Container Store 10Q 2019 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 27, 2020


☐	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)			(I.R.S. Employer Identification No.)


500 Freeport Parkway, Coppell, TX	75019
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area 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 ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☑ No ◻

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. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

The registrant had 50,362,468 shares of its common stock outstanding as of July 24, 2020.

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TABLE OF CONTENTS



PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Unaudited Consolidated Balance Sheets as of June 27, 2020, March 28, 2020, and June 29, 2019	3

	Unaudited Consolidated Statements of Operations for the Thirteen Weeks ended June 27, 2020 and June 29, 2019	5

	Unaudited Consolidated Statements of Comprehensive Loss for the Thirteen Weeks ended June 27, 2020 and June 29, 2019	6

	Unaudited Consolidated Statements of Cash Flows for the Thirteen Weeks ended June 27, 2020 and June 29, 2019	7

	Unaudited Consolidated Statements of Shareholders’ Equity for the Thirteen Weeks ended June 27, 2020 and June 29, 2019	8

	Notes to the Unaudited Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	33

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	34

Item 1A.	Risk Factors	34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3.	Default Upon Senior Securities	34

Item 4.	Mine Safety Disclosures	34

Item 5.	Other Information	34

Item 6.	Exhibits	35

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PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

The Container Store Group, Inc.

Consolidated balance sheets


	June 27,		March 28,		June 29,
(In thousands)	2020		2020		2019
Assets	(unaudited)				(unaudited)
Current assets:
Cash	$	63,508	$	67,755	$	11,404
Accounts receivable, net		25,369		24,721		27,821
Inventory		109,182		124,207		120,512
Prepaid expenses		8,632		8,852		11,129
Income taxes receivable		3,391		4,724		1,124
Other current assets		14,235		11,907		11,867
Total current assets		224,317		242,166		183,857
Noncurrent assets:
Property and equipment, net		141,504		147,540		152,448
Noncurrent operating lease assets		311,911		347,170		353,490
Goodwill		202,815		202,815		202,815
Trade names		225,100		222,769		225,182
Deferred financing costs, net		153		170		223
Noncurrent deferred tax assets, net		2,411		2,311		1,898
Other assets		2,250		1,873		1,607
Total noncurrent assets		886,144		924,648		937,663
Total assets	$	1,110,461	$	1,166,814	$	1,121,520

See accompanying notes.

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The Container Store Group, Inc.

Consolidated balance sheets (continued)


	June 27,		March 28,		June 29,
(In thousands, except share and per share amounts)	2020		2020		2019
Liabilities and shareholders’ equity	(unaudited)				(unaudited)
Current liabilities:
Accounts payable	$	51,656	$	53,647	$	55,387
Accrued liabilities		75,962		66,046		68,507
Revolving lines of credit		5,533		9,050		9,951
Current portion of long-term debt		6,952		6,952		6,931
Current operating lease liabilities		53,165		62,476		58,664
Income taxes payable		198		—		2,011
Total current liabilities		193,466		198,171		201,451
Noncurrent liabilities:
Long-term debt		296,209		317,485		272,556
Noncurrent operating lease liabilities		301,399		317,284		327,221
Noncurrent deferred tax liabilities, net		45,053		50,178		50,182
Other long-term liabilities		11,304		11,988		8,903
Total noncurrent liabilities		653,965		696,935		658,862
Total liabilities		847,431		895,106		860,313
Commitments and contingencies (Note 6)
Shareholders’ equity:
Common stock, $0.01 par value, 250,000,000 shares authorized; 48,491,369 shares issued at June 27, 2020; 48,316,559 shares issued at March 28, 2020; 48,283,197 shares issued at June 29, 2019		485		483		483
Additional paid-in capital		867,332		866,667		864,386
Accumulated other comprehensive loss		(28,970)		(36,295)		(25,929)
Retained deficit		(575,817)		(559,147)		(577,733)
Total shareholders’ equity		263,030		271,708		261,207
Total liabilities and shareholders’ equity	$	1,110,461	$	1,166,814	$	1,121,520

See accompanying notes.

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The Container Store Group, Inc.

Consolidated statements of operations



	Thirteen Weeks Ended
	June 27,		June 29,
(In thousands, except share and per share amounts) (unaudited)	2020		2019
Net sales	$	151,686	$	209,520
Cost of sales (excluding depreciation and amortization)		73,447		89,713
Gross profit		78,239		119,807
Selling, general, and administrative expenses (excluding depreciation and amortization)		86,265		109,029
Stock-based compensation		832		811
Pre-opening costs		9		477
Depreciation and amortization		8,949		9,706
Other expenses (income)		809		(27)
Gain on disposal of assets		(7)		(4)
Loss from operations		(18,618)		(185)
Interest expense, net		4,950		5,709
Loss before taxes		(23,568)		(5,894)
Benefit for income taxes		(6,898)		(1,795)
Net loss	$	(16,670)	$	(4,099)

Net loss per common share — basic and diluted	$	(0.34)	$	(0.08)

Weighted-average common shares — basic and diluted		48,389,205		48,231,148

See accompanying notes.

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The Container Store Group, Inc.

Consolidated statements of comprehensive loss



	Thirteen Weeks Ended
	June 27,		June 29,
(In thousands) (unaudited)	2020		2019
Net loss	$	(16,670)	$	(4,099)
Unrealized gain (loss) on financial instruments, net of tax provision (benefit) of $1,393 and ($18)		3,961		(128)
Pension liability adjustment, net of $0		(219)		(2)
Foreign currency translation adjustment		3,583		333
Comprehensive loss	$	(9,345)	$	(3,896)

See accompanying notes.

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The Container Store Group, Inc.

Consolidated statements of cash flows



	Thirteen Weeks Ended
	June 27,		June 29,
(In thousands) (unaudited)	2020		2019
Operating activities
Net loss	$	(16,670)	$	(4,099)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization		8,949		9,706
Stock-based compensation		832		811
Gain on disposal of assets		(7)		(4)
Deferred tax benefit		(7,178)		(1,891)
Non-cash interest		465		465
Other		104		—
Changes in operating assets and liabilities:
Accounts receivable		204		(2,200)
Inventory		16,085		(11,923)
Prepaid expenses and other assets		(1,841)		(670)
Accounts payable and accrued liabilities		11,651		2,275
Net change in lease assets and liabilities		9,851		(152)
Income taxes		1,560		(1,009)
Other noncurrent liabilities		1,609		370
Net cash provided by (used in) operating activities		25,614		(8,321)

Investing activities
Additions to property and equipment		(3,913)		(8,703)
Proceeds from sale of property and equipment		6		4
Net cash used in investing activities		(3,907)		(8,699)

Financing activities
Borrowings on revolving lines of credit		11,340		17,961
Payments on revolving lines of credit		(15,288)		(13,599)
Borrowings on long-term debt		—		19,000
Payments on long-term debt		(21,739)		(1,741)
Payment of taxes with shares withheld upon restricted stock vesting		(406)		(347)
Net cash (used in) provided by financing activities		(26,093)		21,274

Effect of exchange rate changes on cash		139		(214)

Net (decrease) increase in cash		(4,247)		4,040
Cash at beginning of fiscal period		67,755		7,364
Cash at end of fiscal period	$	63,508	$	11,404

Supplemental information for non-cash investing and financing activities:
Purchases of property and equipment (included in accounts payable)	$	407	$	1,590

See accompanying notes.

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The Container Store Group, Inc.

Consolidated statements of shareholders’ equity


								Accumulated
						Additional		other				Total
(In thousands, except share amounts)	Par		Common stock			paid-in		comprehensive		Retained		shareholders’
(unaudited)	value		Shares	Amount		capital		(loss) income		deficit		equity
Balance at March 28, 2020	$	0.01	48,316,559	$	483	$	866,667	$	(36,295)	$	(559,147)	$	271,708
Net loss			—		—		—		—		(16,670)		(16,670)
Stock-based compensation			—		—		832		—		—		832
Vesting of restricted stock awards			174,810		2		(2)		—		—		0
Taxes related to net share settlement of restricted stock awards			—		—		(165)		—		—		(165)
Foreign currency translation adjustment			—		—		—		3,583		—		3,583
Unrealized gain on financial instruments, net of $1,393 tax provision			—		—		—		3,961		—		3,961
Pension liability adjustment, net of $0			—		—		—		(219)		—		(219)
Balance at June 27, 2020	$	0.01	48,491,369		485		867,332		(28,970)		(575,817)		263,030


								Accumulated
						Additional		other				Total
(In thousands, except share amounts)	Par		Common stock			paid-in		comprehensive		Retained		shareholders’
(unaudited)	value		Shares	Amount		capital		(loss) income		deficit		equity
Balance at March 30, 2019	$	0.01	48,142,319	$	481	$	863,978	$	(26,132)	$	(573,634)	$	264,693
Net loss			—		—		—		—		(4,099)		(4,099)
Stock-based compensation			—		—		811		—		—		811
Vesting of restricted stock awards			140,878		2		(56)		—		—		(54)
Taxes related to net share settlement of restricted stock awards			—		—		(347)		—		—		(347)
Foreign currency translation adjustment			—		—		—		333		—		333
Unrealized gain on financial instruments, net of ($18) tax benefit			—		—		—		(128)		—		(128)
Pension liability adjustment, net of $0			—		—		—		(2)		—		(2)
Balance at June 29, 2019	$	0.01	48,283,197		483		864,386		(25,929)		(577,733)		261,207

See accompanying notes.

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The Container Store Group, Inc.

Notes to consolidated financial statements (unaudited)

(In thousands, except share amounts and unless otherwise stated)

June 27, 2020

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 March 28, 2020, filed with the Securities and Exchange Commission (“SEC”) on June 17, 2020 (the “2019 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 2020” refer to the 53-week fiscal year ending April 3, 2021, “fiscal 2019” refer to the 52-week fiscal year ended March 28, 2020, and “fiscal 2018” refer to the 52-week fiscal year ended March 30, 2019.

Description of business

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 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”). On November 6, 2013, the Company completed its initial public offering (the “IPO”). As the majority shareholder, LGP retains a controlling interest in the Company. As of June 27, 2020, The Container Store, Inc. (“TCS”) operates 93 stores with an average size of approximately 25,000 square feet (19,000 selling square feet) in 33 states and the District of Columbia. The Container Store, Inc. also offers all of its products directly to its customers (including business customers), through its website and call center. 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. 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.

Business Update Related to Coronavirus

The novel coronavirus (“COVID-19”) pandemic had a negative impact on the Company’s first quarter of fiscal 2020 operations and financial results. We experienced significant disruptions in store operations, including the temporary closure of all stores, which adversely affected our business, results of operations and financial condition, and saw a significant increase in our curbside pick-up and online selling. As of June 27, 2020, all 93 stores were reopened and operating at close to normalized schedules, with limited capacity. Therefore, we expect online sales to moderate, compared to the significant increase experienced while our stores were temporarily closed, as customers shift to purchasing in-store. However, we will continue to review local, state, and federal mandates as we may need to temporarily close some or all of the stores again, as COVID-19 and other uncertainties continue to unfold. The Company has taken actions to tightly manage costs, working capital and capital expenditures to preserve the Company’s financial health. As previously announced, the Company furloughed approximately 2,800 employees, primarily in its stores, as well as a portion of corporate employees, and reduced the base salaries of its executive officers, due to COVID-19. As of the date of this filing, we have approximately 3,500 active employees. We have also prioritized the health and safety of our customers and employees by implementing strict health and safety protocols in our stores, including intensive and frequent cleaning procedures and limitations on the number of customers shopping in each store at any given time. Furthermore, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020 and the Company is implementing applicable benefits of the CARES Act, such as deferring employer payroll taxes and evaluating potential employee retention credits. We will continue to monitor guidance from the Centers for Disease

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Control and Prevention, local, state and federal guidance, and the impact of COVID-19 on the Company's business, results of operations, financial position and cash flows.

Seasonality

The Company’s business is moderately seasonal in nature and, therefore, the results of operations for the thirteen weeks ended June 27, 2020 are not necessarily indicative 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 fiscal quarter, attributable primarily to the timing and impact of Our Annual elfa^® Sale, which traditionally starts in late December and runs into February.

Recent accounting pronouncements

In July 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 changes how to recognize expected credit losses on financial assets. The standard requires a more timely recognition of credit losses on loans and other financial assets and also provides additional transparency about credit risk. The current credit loss standard generally requires that a loss actually be incurred before it is recognized, while the new standard will require recognition of full lifetime expected losses upon initial recognition of the financial instrument. Originally, ASU 2016-13 was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. An entity should apply the standard by recording a cumulative effect adjustment to retained earnings upon adoption. In November 2019, FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is planning to adopt this standard in the first quarter of fiscal 2023. The adoption of this standard is not expected to result in a material impact to the Company’s financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification (“ASC”) 350-40 to determine which implementation costs to capitalize as assets. A customer’s accounting for the costs of the hosting component of the arrangement are not affected by the new guidance. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of this standard did not result in a material impact to the Company’s financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, with early adoption permitted. The Company is planning to adopt this standard in the first quarter of fiscal 2021. The adoption of this standard is not expected to result in a material impact to the Company’s financial statements.

In March 2020, the FASB issued, ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited time to ease the potential burden in accounting for the effects of reference rate reform on financial reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 applies only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in ASU 2020-04 are elective and are effective upon

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issuance for all entities. The adoption of this standard did not result in a material impact to the Company’s financial statements.

2. Detail of certain balance sheet accounts


	June 27,		March 28,		June 29,
	2020		2020		2019
Accounts receivable, net:
Trade receivables, net	$	14,678	$	20,217	$	15,366
Credit card receivables		9,297		3,326		10,677
Other receivables		1,394		1,178		1,778
	$	25,369	$	24,721	$	27,821
Inventory:
Finished goods	$	103,880	$	118,981	$	115,536
Raw materials		4,697		4,523		4,321
Work in progress		605		703		655
	$	109,182	$	124,207	$	120,512
Accrued liabilities:
Accrued payroll, benefits and bonuses	$	20,214	$	19,112	$	21,684
Unearned revenue		14,554		12,976		15,297
Accrued transaction and property tax		13,099		12,509		11,484
Gift cards and store credits outstanding		9,035		9,208		9,010
Accrued lease liabilities		1,311		49		187
Accrued interest		2,633		1,483		1,796
Accrued sales returns		8,165		1,650		2,531
Other accrued liabilities		6,951		9,059		6,518
	$	75,962	$	66,046	$	68,507

Contract balances as a result of transactions with customers primarily consist of trade receivables included in Accounts receivable, net, Unearned revenue included in Accrued liabilities, and Gift cards and store credits outstanding included in Accrued liabilities in the Company's Consolidated Balance Sheets provided above. Unearned revenue was $12,976 as of March 28, 2020, and $9,855 was subsequently recognized into revenue for the thirteen weeks ended June 27, 2020. Gift cards and store credits outstanding was $9,208 as of March 28, 2020, and $869 was subsequently recognized into revenue for the thirteen weeks ended June 27, 2020. See Note 10 for disaggregated revenue disclosures.

3. Leases

We conduct all of our U.S. operations from leased facilities that include corporate headquarters, warehouse facilities, and 93 store locations. The corporate headquarters, warehouse facilities, and stores are under operating leases that generally expire over the next 1 to 20 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 leases. The Company also has finance leases at our Elfa segment which are immaterial.

Lease expense on operating leases is recorded on a straight-line basis over the term of the lease, commencing on the date the Company takes possession of the leased property and is recorded in selling, general and administrative expenses (“SG&A”).

We consider lease payments that cannot be predicted with 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 are based on a percentage of sales.

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Upon lease commencement, we recognize the lease liability measured at the present value of the fixed 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 and initial direct costs and reduced by any lease incentives. We remeasure the lease liability and right-of-use asset when a change to our future minimum lease payments occurs. Key assumptions and judgments included in the determination of the lease liability include the discount rate applied to present value the future lease payments and the exercise of renewal options.

Many of our leases contain renewal options. The option periods are generally not included in the lease term used to measure our lease liabilities and right-of-use assets upon commencement as exercise of the options is not reasonably certain. We remeasure the lease liability and right-of-use asset when we are reasonably certain to exercise a renewal option.

During the first quarter of fiscal 2020, the Company renegotiated terms with landlords as a result of the COVID-19 pandemic, which resulted in the deferral of $11,900 of certain cash lease payments and the modification of certain lease terms for a substantial portion of our leased properties. Under ASC 842, changes to lease payments that are not stipulated in the original lease contract are generally accounted for as lease modifications. In April 2020, the FASB issued guidance related to the relief for lease concessions offered as a result of the effects of the COVID-19 pandemic and does not require these concessions to be accounted for in accordance with the lease modification guidance in ASC 842. Under existing lease guidance, the Company would determine, on a lease by lease basis, if a lease concession was the result of a new arrangement with the tenant or if it was under the enforceable rights and obligations within the lease agreement. Under the relief guidance, a company can account for the concessions (i) as if no changes to the existing lease contract were made or (ii) as a variable lease adjustment. The Company did not apply the lease modification relief, and the remeasurement impact is included in the Company’s condensed consolidated financial statements as of and for the three months ended June 27, 2020.

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 our future lease obligations. The incremental borrowing rate represents the rate of interest we would have to pay on a collateralized 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 weeks ended June 27, 2020 and June 29, 2019 were as follows:


		Thirteen Weeks Ended
		June 27, 2020		June 29, 2019
Operating lease costs	$	22,500	$	22,364
Variable lease costs		32		472
Total lease costs	$	22,532	$	22,836

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 weeks ended June 27, 2020.

Supplemental cash flow information related to our leases for the thirteen weeks ended June 27, 2020 and June 29, 2019 were as follows:


		Thirteen Weeks Ended
		June 27, 2020		June 29, 2019
Cash paid for amounts included in the measurement of operating lease liabilities	$	11,434	$	22,168
Additions to right-of-use assets	$	28,943	$	15,565

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Weighted average remaining operating lease term and incremental borrowing rate as of June 27, 2020 and June 29, 2019 were as follows:


	Thirteen Weeks Ended
	June 27, 2020		June 29, 2019
Weighted average remaining lease term (years)	7.1		7.3
Weighted average incremental borrowing rate	14.5	%	8.8	%

As of June 27, 2020, future minimum lease payments under our operating lease liabilities were as follows:


	Operating leases⁽¹⁾
Within 1 year (remaining)	$	73,320
2 years		91,012
3 years		77,194
4 years		69,586
5 years		62,266
Thereafter		192,157
Total lease payments	$	565,535
Less amount representing interest		(210,971)
Total lease liability	$	354,564
Less current lease liability		(53,165)
Total noncurrent lease liability	$	301,399

(1)	Operating lease payments exclude $12,125 of legally binding minimum lease payments for leases signed but not yet commenced.

4. Net loss per common share

Basic net loss per common share is computed as net loss divided by the weighted-average number of common shares for the period. Net loss per common share – diluted is computed as net loss 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 net loss per common share – diluted if their effect is anti-dilutive.

The following is a reconciliation of net loss and the number of shares used in the basic and diluted net loss per common share calculations:


	Thirteen Weeks Ended
	June 27,		June 29,
	2020		2019
Numerator:
Net loss	$	(16,670)	$	(4,099)
Denominator:
Weighted-average common shares — basic and diluted		48,389,205		48,231,148

Net loss per common share — basic and diluted	$	(0.34)	$	(0.08)
Antidilutive securities not included:
Stock options outstanding		2,545,383		2,497,573
Nonvested restricted stock awards		674,176		197,687

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5. Income taxes

The benefit for income taxes in the thirteen weeks ended June 27, 2020 was $6,898 as compared to a benefit of $1,795 in the thirteen weeks ended June 29, 2019. The effective tax rate for the thirteen weeks ended June 27, 2020 was 29.3%, as compared to 30.5% in the thirteen weeks ended June 29, 2019. During the thirteen weeks ended June 27, 2020, the effective tax rate rose above the U.S. statutory rate of 21%, primarily due to stock-based compensation, U.S. state income taxes, and the impact of the global intangible low-taxed income (“GILTI”) provision. During the thirteen weeks ended June 29, 2019, the effective tax rate rose above the U.S. statutory rate primarily due to the impact of the GILTI provision and U.S. state income taxes.

6. Commitments and contingencies

In connection with insurance policies and other contracts, the Company has outstanding standby letters of credit totaling $3,635 as of June 27, 2020.

The Company is subject to ordinary litigation and routine reviews by regulatory bodies that are incidental to its business, none of which is expected to have a material adverse effect on the Company’s financial condition, results of operations, or cash flows on an individual basis or in the aggregate.

7. 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 thirteen weeks ended June 27, 2020:


	Foreign
	currency		Pension		Foreign
	hedge		liability		currency
	instruments		adjustment		translation		Total
Balance at March 28, 2020	$	(5,563)	$	(2,611)	$	(28,121)	$	(36,295)

Other comprehensive income (loss) before reclassifications, net of tax		3,617		(219)		3,583		6,981
Amounts reclassified to earnings, net of tax		344		—		—		344
Net current period other comprehensive income (loss)		3,961		(219)		3,583		7,325

Balance at June 27, 2020	$	(1,602)	$	(2,830)	$	(24,538)	$	(28,970)

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.

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During the thirteen weeks ended June 27, 2020 and June 29, 2019, the TCS segment used forward contracts for 63% and 100% of inventory purchases in Swedish krona, respectively. Generally, the Company’s foreign currency forward contracts have terms from 1 to 24 months and require the Company to exchange currencies at agreed-upon rates at settlement.

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 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 thirteen weeks ended June 27, 2020 and June 29, 2019. Forward contracts not designated as hedges in the Elfa segment are adjusted to fair value as SG&A on the consolidated statements of operations; however, during the thirteen weeks ended June 27, 2020, the Company did not recognize any amount associated with the change in fair value of forward contracts not designated as hedging instruments, as the Company had none of these instruments outstanding.

The Company had a $1,602 loss in accumulated other comprehensive loss related to foreign currency hedge instruments at June 27, 2020, of which $688 represents an unrealized loss for settled foreign currency hedge instruments related to inventory on hand as of June 27, 2020. The Company expects the unrealized loss of $688, 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 or 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 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.

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As of June 27, 2020, March 28, 2020 and June 29, 2019, the Company held certain items that are required to be measured at fair value on a recurring basis. These included the nonqualified retirement plan, which consists of investments purchased by employee contributions to retirement savings accounts. 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 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.

The following items are measured at fair value on a recurring basis, subject to the disclosure requirements of ASC 820, Fair Value Measurements:


			June 27,		March 28,		June 29,
Description		Balance Sheet Location	2020		2020		2019
Assets
Nonqualified retirement plan	N/A	Other current assets	$	5,350	$	5,066	$	5,673
Total assets			$	5,350	$	5,066	$	5,673

The fair value of long-term debt was estimated using quoted prices as well as recent transactions for similar types of borrowing arrangements (Level 2 valuations). As of June 27, 2020, March 28, 2020 and June 29, 2019, the estimated fair value of the Company’s long-term debt, including current maturities, was as follows:


	June 27,		March 28,		June 29,
	2020		2020		2019
Senior secured term loan facility	$	206,728	$	198,041	$	254,729
2019 Elfa revolving credit facility		5,533		9,050		9,951
Obligations under finance leases		254		274		262
Revolving credit facility		58,000		78,000		31,000
Total fair value of debt		270,515		285,365		295,942

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 2 reportable segments consist of TCS and Elfa. The TCS segment includes the Company’s retail stores, website and call center, as well as the installation and organization services business.

The Elfa segment includes the manufacturing business that produces the 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® 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

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EBITDA as net loss before interest, taxes, depreciation and amortization, certain non-cash items, and other adjustments that we do not consider in our evaluation of ongoing operating performance from period to period.


Thirteen Weeks Ended June 27, 2020	TCS		Elfa		Eliminations		Total
Net sales to third parties	$	139,386	$	12,300	$	—	$	151,686
Intersegment sales		—		8,691		(8,691)		—
Adjusted EBITDA		1,725		2,937		(199)		4,463
Interest expense, net		4,848		102		—		4,950
Assets (1)		1,016,425		100,834		(6,798)		1,110,461


Thirteen Weeks Ended June 29, 2019	TCS		Elfa		Eliminations		Total
Net sales to third parties	$	195,076	$	14,444	$	—	$	209,520
Intersegment sales		—		11,550		(11,550)		—
Adjusted EBITDA		10,234		2,088		(1,679)		10,643
Interest expense, net		5,614		95		—		5,709
Assets (1)		1,018,984		107,678		(5,142)		1,121,520

(1)	Tangible assets in the Elfa column are located outside of the United States.

A reconciliation of loss before taxes to Adjusted EBITDA is set forth below:


		Thirteen Weeks Ended
	June 27,		June 29,
	2020		2019
Loss before taxes	$	(23,568)	$	(5,894)
Add:
Depreciation and amortization		8,949		9,706
Interest expense, net		4,950		5,709
Pre-opening costs (a)		9		477
Non-cash lease expense (b)		11,138		(64)
Stock-based compensation (c)		832		811
Foreign exchange losses (gains) (d)		121		(75)
COVID-19 costs (e)		1,223		—
Severance and other costs (f)		809		(27)
Adjusted EBITDA	$	4,463	$	10,643

(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. Non-cash lease expense increased due to renegotiated terms with landlords during the first quarter of fiscal 2020 due to COVID-19 that resulted in deferral of $11,900 of certain cash lease payments and the modification of certain lease terms for a substantial portion of our leased properties.

(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)	Realized foreign exchange transactional gains/losses our management does not consider in our evaluation of our ongoing operations.

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(e)	Includes incremental costs attributable to the COVID-19 pandemic, substantially all of which consist of hazard pay for distribution center employees and sanitization costs.

(f)

Severance and other costs include amounts our management does not consider in our evaluation of our ongoing operations. For the first quarter of fiscal 2020, Severance and other costs consists of amounts associated with the reduction in workforce as a result of the COVID-19 pandemic and the related temporary store closures, and for the first quarter of fiscal 2019, consist of severance and other charges unrelated to COVID-19.

11. Stock-based compensation

On June 1, 2020, the Company granted time-based and performance-based restricted stock awards under the Company’s Amended and Restated 2013 Incentive Award Plan to certain officers and employees of the Company. The total number of restricted shares granted was 1,358,709 with a grant-date fair value of $3.03 per share. The time-based restricted stock awards will vest over 3 years. The performance-based restricted stock awards vest based on achievement of fiscal 2020 performance targets and are also subject to time-based vesting requirements over 3 years.

Unrecognized compensation expense related to outstanding restricted stock awards to employees as of June 27, 2020 is $4,240, and recognized over a weighted average period of 1.4 years. As of June 27, 2020, the total number of nonvested restricted stock awards was 1,864,446.

12. Subsequent Events

Subsequent to the fiscal quarter ended June 27, 2020, the Company paid down $40,000 of outstanding borrowings on the Revolving Credit Facility.

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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, anticipated financial performance and liquidity, including, without limitation impacts of, and our plans in response to, the outbreak of COVID-19, and 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: the outbreak of COVID-19 and the associated impact on our business, results of operations and financial condition; our ability to continue to lease space on favorable terms; costs and risks relating 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; overall decline in the health of the economy, consumer spending, and the housing market; our inability to source and market new products to meet consumer preferences; failure to successfully anticipate consumer preferences and demand; competition from other stores and internet-based competition; vendors may sell similar or identical products to our competitors; our and our vendors’ vulnerability to natural disasters and other unexpected events; disruptions at our Elfa manufacturing facilities; deterioration or change in vendor relationships or events that adversely affect our vendors or their ability to obtain financing for their operations, including COVID-19; product recalls and/or product liability, as well as changes in product safety and other consumer protection laws; risks relating to operating two distribution centers; our dependence on foreign imports for our merchandise; our reliance upon independent third party transportation providers; our inability to effectively manage our online sales; effects of a security breach or cyber-attack of our website or information technology systems, including relating to our use of third-party web service providers; damage to, 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; 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 maintain sufficient levels of cash flow to meet growth expectations; our 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; changes to global markets and inability to predict future interest expenses; our reliance on key executive management; employee furloughs and uncertainty about their ability to return to work; our inability to find, train and retain key personnel; labor relations difficulties; increases in health care costs and labor costs; violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery and anti-kickback laws; impairment charges and effects of changes in estimates or projections used to assess the fair value of our assets; effects of tax reform and other tax 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; anti-takeover provisions in our governing documents, which could delay or prevent a change in control; 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 March 28, 2020 (the “2019 Annual Report on Form 10-K”), filed with the Securities and Exchange Commission (the “SEC”) on June 17, 2020.

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

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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 2020 ends on April 3, 2021 and will include 53 weeks and fiscal 2019 ended on March 28, 2020 and included 52 weeks. The first quarter of fiscal 2020 ended on June 27, 2020 and the first quarter of fiscal 2019 ended on June 29, 2019, and both included thirteen weeks.

Overview

The Container Store® is the original and leading specialty retailer of storage and organization products and solutions 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. We feature The Container Store Custom Closets consisting of our elfa® Classic, elfa® Décor, Avera® and Laren® closet lines. Our vision is to be a beloved brand and the first choice for customized organization solutions and services. Our customers are highly educated, very busy and primarily homeowners with a higher than average household income. We service them with storage and organization solutions that help them accomplish projects, maximize their space, and make the most of their home.

Our operations consist of two operating 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 organizational services business. As of June 27, 2020, we operated 93 stores with an average size of approximately 25,000 square feet (19,000 selling square feet) in 33 states and the District of Columbia. We also offer all of our products directly to customers through our website, responsive mobile site, and call center. 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 headquarters and call center, and our second distribution center in Aberdeen, Maryland, became fully operational in fiscal 2019.

● 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. 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® products in 1978 and acquired Elfa in 1999. Today our TCS segment is the exclusive distributor of 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.

Business Update Related to Coronavirus

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well as a portion of corporate employees, and reduced the base salaries of its executive officers and certain other employees, due to COVID-19. As of the date of this filing, we have approximately 3,500 active employees. We have also prioritized the health and safety of our customers and employees by implementing strict health and safety protocols in our stores, including intensive and frequent cleaning procedures and limitations on the number of customers shopping in each store at any given time. Furthermore, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020 and the Company is implementing applicable benefits of the CARES Act, such as deferring employer payroll taxes and evaluating potential employee retention credits. We will continue to monitor guidance from the Centers for Disease Control and Prevention, state, local and federal guidance, and the impact of COVID-19 on the Company's business, results of operations, financial position and cash flows.

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
	June 27,		June 29,
	2020		2019
Net sales	$	151,686	$	209,520
Cost of sales (excluding depreciation and amortization)		73,447		89,713
Gross profit		78,239		119,807
Selling, general, and administrative expenses (excluding depreciation and amortization)		86,265		109,029
Stock-based compensation		832		811
Pre-opening costs		9		477
Depreciation and amortization		8,949		9,706
Other expenses (income)		809		(27)
Gain on disposal of assets		(7)		(4)
Loss from operations		(18,618)		(185)
Interest expense, net		4,950		5,709
Loss before taxes		(23,568)		(5,894)
Benefit for income taxes		(6,898)		(1,795)
Net loss	$	(16,670)	$	(4,099)

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	Thirteen Weeks Ended
	June 27,			June 29,
	2020			2019
Percentage of net sales:
Net sales		100.0	%		100.0	%
Cost of sales (excluding depreciation and amortization)		48.4	%		42.8	%
Gross profit		51.6	%		57.2	%
Selling, general, and administrative expenses (excluding depreciation and amortization)		56.9	%		52.0	%
Stock‑based compensation		0.5	%		0.4	%
Pre‑opening costs		0.0	%		0.2	%
Depreciation and amortization		5.9	%		4.6	%
Other expenses (income)		0.5	%		(0.0)	%
Gain on disposal of assets		(0.0)	%		(0.0)	%
Loss from operations		(12.3)	%		(0.1)	%
Interest expense, net		3.3	%		2.7	%
Loss before taxes		(15.5)	%		(2.8)	%
Benefit for income taxes		(4.5)	%		(0.9)	%
Net loss		(11.0)	%		(2.0)	%
Operating data:
Number of stores at end of period		93			92
Non‑GAAP measures (1):
Adjusted EBITDA (2)	$	4,463		$	10,643
Adjusted net loss (3)	$	(15,523)		$	(4,099)
Adjusted net loss per common share — basic and diluted (3)	$	(0.32)		$	(0.08)

(1)

We have presented EBITDA, Adjusted EBITDA, adjusted net loss, and adjusted net 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 (2) and (3) 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 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. The Company believes the disclosure of Elfa third-party net sales without the effects of currency exchange rate fluctuations helps investors understand the Company’s underlying performance.

(2)

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 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

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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.

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 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 stock 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 are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.

A reconciliation of net loss to EBITDA and Adjusted EBITDA is set forth below:


	Thirteen Weeks Ended
	June 27,		June 29,
	2020		2019

Net loss	$	(16,670)	$	(4,099)
Depreciation and amortization		8,949		9,706
Interest expense, net		4,950		5,709
Income tax benefit		(6,898)		(1,795)
EBITDA		(9,669)		9,521
Pre-opening costs (a)		9		477
Non-cash lease expense (b)		11,138		(64)
Stock-based compensation (c)		832		811
Foreign exchange losses (gains) (d)		121		(75)
COVID-19 costs (e)		1,223		—
Severance and other costs (f)		809		(27)
Adjusted EBITDA	$	4,463	$	10,643

(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

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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. Non-cash lease expense increased due to renegotiated terms with landlords during the first quarter of fiscal 2020 due to COVID-19 that resulted in deferral of $11,900 of certain cash lease payments and the modification of certain lease terms for a substantial portion of our leased properties.

(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)	Realized foreign exchange transactional gains/losses our management does not consider in our evaluation of our ongoing operations.

(e)	Includes incremental costs attributable to the COVID-19 pandemic, substantially all of which consist of hazard pay for distribution center employees and sanitization costs.

(f)

(3)

Adjusted net loss and adjusted net 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 loss as net loss before restructuring charges, charges related to the impact of COVID-19, loss 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, charges associated with an Elfa manufacturing facility closure, charges related to the closure of Elfa France operations, and the tax impact of these adjustments and other unusual or infrequent tax items. We define adjusted net loss per common share – diluted as adjusted net loss divided by the diluted weighted average common shares outstanding. We use adjusted net loss and adjusted net 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 loss and adjusted net 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.

A reconciliation of the GAAP financial measures of net loss and net loss per common share – diluted to the non-GAAP financial measures of adjusted net loss and adjusted net loss per common share – diluted is set forth below:


	Thirteen Weeks Ended
	June 27,		June 29,
	2020		2019

Numerator:
Net loss	$	(16,670)	$	(4,099)
COVID-19 costs (a)		1,223		—
Severance (b)		809		—
Taxes (c)		(885)		—
Adjusted net loss	$	(15,523)	$	(4,099)
Denominator:
Weighted-average common shares outstanding — basic and diluted		48,389,205		48,231,148

Net loss per common share — basic and diluted	$	(0.34)	$	(0.08)
Adjusted net loss per common share — basic and diluted	$	(0.32)	$	(0.08)

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(a)	Includes incremental costs attributable to the COVID-19 pandemic, substantially all of which consist of hazard pay for distribution center employees and sanitization costs.

(b)	Includes costs associated with the reduction in workforce as a result of the COVID-19 pandemic and the related temporary store closures.

(c)	Tax impact of adjustments to net loss which are considered to be unusual or infrequent tax items, all of which we do not consider in our evaluation of ongoing performance.

Thirteen Weeks Ended June 27, 2020 Compared to Thirteen Weeks Ended June 29, 2019

Net sales

The following table summarizes our net sales for each of the thirteen weeks ended June 27, 2020 and June 29, 2019:



	June 27, 2020		% total		June 29, 2019		% total
TCS net sales	$	139,386	91.9	%	$	195,076	93.1	%
Elfa third party net sales		12,300	8.1	%		14,444	6.9	%
Net sales	$	151,686	100.0	%	$	209,520	100.0	%

Net sales in the thirteen weeks ended June 27, 2020 decreased by $57,834, or 27.6%, compared to the thirteen weeks ended June 29, 2019. This decrease was comprised of the following components:


	Net sales
Net sales for the thirteen weeks ended June 29, 2019	$	209,520
Incremental net sales decrease due to:
TCS net sales (including a $43,415, or 192.3%, increase in online sales)		(55,690)
Elfa third party net sales (excluding impact of foreign currency translation)		(1,828)
Impact of foreign currency translation on Elfa third party net sales		(316)
Net sales for the thirteen weeks ended June 27, 2020	$	151,686

The Company’s consolidated net sales decreased $57,834 or 27.6%, compared to the first quarter of fiscal 2019, due primarily to the impact of COVID-19 on store operations. TCS net sales were down $55,690 or 28.5% with Custom Closets contributing 22.7% and other product categories declining 33.5%. Although the impact of COVID-19 and the related temporary closure of our stores negatively affected our net sales for the first quarter of fiscal 2020, our online sales increased 192.3%, compared to the first quarter of fiscal 2019. As a result of the reopening of our 93 stores by the end of the first quarter of fiscal 2020, we expect online sales to moderate as customers shift to purchasing in-store. Elfa third party net sales decreased $2,144 in the thirteen weeks ended June 27, 2020. After converting Elfa’s third party net sales from Swedish krona to U.S. dollars using the prior year’s conversion rate for both the thirteen weeks ended June 27, 2020 and the thirteen weeks ended June 29, 2019, Elfa third party net sales decreased $1,828 primarily due to the impact of COVID-19.

As a result of the extended closures of the Company’s stores due to the COVID-19 pandemic and the Company’s policy of excluding extended store closures from its comparable sales calculation, the Company believes that comparable sales is not a meaningful metric for the thirteen weeks ended June 27, 2020.

Gross profit and gross margin

Gross profit in the thirteen weeks ended June 27, 2020 decreased by $41,568, or 34.7%, compared to the thirteen weeks ended June 29, 2019. The decrease in gross profit was primarily the result of decreased consolidated net sales and consolidated gross margin. The following table summarizes the gross margin for the thirteen weeks ended June 27, 2020

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and June 29, 2019 by segment and total. The segment gross margins include the impact of inter-segment net sales from the Elfa segment to the TCS segment:


	June 27, 2020		June 29, 2019
TCS gross margin	49.8	%	57.4	%
Elfa gross margin	42.7	%	36.3	%
Total gross margin	51.6	%	57.2	%

TCS gross margin decreased 760 basis points primarily due to increased shipping costs as a result of a higher mix of online sales and increased promotional activity in the first quarter of fiscal 2020. Elfa gross margin increased 640 basis points primarily due to favorable customer and product sales mix and, to a lesser extent, lower direct material costs. In total, gross margin decreased 560 basis points, primarily due to the decrease in TCS gross margin during the thirteen weeks ended June 27, 2020.

Selling, general and administrative expenses

Selling, general and administrative expenses in the thirteen weeks ended June 27, 2020 decreased by $22,764, or 20.9%, compared to the thirteen weeks ended June 29, 2019. As a percentage of consolidated net sales, SG&A increased as compared to the thirteen weeks ended June 29, 2019. The following table summarizes SG&A as a percentage of consolidated net sales for the thirteen weeks ended June 27, 2020 and June 29, 2019:


	June 27, 2020		June 29, 2019
	% of Net sales		% of Net sales
TCS selling, general and administrative	52.8	%	48.5	%
Elfa selling, general and administrative	4.1	%	3.5	%
Total selling, general and administrative	56.9	%	52.0	%

Total selling, general and administrative expenses as a percentage of consolidated net sales increased 490 basis points primarily due to the deleverage of occupancy and other fixed costs associated with lower sales, partially offset by reductions in payroll, transportation and marketing costs during the quarter.

Other expenses (income)

Other expenses increased to $809 in the thirteen weeks ended June 27, 2020 as compared to other income of $27 in the thirteen weeks ended June 29, 2019 due to severance costs associated with the reduction in workforce as a result of the COVID-19 pandemic and the related temporary store closures.

Interest expense

Interest expense decreased by $759, or 13.3%, in the thirteen weeks ended June 27, 2020 to $4,950, as compared to $5,709 in the thirteen weeks ended June 29, 2019. The decrease is primarily due to lower interest rates, combined with a lower principal balance on the Senior Secured Term Loan Facility (as defined below), partially offset by increased borrowings on the Revolving Credit Facility (as defined below).

Taxes

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Liquidity and Capital Resources

We have 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 2019 Elfa Senior Secured Credit Facilities (as defined below) as our primary sources of liquidity.

Due to the uncertainty related to COVID-19, the Company took various actions to preserve its liquidity and increase its financial flexibility. We extended payment terms for most goods and services and renegotiated alternative terms for lease payments as well as other business contracts. In addition, we reduced merchandise purchases and are managing to lower inventory levels and reduced or stopped discretionary spending across all areas of the business. The Company has planned to substantially reduce capital expenditures for fiscal 2020 as compared to fiscal 2019 with a primary focus on critical activities, such as maintenance capital and necessary technology investments.

Our primary cash needs are for merchandise inventories, direct materials, payroll, store leases, capital expenditures associated with opening new stores and updating existing stores, as well as information technology and infrastructure, 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 noncurrent 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. We believe that cash expected to be generated from operations and the remaining availability of borrowings under the Revolving Credit Facility and the 2019 Elfa Senior Secured Credit Facilities will be sufficient to meet liquidity requirements, anticipated capital expenditures and payments due under our existing credit facilities for at least the next 12 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.

At June 27, 2020, we had $63,508 of cash, of which $4,378 was held by our foreign subsidiaries. In addition, we had $24,740 of additional availability under the Revolving Credit Facility and approximately $18,642 of additional availability under the 2019 Elfa Revolving Credit Facility (as defined below) as of June 27, 2020. There were $3,635 in letters of credit outstanding under the Revolving Credit Facility and other contracts at that date.

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Cash flow analysis

A summary of our key components and measures of liquidity are shown in the following table:




	Thirteen Weeks Ended
	June 27,		June 29,
	2020		2019
Net cash provided by (used in) operating activities	$	25,614	$	(8,321)
Net cash used in investing activities		(3,907)		(8,699)
Net cash (used in) provided by financing activities		(26,093)		21,274
Effect of exchange rate changes on cash		139		(214)
Net (decrease) increase in cash	$	(4,247)	$	4,040
Free cash flow (Non-GAAP) (1)	$	21,701	$	(17,024)

(1)

See below for a discussion of this non-GAAP financial measure and reconciliation to its most directly comparable GAAP financial measure.

Net cash provided by (used in) operating activities

Cash from operating activities consists primarily of net loss adjusted for non-cash items, including depreciation and amortization, stock-based compensation, and deferred taxes as well as the effect of changes in operating assets and liabilities.

Net cash provided by operating activities was $25,614 for the thirteen weeks ended June 27, 2020. The net change in operating assets and liabilities of $39,119 and non-cash items of $3,165, were partially offset by net loss of $16,670. The net change in operating assets and liabilities is primarily due to a decrease in merchandise inventory, combined with an increase in accounts payable and accrued liabilities as well as a decrease in cash operating lease payments. The decrease in merchandise inventory was due to a reduction in inventory purchases in light of the COVID-19 pandemic. The increase in accounts payable was primarily driven by a temporary increase in vendor payment terms.

Net cash used in operating activities was $8,321 for the thirteen weeks ended June 29, 2019. Non-cash items of $9,087 and net loss of $4,099 were partially offset by a net change in operating assets and liabilities of $13,309. The net change in operating assets and liabilities is primarily due to an increase in merchandise inventory due to new product introductions and inventory build-up related to the new distribution center as well as timing of credit card receivables, partially offset by an increase in accounts payable and accrued liabilities primarily driven by timing of inventory receipts during the thirteen weeks ended June 29, 2019.

Net cash used in investing activities

Investing activities consist primarily of capital expenditures for new store openings, existing store remodels, infrastructure, information systems, and our distribution centers.

Our total capital expenditures for the thirteen weeks ended June 27, 2020 were $3,913. We incurred capital expenditures of $2,148 for maintenance capital and information technology investments. We incurred capital expenditures of $974 related to the distribution centers. The remaining capital expenditures of $791 were primarily related to investments in our existing stores. We did not open any new stores during the thirteen weeks ended June 27, 2020.

Our total capital expenditures for the thirteen weeks ended June 29, 2019 were $8,703 with new store openings, relocations and existing store remodels accounting for less than half of spending at $2,303. We did not open any stores during the thirteen weeks ended June 29, 2019. We incurred $4,416 of capital expenditures for distribution centers, the majority of which is related to the new distribution center in Aberdeen, Maryland, which became fully operational in fiscal 2019. The remaining capital expenditures of $1,984 were primarily for investments in information technology and new product rollouts.

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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 Senior Secured Credit Facilities.

Net cash used in financing activities was $26,093 for the thirteen weeks ended June 27, 2020. This included net repayments of $20,000 on the Revolving Credit Facility and net repayments of $3,948 for the 2019 Elfa Senior Secured Credit Facilities. In addition, the Company made payments of $1,739 for repayment of long-term indebtedness, and $406 for taxes paid with the withholding of shares upon vesting of restricted stock awards.

Net cash provided by financing activities was $21,274 for the thirteen weeks ended June 29, 2019. This included proceeds of $19,000 from borrowings under the Revolving Credit Facility, and net proceeds of $4,362 from borrowings under the 2019 Elfa Senior Secured Credit Facilities, partially offset by net payments of $1,741 for repayment of long-term indebtedness, and $347 for taxes paid with the withholding of shares upon vesting of restricted stock awards.

As of June 27, 2020, TCS had a total of $24,740 of unused borrowing availability under the Revolving Credit Facility, and $58,000 of borrowings outstanding under the Revolving Credit Facility.

As of June 27, 2020, Elfa had a total of $18,642 of unused borrowing availability under the 2019 Elfa Revolving Credit Facility and $5,533 outstanding under the 2019 Elfa Senior Secured Credit Facilities.

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Free cash flow (Non-GAAP)

We present free cash flow, which we define as net cash provided by (used in) 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 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. However, our positive free cash flow of $21,701 for the thirteen weeks ended June 27, 2020 increased as compared to negative free cash flow of $17,024 for the thirteen weeks ended June 29, 2019. Free cash flow generation during the first quarter was strong, despite the significant impact of COVID-19, as a result of the many actions undertaken by the Company to preserve liquidity, including temporary reductions in inventory purchases, temporary extension of payment terms, and reduced capital expenditures which focus on maintenance capital and necessary technology investments. Additionally, during the first quarter of fiscal 2020, the Company renegotiated terms with landlords as a result of the COVID-19 pandemic, which resulted in the deferral of $11,900 of certain cash lease payments and the modification of certain lease terms for a substantial portion of our leased properties. Less than half of these lease amounts are expected to be repaid in the second half of fiscal 2020 and the remaining amounts are expected to be repaid primarily in fiscal 2021.

The following table sets forth a reconciliation of free cash flow, a non-GAAP financial measure, to net cash provided by (used in) operating activities, which we believe to be the GAAP financial measure most directly comparable to free cash flow:



	Thirteen Weeks Ended
	June 27,		June 29,
	2020		2019
Net cash provided by (used in) operating activities	$	25,614	$	(8,321)
Less: Additions to property and equipment		(3,913)		(8,703)
Free cash flow	$	21,701	$	(17,024)

Senior Secured Term Loan Facility

On April 6, 2012, The Container Store Group, Inc., The Container Store, Inc. and certain of our domestic subsidiaries entered into a credit agreement with JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and the lenders party thereto (the “Senior Secured Term Loan Facility”). On September 14, 2018 (the “Effective Date”), the Company entered into a fifth amendment (the “Fifth Amendment”) to the Senior Secured Term Loan Facility. The Fifth Amendment amended the Senior Secured Term Loan Facility to, among other things, (i) extend the maturity date of the loans under the Senior Secured Term Loan Facility to September 14, 2023, (ii) decrease the applicable interest rate margin to 5.00% for LIBOR loans and 4.00% for base rate loans and, beginning from the date that a compliance certificate was delivered to the administrative agent for the fiscal year ended March 30, 2019, allow the applicable interest rate margin to step down to 4.75% for LIBOR loans and 3.75% for base rate loans upon achievement of a consolidated leverage ratio equal to or less than 2.75:1.00, and (iii) impose a 1.00% premium if a voluntary prepayment is made from the proceeds of a repricing transaction within 12 months after the Effective Date.

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In connection with the Fifth Amendment, we repaid $20,000 of the outstanding loans under the Senior Secured Term Loan Facility, which reduced the aggregate principal amount of the Senior Secured Term Loan Facility to $272,500. We drew down a net amount of approximately $10,000 on the Revolving Credit Facility in connection with the closing of the Fifth Amendment. As of June 27, 2020, the aggregate principal amount in outstanding borrowings under the Senior Secured Term Loan Facility was $250,579 and the interest rate on such borrowings is LIBOR +5.00%, 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 $1,703 through June 30, 2023, with a balloon payment for the remaining balance due on September 14, 2023.

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 subject to certain other exceptions) (other than the collateral that secures the Revolving Credit Facility described below on a first-priority basis) and (b) a second priority security interest in the assets securing the Revolving Credit Facility described below on a first-priority basis. Obligations under the Senior Secured Term Loan Facility are guaranteed by The Container Store Group, Inc. and each 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 contain certain cross-default provisions and also require certain mandatory prepayments of the Senior Secured Term Loan Facility, among these an Excess Cash Flow (as such term is defined in the Senior Secured Term Loan Facility) requirement. As of June 27, 2020, 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 Container Store, Inc. and certain of our 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, the “Revolving Credit Facility”). The maturity date of the loans under the Revolving Credit Facility is August 18, 2022.

The aggregate principal amount of the facility is $100,000. Borrowings under the Revolving Credit Facility accrue interest at LIBOR+1.25%. 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. and each of The Container Store, Inc.’s U.S. subsidiaries.

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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 June 27, 2020, 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. Subsequent to the quarter ended June 27, 2020, the Company paid down $40,000 of outstanding borrowings on the Revolving Credit Facility.

2019 Elfa Senior Secured Credit Facilities

On March 18, 2019, Elfa 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 Bank”), which consists of (i) an SEK 110.0 million (approximately $11,819 as of June 27, 2020) revolving credit facility (the “2019 Original Revolving Facility”), (ii) upon Elfa’s request, an additional SEK 115.0 million (approximately $12,356 as of June 27, 2020) revolving credit facility (the “2019 Additional Revolving Facility” and together with the 2019 Original Revolving Facility, the “2019 Elfa Revolving Facilities”), and (iii) an uncommitted term loan facility in the amount of SEK 25.0 million (approximately $2,686 as of June 27, 2020), which is subject to receipt of Nordea Bank’s commitment and satisfaction of specified conditions (the “Incremental Term Facility”, together with the 2019 Elfa Revolving Facilities, the “2019 Elfa Senior Secured Credit Facilities”). The term for the 2019 Elfa Senior Secured Credit Facilities began on April 1, 2019 and matures on April 1, 2024. Loans borrowed under the 2019 Elfa Revolving Facilities bear interest at Nordea Bank’s base rate +1.40%. Any loan borrowed under the Incremental Term Facility would bear interest at Stibor +1.70%.

The 2019 Elfa Senior Secured Credit Facilities are secured by the majority of assets of Elfa. The 2019 Elfa Senior Secured Credit Facilities contains 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 Group Equity Ratio (as defined in the 2019 Elfa Senior Secured Credit Facilities) of not less than 32.5% and (ii) a consolidated ratio of net debt to EBITDA (as defined in the 2019 Elfa Senior Secured Credit Facilities) of less than 3.20. As of June 27, 2020, Elfa was in compliance with all covenants under the 2019 Elfa Senior Secured Credit Facilities and no Event of Default (as defined in the 2019 Elfa Senior Secured Credit Facilities) had occurred.

Critical accounting policies and estimates

The preparation of financial statements in accordance with GAAP 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 our significant accounting policies is included in Note 1 to our annual consolidated financial statements in our 2019 Annual Report on Form 10-K.

Certain of our accounting policies and estimates are considered critical, as these policies and estimates are the most important to the depiction of our 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 2019 Annual Report on Form 10-K. As of June 27, 2020, there were no significant changes to any of our critical accounting policies and estimates.

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Contractual obligations

There were no material changes to our contractual obligations in the quarter ended June 27, 2020 from those disclosed in our 2019 Annual Report on Form 10-K, other than those shown in the table below, primarily related to paydowns of outstanding borrowings under the Revolving Credit Facility and certain modifications to our operating leases as a result of renegotiated terms with landlords.


	Payments due by period
			Within
	Total		1 Year		1 ‑ 3 Years		3 ‑ 5 Years		After 5 Years
Recorded contractual obligations
Term loans	$	250,579	$	6,813	$	13,626	$	230,140	$	—
Revolving loans		63,533		5,533		58,000		—		—
Operating leases (1)		565,535		73,320		168,206		131,852		192,157
Total	$	879,647	$	85,666	$	239,832	$	361,992	$	192,157

(1)

We enter into operating leases during the normal course of business. Most lease arrangements provide us with the option to renew the leases at defined terms. The future operating lease obligations would change if we were to exercise these options, or if we were to enter into additional operating leases. During the first quarter of fiscal 2020, the Company renegotiated terms with landlords as a result of the COVID-19 pandemic, which resulted in the deferral of $11,900 of certain cash lease payments and the modification of certain lease terms for a substantial portion of our leased properties.

Off-Balance Sheet Arrangements

There have been no material changes to our off-balance sheet arrangements as disclosed in our 2019 Annual Report on Form 10-K.

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.

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 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”)). 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 June 27, 2020.

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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 June 27, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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.

ITEM 1A. RISK FACTORS

There have been no material changes to our risk factors as previously disclosed in Item 1A of Part I of our 2019 Annual Report on Form 10-K.

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 INFORMATION

None.

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ITEM 6. EXHIBITS

Incorporated by Reference

Exhibit
Number

Exhibit Description

Form

File No.

Exhibit

Filing
Date

Filed/
Furnished
Herewith

3.1

Amended and Restated Certificate of Incorporation of The Container Store Group, Inc.

10-Q

001-36161

3.1

1/10/14

3.2

Amended and Restated Bylaws of The Container Store Group, Inc.

10-Q

001-36161

3.2

1/10/14

10.1

Fifth Amended and Restated Employment Agreement, dated November 5, 2019, between Melissa Reiff and The Container Store Group, Inc.

10-Q

001-36161

10.1

2/05/20

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

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

104

Cover Page Interactive Data File – the cover page XBRL tags are embedded

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within the Inline Instance XBRL Document

* Filed herewith.

** Furnished herewith.

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SIGNATURES

Pursuant to the requirements 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: July 29, 2020	\s\ Jodi L. Taylor
	Jodi L. Taylor
Chief Financial Officer and Chief Administrative Officer (duly authorized officer and Principal Financial Officer)

Date: July 29, 2020	\s\ Jeffrey A. Miller
	Jeffrey A. Miller
Chief Accounting Officer (Principal Accounting Officer)

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Container Store (TCSGQ) 10-Q2019 Q1 Quarterly report

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