facilitate comparisons from period to period.
(d) Loss recorded as a result of the amendments made to the Senior Secured Term Loan Facility and the Revolving Credit Facility in August 2017, which we do not consider in our evaluation of our ongoing operations.
(e) Realized foreign exchange transactional gains/losses our management does not consider in our evaluation of our ongoing operations.
(f) Charges incurred to implement our Optimization Plan, which include certain consulting costs recorded in selling, general and administrative expenses, cash severance payments associated with the elimination of certain full-time positions at the TCS segment recorded in other expenses, and cash severance payments associated with organizational realignment at the Elfa segment recorded in other expenses, which we do not consider in our evaluation of ongoing performance.
(g) Charges related to the closure of an Elfa manufacturing facility in Lahti, Finland in December 2017, recorded in other expenses, which we do not consider in our evaluation of our ongoing performance.
(h) Other adjustments include amounts our management does not consider in our evaluation of our ongoing
operations, including certain severance and other charges.
11. Optimization Plan
On May 23, 2017, the Company announced a four-part plan designed to optimize its consolidated business and drive improved sales and profitability (the “Optimization Plan”), which included sales initiatives, certain full-time position eliminations at TCS, organizational realignment at Elfa and ongoing savings and efficiency efforts.
In the thirteen weeks and thirty-nine weeks ended December 30, 2017, the Company incurred the following charges related to the implementation of the Optimization Plan:
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|
|
|
Thirteen |
| Thirty-Nine |
|
|
|
|
|
|
|
|
|
|
| Income Statement Location |
| December 30, |
| December 30, |
|
Consulting fees and other costs |
| Selling, general & administrative |
| $6 |
| $6,686 |
|
Severance - full-time position eliminations at TCS |
| Other expenses |
| - |
| 1,836 |
|
Severance - organizational realignment at Elfa |
| Other expenses |
| 416 |
| 2,220 |
|
Total Optimization Plan charges |
|
|
| $422 |
| $10,742 |
|
Certain aspects of the Optimization Plan meet the definition of exit or disposal costs as defined in the Accounting Standards Codification (“ASC”) Topic 420, Exit or Disposal Cost Obligations. The following table summarizes the exit or disposal activities during the thirty-nine weeks ended December 30, 2017:
| (a) | Non-capital expenditures associated with opening new stores and relocating stores, including marketing expenses, travel and relocation costs, and training costs. We adjust for these costs to facilitate comparisons of our performance from period to period. |
| (b) | Reflects the extent to which our annual GAAP operating lease expense has been above or below our cash operating lease payments. The amount varies depending on the average age of our lease portfolio (weighted for size), as our GAAP operating lease expense on younger leases typically exceeds our cash operating lease payments, while our GAAP operating lease expense on older leases is typically less than our cash operating lease payments. |
TCS PositionEliminations
| (c) | Non-cash goodwill impairment charge recognized in the second quarter of fiscal 2023, which we do not consider in our evaluation of ongoing performance. |
| (d) | Non-cash charges related to stock-based compensation programs, which vary from period to period depending on volume and vesting timing of awards. We adjust for these charges to facilitate comparisons from period to period. |
| (e) |
|
| (f) | Includes legal costs incurred in the second quarter of fiscal 2022 associated with the acquisition of Closet Works, all of which are recorded as selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance. |
| Severance charges associated with the elimination of |
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| ongoing performance. |
| (h) | Charges associated with the close-down of Elfa segment sales operations in Poland in the third quarter of fiscal 2023, which we do not consider in our evaluation of ongoing performance. |
19
The balance of $113 as of December 30, 2017 is recorded in the Accrued liabilities line item in the Consolidated Balance Sheets. The Company does not expect future severance costs to be incurred related to full-time position eliminations at TCS as the actions were completed during the first quarter of fiscal 2017.
12. Elfa manufacturing facility closure11. Subsequent event
During the thirteen weeks ended December 30, 2017,On February 1, 2024, the Company closedentered into a Seventh Amendment to Lease (the “Seventh Amendment”) to the Elfa manufacturing facility in Lahti, Finland.Office, Warehouse and Distribution Center Lease Agreement dated October 8, 2002. The Company recorded $335 and $852 asSeventh Amendment amends the lease to, among other expenses in connection withthings, extend the closureterm of the manufacturing facility inlease for 120 months, commencing on May 1, 2025, such that the thirteen weeks ended December 30, 2017 and the thirty-nine weeks ended December 30, 2017, respectively, which includes severance costs, charges for inventory obsolescence and accelerated depreciation on machinery and equipment.
13. Stock-based compensation
On September 12, 2017, the Company’s shareholders approved The Container Store Group Inc. Amended and Restated 2013 Incentive Award Plan (the “Amended and Restated Plan”), which previously had been approved by the Company’s Board of Directors. The Amended and Restated Plan (i) increases the number of shares of common stock available for issuance under such plan from 3,616,570 shares to 11,116,570 shares; (ii) is intended to allow awards under the Amended and Restated Plan to continue to qualify as tax-deductible performance-based compensation under Section 162(m)expiration of the Internal Revenue Codelease term, is amended to be April 30, 2035, an annual lease payment of 1986, as amended, subject to anticipated changes resulting fromapproximately $7,435 for the Tax Act as described below;first year, and (iii) makes certain minor technical changes toincrease lease payments 4.0% on an annual-base, following the termsfirst year of the Amendedamended lease. The amended lease is expected to have a balance sheet impact of approximately $55,000 to increase the operating lease right-of-use assets and Restated Plan.operating lease liabilities, respectively.
Pursuant to the Tax Act, the exception for performance-based compensation has been repealed, effective for tax years beginning after December 31, 2017, and, therefore, compensation previously intended to be performance-based may not be deductible unless it qualifies for limited transition relief applicable to certain amounts payable pursuant to a written binding contract that was in effect on November 2, 2017.
20
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary note regarding forward-looking statements
This report, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements included in this Quarterly Report, including without limitation statements regarding expectations for our business including anticipated store openings, anticipated financial performance and liquidity, the impact of macroeconomic conditions, expectations related to litigation matters, anticipated capital expenditures, and other expenses, are only predictions and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These include, but are not limited to: a decline in the health of the economy and the purchase of discretionary items; the anticipated impact of macroeconomic conditions on our business, results of operations and financial condition; our ability to continue to lease space on favorable terms; costs and risks relatedrelating to new store openings; quarterly and seasonal fluctuations in our operating results; cost increases that are beyond our control; our inability to protect our brand; our failure or inability to protect our intellectual property rights; our inability to source and market ournew products to meet customerconsumer preferences; failure to successfully anticipate, or manage inventory commensurate with, consumer preferences orand demand; competition from other stores and internet-based competition; our inability to offer customers an aesthetically pleasing shopping environment;obtain merchandise from our vendors on a timely basis and at competitive prices; the risk that our operatingvendors may sell similar or identical products to our competitors; our and financial performance in a given period will not meet the guidance we provided to the public; the risk that significant business initiatives may not be successful; our dependence on a single distribution center for all of our stores; thevendors’ vulnerability of our facilities and systems to natural disasters and other unexpected events; product recalls and/or product liability, as well as changes in product safety and other consumer protection laws; risks relatedrelating to operating two distribution centers; our dependence on foreign imports for our merchandise; our reliance onupon independent third-party transportation providers for substantially all ofproviders; our product shipments; our dependence on our brand image and any inability to protect our brand; our failure to successfully anticipate consumer demand and manage inventory commensurate with demand; our failure to effectively manage our growth; our inabilityonline sales; failure to lease space on favorable terms; fluctuations in currency exchange rates; risks relatedcomply with laws and regulations relating to privacy, data protection, and consumer protection; effects of a security breach or cyber-attack of our website or information technology systems, and otherincluding relating to our use of third-party web service providers; damage to, such systems;or interruptions in, our information systems as a result of external factors, working from home arrangements, staffing shortages and difficulties in updating our existing software or developing or implementing new software; risk related to our indebtedness may restrict our current and future operations, and we may not be able to refinance our debt on favorable terms, or at all; fluctuations in currency exchange rates; our inability to effectively manage online sales; effectsmaintain sufficient levels of competition oncash flow to meet growth expectations; our business; risks related to our inability to obtain capital on satisfactory terms or at all;fixed lease obligations; disruptions in the global financial markets leading to difficulty in borrowing sufficient amounts of capital to finance the carrying costs of inventory to pay for capital expenditures and operating costs; ourchanges to global markets and inability to obtain merchandise frompredict future interest expenses; our vendors on a timely basis and at competitive prices; the risk that our vendors may sell their products to our competitors; our dependencereliance on key executive management, and the transition in our executive leadership;management; our inability to find, train and retain key personnel; labor activities and unrest; risingrelations difficulties; increases in health care costs and labor costs; risks associated with our dependence on foreign imports; risks related to violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery and anti-kickback laws; risks related to our indebtedness; risks related to our fixed lease obligations; material damage to or interruptions in our information technology systems; risks related to litigation; product recalls and/or product liabilityimpairment charges and changes in product safety and consumer protection laws; changes in statutory, regulatory, accounting and other legal requirements; risks related toeffects of changes in estimates or projections used to assess the fair value of our intangible assets; fluctuations in oureffects of tax obligations, effectivereform and other tax rate and realization of deferred tax assets, as a result of the Tax Cuts and Jobs Act; seasonal fluctuations in our operating results; material disruptions in one of our Elfa manufacturing facilities; our inability to protect our intellectual property rights and claims that we have infringed third parties’ intellectual property rights; risks related to our status as a controlled company;fluctuations; significant fluctuations in the price of our common stock; substantial future sales of our common stock, or the perception that such sales may occur, which could depress the price of our common stock; risks related to being a public company; our performance meeting guidance provided to the public; risks relating to acquisitions; anti-takeover provisions in our governing documents, which could delay or prevent a change in control; reduced disclosure requirements applicable to emerging growth companies, which could make our stock less attractive to investors; and our failure to establish and maintain effective internal controls. Other important risk factors that could affect the outcome of the events set forth in these statements and that could affect our operating results and financial condition are described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended April 1, 2017,2023 (the “2022 Annual Report on Form 10-K”), filed with the Securities and Exchange Commission (the “SEC”) on June 1, 2017.May 26, 2023.
We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this report. Because forward-looking statements are
inherently subject to risks and uncertainties, you should not rely on these forward-looking statements as predictions of future
21
events. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein after the date of this report, whether as a result of any new information, future events or otherwise.
Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to the “Company,” “we,” “us,” and “our” refer to The Container Store Group, Inc. and, where appropriate, its subsidiaries.
We follow a 4-4-5 fiscal calendar, whereby each fiscal quarter consists of thirteen weeks grouped into two four-week “months” and one five-week “month”, and our fiscal year is the 52- or 53-week period ending on the Saturday closest to March 31. Fiscal 20172023 ends on March 31, 2018,30, 2024 and will include 52 weeks and fiscal 20162022 ended on April 1, 2017,2023 and fiscal 2015 ended on February 27, 2016.included 52 weeks. The third quarter of fiscal 20172023 ended on December 30, 20172023 and the third quarter of fiscal 20162022 ended on December 31, 2016,2022, and both included thirteen weeks.
OverviewNote on Dollar Amounts
All dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are in thousands, except per share amounts and unless otherwise stated.
Overview
The Container Store® is the original and leading specialty retailer of storageorganizing solutions, custom spaces and organization products and solutionsin-home services in the United States and the only national retailer solely devoted to the category. We provide a collection of creative, multifunctional and customizable storage and organization solutions that are sold in our stores and online through a high-service, differentiated shopping experience. Our vision is to be a beloved brandWe feature The Container Store Custom Spaces (“Custom Spaces”) consisting of our elfa® Classic, elfa® Décor, Avera® and the first choice for customized organization solutionsPreston® systems, which are wholly-owned and manufactured by The Container Store.Custom Spaces includes metal-based and wood-based custom space products and in-home installation services.Our customers are highly educated, and very busy – from college studentsand primarily homeowners with a higher than average household income. Our customers crave discovery, inspiration, and solutions that simplify their lives and maximize their spaces within their homes. Our vision is to empty nesters. We service themdeepen our relationship with storageour customers, expand our reach and organization solutions to accomplish projects that save them space and time and ultimately improvestrengthen our capabilities, all while transforming lives through the qualitypower of their lives. We believe an organized life is a happy life.organization.
Our operations consist of two operatingreportable segments:
·● The Container Store (“TCS”), which consists of our retail stores, website and call center (which includes business sales), as well as our installation and organizationalin-home services business. As of December 30, 2017,2023, we operated 90100 stores with an average size of approximately 25,00024,000 square feet (19,000(18,000 selling square feet) in 3234 states and the District of Columbia. We also offer all of our products directly to customers including business-to-business customers, through our website, responsive mobile site and app, call center.center, and in-home design specialists and in-home design organizers. Our stores receive substantially all of our products directly from one of our two distribution centers. Our first distribution center in Coppell, Texas, is co-located with our corporate headquarterssupport center and call center, and our second distribution center is located in Coppell, Texas.Aberdeen, Maryland. C Studio designs and manufactures the Company’s premium wood-based custom space product offering, and is included in the TCS reportable segment.
·● Elfa, The Container Store, Inc.’s wholly-owned Swedish subsidiary, Elfa International AB (“Elfa”), which designs and manufactures component-based shelving and drawer systems and made-to-measure sliding doors. Elfa was founded in 1948 and is headquartered in Malmö, Sweden. Elfa’s shelving and drawer systems are customizable for any area of the home, including closets, kitchens, offices and garages. Elfa operates three manufacturing facilities with two located in Sweden and one in Poland. The Container Store began selling elfa®elfa® products in 1978 and acquired Elfa in 1999. Today our TCS segment is the exclusive distributor of elfa®elfa® products in the U.S. Elfa also sells its products on a wholesale basis to various retailers in approximately 30 countries around the world, with a concentration in the Nordic region of Europe.
Optimization Plan
As previously announced on May 23, 2017, the Company launched a four-part optimization plan to drive improved sales and profitability (the “Optimization Plan”). This plan includes sales initiatives, certain full-time position eliminations at TCS that were concluded in the first fiscal quarter, organizational realignment at Elfa and ongoing savings and efficiency efforts. In fiscal 2016, the Company’s savings program was primarily focused within selling, general and administrative expenses. However, as part of the Optimization Plan, the Company also intends to focus on savings and efficiency efforts within cost of sales, in addition to selling, general and administrative expenses.22
The Company expects to incur pre-tax charges associated with the implementation of the Optimization Plan of approximately $11 million in fiscal 2017. The expected annualized pre-tax savings associated with the Optimization Plan continue to be approximately $20 million, of which approximately $12 to $14 million is now expected to be realized in fiscal 2017.
Note on Dollar Amounts
All dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are in thousands, except per share amounts and unless otherwise stated.
Results of Operations
The following data represents the amounts shown in our unaudited consolidated statements of operations expressed in dollars and as a percentage of net sales and operating data for the periods presented. For segment data, see Note 10 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
| | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | Thirty-Nine Weeks Ended | | ||||||||
|
| December 30, |
| December 31, |
| December 30, |
| December 31, | | ||||
| | 2023 | | 2022 | | 2023 | | 2022 | | ||||
Net sales | | $ | 214,899 | | $ | 252,236 | | $ | 641,742 | | $ | 787,542 | |
Cost of sales (excluding depreciation and amortization) | |
| 89,682 | |
| 108,795 | |
| 275,308 | |
| 339,583 | |
Gross profit | |
| 125,217 | |
| 143,441 | |
| 366,434 | |
| 447,959 | |
Selling, general, and administrative expenses (excluding depreciation and amortization) | |
| 111,820 | |
| 121,540 | |
| 332,471 | |
| 362,104 | |
Impairment charges | | | — | | | — | | | 23,447 | | | — | |
Stock-based compensation | |
| 515 | |
| 825 | |
| 1,605 | |
| 2,562 | |
Pre-opening costs | |
| 849 | |
| 430 | |
| 1,583 | |
| 1,049 | |
Depreciation and amortization | |
| 11,532 | |
| 9,952 | |
| 32,427 | |
| 28,507 | |
Other expenses | |
| 130 | |
| — | |
| 2,589 | |
| — | |
Loss on disposal of assets | |
| — | |
| 10 | |
| 221 | |
| 91 | |
Income (loss) from operations | |
| 371 | |
| 10,684 | |
| (27,909) | |
| 53,646 | |
Interest expense, net | | | 5,151 | | | 4,389 | | | 15,356 | | | 11,395 | |
(Loss) income before taxes | |
| (4,780) | |
| 6,295 | |
| (43,265) | |
| 42,251 | |
Provision (benefit) for income taxes | |
| 1,651 | |
| 2,127 | |
| (1,344) | |
| 11,857 | |
Net (loss) income | | $ | (6,431) | | $ | 4,168 | | $ | (41,921) | | $ | 30,394 | |
| | | | | | | | | | | | | |
Net (loss) income per common share — basic | | $ | (0.13) | | $ | 0.08 | | $ | (0.85) | | $ | 0.61 | |
Net (loss) income per common share — diluted | | $ | (0.13) | | $ | 0.08 | | $ | (0.85) | | $ | 0.61 | |
| | | | | | | | | | | | | |
Weighted-average common shares — basic | | | 49,591,111 | | | 49,263,122 | | | 49,435,182 | | | 49,661,209 | |
Weighted-average common shares — diluted | |
| 49,591,111 | |
| 49,452,980 | |
| 49,435,182 | |
| 50,024,589 | |
|
| Thirteen Weeks Ended |
| Thirty-Nine Weeks Ended | |||||
|
| December 30, |
| December 31, |
| December 30, |
| December 31, |
|
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Net sales |
| $222,986 |
| $216,380 |
| $624,464 |
| $598,888 |
|
Cost of sales (excluding depreciation and amortization) |
| 92,425 |
| 90,678 |
| 263,919 |
| 250,136 |
|
Gross profit |
| 130,561 |
| 125,702 |
| 360,545 |
| 348,752 |
|
Selling, general, and administrative expenses (excluding depreciation and amortization) |
| 103,894 |
| 100,206 |
| 306,866 |
| 288,037 |
|
Stock-based compensation |
| 585 |
| 599 |
| 1,589 |
| 1,355 |
|
Pre-opening costs |
| 1,872 |
| 2,918 |
| 4,676 |
| 6,558 |
|
Depreciation and amortization |
| 9,477 |
| 9,236 |
| 28,524 |
| 28,061 |
|
Other expenses |
| 751 |
| 182 |
| 4,908 |
| 839 |
|
Loss on disposal of assets |
| 83 |
| - |
| 236 |
| 41 |
|
Income from operations |
| 13,899 |
| 12,561 |
| 13,746 |
| 23,861 |
|
Interest expense |
| 7,300 |
| 4,119 |
| 17,398 |
| 12,434 |
|
Loss on extinguishment of debt |
| - |
| - |
| 2,369 |
| - |
|
Income (loss) before taxes |
| 6,599 |
| 8,442 |
| (6,021 | ) | 11,427 |
|
(Benefit) provision for income taxes |
| (21,780 | ) | 3,350 |
| (25,848 | ) | 4,851 |
|
Net income |
| $28,379 |
| $5,092 |
| $19,827 |
| $6,576 |
|
|
| Thirteen Weeks Ended |
| Thirty-Nine Weeks Ended | ||||
|
| December 30, |
| December 31, |
| December 30, |
| December 31, |
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
Percentage of net sales: |
|
|
|
|
|
|
|
|
Net sales |
| 100.0% |
| 100.0% |
| 100.0% |
| 100.0% |
Cost of sales (excluding depreciation and amortization) |
| 41.4% |
| 41.9% |
| 42.3% |
| 41.8% |
Gross profit |
| 58.6% |
| 58.1% |
| 57.7% |
| 58.2% |
Selling, general and administrative expenses (excluding depreciation and amortization) |
| 46.6% |
| 46.3% |
| 49.1% |
| 48.1% |
Stock-based compensation |
| 0.3% |
| 0.3% |
| 0.3% |
| 0.2% |
Pre-opening costs |
| 0.8% |
| 1.3% |
| 0.7% |
| 1.1% |
Depreciation and amortization |
| 4.3% |
| 4.3% |
| 4.6% |
| 4.7% |
Other expenses |
| 0.3% |
| 0.1% |
| 0.8% |
| 0.1% |
Loss on disposal of assets |
| 0.0% |
| 0.0% |
| 0.0% |
| 0.0% |
Income from operations |
| 6.2% |
| 5.8% |
| 2.2% |
| 4.0% |
Interest expense |
| 3.3% |
| 1.9% |
| 2.8% |
| 2.1% |
Loss on extinguishment of debt |
| 0.0% |
| 0.0% |
| 0.4% |
| 0.0% |
Income (loss) before taxes |
| 3.0% |
| 3.9% |
| (1.0%) |
| 1.9% |
(Benefit) provision for income taxes |
| (9.8%) |
| 1.5% |
| (4.1%) |
| 0.8% |
Net income |
| 12.7% |
| 2.4% |
| 3.2% |
| 1.1% |
Operating data: |
|
|
|
|
|
|
|
|
Comparable store sales(1) |
| (0.2%) |
| (3.9%) |
| 0.2% |
| (3.3%) |
Number of stores open at end of period |
| 90 |
| 86 |
| 90 |
| 86 |
Non-GAAP measures(2): |
|
|
|
|
|
|
|
|
Adjusted EBITDA(3) |
| $25,561 |
| $25,318 |
| $58,507 |
| $59,650 |
Adjusted net income (4) |
| $5,083 |
| $5,228 |
| $5,153 |
| $4,652 |
Adjusted net income per diluted share (4) |
| $0.11 |
| $0.11 |
| $0.11 |
| $0.10 |
23
| | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | Thirty-Nine Weeks Ended | | | ||||||||
| | December 30, | | December 31, | | December 30, | | December 31, | | | ||||
| | 2023 | | 2022 | | 2023 | | 2022 | | | ||||
Percentage of net sales: |
| |
|
| |
|
| |
|
| |
|
|
|
Net sales |
| | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
|
Cost of sales (excluding depreciation and amortization) |
| | 41.7 | % | | 43.1 | % | | 42.9 | % | | 43.1 | % |
|
Gross profit |
| | 58.3 | % | | 56.9 | % | | 57.1 | % | | 56.9 | % |
|
Selling, general, and administrative expenses (excluding depreciation and amortization) |
| | 52.0 | % | | 48.2 | % | | 51.8 | % | | 46.0 | % |
|
Impairment charges | | | — | % | | — | % | | 3.7 | % | | — | % | |
Stock‑based compensation |
| | 0.2 | % | | 0.3 | % | | 0.3 | % | | 0.3 | % |
|
Pre‑opening costs |
| | 0.4 | % | | 0.2 | % | | 0.2 | % | | 0.1 | % |
|
Depreciation and amortization |
| | 5.4 | % | | 3.9 | % | | 5.1 | % | | 3.6 | % |
|
Other expenses |
| | 0.1 | % | | — | % | | 0.4 | % | | — | % |
|
Loss on disposal of assets |
| | — | % | | 0.0 | % | | 0.0 | % | | 0.0 | % |
|
Income (loss) from operations |
| | 0.2 | % | | 4.2 | % | | (4.3) | % | | 6.8 | % |
|
Interest expense, net |
| | 2.4 | % | | 1.7 | % | | 2.4 | % | | 1.4 | % |
|
(Loss) income before taxes |
| | (2.2) | % | | 2.5 | % | | (6.7) | % | | 5.4 | % |
|
Provision (benefit) for income taxes |
| | 0.8 | % | | 0.8 | % | | (0.2) | % | | 1.5 | % |
|
Net (loss) income |
| | (3.0) | % | | 1.7 | % | | (6.5) | % | | 3.9 | % |
|
Operating data: |
| | |
| |
|
| | |
| | |
|
|
Comparable store sales change for the period (1) |
| | (16.8) | % | | (4.3) | % | | (18.9) | % | | (0.2) | % |
|
Number of stores at end of period |
| | 100 |
| | 95 |
| | 100 |
| | 95 |
|
|
Non‑GAAP measures (2): |
| |
|
| |
|
| |
|
| |
|
|
|
Adjusted EBITDA (3) |
| $ | 12,795 |
| $ | 22,161 |
| $ | 32,741 |
| $ | 86,260 |
|
|
Adjusted net (loss) income (4) |
| $ | (4,063) |
| $ | 4,109 |
| $ | (13,831) |
| $ | 28,402 |
|
|
Adjusted net (loss) income per common share — diluted (4) |
| $ | (0.08) |
| $ | 0.08 |
| $ | (0.28) |
| $ | 0.57 |
|
|
| (1) | Comparable store sales includes all net sales from our TCS segment, except for (i) sales from stores open less than sixteen months, (ii) stores that have been closed permanently, (iii) stores that have been closed temporarily for more than seven days and (iv) C Studio sales to third parties. A store is included in the comparable store sales calculation on the first day of the sixteenth full fiscal month following the store’s opening. When a store is relocated, we continue to consider sales from that store to be comparable store sales. A store permanently closed is not considered comparable in the fiscal month that it closes. A store temporarily closed for more than seven days is not considered comparable in the fiscal month it is closed. The store then becomes comparable on the first day of the following fiscal month in which it reopens. |
(1) A store is included in the comparable store sales calculation on the first day of the sixteenth full fiscal month following the store’s opening. Comparable store sales reflect the point at which merchandise and service orders are fulfilled and delivered to customers, excluding shipping and delivery, and are net of discounts and returns. When a store is relocated, we continue to consider net sales from that store to be comparable store sales. Website, call center and business-to-business net sales are also included in calculations of comparable store sales.
| (2) | We have presented in the table above Adjusted EBITDA, adjusted net income (loss), and adjusted net income (loss) per common share – diluted as supplemental measures of financial performance that are not required by, or presented in accordance with, accounting principles generally accepted in the United States of America (“GAAP”). These non-GAAP measures should not be considered as alternatives to net income or net loss as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. These non-GAAP measures are key metrics used by management, our board of directors, and Leonard Green and Partners, L.P. (“LGP”) to assess our financial performance. We present these non-GAAP measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance and because we believe it is useful for investors to see the measures that management uses to evaluate the Company. These non-GAAP measures are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In evaluating these non-GAAP measures, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of these non-GAAP measures should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using non-GAAP measures supplementally. Our non-GAAP measures are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation. Please refer to footnotes (3) and (4) of this table for further information regarding why we believe each non-GAAP measure provides useful |
24
| information to investors regarding our financial condition and results of operations, as well as the additional purposes for which management uses each non-GAAP financial measure. |
(2) We have presented EBITDA, Adjusted EBITDA, adjusted net income, and adjusted net income per diluted share as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. These non-GAAP measures should not be considered as alternatives to net income as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. These non-GAAP measures are key metrics used by management, our board of directors, and LGP to assess our financial performance. We present these non-GAAP measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance and because we believe it is useful for investors to see the measures that management uses to evaluate the Company. These non-GAAP measures are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In evaluating these non-GAAP measures, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of these non-GAAP measures should not be construed to imply that our future results will be unaffected by any such
adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using non-GAAP measures supplementally. Our non-GAAP measures are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation. Please refer to footnotes (3) and (4) of this table for further information regarding why we believe each non-GAAP measure provides useful information to investors regarding our financial condition and results of operations, as well as the additional purposes for which management uses each non-GAAP financial measure.
Additionally, this Management’s Discussion and Analysis also refers to the change in Elfa third-party net sales after the conversion of Elfa’s net sales from Swedish krona to U.S. dollars using the prior year’s conversion rate.rate, which is a financial measure not calculated in accordance with GAAP. The Company believes the disclosure of the change in Elfa third-party net sales without the effects of currency exchange rate fluctuations helps investors understand the Company’s underlying performance.
| (3) | EBITDA and Adjusted EBITDA have been presented in this Quarterly Report on Form 10-Q as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as net income (loss) before interest, taxes, depreciation, and amortization. Adjusted EBITDA is calculated in accordance with our Secured Term Loan Facility (as defined below) and the Revolving Credit Facility (as defined below) and is one of the components for performance evaluation under our executive compensation programs. Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of certain items, including certain non-cash and other items that we do not consider in our evaluation of ongoing operating performance from period to period as discussed further below. |
(3) EBITDA and Adjusted EBITDA have been presented in this Quarterly Report on Form 10-Q as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as net income before interest, taxes, depreciation, and amortization. Adjusted EBITDA is calculated in accordance with our Secured Term Loan Facility and the Revolving Credit Facility and is one of the components for performance evaluation under our executive compensation programs. Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of certain items, including certain non-cash and other items that we do not consider in our evaluation of ongoing operating performance from period to period as discussed further below.
EBITDA and Adjusted EBITDA are included in this Quarterly Report on Form 10-Q because they are key metrics used by management, our board of directors and LGP to assess our financial performance. In addition, we use Adjusted EBITDA in connection with covenant compliance and executive performance evaluations, and we use Adjusted EBITDA to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We believe it is useful for investors to see the measures that management uses to evaluate the Company, its executives and our covenant compliance, as applicable. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.
EBITDA and Adjusted EBITDA are not GAAP measures of our financial performance or liquidity and should not be considered as alternatives to net income (loss) as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Additionally, EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as they do not reflect certain cash requirements such as tax payments, debt service requirements, capital expenditures, store openings and certain other cash costs that may recur in the future. EBITDA and Adjusted EBITDA contain certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation, such as pre-opening costs and stockstock-based compensation expense. Our presentation of Adjusted EBITDA should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using EBITDA and Adjusted EBITDA supplementally. Our measures of EBITDA and Adjusted EBITDA margin are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.
25
A reconciliation of net (loss) income to EBITDA and Adjusted EBITDA is set forth below:
|
| Thirteen Weeks Ended |
| Thirty-Nine Weeks Ended | |||||
|
| December 30, |
| December 31, |
| December 30, |
| December 31, |
|
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Net income |
| $28,379 |
| $5,092 |
| $19,827 |
| $6,576 |
|
Depreciation and amortization |
| 9,477 |
| 9,236 |
| 28,524 |
| 28,061 |
|
Interest expense, net |
| 7,300 |
| 4,119 |
| 17,398 |
| 12,434 |
|
(Benefit) provision for income taxes |
| (21,780 | ) | 3,350 |
| (25,848 | ) | 4,851 |
|
EBITDA |
| 23,376 |
| 21,797 |
| 39,901 |
| 51,922 |
|
Pre-opening costs (a) |
| 1,872 |
| 2,918 |
| 4,676 |
| 6,558 |
|
Non-cash rent (b) |
| (714 | ) | (298 | ) | (1,451 | ) | (970 | ) |
Stock-based compensation (c) |
| 585 |
| 599 |
| 1,589 |
| 1,355 |
|
Loss on extinguishment of debt (d) |
| - |
| - |
| 2,369 |
| - |
|
Foreign exchange (gains) losses (e) |
| (360 | ) | 53 |
| (306 | ) | (211 | ) |
Optimization Plan implementation charges (f) |
| 422 |
| - |
| 10,742 |
| - |
|
Elfa manufacturing facility closure (g) |
| 335 |
| - |
| 852 |
| - |
|
Other adjustments (h) |
| 45 |
| 249 |
| 135 |
| 996 |
|
Adjusted EBITDA |
| $25,561 |
| $25,318 |
| $58,507 |
| $59,650 |
|
| | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | Thirty-Nine Weeks Ended | | | ||||||||
| | December 30, | | December 31, | | December 30, | | December 31, | | | ||||
| | 2023 | | 2022 | | 2023 | | 2022 | | | ||||
|
| | |
| |
| | |
| |
|
| ||
Net (loss) income | | $ | (6,431) | | $ | 4,168 | | $ | (41,921) | | $ | 30,394 | | |
Depreciation and amortization | |
| 11,532 | |
| 9,952 | |
| 32,427 | |
| 28,507 | | |
Interest expense, net | |
| 5,151 | |
| 4,389 | |
| 15,356 | |
| 11,395 | | |
Income tax provision (benefit) | |
| 1,651 | |
| 2,127 | |
| (1,344) | |
| 11,857 | | |
EBITDA | |
| 11,903 | |
| 20,636 | |
| 4,518 | |
| 82,153 | | |
Pre-opening costs (a) | |
| 849 | |
| 430 | |
| 1,583 | |
| 1,049 | | |
Non-cash lease expense (b) | |
| (573) | |
| 232 | |
| (902) | |
| 403 | | |
Impairment charges (c) | | | — | | | — | | | 23,447 | | | — | | |
Stock-based compensation (d) | |
| 515 | |
| 825 | |
| 1,605 | |
| 2,562 | | |
Foreign exchange losses (gains) (e) | |
| (29) | |
| 38 | |
| (102) | |
| 30 | | |
Severance charges (f) | | | — | | | — | | | 2,462 | | | — | | |
Elfa restructuring (g) | | | 130 | | | — | | | 130 | | | — | | |
Acquisition-related costs (h) | | | — | | | — | | | — | | | 63 | | |
Adjusted EBITDA | | $ | 12,795 | | $ | 22,161 | | $ | 32,741 | | $ | 86,260 | | |
| (a) | Non-capital expenditures associated with opening new stores and relocating stores, including marketing expenses, travel and relocation costs, and training costs. We adjust for these costs to facilitate comparisons of our performance from period to period. |
| (b) | Reflects the extent to which our annual GAAP operating lease expense has been above or below our cash operating lease payments. The amount varies depending on the average age of our lease portfolio (weighted for size), as our GAAP operating lease expense on younger leases typically exceeds our cash operating lease payments, while our GAAP operating lease expense on older leases is typically less than our cash operating lease payments. |
(a)Non-capital expenditures associated with opening new stores and relocating stores, including rent, marketing expenses, travel and relocation costs, and training costs. We adjust for these costs to facilitate comparisons of our performance from period to period.
| (c) | Non-cash goodwill impairment charge recognized in the second quarter of fiscal 2023, which we do not consider in our evaluation of ongoing performance. |
| (d) | Non-cash charges related to stock-based compensation programs, which vary from period to period depending on volume and vesting timing of awards. We adjust for these charges to facilitate comparisons from period to period. |
(b)Reflects the extent to which our annual GAAP rent expense has been above or below our cash rent payment due to lease accounting adjustments. The adjustment varies depending on the average age of our lease portfolio (weighted for size), as our GAAP rent expense on younger leases typically exceeds our cash cost, while our GAAP rent expense on older leases is typically less than our cash cost.
| (e) | Realized foreign exchange transactional gains/losses our management does not consider in our evaluation of ongoing performance. |
| (f) | Severance charges associated with the elimination of certain positions recorded in other expenses in the first and second quarters of fiscal 2023, which we do not consider in our evaluation of ongoing performance. |
(c)Non-cash charges related to stock-based compensation programs, which vary from period to period depending on volume and vesting timing of awards. We adjust for these charges to facilitate comparisons from period to period.
| (g) | Charges associated with the close-down of Elfa segment sales operations in Poland in the third quarter of fiscal 2023, which we do not consider in our evaluation of ongoing performance. |
| (h) | Includes legal costs incurred in the second quarter of fiscal 2022 associated with the acquisition of Closet Works, all of which are recorded in selling, general, and administrative expenses, which we do not consider in our evaluation of ongoing performance. |
(d)Loss recorded as a result of the amendments made to the Senior Secured Term Loan Facility and the Revolving Credit Facility in August 2017, which we do not consider in our evaluation of our ongoing operations.
| (4) | Adjusted net income (loss) and adjusted net income (loss) per common share – diluted have been presented in this Quarterly Report on Form 10-Q as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define adjusted net income (loss) as net income (loss) before restructuring charges, severance charges, acquisition-related costs, impairment charges related to intangible assets, loss on extinguishment of debt, certain losses (gains) on disposal of assets, legal settlements and the tax impact of these adjustments and other unusual or infrequent tax items. We define adjusted net income (loss) per common share – |
26
| diluted as adjusted net income (loss) divided by the diluted weighted average common shares outstanding. We use adjusted net income (loss) and adjusted net income (loss) per common share – diluted to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We present adjusted net income (loss) and adjusted net income (loss) per common share – diluted because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance and because we believe it is useful for investors to see the measures that management uses to evaluate the Company. |
(e)Realized foreign exchange transactional gains/losses our management does not consider in our evaluation of our ongoing operations.
(f)Charges incurred to implement our Optimization Plan, which include certain consulting costs recorded in selling, general and administrative expenses, cash severance payments associated with the elimination of certain full-time positions at the TCS segment recorded in other expenses, and cash severance payments associated with organizational realignment at the Elfa segment recorded in other expenses, which we do not consider in our evaluation of ongoing performance.
(g)Charges related to the closure of an Elfa manufacturing facility in Lahti, Finland in December 2017, recorded in other expenses, which we do not consider in our evaluation of our ongoing performance.
(h)Other adjustments include amounts our management does not consider in our evaluation of our ongoing operations, including certain severance and other charges.
(4) Adjusted net income and adjusted net income per diluted share have been presented in this Quarterly Report on Form 10-Q as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define adjusted net income as net income available to common shareholders before distributions accumulated to preferred shareholders, stock-based compensation and other costs in connection with our IPO, restructuring charges, impairment charges related to intangible assets, losses on extinguishment of debt, certain gains on disposal of assets, certain management transition costs incurred and benefits realized, charges incurred as part of the implementation of our Optimization Plan, and the tax impact of these adjustments and other unusual or infrequent tax items. We define adjusted net income per diluted share as adjusted net income divided by the diluted weighted average common shares outstanding. We use adjusted net income and adjusted net income per diluted share to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We present adjusted net income and adjusted net income per diluted share because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance and because we believe it is useful for investors to see the measures that management uses to evaluate the Company.
We have included a presentation of adjusted net income and adjusted net income per diluted share for the thirteen and thirty-nine weeks ended December 31, 2016 to show the net impact of the amended and restated employment agreements entered into with key executives during the thirteen and thirty-nine weeks ended December 31, 2016 (“management transition costs (benefits)”). Although we disclosed the net positive impact of the amended and restated employment agreements in our discussions of earnings per share and SG&A in our fiscal 2016 filings with the SEC, we did not adjust for the net impact of these agreements in our fiscal 2016 presentation of adjusted net income and adjusted net income per diluted share. However, in the thirteen and thirty-nine weeks ended December 30, 2017, our Optimization Plan has caused us to incur similar charges that we believe are not indicative of our core operating performance, and we expect to continue to incur such charges in the remainder of fiscal 2017. As a result, we believe that adjusting net income and net income per diluted share in the thirteen and thirty-nine weeks ended December 31, 2016 for management transition costs (benefits), in addition to adjusting net income and net income per diluted share for the thirteen and thirty-nine weeks ended December 30, 2017 for charges incurred as part of the implementation of our Optimization Plan will assist investors in comparing our core operating performance across reporting periods on a consistent basis.
A reconciliation of the GAAP financial measures of net income (loss) and net income (loss) per common share – diluted share to the non-GAAP financial measures of adjusted net income (loss) and adjusted net income (loss) per common share – diluted share is set forth below:
|
| Thirteen Weeks Ended |
| Thirty-Nine Weeks Ended |
| ||||
|
| December 30, |
| December 31, |
| December 30, |
| December 31, |
|
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
Net income |
| $28,379 |
| $5,092 |
| $19,827 |
| $6,576 |
|
Management transition costs (benefits) (a) |
| - |
| 182 |
| - |
| (3,071 | ) |
Elfa manufacturing facility closure (b) |
| 335 |
| - |
| 852 |
| - |
|
Loss on extinguishment of debt (c) |
| - |
| - |
| 2,369 |
| - |
|
Optimization Plan implementation charges (d) |
| 422 |
| - |
| 10,742 |
| - |
|
Taxes (e) |
| (24,053 | ) | (46) |
| (28,637 | ) | 1,147 |
|
Adjusted net income |
| $5,083 |
| $5,228 |
| $5,153 |
| $4,652 |
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - diluted |
| 48,167,882 |
| 48,022,499 |
| 48,128,682 |
| 48,002,495 |
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income per common share - diluted |
| $0.11 |
| $0.11 |
| $0.11 |
| $0.10 |
|
| | | | | | | | | | | | | | |
| | Thirteen Weeks Ended | | Thirty-Nine Weeks Ended | | | ||||||||
| | December 30, | | December 31, | | December 30, | | December 31, | | | ||||
| | 2023 | | 2022 | | 2023 | | 2022 | | | ||||
Numerator: |
| |
|
| |
|
| |
|
| |
|
|
|
Net (loss) income | | $ | (6,431) | | $ | 4,168 | | $ | (41,921) | | $ | 30,394 | | |
Impairment charges (a) | | | — | | | — | | | 23,447 | | | — | | |
Severance charges (b) | | | — | | | — | | | 2,462 | | | — | | |
Elfa restructuring (c) | | | 130 | | | — | | | 130 | | | — | | |
Acquisition-related costs (d) | | | — | | | — | | | — | | | 63 | | |
Legal settlement (e) | | | — | | | — | | | — | | | (2,600) | | |
Taxes (f) | |
| 2,238 | |
| (59) | |
| 2,051 | |
| 545 | | |
Adjusted net (loss) income | | $ | (4,063) | | $ | 4,109 | | $ | (13,831) | | $ | 28,402 | | |
Denominator: | |
|
| |
|
| |
|
| |
|
| | |
Weighted-average common shares outstanding — basic | | | 49,591,111 | | | 49,263,122 | | | 49,435,182 | | | 49,661,209 | | |
Weighted-average common shares outstanding — diluted | |
| 49,591,111 | |
| 49,452,980 | |
| 49,435,182 | |
| 50,024,589 | | |
| | | | | | | | | | | | | | |
Net (loss) income per common share — diluted | | $ | (0.13) | | $ | 0.08 | | $ | (0.85) | | $ | 0.61 | | |
Adjusted net (loss) income per common share — diluted | | $ | (0.08) | | $ | 0.08 | | $ | (0.28) | | $ | 0.57 | | |
| (a) | Non-cash goodwill impairment charge recognized in the second quarter of fiscal 2023, which we do not consider in our evaluation of ongoing performance. |
| (b) | Severance charges associated with the elimination of certain positions recorded in other expenses in the first and second quarters of fiscal 2023, which we do not consider in our evaluation of ongoing performance. |
(a)Certain management transition costs incurred and benefits realized, including the impact of amended and restated employment agreements entered into with key executives during fiscal 2016, which resulted in the reversal of accrued deferred compensation associated with the original employment agreements, net of costs incurred to execute the agreements, partially offset by cash severance payments, which we do not consider in our evaluation of ongoing performance.
| (c) | Charges associated with the close-down of Elfa segment sales operations in Poland in the third quarter of fiscal 2023, which we do not consider in our evaluation of ongoing performance. |
| (d) | Includes legal costs incurred in the second quarter of fiscal 2022 associated with the acquisition of Closet Works, all of which are recorded in selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance. |
(b)Charges related to the closure of an Elfa manufacturing facility in Lahti, Finland in December 2017, recorded in other expenses, which we do not consider in our evaluation of our ongoing performance.
| (e) | The Company received a legal settlement, net of legal fees, in the second quarter of fiscal 2022, which we do not consider in our evaluation of ongoing performance. The amount is recorded as selling, general and administrative expenses. |
| (f) | Tax impact of adjustments to net income (loss) that are considered to be unusual or infrequent tax items. For fiscal 2023, also includes $2.6 million of discrete income tax expense recorded in the third quarter of fiscal 2023 related to the expiration of certain stock options granted in connection with our initial public offering in 2013, all of which we do not consider in our evaluation of ongoing performance. |
(c)Loss recorded as a result of the amendments made to the Senior Secured Term Loan Facility and the Revolving Credit Facility in August 2017, which we do not consider in our evaluation of our ongoing operations.
27
(d)Charges incurred to implement our Optimization Plan, which includes certain consulting costs recorded in selling, general and administrative expenses, cash severance payments associated with the elimination of certain full-time positions at the TCS segment recorded in other expenses, and cash severance payments associated with organizational realignment at the Elfa segment recorded in other expenses, which we do not consider in our evaluation of ongoing performance.
(e)Tax impact of adjustments to net income, as well as the estimated impact of the Tax Cuts and Jobs Act enacted in the third quarter of fiscal 2017, which is considered to be an unusual or infrequent tax item, all of which we do not consider in our evaluation of ongoing performance.
Thirteen Weeks Ended December 30, 20172023 Compared to Thirteen Weeks Ended December 31, 20162022
Net sales
The following table summarizes our net sales for each of the thirteen weeks ended December 30, 20172023 and December 31, 2016:2022:
|
| December 30, |
| % total |
| December 31, |
| % total | ||||||||||||
| | | | | | | | | | | | | ||||||||
|
| | | | | | | | |
| ||||||||||
|
| December 30, 2023 |
| % total |
| | December 31, 2022 |
| % total | | ||||||||||
TCS net sales |
| $203,881 |
| 91.4 | % | $199,087 |
| 92.0% | | $ | 202,485 |
| 94.2 | % | | $ | 239,271 |
| 94.9 | % |
Elfa third party net sales |
| 19,105 |
| 8.6 | % | 17,293 |
| 8.0% | ||||||||||||
Elfa third-party net sales | |
| 12,414 |
| 5.8 | % | |
| 12,965 |
| 5.1 | % | ||||||||
Net sales |
| $222,986 |
| 100.0 | % | $216,380 |
| 100.0% | | $ | 214,899 |
| 100.0 | % | | $ | 252,236 |
| 100.0 | % |
Net sales in the thirteen weeks ended December 30, 2017 increased by $6,606,2023 decreased $37,337, or 3.1%,14.8% compared to the thirteen weeks ended December 31, 2016.2022. This increase isdecrease was comprised of the following components:
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| | | |
|
| Net sales | |
Net sales for the thirteen weeks ended December 31, 2022 | | $ | 252,236 |
Incremental net sales (decrease) increase due to: | |
| |
Comparable store sales (including a $8,169, or 26.3%, decrease in online sales) | |
| (39,807) |
Non-comparable sales | | | 3,021 |
Elfa third-party net sales (excluding impact of foreign currency translation) | |
| (636) |
Impact of foreign currency translation on Elfa third-party net sales | |
| 85 |
Net sales for the thirteen weeks ended December 30, 2023 | | $ | 214,899 |
InTCS net sales decreased $36,786 or 15.4%. Comparable store sales decreased 16.8%, with general merchandise categories down 20.4%, negatively impacting comparable store sales by 1,380 basis points, and Custom Spaces down 9.2%, negatively impacting comparable sales by 300 basis points. Non-comparable sales were $3,021 during the thirteen weeks ended December 30, 2017, ten new stores generated $4,999 of incremental2023. Elfa third-party net sales six of which were opened during fiscal 2016 and four of which were opened in the first thirty-nine weeks of fiscal 2017. New store sales were partially offset by a $316,decreased $551 or a 0.2%, decrease in net sales from comparable stores. Elfa third party net sales increased $1,8124.2% in the thirteen weeks ended December 30, 2017, primarily due to the positive impact of foreign currency translation, which increased third party net sales by $1,439.2023. After converting Elfa’s third partythird-party net sales from Swedish krona to U.S. dollars using the prior year’s conversion rate for both the thirteen weeks ended December 30, 20172023 and the thirteen weeks ended December 31, 2016,2022, Elfa third partythird-party net sales increased $373decreased $636 or 4.9%, primarily due to higher neta decline in sales in Russia.Nordic markets.
Gross profit and gross margin
Gross profit in the thirteen weeks ended December 30, 2017 increased by $4,859,2023 decreased $18,224, or 3.9%12.7%, compared to the thirteen weeks ended December 31, 2016.2022. The increasedecrease in gross profit was primarily the result of increaseddecreased consolidated net sales, combined withpartially offset by an increase in consolidated gross margin. The following table summarizes the gross margin for the thirteen weeks ended December 30, 20172023 and December 31, 20162022 by segment and total.consolidated. The segment gross margins include the impact of inter-segmentintersegment net sales from the Elfa segment to the TCS segment:
|
| December 30, 2017 |
| December 31, 2016 |
TCS gross margin |
| 58.1% |
| 57.0% |
Elfa gross margin |
| 36.3% |
| 37.8% |
Total gross margin |
| 58.6% |
| 58.1% |
| | | | | |
|
| December 30, 2023 |
| December 31, 2022 | |
TCS gross margin |
| 57.6 | % | 57.2 | % |
Elfa gross margin |
| 31.0 | % | 32.7 | % |
Consolidated gross margin |
| 58.3 | % | 56.9 | % |
TCS gross margin increased 110 basis points, as lower cost of goods associated with the Optimization Plan and the benefit of favorable foreign currency contracts were partially offset by higher costs associated with our installation services business during the quarter. Elfa gross margin decreased 15040 basis points primarily due to higher direct materialslower freight costs, duringpartially offset by unfavorable product and services mix and increased promotional activity in the quarter. In total,thirteen weeks ended December 30, 2023. Elfa gross margin decreased 170 basis points compared to the third quarter of fiscal 2022 primarily due to unfavorable mix, partially offset by price increases to customers. On a consolidated basis, gross margin increased 50140 basis points asprimarily due to a higher mix of Custom Spaces+ sales year over year in the increase in TCS gross margin was partially offset by the decrease in Elfa gross margin.thirteen weeks ended December 30, 2023.
28
Selling, general and administrative expenses
Selling, general and administrative expenses in the thirteen weeks ended December 30, 2017 increased by $3,688,2023 decreased $9,720, or 3.7%8.0%, compared to the thirteen weeks ended December 31, 2016. As2022. The following table summarizes SG&A as a percentage of consolidated net sales selling, generalfor the thirteen weeks ended December 30, 2023 and administrative expenses increased by 30 basis points. The following table summarizesDecember 31, 2022:
| | | | | |
| | December 30, 2023 | | December 31, 2022 |
|
|
| % of Net sales |
| % of Net sales |
|
TCS selling, general and administrative |
| 49.0 | % | 45.6 | % |
Elfa selling, general and administrative |
| 3.0 | % | 2.6 | % |
Consolidated selling, general and administrative |
| 52.0 | % | 48.2 | % |
Consolidated selling, general and administrative expenses as a percentage of totalconsolidated net sales for the thirteen weeks ended December 30, 2017 and December 31, 2016:
|
| December 30, 2017 |
| December 31, 2016 |
|
| % of Net sales |
| % of Net sales |
TCS selling, general and administrative |
| 42.7% |
| 42.0% |
Elfa selling, general and administrative |
| 3.9% |
| 4.3% |
Total selling, general and administrative |
| 46.6% |
| 46.3% |
TCS selling, general and administrative expenses increased by 70380 basis points, as a percentage of consolidated net sales. This was primarily due to an increase in marketing and technology-related expenses, as well as deleverage of occupancyfixed costs associated with negative comparable store neton lower sales duringin the quarter. Elfa selling, generalthird quarter of fiscal 2023 as compared to the third quarter of fiscal 2022.
Depreciation and administrative expenses decreased by 40 basis points as a percentage of consolidated net sales, primarily dueamortization
Depreciation and amortization increased to ongoing savings and efficiency efforts.
Pre-opening costs
Pre-opening costs decreased by $1,046, or 35.8%,$11,532 in the thirteen weeks ended December 30, 2017 to $1,872,2023, as compared to $2,918$9,952 in the thirteen weeks ended December 31, 2016. We opened three2022 primarily due to capital investments in stores inclusive of one relocation,and technology in fiscal 2022.
Interest expense
Interest expense increased by $762, or 17.4% to $5,151 in the thirteen weeks ended December 30, 2017, and we opened four stores2023 as compared to $4,389 in the thirteen weeks ended December 31, 2016.
Other expenses
Other expenses of $751 were recorded in the thirteen weeks ended December 30, 2017. The Company incurred $416 of charges related2022 primarily due to the implementation of the Optimization Plan. Additionally, the Company recorded $335 of expenses in connection with the closure of an Elfa manufacturing facility in Lahti, Finland in December 2017, which are primarily related to severance. The Company expects to incur approximately $1,000 of total expenses related to the closure of the manufacturing facility in fiscal 2017.
Interest expense
Interest expense increased by $3,181, or 77.2%, in the thirteen weeks ended December 30, 2017 to $7,300, as compared to $4,119 in the thirteen weeks ended December 31, 2016. On August 18, 2017, the Company entered into a fourth amendment (the “Term Loan Amendment”) tohigher interest rate on the Senior Secured Term Loan Facility dated as of April 6, 2012. The fourth amendment amendsand higher average borrowings on the Senior Secured Term Loan Facility to, among other things, increase the applicable interest rate margin to 7.00% for LIBOR loans and 6.00% for base rate loans, which resulted in increased interest expense during the thirteen weeks ended December 30, 2017. The Company expects to incur approximately $25,000 of total interest expense in fiscal 2017.
TaxesRevolving Credit Facility.
Taxes
The benefitprovision for income taxes in the thirteen weeks ended December 30, 20172023 was $21,780$1,651 as compared to a provision of $3,350$2,127 in the thirteen weeks ended December 31, 2016.2022. The effective tax rate for the thirteen weeks ended December 30, 20172023 was -330.1%(34.5)%, as compared to 39.7%33.8% in the thirteen weeks ended December 31, 2016.2022. The decrease in thenegative effective tax rate is primarily due to the initial estimated impact of the Tax Cuts and Jobs Act (the “Tax Act”) enacted during the thirteen weeks ended December 30, 2017, which was primarily driven by the remeasurement of deferred tax balances resulting in the recognition of a provisional benefit of $24,253 in the thirteen weeks ended December 30, 2017.
The Company has made a provisional estimate of2023 was primarily related to the impact of remeasuring its deferred tax balances during the third fiscal quarter of 2017 and has not been able to reasonably estimate the one-time transition tax on the earnings of foreign subsidiaries and continues to account for foreign earnings based on the provisions of the tax laws that were in effect immediately prior to the enactment of the Tax Act. Pursuant to Staff Accounting Bulletin No. 118, the Company’s measurement period for implementing the accounting changes required by the Tax Act will close before December 22, 2018 and the Company anticipates completing the accounting under ASC Topic 740 in a subsequent reporting period within the measurement period.
Due to the Tax Act, the effective tax rate for fiscal 2017 is now estimated to be approximately -170%. However, excluding the impact of the provisional benefit of $24,253discrete items related to the remeasurement of deferred tax balances recordedshare-based compensation on a pre-tax loss as compared to pre-tax income in the thirteen weeks ended December 30, 2017, the effective tax rate for fiscal 2017 is estimated to be in the mid-30% range. We believe that presenting the anticipated effective tax rate excluding the impact of the provisional benefit for the measurement of deferred tax assets assists provides investors with better insight into our anticipated fiscal 2017 performance. The Company is not able to estimate any future adjustments to the provisional amount recognized for the remeasurement of deferred tax balances. The effective tax rate for fiscal 2018 and beyond is estimated to be in the high-20% range. The foregoing estimated effective tax rate ranges exclude the impact of the one-time transition tax on foreign earnings, as the timing and amount of this tax cannot be reasonably estimated.31, 2022.
Thirty-Nine Weeks EndedDecember 30, 20172023 Compared to Thirty-Nine Weeks Ended December 31, 20162022
Net sales
The following table summarizes our net sales for each of the thirty-nine weeks ended December 30, 20172023 and December 31, 2016:2022:
|
| December 30, |
| % total |
| December 31, |
| % total | ||||||||||||
| | | | | | | | | | | | | ||||||||
|
| December 30, 2023 |
| % total |
| | December 31, 2022 |
| % total | | ||||||||||
TCS net sales |
| $573,261 |
| 91.8 | % | $549,423 |
| 91.7% | | $ | 606,137 |
| 94.5 | % | | $ | 745,914 |
| 94.7 | % |
Elfa third party net sales |
| 51,203 |
| 8.2 | % | 49,465 |
| 8.3% | ||||||||||||
Elfa third-party net sales | |
| 35,605 |
| 5.5 | % | |
| 41,628 |
| 5.3 | % | ||||||||
Net sales |
| $624,464 |
| 100.0 | % | $598,888 |
| 100.0% | | $ | 641,742 |
| 100.0 | % | | $ | 787,542 |
| 100.0 | % |
29
Net sales in the thirty-nine weeks ended December 30, 2017 increased by $25,576,2023 decreased $145,800 or 4.3%18.5%, compared to the thirty-nine weeks ended December 31, 2016.2022. This increase isdecrease was comprised of the following components:
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| | | |
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| Net sales | |
Net sales for the thirty-nine weeks ended December 31, 2022 | | $ | 787,542 |
Incremental net sales decrease to: | |
|
|
Comparable store sales (including a $20,456, or 21.2%, decrease in online sales) | |
| (139,763) |
Non-comparable sales | | | (14) |
Elfa third-party net sales (excluding impact of foreign currency translation) | |
| (5,051) |
Impact of foreign currency translation on Elfa third-party net sales | |
| (972) |
Net sales for the thirty-nine weeks ended December 30, 2023 | | $ | 641,742 |
In the thirty-nine weeks ended December 30, 2017, thirteen new stores generated $22,301 of incrementalTCS net sales ninedecreased $139,777 or 18.7%. Comparable store sales decreased 18.9%, with general merchandise categories down 20.5%, contributing 1,350 basis points of which were opened priorthe decrease, combined with a decrease in Custom Spaces of 15.9%, contributing a negative impact of 540 basis points to or during fiscal 2016 and four of which were opened in the first thirty-nine weeks of fiscal 2017. Additionally, comparable stores generated $1,196, or 0.2%, of incremental netstore sales. Elfa third party netNon-comparable sales increased $1,738decreased $14 during the thirty-nine weeks ended December 30, 2017,2023 primarily due to the positive impactdiscontinuation of foreign currency translation, which increased third partyC Studio third-party sales, partially offset by new store sales. Elfa third-party net sales by $1,040.decreased $6,023 or 14.5% in the thirty-nine weeks ended December 30, 2023. After converting Elfa’s third partythird-party net sales from Swedish krona to U.S. dollars using the prior year’s conversion rate for both the thirty-nine weeks ended December 30, 20172023 and the thirty-nine weeks ended December 31, 2016,2022, Elfa third partythird-party net sales increased $698decreased $5,051 or 12.1%, primarily due to higher neta decline in sales in Russia.Nordic markets.
Gross profit and gross margin
Gross profit in the thirty-nine weeks ended December 30, 2017 increased by $11,793,2023 decreased $81,525, or 3.4%,18.2% compared to the thirty-nine weeks ended December 31, 2016.2022. The increasedecrease in gross profit was primarily the result of increased a decrease in consolidated net sales partially offset by a decreasean increase in consolidated gross margin. The following table summarizes the gross margin for the thirty-nine weeks ended December 30, 20172023 and December 31, 20162022 by segment and total.consolidated. The segment gross margins include the impact of inter-segmentintersegment net sales from the Elfa segment to the TCS segment:
|
| December 30, 2017 |
| December 31, 2016 |
| |||||
| | | | | | |||||
|
| December 30, 2023 |
| December 31, 2022 | | |||||
TCS gross margin |
| 57.3% |
| 57.6% |
|
| 56.4 | % | 56.9 | % |
Elfa gross margin |
| 37.6% |
| 39.1% |
|
| 31.5 | % | 31.6 | % |
Total gross margin |
| 57.7% |
| 58.2% |
| |||||
Consolidated gross margin |
| 57.1 | % | 56.9 | % | |||||
TCS gross margin decreased 50 basis points primarily due to increased promotional activity and unfavorable product and services mix, partially offset by lower freight costs. Elfa gross margin decreased 10 basis points primarily due to unfavorable mix, partially offset by price increases to customers. On a consolidated basis, gross margin decreased 50increased 20 basis points as a result of decreased gross margin at TCS and Elfa duringcompared to the first thirty-nine weeks ended of fiscal 2017. TCS gross margin declined 30 basis points, primarily due to higher costs associated with our installation services business, combined with a greater portion of sales generated by
merchandise campaigns, partially offset by lower cost of goods associated with the Optimization Plan. Elfa segment gross margin declined 150 basis points, primarily due to higher direct materials costs.2022.
Selling, general and administrative expenses
Selling, general and administrative expenses in the thirty-nine weeks ended December 30, 2017 increased by $18,829,2023 decreased $29,633, or 6.5%,8.2% compared to the thirty-nine weeks ended December 31, 2016. As a percentage of consolidated net sales, selling, general and administrative expenses increased by 100 basis points.2022. The following table summarizes selling, general and administrative expensesSG&A as a percentage of consolidated net sales for the thirty-nine weeks ended December 30, 20172023 and December 31, 2016:2022:
| | | | | |
| | | | |
|
| | December 30, 2023 | | December 31, 2022 |
|
|
| % of Net sales |
| % of Net sales |
|
TCS selling, general and administrative |
| 49.0 | % | 43.6 | % |
Elfa selling, general and administrative |
| 2.8 | % | 2.4 | % |
Consolidated selling, general and administrative |
| 51.8 | % | 46.0 | % |
|
| December 30, 2017 |
| December 31, 2016 |
|
| % of Net sales |
| % of Net sales |
TCS selling, general and administrative |
| 45.1% |
| 43.7% |
Elfa selling, general and administrative |
| 4.0% |
| 4.4% |
Total selling, general and administrative |
| 49.1% |
| 48.1% |
30
TCS selling, general and administrative expenses increased by 140 basis points as a percentage of consolidated net sales. The increase was primarily due to consulting costs incurred as part of the Optimization Plan, which contributed 105 basis points to the increase in the first thirty-nine weeks of fiscal 2017. Additionally, the impact of amended and restated employment agreements entered into with key executives during fiscal 2016, which led to the reversal of accrued deferred compensation associated with the original employment agreements, net of costs incurred to execute the agreements, contributed a 65 basis points benefit in the thirty-nine weeks ended December 31, 2016. This combined 170 basis points year-over-year increase was partially offset by a 30 basis point improvement in TCSConsolidated selling, general and administrative expenses as a percentage of consolidated net sales increased 580 basis points, with the increase primarily due to ongoing savingsdeleverage on fixed costs on lower sales in the thirty-nine weeks ended of fiscal 2023, and efficiency efforts, inclusive of savings from the Optimization Plan, as well as lower self-insurance costs, partially offset by increased occupancy costs and an increase in marketing and technology-related expenses. Elfa selling, general and administrative expenses decreased by 40 basis points as a percentage of consolidated net sales, primarily due to ongoing savings and efficiency efforts.the benefit of the legal settlement received in the second quarter of fiscal 2022.
Pre-opening costsGoodwill impairment
Pre-opening costs decreased by $1,882, or 28.7%A non-cash goodwill impairment charge of $23,447 was recorded in the thirty-nine weeks ended December 30, 2017 to $4,676,2023 as compared to $6,558zero in the thirty-nine weeks ended December 31, 2016.2022. We opened five stores, inclusivecompleted an interim assessment of one relocation,our goodwill balance as of September 30, 2023 in accordance with ASC 350 due to certain indicators identified during the second quarter of fiscal 2023. The interim assessment resulted in the Company recording a $23,447 charge which represented an impairment of the remaining goodwill balance in the TCS reporting unit as of September 30, 2023.
Depreciation and amortization
Depreciation and amortization increased to $32,427 in the thirty-nine weeks ended December 30, 2017, and we opened seven stores2023, as compared to $28,507 in the thirty-nine weeks ended December 31, 2016.2022 primarily due to capital investments in stores and technology in fiscal 2022.
Other expenses
Other expenses of $4,908$2,589 were recorded in the thirty-nine weeks ended December 30, 2017, which were2023 primarily related to severance costs associated with the Optimization Plan. The Company incurred $1,836 of severance charges associated with thepreviously announced elimination of certain full-time positions at TCS, as well as $2,220 of severance charges associated with organizational realignment at Elfa. Additionally,positions. We did not record other expenses of $852 were recorded in connection with the closure of an Elfa manufacturing facility in Lahti, Finland in December 2017, which are primarily related to severance, an increase in the reserve for inventory obsolescence related to raw materials that were disposed of upon closure of the facility, and accelerated depreciation on machinery and equipment that was disposed of upon closure of the facility. The Company expects to incur approximately $1,000 of total expenses related to the closure of the manufacturing facility in fiscal 2017.thirty-nine weeks ended December 31, 2022.
Interest expense and loss on extinguishment of debt
Interest expense increased by $4,964,$3,961, or 39.9%34.8%, in the thirty-nine weeks ended December 30, 20172023 to $17,398,$15,356, as compared to $12,434$11,395 in the thirty-nine weeks ended December 31, 2016. On August 18, 2017, the Company entered into2022. The increase is primarily due to a fourth amendment (the “Term Loan Amendment”) tohigher interest rate on the Senior Secured Term Loan Facility dated as of April 6, 2012. The fourth amendment amends the Senior Secured Term Loan Facility to, among other things, increase the applicable interest rate margin to 7.00% for LIBOR loans and 6.00% for base rate loans, which resulted in increased interest expense during the thirty-nine weeks ended December 30, 2017. The Company expects to incur approximately $25,000 of total interest expense in fiscal 2017.Facility.
Additionally, as a result of the Term Loan Amendment, the Company recorded $2,369 of loss on extinguishment of debt in the thirty-nine weeks ended December 30, 2017.Taxes
Taxes
The benefit for income taxes in the thirty-nine weeks ended December 30, 20172023 was $25,848,($1,344) as compared to athe provision for income taxes of $4,851$11,857 in the thirty-nine weeks ended December 31, 2016.2022. The effective tax rate for the thirty-nine weeks ended December 30, 20172023 was 429.3%3.1%, as compared to 42.5%28.1% in the thirty-nine weeks ended December 31, 2016.2022. The increasedecrease in the effective tax rate is primarily due to the initial estimated impact of the Tax Act enacted during the thirteen weeks ended December 30, 2017, which was primarily driven by the remeasurement of deferred tax balances resulting in the recognition of a provisional benefit of $24,253 in the third fiscal quarter, combined withrelated to the impact of discrete items related to share-based compensation on a pre-tax loss position in the thirty-nine weeks ended December 30, 2017,2023, as compared to a pre-tax income position in the thirty-nine weeks ended December 31, 2016.2022.
The Company has made a provisional estimate of the impact of remeasuring its deferred tax balances during the third fiscal quarter of 2017 and has not been able to reasonably estimate the one-time transition tax on the earnings of foreign subsidiaries and continues to account for foreign earnings based on the provisions of the tax laws that were in effect immediately prior to the enactment of the Tax Act. Pursuant to Staff Accounting Bulletin No. 118, the Company’s measurement period for implementing the accounting changes required by the Tax Act will close before December 22, 2018 and the Company anticipates completing the accounting under ASC Topic 740 in a subsequent reporting period within the measurement period.
Due to the Tax Act, the effective tax rate for fiscal 2017 is now estimated to be approximately -170%. However, excluding the impact of the provisional benefit of $24,253 related to the remeasurement of deferred tax balances recorded in the thirteen weeks ended December 30, 2017, the effective tax rate for fiscal 2017 is estimated to be in the mid-30% range. We believe that presenting the anticipated effective tax rate excluding the impact of the provisional benefit for the measurement of deferred tax assets assists provides investors with better insight into our anticipated fiscal 2017 performance. The Company is not able to estimate any future adjustments to the provisional amount recognized for the remeasurement of deferred tax balances. The effective tax rate for fiscal 2018 and beyond is estimated to be in the high-20% range. The foregoing estimated effective tax rate ranges exclude the impact of the one-time transition tax on foreign earnings, as the timing and amount of this tax cannot be reasonably estimated.
Liquidity and Capital Resources
We relyhave relied on cash flows from operations, a $100,000 asset-based revolving credit agreement (the “Revolving Credit Facility” as further discussed under “Revolving Credit Facility” below), and the SEK 140.0 million (approximately $17,129 as of December 30, 2017) 2014 Elfa revolving credit facility (the “2014 Elfa Revolving Credit Facility” as further discussed under “20142019 Elfa Senior Secured Credit Facilities”Facilities (as defined below) as our primary sources of liquidity.
Our primary cash needs are for merchandise inventories and direct materials, payroll, store rent,leases, capital expenditures associated with opening new stores and updating existing stores, as well as information technology and infrastructure, including theour distribution centercenters, and Elfa manufacturing facility enhancements. The most significant components of our operating assets and liabilities are merchandise inventories, accounts receivable, prepaid expenses, operating lease assets and other
assets, accounts payable, operating lease liabilities, other current and non-currentnoncurrent liabilities, taxes receivable and taxes payable. Our liquidity fluctuates as a result of our building inventory for key selling periods, and as a result, our borrowings are generally higher during these periods when compared to the rest of our fiscal year. Our borrowings generally increase in our second and third fiscal quarters as we prepare for Our Annual Shelving Sale,our promotional campaigns and the holiday season,season. In fiscal 2023, we expect total capital expenditures to be in the range of $40,000 to $45,000 for technology
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infrastructure and Our Annual elfa® Sale. software projects, existing store merchandising and refresh activities, our Elfa business, and new store development. The Company opened two new stores during the third fiscal quarter of fiscal 2023 and is on track to open two new small format stores in the remainder of fiscal 2023 and four new stores in fiscal 2024. We also plan to have one store closure and one store relocation on fiscal 2024. We believe that cash expected to be generated from operations and the remaining availability of borrowings under the Revolving Credit Facility and the 20142019 Elfa Revolving Credit FacilityFacilities will be sufficient to meet liquidity requirements, anticipated capital expenditures and payments due under our existing credit facilities for at least the next 2412 months. In the future, we may seek to raise additional capital, which could be in the form of loans, bonds, convertible debt or equity, to fund our operations and capital expenditures. There can be no assurance that we will be able to raise additional capital on favorable terms or at all.
On August 1, 2022, our board of directors approved a stock repurchase program with authorization to purchase up to $30,000 of our common stock. Repurchases under the program may be made in the open market, in privately negotiated transactions or otherwise, with the amount and timing of repurchases to be determined at our discretion, depending on market conditions and corporate needs. Open market repurchases will be structured to occur in accordance with applicable federal securities laws, including within the pricing and volume requirements of Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We may also, from time to time, enter into Rule 10b5-1 plans to facilitate repurchases of our shares under this authorization. This program does not obligate us to acquire any particular amount of common stock and may be modified, suspended or terminated at any time at the discretion of our board of directors. We expect to fund repurchases with existing cash on hand. We did not repurchase any shares of our common stock during the thirty-nine weeks ended December 30, 2023. As of December 30, 2023, $25,000 remains available to repurchase common stock under the share repurchase program.
At December 30, 2017,2023, we had $22,653$16,007 of cash, of which $12,913$5,338 was held by our foreign subsidiaries. Pursuant to the Tax Act, we will be required to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. The Company has not been able to determine a reasonable estimate of this one-time transition tax and will recognize this in a subsequent reporting period when a reasonable estimate can be determined. Future amounts earned in our foreign subsidiaries are not expected to be subject to federal income taxes upon transfer to the U.S. If these funds were transferred to the U.S., we may; however, be required to pay taxes in certain international jurisdictions as well as certain states. However, it is our intent to indefinitely reinvest these funds outside the U.S. In addition, we had $62,854$75,980 of additional availability under the Revolving Credit Facility and approximately $17,129$7,645 of additional availability under the 20142019 Elfa Revolving Credit FacilityFacilities (as defined below) as of December 30, 2017.2023. There were $4,023$3,829 in letters of credit outstanding under the Revolving Credit Facility and other contracts at that date.
Cash flow analysis
A summary of our operating, investingkey components and financing activities aremeasures of liquidity is shown in the following table:
| | | | | | | | |
| | | | | | | | |
| | Thirty-Nine Weeks Ended | | | ||||
| | December 30, | | December 31, | | | ||
|
| 2023 |
| 2022 |
|
| ||
Net cash provided by operating activities | | $ | 26,673 | | $ | 18,856 | | |
Net cash used in investing activities | |
| (32,953) | |
| (46,760) | | |
Net cash provided by financing activities | |
| 15,065 | |
| 19,603 | | |
Effect of exchange rate changes on cash | |
| 264 | |
| (191) | | |
Net increase (decrease) in cash | | $ | 9,049 | | $ | (8,492) | | |
Free cash flow (Non-GAAP) (1) | | $ | (6,703) | | $ | (27,702) | | |
| (1) | See below for a discussion of this non-GAAP financial measure and reconciliation to its most directly comparable GAAP financial measure. |
|
| Thirty-Nine Weeks Ended |
| ||
|
|
|
| ||
|
| December 30, |
| December 31, |
|
|
|
2017 |
| 2016 |
|
Net cash provided by operating activities |
| $39,392 |
| $23,875 |
|
Net cash used in investing activities |
| (20,082 | ) | (21,003 | ) |
Net cash (used in) provided by financing activities |
| (8,170 | ) | 7,361 |
|
Effect of exchange rate changes on cash |
| 777 |
| (551 | ) |
Net increase in cash |
| $11,917 |
| $9,682 |
|
Net cash provided by operating activities
Cash from operating activities consists primarily of net income (loss) adjusted for non-cash items, including depreciation and amortization, stock-based compensation, and deferred taxes andas well as the effect of changes in operating assets and liabilities.
Net cash provided by operating activities was $39,392$26,673 for the thirty-nine weeks ended December 30, 2017. 2023 and was comprised of net loss of $41,921 offset by non-cash items of $52,499 primarily due to the non-cash goodwill impairment charge recorded in the second quarter of fiscal 2023, as well as a net change in operating assets and liabilities of $16,095 primarily driven by a decrease in accounts payable and accrued liabilities due to the timing of receipts and payments.
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Net cash provided by operating activities was $18,856 for the thirty-nine weeks ended December 31, 2022 and was comprised of net income of $19,827$30,394 and non-cash items of $7,694 were$32,410, partially offset by a net change in operating assets and liabilities of $11,871. $43,948. The net change in operating assets and liabilities iswas primarily due to an increasedriven by a decrease in accounts payable and accrued liabilities partially offset by an increase in merchandise inventory and decreases in income taxes payable and other noncurrent liabilities, during the thirty-nine weeks ended December 30, 2017.
Net cash provided by operating activities was $23,875 for the thirty-nine weeks ended December 31, 2016. Non-cash items of $29,719 and net income of $6,576 were partially offset by a net change in operating assets and liabilities of $12,420, primarily due to increases in accounts receivable and merchandise inventory, partially offset by increases in accounts payable and accrued liabilities, during the thirty-nine weeks ended December 31, 2016.timing of payments.
Net cash used in investing activities
Investing activities consist primarily of capital expenditures for new store openings, existing store remodels and maintenance, infrastructure, information systems, and our distribution center.centers and manufacturing facilities, as well as investments and proceeds in the Company’s non-qualified retirement plan trust.
Net cash used in investing activities was $32,953 for the thirty-nine weeks ended December 30, 2023. Our total capital expenditures for the thirty-nine weeks ended December 30, 20172023 were $20,101 with new store openings, relocations$33,376. We incurred capital expenditures of $16,700 for investments in our stores. We incurred capital expenditures of $12,078 for technology investments. The remaining capital expenditures of $4,598 were related to maintenance capital in manufacturing facilities and existing store remodels accountingdistribution centers. In addition, we had net proceeds of $422 from the non-qualified retirement plan trust.
Net cash used in investing activities was $46,760 for more than half of spending at $11,466. We opened five stores, including one relocation, during the thirty-nine weeks ended December 30, 2017. The remaining capital expenditures of $8,635 were primarily for investments in information technology, our corporate offices and distribution center enhancements.
31, 2022. Our total capital expenditures for the thirty-nine weeks ended December 31, 20162022 were $21,010 with new store openings, relocations and existing store remodels accounting$46,558. We incurred capital expenditures of $24,150 for the majoritytechnology investments. We incurred capital expenditures of spending at $12,447. We opened seven new stores during the thirty-nine weeks ended December 31, 2016. $17,108 for investments in our stores. The remaining capital expenditures of $8,563$5,300 were primarily for investmentsrelated to maintenance capital in information technology, our corporate officesmanufacturing facilities and distribution center and Elfa manufacturing facility enhancements.centers. In addition, we had net investments of $238 in the non-qualified retirement plan trust.
Net cash (used in) provided by financing activities
Financing activities consist primarily of borrowings and payments under the Senior Secured Term Loan Facility, the Revolving Credit Facility, and the 2019 Elfa RevolvingSenior Secured Credit Facility.Facilities.
Net cash used inprovided by financing activities was $8,170$15,065 for the thirty-nine weeks ended December 30, 2017.2023. This included $11,246 for paymentnet borrowings of debt issuance costs, net payments of $21,885 for repayment of long-term indebtedness (excluding$16,000 on the Revolving Credit Facility),Facility and $39 for taxes paidnet borrowings of $759 on the 2019 Elfa Senior Secured Credit Facilities, repayments of $1,550 on indebtedness outstanding under the Senior Secured Term Loan Facility and the 2019 Elfa Senior Secured Term Loan Facility, and payments of $144 in connection with the withholding of shares upon vesting of restricted stock awards partially offset by net proceeds of $25,000 from borrowings under the Revolving Credit Facility.awards.
Net cash provided by financing activities was $7,361$19,603 for the thirty-nine weeks ended December 31, 2016.2022. This included net proceedsborrowings of $15,000 from borrowings under$20,000 on the Revolving Credit Facility, combined with net borrowings of $6,547 on the 2019 Elfa Senior Secured Credit Facilities and proceeds of $340 from the exercise of stock options, partially offset by net paymentsshare repurchases of $3,518$5,000, repayments of $1,572 on indebtedness outstanding under the 2014Senior Secured Term Loan Facility and the 2019 Elfa Revolving CreditSenior Secured Term Facility, and payments of $4,121 for repayment$712 in connection with the withholding of long-term indebtedness.shares upon vesting of restricted stock awards.
As of December 30, 2017,2023, TCS had a total of $62,854$75,980 of unused borrowing availability under the Revolving Credit Facility, and $25,000 of$21,000 borrowings outstanding under the Revolving Credit Facility.
As of December 30, 2017,2023, Elfa had a total of $17,129$7,645 of unused borrowing availability under the 2014 Elfa Revolving Credit Facility and no$3,300 borrowings outstanding under the 20142019 Elfa Revolving Credit Facility.Facilities.
Free cash flow (Non-GAAP)
We present free cash flow, which we define as net cash provided by operating activities in a period minus payments for property and equipment made in that period, because we believe it is a useful indicator of the Company’s overall liquidity, as the amount of free cash flow generated in any period is representative of cash that is available for debt repayment, investment, and other discretionary and non-discretionary cash uses. Accordingly, we believe that free cash flow provides useful information to investors in understanding and evaluating our liquidity in the same manner as
33
management. Our definition of free cash flow is limited in that it does not solely represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other contractual obligations. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our Consolidated Statements of Cash Flows. Although other companies report their free cash flow, numerous methods may exist for calculating a company’s free cash flow. As a result, the method used by our management to calculate our free cash flow may differ from the methods used by other companies to calculate their free cash flow.
Our free cash flow fluctuates as a result of seasonality of net sales, building inventory for key selling periods, and timing of investments in new store openings, existing store remodels, infrastructure, information systems, and our distribution centers, among other things. Historically, our free cash flow has been lower in the first half of the fiscal year, due to lower net sales, operating income, and cash flows from operations, and as such, is not necessarily indicative of the free cash flow for the full year. We generated negative free cash flow of $6,703 for the thirty-nine weeks ended December 30, 2023, as compared to negative free cash flow of $27,702 for the thirty-nine weeks ended December 31, 2022.
The following table sets forth a reconciliation of free cash flow, a non-GAAP financial measure, to net cash provided by operating activities, which we believe to be the GAAP financial measure most directly comparable to free cash flow:
| | | | | | | | |
| | Thirty-Nine Weeks Ended | | | ||||
| | December 30, | | December 31, |
|
| ||
|
| 2023 |
| 2022 |
|
| ||
Net cash provided by operating activities | | $ | 26,673 | | $ | 18,856 | | |
Less: Additions to property and equipment | |
| (33,376) | |
| (46,558) | | |
Free cash flow | | $ | (6,703) | | $ | (27,702) | | |
Senior Secured Term Loan Facility
On April 6, 2012, The Container Store Group, Inc.,the Company, The Container Store, Inc. and certain of itsour domestic subsidiaries entered into a credit agreement with JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and the lenders party thereto (as amended to date, the “Senior Secured Term Loan Facility”). On August 18, 2017,June 14, 2023, the Company entered into a fourth amendmentAmendment No. 8 (the “Term Loan“Eighth Amendment”) to the Senior Secured Term Loan Facility dated asFacility. Pursuant to the terms of April 6, 2012. The fourth amendment amendsthe Eighth Amendment, the LIBOR-based interest rate applicable to borrowings under the Senior Secured Term Loan Facility was replaced with a SOFR-based interest rate, subject to among other things, (i) extendadjustment as specified in the Eighth Amendment. The Company is required to make quarterly amortization payments of $500 on the term loan facility, with the remaining balance due on the maturity date of January 31, 2026. Prior to the date of delivery of a compliance certificate for the fiscal quarter ended December 30, 2023, the applicable interest rate margin for term benchmark loans was 4.75%, subject to a floor of 1.00%, and 3.75% for base rate loans and, thereafter, may step up to 5.00% for term benchmark loans and 4.00% for base rate loans unless the consolidated leverage ratio achieved is less than or equal to 2.75 to 1.00. As of December 30, 2023, the aggregate principal amount in outstanding borrowings under the Senior Secured Term Loan Facility to August 18, 2021, (ii) add a maximum leverage covenantwas $160,185 net of 5.0:1.0 which steps down by 0.25x on June 30 of each year commencing on June 30, 2018, (iii) increase the applicable interest rate margin to 7.00% for LIBOR loans and 6.00% for base rate loans, (iv) reduce the aggregate principal amount of the Senior Secured Term Loan Facility to $300,000, (v) increase principal amortization to 2.5% per annum, (vi) require a 3.0% upfront fee on the aggregate principal amount of the Senior Secured Term Loan Facility, and (vii) impose a 1% premium if a voluntary prepayment is made from the proceeds of
a repricing transaction within 12 months after August 18, 2017. Leonard Green & Partners, L.P., which, together with certain of its affiliates, beneficially owns a majority of the outstanding common stock of the Company, funded $20,000 of the $300,000 Senior Secured Term Loan Facility.
Under the Senior Secured Term Loan Facility, we had $296,250 in outstanding borrowings as of December 30, 2017deferred financing costs, and the interest rate on such borrowings is LIBOR + 7.00%, subject to a LIBOR floor of 1.00%. The Senior Secured Term Loan Facility provides that we are required to make quarterly principal repayments of $1,875 through June 30, 2021, with a balloon payment for the remaining balance due on August 18, 2021.
consolidated leverage ratio was approximately 2.8x.
The Senior Secured Term Loan Facility is secured by (a) a first priority security interest in substantially all of our assets (excluding stock in foreign subsidiaries in excess of 65%, assets of non-guarantors and certain assets(other exceptions) (other than the collateral that secures the Revolving Credit Facility described below on a first-priority basis)basis and excluding stock in foreign subsidiaries in excess of 65%, assets of non-guarantors and subject to certain other exceptions) and (b) a second priority security interest in the assets securing the Revolving Credit Facility described below on a first-priority basis.Facility. Obligations under the Senior Secured Term Loan Facility are guaranteed by The Container Store Group, Inc.the Company and eachcertain of The Container Store, Inc.’s U.S. subsidiaries. The Senior Secured Term Loan Facility contains a number of covenants that, among other things, restrict our ability, subject to specified exceptions, to incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves, engage in businesses that are not in a related line of business; make loans, advances or guarantees; engage in transactions with affiliates; and make investments. In addition, the financing agreements containSenior Secured Term Loan Facility contains certain cross-default provisions and also requirerequires certain mandatory prepayments of the Senior Secured Term Loan Facility, among theseloans thereunder upon the occurrence of specific events, including an Excess Cash Flow requirement (as such term is defined in the Senior Secured Term Loan Facility). requirement. As of
34
December 30, 2017,2023, we were in compliance with all covenants under the Senior Secured Term Loan Facility and no Event of Default (as such term is defined in the Senior Secured Term Loan Facility) had occurred.
Revolving Credit Facility
On April 6, 2012, The Container Store Group, Inc.,the Company, The Container Store, Inc. and certain of itsour domestic subsidiaries entered into an asset-based revolving credit agreement with the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and Wells Fargo Bank, National Association, as Syndication Agent (as amended to date, the “Revolving Credit Facility”). On August 18, 2017,May 22, 2023, the Company entered into a fourth amendmentAmendment No. 6 (the “Revolving“Sixth Amendment”), pursuant to which the Revolving Credit Facility dated as of April 6, 2012, which, among other things, extend the maturity date of the loansLIBOR-based interest rate applicable to borrowings under the Revolving Credit Facility was replaced with a SOFR-based interest rate, subject to adjustment as specified in the Sixth Amendment. The Revolving Credit Facility matures on the earlier of (i) August 18, 2022(a) November 25, 2025 and (ii) May 18, 2021(b) October 31, 2025 if any portion of the Senior Secured Term Loan Facility remains outstanding on such date and the maturity date of the Senior Secured Term Loan Facility is not extended.
The aggregate principal amount of the facility is $100,000. Borrowings under the Revolving Credit Facility accrue interest at LIBOR+1.25%. plus SOFR. In addition, the Revolving Credit Facility includes an uncommitted incremental revolving facility in the amount of $50,000, which is subject to receipt of lender commitments and satisfaction of specified conditions.
The Revolving Credit Facility provides that proceeds are to be used for working capital and other general corporate purposes, and allows for swing line advances of up to $15,000 and the issuance of letters of credit of up to $40,000.
The availability of credit at any given time under the Revolving Credit Facility is limited by reference to a borrowing base formula based upon numerous factors, including the value of eligible inventory, eligible accounts receivable, and reserves established by the administrative agent. As a result of the borrowing base formula, the actual borrowing availability under the Revolving Credit Facility could be less than the stated amount of the Revolving Credit Facility (as reduced by the actual borrowings and outstanding letters of credit under the Revolving Credit Facility).
The Revolving Credit Facility is secured by (a) a first-priority security interest in substantially all of our personal property, consisting of inventory, accounts receivable, cash, deposit accounts, and other general intangibles, and (b) a second-priority security interest in the collateral that secures the Senior Secured Term Loan Facility on a first-priority
basis, as described above (excluding stock in foreign subsidiaries in excess of 65%, and assets of non-guarantor subsidiaries and subject to certain other exceptions). Obligations under the Revolving Credit Facility are guaranteed by The Container Store Group, Inc.the Company and eachcertain of The Container Store, Inc.’s U.S. subsidiaries.
The Revolving Credit Facility contains a number of covenants that, among other things, restrict our ability, subject to specified exceptions, to incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves, engage in businesses that are not in a related line of business; make loans, advances or guarantees; engage in transactions with affiliates; and make investments. In addition, the financing agreements contain certain cross-default provisions. We are required to maintain a consolidated fixed-charge coverage ratio of 1.0 to 1.0 if excess availability is less than $10,000 at any time. As of December 30, 2017,2023, we were in compliance with all covenants under the Revolving Credit Facility and no Event of Default (as such term is defined in the Revolving Credit Facility) had occurred.
20142019 Elfa Senior Secured Credit Facilities
On April 1, 2014,March 18, 2019, Elfa entered into a refinanced its master credit agreement with Nordea Bank AB entered into on April 1, 2014 and the senior secured credit facilities thereunder, and entered into a new master credit agreement with Nordea Bank Abp, filial i Sverige (“Nordea”Nordea Bank”), which consists of a(i) an SEK 60.0110.0 million (approximately $7,341$10,945, as of December 30, 2017) term loan facility (the “2014 Elfa Term Loan Facility”) and a SEK 140.0 million (approximately $17,129 as of December 30, 2017)2023) revolving credit facility (the “2014 Elfa“2019 Original Revolving Credit Facility,”Facility”), (ii) upon Elfa’s request, an additional SEK 115.0 million (approximately $11,436 as of December 30, 2023) revolving credit facility (the “2019 Additional Revolving Facility” and together with the 2014 Elfa Term Loan2019 Original Revolving Facility, the “2014“2019 Elfa Senior Secured CreditRevolving Facilities”)., and (iii) an uncommitted term loan facility in the amount of SEK 25.0 million (approximately $2,487 as of
35
December 30, 2023), which is subject to receipt of Nordea Bank’s commitment and satisfaction of specified conditions (the “Incremental The 2014term for the 2019 Elfa Senior Secured Credit Facilities term began on August 29, 2014April 1, 2019 and, pursuant to an amendment entered into in April 2023, matures on August 29,March 31, 2025. Loans borrowed under the 2019 or such shorter period as providedElfa Revolving Facilities bear interest at Nordea Bank’s base rate +1.40%. Any loan borrowed under the Incremental Term Facility would bear interest at the Stockholm Interbank Offered Rate (Stibor) +1.70%.
The 2019 Elfa Senior Secured Credit Facilities are secured by the agreement. Elfa is required to make quarterly principal payments under the 2014 Elfa Term Loan Facility in the amountmajority of SEK 3.0 million (approximately $367 asassets of December 30, 2017) through maturity.Elfa. The 2014 Elfa Term Loan Facility bears interest at STIBOR + 1.7% and the 2014 Elfa Revolving Credit Facility bears interest at Nordea’s base rate + 1.4%. In the fourth quarter of fiscal 2016, Elfa and Nordea agreed that the stated rates would apply through maturity.
The 20142019 Elfa Senior Secured Credit Facilities contain a number of covenants that, among other things, restrict Elfa’s ability, subject to specified exceptions, to incur additional liens, sell or dispose of assets, merge with other companies, engage in businesses that are not in a related line of business and make guarantees. In addition, Elfa is required to maintain (i) a consolidated equity ratioGroup Equity Ratio (as defined in the 20142019 Elfa Senior Secured Credit Facilities) of not less than 30% in year one and not less than 32.5% thereafter and (ii) a consolidated ratio of net debt to EBITDA (as defined in the 20142019 Elfa Senior Secured Credit Facilities) of less than 3.2, the consolidated equity ratio tested at the end of each calendar quarter and the ratio of net debt to EBITDA tested as of the end of each fiscal quarter.3.20. As of December 30, 2017,2023, Elfa was in compliance with all covenants under the 2019 Elfa Senior Secured Credit Facilities and no Event of Default (as defined in the 20142019 Elfa Senior Secured Credit Facilities) had occurred.
Critical accounting policies and estimates
The preparation of financial statements in accordance with generally accepted accounting principles in the United StatesGAAP requires management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. A summary of the Company’sour significant accounting policies is included in Note 1 to the Company’sour annual consolidated financial statements in the Company’sour 2022 Annual Report on Form 10-K for the fiscal year ended April 1, 2017, filed with the SEC on June 1, 2017.10-K.
Certain of the Company’sour accounting policies and estimates are considered critical, as these policies and estimates are the most important to the depiction of the company’sour consolidated financial statements and require significant, difficult, or complex judgments, often about the effect of matters that are inherently uncertain. Such policies are summarized in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our 2022 Annual Report on Form 10-K for the fiscal year ended April 1, 2017, filed with the SEC on June 1, 2017.10-K. As of December 30, 2017,2023, there were no significant changes to any of our critical accounting policies and estimates.
Contractual obligations
There have beenwere no material changes to our contractual obligations asfrom those disclosed in our 2022 Annual Report on Form 10-K, for the fiscal year ended April 1, 2017, filedexcept with the SEC on June 1, 2017, other than those shown in the table below and those which occur in the normal course of business. The table below has been updated to reflect our contractual obligations as of December 30, 2017 relatedrespect to the Term Loan Amendment and Revolving Amendment executedlease amendment described in the second fiscal quarter of 2017. PursuantNote 11 to the Tax Act, we will be required to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. The Company has not been able to determine a reasonable estimateour unaudited consolidated financial statements included in Part I, Item I of this one-time transition tax; therefore, the one-time transition tax on earnings of certain foreign subsidiaries has been excluded from the table below.Form 10-Q.
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| Payments due by period |
| ||||||||
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| Total |
| Within |
| 1 - 3 Years |
| 3 - 5 Years |
| After 5 Years |
|
Recorded contractual obligations |
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Term loans |
| $296,250 |
| $7,500 |
| $15,000 |
| $273,750 |
| $- |
|
Revolving loans |
| 25,000 |
| - |
| - |
| 25,000 |
| - |
|
Unrecorded contractual obligations |
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Estimated interest(1) |
| 93,827 |
| 21,216 |
| 51,091 |
| 21,520 |
| - |
|
Total |
| $415,077 |
| $28,716 |
| $66,091 |
| $320,270 |
| $- |
|
(1)For purposes of this table, interest has been estimated based on interest rates in effect for our indebtedness as of December 30, 2017, and estimated borrowing levels in the future. Actual borrowing levels and interest costs may differ.
Off Balance Sheet Arrangements
We are not party to any off balance sheet arrangements.
Recent Accounting Pronouncements
Please refer to Note 1 of our unaudited consolidated financial statements for a summary of recent accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Our market risk profile as of December 30, 2017 has not materially changed since April 1, 2017. Our market risk profile as of April 1, 2017 is disclosed in our Annual Report on Form 10-K filed with the SEC on June 1, 2017. See Note 8 of Notes to our unaudited consolidated financial statements included in Part I, Item 1, of this Form 10-Q, for disclosures on our foreign currency forward contracts.
ITEM 4. CONTROLS AND PROCEDURES
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are
36
resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”))Act). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 30, 2017.2023.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended December 30, 20172023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
We are subject to various legal proceedings and claims, including employment claims, wage and hour claims, intellectual property claims, contractual and commercial disputes and other matters that arise in the ordinary course of business. While the outcome of these and other claims cannot be predicted with certainty, management does not believe that the outcome of these matters will have a material adverse effect on our business, results of operations or financial condition on an individual basis or in the aggregate.
For information about our legal proceedings, see Note 7 of our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q.
There have been no material changes to our risk factors as previously disclosed in Item 1A of Part I of our 2022 Annual Report on Form 10-K for the fiscal year ended April 1, 2017, filed with the SEC on June 1, 2017, other than those disclosed below.10-K.
The final impacts of the Tax Cuts and Jobs Act could be materially different from our current estimates.
The Tax Cuts and Jobs Act (the “Tax Act”) was signed into law on December 22, 2017. The Tax Act made numerous changes to federal corporate tax law, including a permanent reduction to the federal corporate income tax rate, changes in the deductibility of interest on corporate debt obligations, a one-time transition tax on foreign earnings and limitations on the deductibility of certain executive compensation arrangements, among others, that we expect in the aggregate will reduce our effective tax rate in future periods. Our fiscal third quarter effective income tax rate reflects a significant benefit primarily due to the provisional remeasurement of our deferred tax balances and does not include any provisional amounts for the one-time transition tax on foreign earnings. Changes to the taxation of undistributed foreign earnings could also affect our future intentions regarding reinvestment of such earnings. The impact of the Tax Act is based on management’s current knowledge and assumptions, and final recognized impacts on our financial results could be materially different from current estimates based on our actual results in the fourth quarter of fiscal 2017 and our further analysis of the Tax Act. Additionally, the full impact of the Tax Act on the Company in future periods cannot be predicted at this time.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER
None.During the thirteen weeks ended on December 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.
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| Incorporated by Reference | ||||||||
Exhibit |
| Exhibit Description |
| Form |
| File No. |
| Exhibit |
| Filing |
| Filed/ |
3.1 |
| Amended and Restated Certificate of Incorporation of The Container Store Group, Inc. |
| 10-Q |
| 001-36161 |
| 3.1 |
| 1/10/14 |
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3.2 |
| Amended and Restated By-laws of The Container Store Group, Inc. |
| 10-Q |
| 001-36161 |
| 3.2 |
| 1/10/14 |
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31.1 |
| Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) |
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| * |
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31.2 |
| Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) |
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| * |
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32.1 |
| Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 |
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| ** |
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32.2 |
| Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |
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| ** |
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101.INS |
| XBRL Instance Document |
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| * |
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101.SCH |
| XBRL Taxonomy Extension Schema Document |
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| * |
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101.CAL |
| XBRL Taxonomy Calculation Linkbase Document |
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| * |
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101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
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| * |
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101.PRE |
| XBRL Taxonomy Extension Presentation |
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| * |
| | | | Incorporated by Reference | ||||||||
Exhibit |
| Exhibit Description |
| Form |
| File No. |
| Exhibit |
| Filing |
| Filed/ |
3.1 | | Amended and Restated Certificate of Incorporation of The Container Store Group, Inc. | | 10-Q | | 001-36161 | | 3.1 | | 01/10/14 | | |
| | | | | | | | | | | | |
3.2 | | Amended and Restated Bylaws of The Container Store Group, Inc. | | 8-K | | 001-36161 | | 3.1 | | 09/07/22 | | |
| | | | | | | | | | | | |
10.1 | | | 8-K | | 001-36161 | | 10.1 | | 02/06/24 | | | |
| | | | | | | | | | | | |
31.1 | | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) | | | | | | | | | | |
| | | | | | | | | | | | |
31.2 | | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) | | | | | | | | | | * |
| | | | | | | | | | | | |
32.1 | | Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 | | | | | | | | | | * |
| | | | | | | | | | | ||
32.2 | | Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 | | | | | | | | | | ** |
101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | | | | | | | | | | |
| | | | | | | | | | | | ** |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | | | * |
| | | | | | | | | | |||
101.CAL | | Inline XBRL Taxonomy Calculation Linkbase Document | | | | | | | | | | * |
| | | | | | | | | | |||
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | | | * |
| | | | | | | | | | |||
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | * |
| | | | | | | | | | |||
101.PRE | | Inline XBRL Taxonomy Extension Presentation | | | | | | | | | | * |
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104 | | Cover Page Interactive Data File – formatted as Inline XBRL and contained in Exhibit 101 | | | | | | | | | | * |
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* Filed herewith.
** Furnished herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
The Container Store Group, Inc.
(Registrant)
Date: February 7, |
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Chief Financial | |
Date: February 7, |
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Chief Accounting Officer (Principal Accounting Officer) | |
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