The Container Store(TCS) - 2023 Q4 - Annual Report

Part I Business Overview The Container Store Group is a leading specialty retailer of organizing solutions and custom spaces, generating $1.0 billion in fiscal 2022 sales - The company operates through two main segments: The Container Store (TCS), which accounted for approximately 95% of consolidated net sales in fiscal 2022, and Elfa, which accounted for the remaining 5%[22] - The company's strategic vision is to achieve $2 billion in annual sales by focusing on three pillars: deepening customer relationships, expanding its reach, and strengthening capabilities[24][37] - A significant portion of sales comes from exclusive or proprietary products; in fiscal 2022, over half of annual sales were from such products, with Elfa-produced items accounting for approximately 31% of TCS retail sales[40][48] Company Structure and Operations (Fiscal 2022) | Segment | Description | Store Count | FY2022 Net Sales (Share) | | :--- | :--- | :--- | :--- | | The Container Store (TCS) | Retail stores, website, call center, in-home services, and C Studio manufacturing | 97 | ~$991.4 million (95%) | | Elfa | Swedish subsidiary designing and manufacturing shelving, drawer systems, and sliding doors. Sells to TCS and third parties in ~30 countries | N/A | ~$55.9 million (5% to third parties) | General Business Description The company is a leading U.S. specialty retailer of organizing solutions, operating primarily through its TCS and Elfa segments - The company is the only national retailer solely devoted to organizing solutions, custom spaces, and in-home services[21] - The company operates 97 stores in 34 states and the District of Columbia, with an average size of 24,000 square feet[22] - The company owns and operates C Studio Manufacturing, Inc in Elmhurst, Illinois, which produces the premium wood-based custom space product line, Preston™[22][42] Strategic Priorities The company's growth strategy focuses on deepening customer relationships, expanding its market reach, and strengthening operational capabilities - Deepening Customer Relationships: The Organized Insider Loyalty Program accounted for nearly 80% of sales since its introduction, with members spending approximately 57% more than non-members[28] - Expanding Reach: The company opened three new small-format stores in fiscal 2022 and plans to open six more in fiscal 2023, with a long-term potential for an additional 76 new stores[30] - Strengthening Capabilities: Investments were made in mobile express check-out, an upgraded in-store Custom Spaces design tool, and ESG initiatives, including offsetting 100% of energy use with renewable energy[35][36] Key Differentiators The company differentiates through its Custom Spaces offerings, vertically integrated Elfa business, and a curated, exclusive product assortment - The Container Store Custom Spaces, featuring exclusive brands like elfa®, Avera®, and Preston™, is a key differentiator; Elfa-produced products accounted for approximately 31% of TCS retail sales in fiscal 2022[39][40] - The multi-channel retail model is integral, with online channels collectively accounting for approximately 26% of TCS net sales in fiscal 2022[45] - Over half of annual sales in fiscal 2022 came from exclusive or proprietary products, including 28% from private label products[48] - The company maintains strong, long-lasting vendor relationships, with 15 of its top 20 vendors having been partners for at least 10 years[50] Environmental, Social and Governance (ESG) The company is advancing its ESG strategy by tracking emissions, using renewable energy, and ensuring supply chain ethics - The company published its first Sustainability Report in fiscal 2022 and is tracking Scope 1 and Scope 2 GHG emissions[36][54] - The company offsets 100% of energy use in its stores, distribution centers, and support center with renewable wind energy[36][54] - As of April 1, 2023, the company had approximately 5,100 employees, and the CEO has signed the CEO Action Pledge for Diversity & Inclusion[62][63] - The company has a zero-tolerance policy against modern slavery and human trafficking and contractually requires suppliers to comply with labor laws[67][68] Manufacturing The company operates one domestic and three international manufacturing facilities for its Preston™, elfa®, and Avera® product lines - The company has one domestic manufacturing facility in Illinois for its Preston™ brand and three international facilities (two in Sweden, one in Poland) for its elfa® and Avera® brands[73][74] Distribution The company's distribution network is centered around two primary facilities in Texas and Maryland totaling 1.7 million square feet - TCS operates two primary distribution centers: one in Coppell, TX (~1.1M sq. ft.) and a second in Aberdeen, MD (~600,000 sq. ft.)[77] Risk Factors The company faces significant risks from economic sensitivity, supply chain dependencies, IT threats, and financial leverage - Consumer Behavior Risks: Business is sensitive to economic conditions that influence discretionary spending, and failure to anticipate consumer demand can lead to inventory issues[99][101] - Supply Chain Risks: Approximately 57% of merchandise was purchased from foreign vendors in fiscal 2022 (including 33% from China), exposing the company to tariffs and geopolitical risks[140][141] - Information Technology Risks: The company is heavily reliant on IT systems and faces threats from cyber-attacks and the need to comply with complex data privacy laws like the CCPA and CPRA[115][122] - Liquidity and Financial Risks: The company has significant debt ($167.9 million as of April 1, 2023) and is exposed to currency exchange rate fluctuations[153][159] - Accounting Risks: The company recorded a significant non-cash goodwill impairment charge of $197.7 million in fiscal 2022 due to lower than expected operating results and changes in projections[187] Unresolved Staff Comments There are no unresolved staff comments - None[212] Properties The company leases all 97 retail stores and its U.S. facilities, while its subsidiary Elfa owns three manufacturing facilities in Europe - As of April 1, 2023, the company leases all 97 of its retail stores across 34 states and the District of Columbia[213] - Key leased facilities include a 1.1 million sq. ft. support/distribution center in Coppell, TX, and a 600,000 sq. ft. distribution center in Aberdeen, MD[213] - Elfa owns its three manufacturing facilities, located in Västervik, Sweden; Mullsjö, Sweden; and Koszalin, Poland[214] Legal Proceedings The company is subject to ordinary course legal proceedings not expected to have a material adverse effect on its financial condition - The company is involved in ordinary course legal proceedings, but management does not expect them to have a material adverse effect[215] Mine Safety Disclosures The company has no mine safety disclosures - None[216] Part II Market for Common Equity and Related Matters The company's common stock trades on the NYSE under "TCS," and it does not currently expect to pay cash dividends - Common stock is traded on the NYSE under the symbol "TCS"[224] - The company does not currently expect to pay cash dividends[225] [Reserved] This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Fiscal 2022 saw a 4.3% sales decline to $1.05 billion and a net loss of $158.9 million, driven by a $197.7 million goodwill impairment - A non-cash goodwill impairment charge of $197.7 million was the primary driver of the significant net loss in fiscal 2022[268] - Free cash flow was negative $4.9 million in fiscal 2022, a significant decrease from the positive $23.6 million generated in fiscal 2021, primarily due to higher capital expenditures[305][306] Fiscal 2022 vs. Fiscal 2021 Performance | Metric | Fiscal 2022 | Fiscal 2021 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,047.3M | $1,094.1M | (4.3)% | | Comparable Store Sales | (3.7)% | N/A | N/A | | Gross Margin | 57.4% | 58.2% | (80 bps) | | Net (Loss) Income | ($158.9M) | $81.7M | (294.4)% | | Adjusted EBITDA | $115.4M | $159.0M | (27.4)% | | Adjusted Net Income | $37.2M | $82.9M | (55.1)% | Results of Operations (Fiscal 2022 vs. 2021) Fiscal 2022 net sales fell 4.3% due to lower comparable sales, while a $197.7 million goodwill charge drove an operating loss - Consolidated SG&A expenses increased as a percentage of net sales by 330 basis points to 46.4%, primarily due to deleverage on lower sales[267] - The company recorded a non-cash goodwill impairment charge of $197.7 million in fiscal 2022, with no such charge in fiscal 2021[268] Net Sales Breakdown (FY2022 vs FY2021) | Component | Change in Net Sales (in thousands) | | :--- | :--- | | FY2021 Net Sales | $1,094,119 | | Comparable Store Sales Decrease | ($38,707) | | Non-Comparable Sales Increase | $6,893 | | Elfa Third-Party Sales Decrease (ex-FX) | ($5,026) | | Foreign Currency Translation Impact | ($10,021) | | FY2022 Net Sales | $1,047,258 | Gross Margin by Segment | Segment | FY2022 Gross Margin | FY2021 Gross Margin | Basis Point Change | | :--- | :--- | :--- | :--- | | TCS | 57.1% | 57.6% | (50) bps | | Elfa | 32.7% | 31.9% | +80 bps | | Consolidated | 57.4% | 58.2% | (80) bps | Liquidity and Capital Resources The company maintains liquidity through cash from operations and credit facilities, ending fiscal 2022 with $167.9 million in total debt - As of April 1, 2023, the company had total outstanding debt of $167.9 million and an additional $100.0 million of availability under its revolving credit facilities[153][286] - The company expects total capital expenditures for fiscal 2023 to be in the range of $45 million to $50 million[287] - A $30 million share repurchase program was authorized in August 2022; as of April 1, 2023, the company had repurchased $5 million worth of common stock[291][503] Cash Flow Summary (in thousands) | Cash Flow Activity | Fiscal 2022 | Fiscal 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $59,305 | $56,990 | | Net cash used in investing activities | ($64,411) | ($50,422) | | Net cash used in financing activities | ($1,669) | ($9,381) | | Free Cash Flow (Non-GAAP) | ($4,918) | $23,601 | Critical Accounting Estimates Key estimates include inventory valuation, lease accounting, and intangible asset valuation, with goodwill impairment being a major factor in fiscal 2022 - Inventories: Estimates for obsolescence and shrinkage reserves are critical, based on historical trends and future sales price estimates[326][327] - Leases: Key judgments include determining the incremental borrowing rate to present value lease payments and assessing lease renewal options[335] - Goodwill and Intangibles: The company tests goodwill for impairment annually; this process resulted in a total non-cash goodwill impairment charge of $197.7 million for the TCS segment in fiscal 2022[337][340][428] Quantitative and Qualitative Disclosures About Market Risk This item is not applicable - Not applicable[357] Financial Statements and Supplementary Data The audited financial statements received an unqualified opinion, with critical audit matters related to goodwill and lease valuations - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the financial statements and internal controls[360][361] - Critical Audit Matters identified were the valuation of goodwill (due to a material impairment) and the valuation of operating lease assets and liabilities[365][371] Consolidated Balance Sheet Summary (in thousands) | Account | April 1, 2023 | April 2, 2022 | | :--- | :--- | :--- | | Total current assets | $230,226 | $260,411 | | Total noncurrent assets | $754,948 | $937,166 | | Total assets | $985,174 | $1,197,577 | | Total current liabilities | $190,315 | $235,515 | | Total noncurrent liabilities | $532,674 | $533,966 | | Total liabilities | $722,989 | $769,481 | | Total shareholders' equity | $262,185 | $428,096 | Consolidated Statement of Operations Summary (in thousands) | Account | Fiscal Year 2022 | Fiscal Year 2021 | | :--- | :--- | :--- | | Net sales | $1,047,258 | $1,094,119 | | Gross profit | $600,963 | $636,237 | | (Loss) income from operations | ($127,595) | $125,454 | | Net (loss) income | ($158,856) | $81,718 | Changes in and Disagreements With Accountants There were no changes in or disagreements with accountants on accounting and financial disclosure - None[546] Controls and Procedures Management concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective - Management concluded that disclosure controls and procedures were effective as of April 1, 2023[548] - Management concluded that internal control over financial reporting was effective as of April 1, 2023, based on the COSO framework (2013)[551] - The independent registered public accounting firm issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[553] Other Information There is no other information to report - None[561] Disclosure Regarding Foreign Jurisdictions That Prevent Inspections This item is not applicable - Not applicable[562] Part III Directors, Executive Officers and Corporate Governance Information is incorporated by reference from the company's 2023 Proxy Statement - The required information is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[564] Executive Compensation Information is incorporated by reference from the company's 2023 Proxy Statement - The required information is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[565] Security Ownership and Related Stockholder Matters Information is incorporated by reference from the company's 2023 Proxy Statement - The required information is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[566] Certain Relationships, Related Transactions, and Director Independence Information is incorporated by reference from the company's 2023 Proxy Statement - The required information is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[567] Principal Accounting Fees and Services Information is incorporated by reference from the company's 2023 Proxy Statement - The required information is incorporated by reference from the definitive Proxy Statement for the 2023 Annual Meeting of Stockholders[568] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements and exhibits filed with the report, omitting inapplicable schedules - The consolidated financial statements are included in Part II, Item 8 of this report[569] - All financial statement schedules have been omitted because they are not applicable or the information is included elsewhere[570] Form 10-K Summary There is no Form 10-K summary provided - None[579]