Container Store Group, Inc. - Quarter Report: 2022 January (Form 10-Q)
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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 January 1, 2022
or
☐ | 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
(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 ◻ | ☑ | 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 50,646,109 shares of its common stock outstanding as of February 4, 2022.
TABLE OF CONTENTS
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| Unaudited consolidated balance sheets as of January 1, 2022, April 3, 2021, and December 26, 2020 | 3 |
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Management’s discussion and analysis of financial condition and results of operations | 23 | |
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2
The Container Store Group, Inc.
Consolidated balance sheets
January 1, | April 3, | December 26, | |||||||
(In thousands) |
| 2022 |
| 2021 |
| 2020 | |||
Assets | (unaudited) | (unaudited) | |||||||
Current assets: | |||||||||
Cash | $ | 19,008 | $ | 17,687 | $ | 27,895 | |||
Accounts receivable, net |
| 32,565 |
| 28,949 |
| 31,799 | |||
Inventory |
| 196,641 |
| 130,619 |
| 138,989 | |||
Prepaid expenses |
| 13,076 |
| 11,429 |
| 10,143 | |||
Income taxes receivable | 1,055 | 93 | 93 | ||||||
Other current assets |
| 9,997 |
| 14,547 |
| 19,103 | |||
Total current assets |
| 272,342 |
| 203,324 |
| 228,022 | |||
Noncurrent assets: | |||||||||
Property and equipment, net |
| 134,810 |
| 131,884 |
| 134,746 | |||
Noncurrent operating lease right-of-use assets | 342,980 | 307,147 | 305,259 | ||||||
Goodwill |
| 221,183 |
| 202,815 |
| 202,815 | |||
Trade names |
| 226,182 |
| 227,669 |
| 230,187 | |||
Deferred financing costs, net |
| 216 |
| 255 |
| 269 | |||
Noncurrent deferred tax assets, net |
| 796 |
| 2,305 |
| 2,503 | |||
Other assets |
| 2,576 |
| 3,070 |
| 4,381 | |||
Total noncurrent assets |
| 928,743 |
| 875,145 |
| 880,160 | |||
Total assets | $ | 1,201,085 | $ | 1,078,469 | $ | 1,108,182 |
See accompanying notes.
3
The Container Store Group, Inc.
Consolidated balance sheets (continued)
| January 1, |
| April 3, |
| December 26, | ||||
(In thousands, except share and per share amounts) |
| 2022 |
| 2021 |
| 2020 | |||
Liabilities and shareholders’ equity | (unaudited) | (unaudited) | |||||||
Current liabilities: | |||||||||
Accounts payable | $ | 70,983 | $ | 68,546 | $ | 86,319 | |||
Accrued liabilities |
| 98,273 |
| 86,551 |
| 88,080 | |||
Current borrowings on revolving lines of credit |
| — |
| — |
| — | |||
Current portion of long-term debt |
| 2,117 |
| 2,166 |
| 2,186 | |||
Current operating lease liabilities | 52,486 | 50,847 | 54,719 | ||||||
Income taxes payable |
| 416 |
| 6,803 |
| 8,859 | |||
Total current liabilities |
| 224,275 |
| 214,913 |
| 240,163 | |||
Noncurrent liabilities: | |||||||||
Long-term debt |
| 196,626 |
| 163,818 |
| 188,890 | |||
Noncurrent operating lease liabilities | 313,414 | 285,022 | 291,710 | ||||||
Noncurrent deferred tax liabilities, net |
| 50,925 |
| 48,923 |
| 51,465 | |||
Other long-term liabilities |
| 9,208 |
| 12,124 |
| 13,415 | |||
Total noncurrent liabilities |
| 570,173 |
| 509,887 |
| 545,480 | |||
Total liabilities |
| 794,448 |
| 724,800 |
| 785,643 | |||
Commitments and contingencies (Note 7) | |||||||||
Shareholders’ equity: | |||||||||
Common stock, $0.01 par value, 250,000,000 shares authorized; 49,618,747 shares issued at January 1, 2022; 48,838,261 shares issued at April 3, 2021; 48,573,694 shares issued at December 26, 2020 |
| 496 |
| 488 |
| 486 | |||
Additional paid-in capital |
| 873,088 |
| 873,048 |
| 870,739 | |||
Accumulated other comprehensive loss |
| (24,643) |
| (19,003) |
| (12,738) | |||
Retained deficit |
| (442,304) |
| (500,864) |
| (535,948) | |||
Total shareholders’ equity |
| 406,637 |
| 353,669 |
| 322,539 | |||
Total liabilities and shareholders’ equity | $ | 1,201,085 | $ | 1,078,469 | $ | 1,108,182 |
See accompanying notes.
4
The Container Store Group, Inc.
Consolidated statements of operations
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||
January 1, | December 26, | January 1, | December 26, | |||||||||
(In thousands, except share and per share amounts) (unaudited) |
| 2022 |
| 2020 |
| 2022 |
| 2020 | ||||
Net sales | $ | 267,304 | $ | 275,478 | $ | 788,573 | $ | 675,405 | ||||
Cost of sales (excluding depreciation and amortization) |
| 114,956 |
| 115,991 |
| 326,363 |
| 291,621 | ||||
Gross profit |
| 152,348 |
| 159,487 |
| 462,210 |
| 383,784 | ||||
Selling, general, and administrative expenses (excluding depreciation and amortization) |
| 120,268 |
| 115,870 |
| 344,478 |
| 303,328 | ||||
Stock-based compensation |
| 1,204 |
| 2,177 |
| 3,159 |
| 4,986 | ||||
Pre-opening costs |
| 20 |
| 95 |
| 686 |
| 111 | ||||
Depreciation and amortization |
| 8,667 |
| 8,498 |
| 25,412 |
| 26,270 | ||||
Other (income) expenses |
| — |
| (13) |
| — |
| 1,089 | ||||
(Gain) loss on disposal of assets |
| (9) |
| 18 |
| (14) |
| 12 | ||||
Income from operations |
| 22,198 |
| 32,842 |
| 88,489 |
| 47,988 | ||||
Interest expense, net |
| 3,213 |
| 4,099 |
| 9,584 |
| 13,540 | ||||
Loss on extinguishment of debt |
| — |
| 893 |
| — |
| 893 | ||||
Income before taxes | 18,985 |
| 27,850 | 78,905 |
| 33,555 | ||||||
Provision for income taxes |
| 5,292 |
| 8,181 |
| 20,345 |
| 10,356 | ||||
Net income | $ | 13,693 | $ | 19,669 | $ | 58,560 | $ | 23,199 | ||||
Net income per common share — basic | $ | 0.28 | $ | 0.40 | $ | 1.19 | $ | 0.48 | ||||
Net income per common share — diluted | $ | 0.27 | $ | 0.40 | $ | 1.16 | $ | 0.47 | ||||
Weighted-average common shares — basic | 49,611,468 | 48,570,843 | 49,386,897 | 48,491,286 | ||||||||
Weighted-average common shares — diluted |
| 50,298,101 |
| 49,513,225 |
| 50,310,320 |
| 48,950,253 |
See accompanying notes.
5
The Container Store Group, Inc.
Consolidated statements of comprehensive income
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||
January 1, | December 26, | January 1, | December 26, | |||||||||
(In thousands) (unaudited) |
| 2022 |
| 2020 |
| 2022 |
| 2020 | ||||
Net income | $ | 13,693 | $ | 19,669 | $ | 58,560 | $ | 23,199 | ||||
Unrealized (loss) gain on financial instruments, net of tax (benefit) provision of ($385), $2,267, ($732), and $4,407 |
| (1,087) |
| 5,919 |
| (2,105) |
| 11,800 | ||||
Pension liability adjustment |
| 99 |
| (341) |
| 114 |
| (697) | ||||
Foreign currency translation adjustment |
| (2,330) |
| 6,425 |
| (3,649) |
| 12,454 | ||||
Comprehensive income | $ | 10,375 | $ | 31,672 | $ | 52,920 | $ | 46,756 |
See accompanying notes.
6
The Container Store Group, Inc.
Consolidated statements of cash flows
Thirty-Nine Weeks Ended | ||||||
January 1, | December 26, | |||||
(In thousands) (unaudited) |
| 2022 |
| 2020 | ||
Operating activities | ||||||
Net income | $ | 58,560 | $ | 23,199 | ||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
Depreciation and amortization | 25,412 |
| 26,270 | |||
Stock-based compensation | 3,159 |
| 4,986 | |||
(Gain) loss on disposal of assets | (14) |
| 12 | |||
Loss on extinguishment of debt | — | 893 | ||||
Deferred tax expense (benefit) | 4,459 |
| (6,203) | |||
Non-cash interest | 1,412 |
| 1,393 | |||
Other | (264) |
| 48 | |||
Changes in operating assets and liabilities (exclusive of effects of acquisition): | ||||||
Accounts receivable | (3,729) |
| (2,962) | |||
Inventory | (64,945) |
| (10,430) | |||
Prepaid expenses and other assets | (767) |
| (823) | |||
Accounts payable and accrued liabilities | 11,161 |
| 55,596 | |||
Net change in lease assets and liabilities | (5,680) | 8,311 | ||||
Income taxes | (8,221) |
| 13,353 | |||
Other noncurrent liabilities | (2,614) |
| 3,046 | |||
Net cash provided by operating activities | 17,929 | 116,689 | ||||
Investing activities | ||||||
Additions to property and equipment | (24,029) |
| (11,670) | |||
Closet Works acquisition, net of cash acquired | (19,445) | — | ||||
Proceeds from sale of property and equipment | 17 |
| 65 | |||
Net cash used in investing activities | (43,457) |
| (11,605) | |||
Financing activities | ||||||
Borrowings on revolving lines of credit | 48,913 |
| 36,292 | |||
Payments on revolving lines of credit | (48,913) |
| (46,202) | |||
Borrowings on long-term debt | 38,000 |
| 200,000 | |||
Payments on long-term debt | (6,633) | (330,403) | ||||
Payment of debt issuance costs | — |
| (5,579) | |||
Payment of taxes with shares withheld upon restricted stock vesting | (4,677) | (412) | ||||
Proceeds from the exercise of stock options | 566 |
| — | |||
Net cash provided by (used in) financing activities | 27,256 |
| (146,304) | |||
Effect of exchange rate changes on cash | (407) |
| 1,360 | |||
Net increase (decrease) in cash | 1,321 |
| (39,860) | |||
Cash at beginning of fiscal period | 17,687 |
| 67,755 | |||
Cash at end of fiscal period | $ | 19,008 | $ | 27,895 | ||
Supplemental information for non-cash investing: | ||||||
Purchases of property and equipment (included in accounts payable) | $ | 3,978 | $ | 732 |
See accompanying notes.
7
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 |
| deficit |
| equity | ||||||
Balance at April 3, 2021 | $ | 0.01 |
| 48,838,261 | $ | 488 |
| $ | 873,048 | $ | (19,003) | $ | (500,864) |
| $ | 353,669 | ||||
Net income |
| — |
| — |
|
| — |
| — |
| 17,672 |
|
| 17,672 | ||||||
Stock-based compensation |
| — |
| — |
|
| 869 |
| — |
| — |
|
| 869 | ||||||
Stock options exercised | 52,183 | 1 | 225 | — | 226 | |||||||||||||||
Vesting of restricted stock awards | 526,771 | 5 | (5) | — | — | — | ||||||||||||||
Taxes related to net share settlement of restricted stock awards | — | — | (3,677) | — | — | (3,677) | ||||||||||||||
Foreign currency translation adjustment |
| — |
| — |
|
| — |
| 703 |
| — |
|
| 703 | ||||||
Unrealized gain on financial instruments, net of $51 tax provision |
| — |
| — |
|
| — |
| 143 |
| — |
|
| 143 | ||||||
Pension liability adjustment |
| — |
| — |
|
| — |
| (57) |
| — |
|
| (57) | ||||||
Balance at July 3, 2021 | $ | 0.01 |
| 49,417,215 | 494 |
|
| 870,460 |
| (18,214) |
| (483,192) |
|
| 369,548 | |||||
Net income | — | — | — | — | 27,195 | 27,195 | ||||||||||||||
Stock-based compensation | — | — | 1,086 | — | — | 1,086 | ||||||||||||||
Vesting of restricted stock awards | 127,938 | 1 | (1) | — | — | — | ||||||||||||||
Taxes related to net share settlement of restricted stock awards | — | — | — | — | — | — | ||||||||||||||
Foreign currency translation adjustment | — | — | — | (2,022) | — | (2,022) | ||||||||||||||
Unrealized loss on financial instruments, net of $398 tax benefit | — | — | — | (1,161) | — | (1,161) | ||||||||||||||
Pension liability adjustment | — | — | — | 72 | — | 72 | ||||||||||||||
Balance at October 2, 2021 | $ | 0.01 | 49,545,153 | 495 | 871,545 | (21,325) | (455,997) | 394,718 | ||||||||||||
Net income | — | — | — | — | 13,693 | 13,693 | ||||||||||||||
Stock-based compensation | — | — | 1,204 | — | — | 1,204 | ||||||||||||||
Stock options exercised | 73,594 | 1 | 339 | — | 340 | |||||||||||||||
Vesting of restricted stock awards | — | — | — | — | — | — | ||||||||||||||
Taxes related to net share settlement of restricted stock awards | — | — | — | — | — | — | ||||||||||||||
Foreign currency translation adjustment | — | — | — | (2,330) | — | (2,330) | ||||||||||||||
Unrealized loss on financial instruments, net of $385 tax benefit | — | — | — | (1,087) | — | (1,087) | ||||||||||||||
Pension liability adjustment | — | — | — | 99 | — | 99 | ||||||||||||||
Balance at January 1, 2022 | $ | 0.01 | 49,618,747 | $ | 496 | $ | 873,088 | $ | (24,643) | $ | (442,304) | $ | 406,637 |
See accompanying notes.
8
The Container Store Group, Inc.
Consolidated statements of shareholders’ equity (continued)
Accumulated | ||||||||||||||||||||
Additional | other | Total | ||||||||||||||||||
(In thousands, except share amounts) | Par | Common stock | paid-in | comprehensive | Retained | shareholders’ | ||||||||||||||
(unaudited) |
| value |
| Shares |
| Amount |
| capital |
| loss |
| deficit |
| equity | ||||||
Balance at 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 | 174,758 | 2 | (2) | — | — | — | ||||||||||||||
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 |
| — |
| — |
|
| — |
| (219) | — |
|
| (219) | |||||||
Balance at June 27, 2020 | $ | 0.01 |
| 48,491,317 | 485 |
| 867,332 | (28,970) | (575,817) |
| 263,030 | |||||||||
Net income |
| — | — |
| — | — | 20,200 |
| 20,200 | |||||||||||
Stock-based compensation |
| — | — |
| 1,836 | — | — |
| 1,836 | |||||||||||
Vesting of restricted stock awards | 78,963 | 1 | (1) | — | — | — | ||||||||||||||
Foreign currency translation adjustment | — | — | — | 2,446 | — | 2,446 | ||||||||||||||
Unrealized gain on financial instruments, net of $747 tax provision | — | — | — | 1,920 | — | 1,920 | ||||||||||||||
Pension liability adjustment | — | — | — | (137) | — | (137) | ||||||||||||||
Balance at September 26, 2020 | $ | 0.01 | 48,570,280 | 486 | 869,167 | (24,741) | (555,617) | 289,295 | ||||||||||||
Net income | — | — | — | — | 19,669 | 19,669 | ||||||||||||||
Stock-based compensation | — | — | 1,583 | — | — | 1,583 | ||||||||||||||
Vesting of restricted stock awards | 3,414 | — | — | — | — | — | ||||||||||||||
Taxes related to net share settlement of restricted stock awards | — | — | (11) | — | — | (11) | ||||||||||||||
Foreign currency translation adjustment | — | — | — | 6,425 | — | 6,425 | ||||||||||||||
Unrealized gain on financial instruments, net of $2,267 tax provision | — | — | — | 5,919 | — | 5,919 | ||||||||||||||
Pension liability adjustment | — | — | — | (341) | — | (341) | ||||||||||||||
Balance at December 26, 2020 | $ | 0.01 | 48,573,694 | $ | 486 | $ | 870,739 | $ | (12,738) | $ | (535,948) | $ | 322,539 |
See accompanying notes.
9
The Container Store Group, Inc.
Notes to consolidated financial statements (unaudited)
(In thousands, except share amounts and unless otherwise stated)
January 1, 2022
1. Description of business and basis of presentation
These financial statements should be read in conjunction with the financial statement disclosures in our Annual Report on Form 10-K for the fiscal year ended April 3, 2021, filed with the Securities and Exchange Commission (“SEC”) on June 3, 2021 (the “2020 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, with the exception of business combinations discussed further below. 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 2021” refer to the 52-week fiscal year ending April 2, 2022, “fiscal 2020” refer to the 53-week fiscal year ended April 3, 2021, and “fiscal 2019” refer to the 52-week fiscal year ended March 28, 2020.
Description of business
Our operations consist of two reportable segments:
The Container Store, Inc. (“TCS”): The Container Store, Inc. was founded in 1978 in Dallas, Texas, as a retailer with a mission to provide customers with storage and organization solutions 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, at which time LGP held a controlling interest in the Company as the majority shareholder. During fiscal 2020, LGP sold common stock of the Company, reducing their ownership to less than 50% of the Company’s outstanding common stock. Although LGP is no longer the majority shareholder, LGP continues to have significant influence over the Company. As of January 1, 2022, TCS operates 94 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, mobile site, call center, and in-home design consultants. On December 30, 2021, the Company completed the acquisition of Closet Parent Company, Inc. (“Closet Works”), a designer, manufacturer and supplier of wood-based custom home storage and organization solutions for total cash consideration of $21,438 which is included in the TCS reportable segment. Closet Works, based in Chicago, Illinois, services the United States by offering customized solutions for closets, garages, home offices, pantries, laundry rooms, murphy beds and built-in wall units.
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® branded products are sold exclusively in the United States in The Container Store retail stores, website and call center, and Elfa sells to various retailers on a wholesale basis in approximately 30 countries around the world, with a concentration in the Nordic region of Europe.
10
Business Update Related to Coronavirus
The novel coronavirus (“COVID-19”) pandemic had a negative impact on the Company’s fiscal 2020 operations and financial results. We experienced significant disruptions in store operations, including the temporary closure of all stores to in-store customer traffic, which adversely affected our business, results of operations and financial condition, and saw a significant increase in our curbside pick-up and online selling. During the third quarter of fiscal 2021, all stores were open. We continued to see a shift back to brick and mortar stores and a decrease in online channel sales year-over year. We will continue to review local, state, and federal mandates as we may need to temporarily adjust our operations to comply as COVID-19 and other uncertainties continue to unfold. We continue to prioritize the health and safety of our customers and employees by implementing strict health and safety protocols in our stores. We will continue to monitor guidance from the Centers for Disease 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 has historically been moderately seasonal in nature and, therefore, the results of operations for the thirty-nine weeks ended January 1, 2022 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 promotional campaigns. However, we do not expect fiscal 2021 sales and profitability to follow historical patterns due to various factors, including changes in promotional strategy and cadence and anticipated supply chain cost headwinds.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting. The cost of an acquired company is assigned to the tangible and identifiable intangible assets purchased and the liabilities assumed on the basis of their fair values at the date of acquisition. Any excess of the purchase price over the fair value of tangible and intangible assets acquired is assigned to goodwill. The transaction costs associated with business combinations are expensed as they are incurred. We recognize any adjustments to provisional amounts and goodwill that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, with the effect on current period earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.
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 2022. The adoption of this standard is not expected to 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
11
periods within those fiscal years, with early adoption permitted. The adoption of this standard in the first quarter of fiscal 2021 did not result in a material impact to the Company’s financial statements.
In November 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contracts Assets and Contract Liabilities from Contracts with Customers, which requires companies to apply Accounting Standard Codification (“ASC”) 606 to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination on the acquisition date. This new guidance creates an exception to the general recognition and measurement principle noted in ASC 805, Business Combinations, which requires the acquirer in a business combination to recognize and measure the assets acquired at fair value at the acquisition date. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022 and interim periods, for all public business entities. Early adoption is permitted, including adoption in an interim period. ASU 2021-08 should be applied prospectively; however, an entity that elects to early adopt in an interim period should apply the amendments to all business combinations that occurred during the fiscal year that includes that interim period. The Company early adopted this standard in the third quarter of fiscal 2021. The adoption of this standard is expected to result in an immaterial impact to the Company’s financial statements.
2. Detail of certain balance sheet accounts
January 1, | April 3, | December 26, | |||||||
| 2022 |
| 2021 |
| 2020 | ||||
Accounts receivable, net: | |||||||||
Trade receivables, net | $ | 17,056 | $ | 18,784 | $ | 17,439 | |||
Credit card receivables |
| 13,009 |
| 8,445 |
| 10,823 | |||
Other receivables |
| 2,500 |
| 1,720 |
| 3,537 | |||
$ | 32,565 | $ | 28,949 | $ | 31,799 | ||||
Inventory: | |||||||||
Finished goods | $ | 188,780 | $ | 126,311 | $ | 134,296 | |||
Raw materials |
| 6,809 |
| 3,614 |
| 4,154 | |||
Work in progress |
| 1,052 |
| 694 |
| 539 | |||
$ | 196,641 | $ | 130,619 | $ | 138,989 | ||||
Accrued liabilities: | |||||||||
Accrued payroll, benefits and bonuses | $ | 27,160 | $ | 30,028 | $ | 29,451 | |||
Unearned revenue | 32,110 | 19,503 | 17,913 | ||||||
Accrued transaction and property tax | 15,944 | 15,660 | 14,673 | ||||||
Gift cards and store credits outstanding | 12,735 | 9,862 | 11,815 | ||||||
Accrued interest | 151 | 95 | 1,151 | ||||||
Accrued sales returns | 3,534 | 3,381 | 3,130 | ||||||
Other accrued liabilities | 6,639 | 8,022 | 9,947 | ||||||
$ | 98,273 | $ | 86,551 | $ | 88,080 |
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. Unearned revenue was $19,503 as of April 3, 2021, and $18,840 was subsequently recognized into revenue for the thirty-nine weeks ended January 1, 2022. Gift cards and store credits outstanding was $9,862 as of April 3, 2021, and $2,777 was subsequently recognized into revenue for the thirty-nine weeks ended January 1, 2022. See Note 11 for disaggregated revenue disclosures.
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3. Leases
We conduct all of our U.S. operations from leased facilities that include our support center, warehouse facilities, and 94 store locations. The support center, warehouse facilities, and stores are under operating leases that generally expire over the next 1 to 20 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 that 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.
Upon lease commencement, we recognize the lease liability measured at the present value of the fixed future minimum lease payments. We do 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 fiscal 2020, the Company renegotiated terms with landlords as a result of the COVID-19 pandemic, which resulted in the deferral of approximately $11,900 of certain cash lease payments, of which the remaining $400 is expected to be repaid in the fourth quarter of fiscal 2021.
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 and thirty-nine weeks ended January 1, 2022 and December 26, 2020 were as follows:
| | | Thirteen Weeks Ended | | | Thirty-Nine Weeks Ended | ||||||
| | January 1, 2022 | | | December 26, 2020 | January 1, 2022 | | | December 26, 2020 | |||
Operating lease costs | $ | 21,873 | | $ | 22,926 | $ | 65,562 | | $ | 68,132 | ||
Variable lease costs |
| 373 | |
| 331 |
| 1,191 | |
| 642 | ||
Total lease costs | $ | 22,246 | | $ | 23,257 | $ | 66,753 | | $ | 68,774 |
We do not have sublease income and do not recognize lease assets or liabilities for short-term leases, defined as operating leases with initial terms of less than 12 months. Our short-term lease costs were not material for the thirteen and thirty-nine week periods ended January 1, 2022 and December 26, 2020.
13
Supplemental cash flow information related to our leases for the thirty-nine weeks ended January 1, 2022 and December 26, 2020 were as follows:
| | | Thirty-Nine Weeks Ended | |||
| | January 1, 2022 | | | December 26, 2020 | |
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 71,949 | | $ | 60,044 | |
Additions to right-of-use assets (1) | $ | 68,934 | | $ | 44,785 |
(1) | Amount includes $1,638 for additions to right-of-use assets acquired in the Closet Works acquisition during the third quarter of fiscal 2021. |
Weighted average remaining operating lease term and incremental borrowing rate as of January 1, 2022 and December 26, 2020 were as follows:
| | Thirty-Nine Weeks Ended | |||
| | January 1, 2022 | | December 26, 2020 | |
Weighted average remaining lease term (years) | 7.1 | | 7.0 | | |
Weighted average incremental borrowing rate | 11.5 | % | 13.9 | % |
As of January 1, 2022, future minimum lease payments under our operating lease liabilities were as follows:
| Operating leases (1) | ||
Within 1 year (remaining) | $ | 22,820 | |
2 years |
| 88,920 | |
3 years |
| 81,727 | |
4 years |
| 72,535 | |
5 years |
| 64,266 | |
Thereafter |
| 206,807 | |
Total lease payments | $ | 537,075 | |
Less amount representing interest | (171,175) | ||
Total lease liability | $ | 365,900 | |
Less current lease liability | (52,486) | ||
Total noncurrent lease liability | $ | 313,414 |
(1) | Operating lease payments exclude approximately $4,194 of legally binding minimum lease payments for one lease signed but not yet commenced. |
4. Net income per common share
Basic net income per common share is computed as net income divided by the weighted-average number of common shares for the period. Net income per common share – diluted is computed as net income divided by the weighted-average number of common shares for the period plus common stock equivalents consisting of shares subject to stock-based awards with exercise prices less than or equal to the average market price of the Company’s common stock for the period, to the extent their inclusion would be dilutive. Potentially dilutive securities are excluded from the computation of net income per common share – diluted if their effect is anti-dilutive.
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The following is a reconciliation of net income and the number of shares used in the basic and diluted net income per common share calculations:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||
January 1, | December 26, | January 1, | December 26, | |||||||||
| 2022 |
| 2020 |
| 2022 |
| 2020 | |||||
Numerator: | ||||||||||||
Net income | $ | 13,693 | $ | 19,669 | $ | 58,560 | $ | 23,199 | ||||
Denominator: | ||||||||||||
Weighted-average common shares — basic |
| 49,611,468 |
| 48,570,843 |
| 49,386,897 |
| 48,491,286 | ||||
Nonvested restricted stock awards and other dilutive securities | 686,633 | 942,382 | 923,423 | 458,967 | ||||||||
Weighted-average common shares — diluted | 50,298,101 | 49,513,225 | 50,310,320 | 48,950,253 | ||||||||
Net income per common share — basic | $ | 0.28 | $ | 0.40 | $ | 1.19 | $ | 0.48 | ||||
Net income per common share — diluted | 0.27 | 0.40 | 1.16 | 0.47 | ||||||||
Antidilutive securities not included: | ||||||||||||
Stock options outstanding |
| 1,654,260 |
| 1,895,557 | 1,714,940 |
| 1,965,591 | |||||
Nonvested restricted stock awards | 97,831 | — | 125,239 | 74,291 |
5. Closet Works Acquisition
On December 30, 2021, the Company acquired 100% of the voting equity interest in Closet Works, a leading designer, manufacturer, and supplier of custom home storage and closet organization solutions. This strategic acquisition will expand The Container Store’s manufacturing capabilities to include wood-based spaces and enhance its premium wood-based product offering. The acquisition provides access to quality equipment and facilities located centrally in the United States and will allow the Company to control the process from product manufacturing to installation.
The acquisition date fair value of the consideration transferred totaled $21,438 of cash (subject to working capital and certain other adjustments as set forth in the purchase agreement for the acquisition). The Closet Works acquisition has been accounted for as a business combination in accordance with the requirements of ASC 805. The acquisition price has been allocated on a preliminary basis among assets acquired and liabilities assumed at fair value based on information currently available, with the excess recorded as goodwill. Prior to the finalization of the purchase price allocation, if information becomes available that would indicate it is probable that unknown events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation and may change goodwill. Prior to the finalization of the purchase price allocation, if information becomes available that would indicate it is probable that unknown events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation and may change goodwill.
The preliminary allocation of consideration to the net tangible assets acquired and liabilities assumed reflects preliminary fair value estimates and analyses using the cost and market approaches, which are subject to change within the measurement period as valuations are finalized. Thus, the following table summarizes the provisional measurements of tangible assets, liabilities, goodwill and deferred income tax assets at the acquisition date and are subject to change.
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December 30, | |||
2021 | |||
Cash | $ | 1,993 | |
Accounts receivable | 389 | ||
Inventory | 1,300 | ||
Prepaid expenses | 177 | ||
Property and equipment | 2,988 | ||
Operating lease right-of-use assets | 1,638 | ||
Goodwill | 18,368 | ||
Other assets | 40 | ||
Total identifiable assets acquired | 26,893 | ||
Accounts payable | (918) | ||
Accrued liabilities | (2,269) | ||
Current operating lease liabilities | (446) | ||
Noncurrent operating lease liabilities | (1,092) | ||
Noncurrent deferred tax liabilities | (730) | ||
Total liabilities | (5,455) | ||
Total purchase price | $ | 21,438 |
The goodwill recorded in connection with the acquisition, which is not expected to be deductible for tax purposes, was included in our TCS segment. The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of Closet Works.
Certain assets and liabilities assumed as part of the acquisition, including receivables, prepaid expenses and other assets, accounts payable and accrued liabilities were recorded at their carrying values which were concluded to approximate fair value, as of the date of acquisition, due to the short term nature of these balances. Substantially all the receivables acquired are expected to be collectible.
The following fair value measurements were primarily based on significant inputs that are observable in the market and thus represent a Level 2 measurement as defined in ASC 820, Fair Value Measurement. The fair value of acquired inventory was based upon the estimated selling price of the eventual finished inventories adjusted for expected (1) costs to complete the manufacturing process, (2) costs of selling efforts, and (3) reasonable profit allowance for the remaining manufacturing and selling effort. The acquired value of property and equipment, in line with our accounting policies, was estimated using common industry valuation methods for similar asset types, based primarily on cost inputs. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for property and equipment. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the property, less an allowance for loss in value due to depreciation. Operating lease right-of-use assets and liabilities were recorded at the discounted value of future obligations in accordance with ASC 842, Leases.
The Company recognized $692 of acquisition-related costs that were expensed as incurred in the third quarter of fiscal 2021. These costs are included in the consolidated statement of operations as selling, general and administrative expenses.
The Company began consolidating Closet Works upon completion of the acquisition effective December 30, 2021; however, there were no amounts of revenue and expenses of Closet Works included in the Company’s consolidated statement of operations from the acquisition date of December 30, 2021 to January 1, 2022, as they were immaterial.
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6. Income taxes
The provision for income taxes in the thirteen weeks ended January 1, 2022 was $5,292 as compared to a provision of $8,181 in the thirteen weeks ended December 26, 2020. The effective tax rate for the thirteen weeks ended January 1, 2022 was 27.9%, as compared to 29.4% in the thirteen weeks ended December 26, 2020. During the thirteen weeks ended January 1, 2022, the effective tax rate rose above the U.S. statutory rate of 21%, primarily due to U.S. state income taxes and the impact of the global intangible low-taxed income (“GILTI”). During the thirteen weeks ended December 26, 2020, the effective tax rate rose above the U.S. statutory rate, primarily due to tax related to stock-based compensation, U.S. state income taxes, officer compensation limitations and the impact of the GILTI provision from the Tax Cuts and Jobs Act.
The provision for income taxes in the thirty-nine weeks ended January 1, 2022 was $20,345 as compared to $10,356 in the thirty-nine weeks ended December 26, 2020. The effective tax rate for the thirty-nine weeks ended January 1, 2022 was 25.8%, as compared to 30.9% in the thirty-nine weeks ended December 26, 2020. During the thirty-nine weeks ended January 1, 2022, the effective tax rate rose above the U.S. statutory rate of 21%, primarily due to U.S. state income taxes and the impact of the GILTI provision. During the thirty-nine weeks ended December 26, 2020, the effective tax rate rose above the U.S. statutory rate, primarily due to stock-based compensation, U.S. state income taxes, officer compensation limitations and the impact of the GILTI provision.
7. Commitments and contingencies
In connection with insurance policies and other contracts, the Company has outstanding standby letters of credit totaling $4,111 as of January 1, 2022.
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.
8. Accumulated other comprehensive loss
Accumulated other comprehensive loss (“AOCL”) consists of changes in our foreign currency forward contracts, pension liability adjustment, and foreign currency translation. The components of AOCL, net of tax, are shown below for the thirty-nine weeks ended January 1, 2022:
Foreign | ||||||||||||
currency | Pension | Foreign | ||||||||||
hedge | liability | currency | ||||||||||
| instruments |
| adjustment |
| translation |
| Total | |||||
Balance at April 3, 2021 | $ | 3,174 | $ | (2,415) | $ | (19,762) | $ | (19,003) | ||||
Other comprehensive (loss) income before reclassifications, net of tax | (402) | 114 | (3,649) | (3,937) | ||||||||
Amounts reclassified to earnings, net of tax | (1,703) | — | — | (1,703) | ||||||||
Net current period other comprehensive (loss) income |
| (2,105) |
| 114 |
| (3,649) |
| (5,640) | ||||
Balance at January 1, 2022 | $ | 1,069 | $ | (2,301) | $ | (23,411) | $ | (24,643) | ||||
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 9.
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9. 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, Derivatives and Hedging. In the Elfa segment, we utilize foreign currency forward contracts to hedge purchases, primarily of raw materials, that are transacted in currencies other than Swedish krona, which is the functional currency of Elfa. Forward contracts in the Elfa segment are economic hedges and are not designated as cash flow hedges as defined by ASC 815.
During the thirty-nine weeks ended January 1, 2022 and December 26, 2020, the TCS segment used forward contracts for 96% and 90% of inventory purchases in Swedish krona, respectively. Generally, the Company’s foreign currency forward contracts have terms from 1 to 12 months and require the Company to exchange currencies at agreed-upon rates at settlement.
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 as other comprehensive income/loss until the hedged item (inventory) is sold to the customer, at which time the deferred gain or loss is recognized through cost of sales. Any portion of a change in the foreign currency hedge instrument’s fair value that is considered to be ineffective, as defined, or that the Company has elected to exclude from its measurement of effectiveness, is immediately recorded in earnings as cost of sales. The Company assessed the effectiveness of the foreign currency hedge instruments and determined the foreign currency hedge instruments were highly effective during the thirty-nine weeks ended January 1, 2022 and December 26, 2020. 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 thirty-nine weeks ended January 1, 2022, the Company did
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 recognized a $1,069 gain in AOCL related to foreign currency hedge instruments at January 1, 2022, of which $943 represents an unrealized gain for settled foreign currency hedge instruments related to inventory on hand as of January 1, 2022. The Company expects the unrealized gain of $943, 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 is included in AOCL, net of taxes, presented in Note 8 of these financial statements.
10. Fair value measurements
Under GAAP, the Company is required to a) measure certain assets and liabilities at fair value and 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.
18
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. |
As of January 1, 2022, April 3, 2021 and December 26, 2020, the Company held certain items that are required to be measured at fair value on a recurring basis. These included foreign currency forward contracts which the Company uses to stabilize its retail gross margins and to protect its operations from downward currency exposure and 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. See Note 5 for non-recurring fair value measurements related to the Closet Works acquisition on December 30, 2021.
The following items are measured at fair value on a recurring basis, subject to the requirements of ASC 820:
January 1, | April 3, | December 26, | |||||||||||
Description |
|
| Balance Sheet Location |
| 2022 |
| 2021 |
| 2020 | ||||
Assets |
| ||||||||||||
Nonqualified retirement plan |
| N/A |
| Other current assets | $ | 4,027 | $ | 5,707 | $ | 6,116 | |||
Foreign currency forward contracts |
| Level 2 |
| Other current assets | 173 | 2,906 | 6,088 | ||||||
Foreign currency forward contracts |
| Level 2 |
| Other noncurrent assets |
| — |
| — |
| 1,303 | |||
Total assets | $ | 4,200 | $ | 8,613 | $ | 13,507 |
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 January 1, 2022, April 3, 2021 and December 26, 2020, the estimated fair value of the Company’s long-term debt, including current maturities, was as follows:
January 1, | April 3, | December 26, | |||||||
| 2022 |
| 2021 |
| 2020 | ||||
Senior secured term loan facility | $ | 173,865 | $ | 174,064 | $ | 200,000 | |||
2019 Elfa revolving facilities | — | — | — | ||||||
Obligations under finance leases | 220 | 335 | 389 | ||||||
Revolving credit facility |
| 33,000 |
| — |
| — | |||
Total fair value of debt | $ | 207,085 | $ | 174,399 | $ | 200,389 |
11. Segment reporting
The Company’s reportable segments were determined on the same basis as how management evaluates performance internally by the Chief Operating Decision Maker (“CODM”). The Company has determined that the Chief Executive Officer is the CODM and the Company’s two reportable segments consist of TCS and Elfa. The TCS segment includes the Company’s retail stores, website and call center, as well as the installation and organization services business. On
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December 30, 2021, the Company completed the acquisition of Closet Works, a designer, manufacturer and supplier of wood-based custom home storage and organization solutions. We determined that TCS and Closet Works have similar economic characteristics and meet the aggregation criteria set forth in ASC 280, Segment Reporting. Therefore, we have combined these two operating segments into the TCS reportable segment. Please refer to Note 5 for additional information regarding the Closet Works acquisition.
The Elfa segment includes the manufacturing business that produces 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 EBITDA as net income 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 January 1, 2022 |
| TCS |
| Elfa |
| Eliminations |
| Total | ||||
Net sales to third parties | $ | 248,618 | $ | 18,686 | $ | — | $ | 267,304 | ||||
Intersegment sales |
| — |
| 21,852 |
| (21,852) |
| — | ||||
Adjusted EBITDA |
| 28,762 |
| 3,690 |
| (1,055) |
| 31,397 | ||||
Interest expense, net | 3,147 | 66 | — | 3,213 | ||||||||
Assets (1) | 1,095,409 | 111,330 | (5,654) | 1,201,085 |
Thirteen Weeks Ended December 26, 2020 |
| TCS |
| Elfa |
| Eliminations |
| Total | ||||
Net sales to third parties | $ | 256,544 | $ | 18,934 | | $ | — | | $ | 275,478 | ||
Intersegment sales | — | 23,915 | | (23,915) | | — | ||||||
Adjusted EBITDA | 37,631 | 9,378 | | (4,564) | | 42,445 | ||||||
Interest expense, net | 4,040 | 59 | | — | | 4,099 | ||||||
Assets (1) | 1,003,828 | 114,375 | | (10,021) | | 1,108,182 |
Thirty-Nine Weeks Ended January 1, 2022 |
| TCS |
| Elfa |
| Eliminations |
| Total | ||||
Net sales to third parties | $ | 736,726 | $ | 51,847 | $ | — | $ | 788,573 | ||||
Intersegment sales |
| — |
| 54,958 |
| (54,958) |
| — | ||||
Adjusted EBITDA |
| 98,406 |
| 11,900 |
| 2,341 |
| 112,647 | ||||
Interest expense, net | 9,368 | 216 | — | 9,584 | ||||||||
Assets (1) | 1,095,409 | 111,330 | (5,654) | 1,201,085 |
Thirty-Nine Weeks Ended December 26, 2020 |
| TCS |
| Elfa |
| Eliminations |
| Total | ||||
Net sales to third parties | $ | 628,933 | $ | 46,472 | $ | — | $ | 675,405 | ||||
Intersegment sales | — | 47,499 | (47,499) | — | ||||||||
Adjusted EBITDA | 77,633 | 18,051 | (4,693) | 90,991 | ||||||||
Interest expense, net | 13,282 | 258 | — | 13,540 | ||||||||
Assets (1) | 1,003,828 | 114,375 | (10,021) | 1,108,182 |
(1) | Tangible assets in the Elfa column are located outside of the United States. |
20
A reconciliation of income before taxes to Adjusted EBITDA is set forth below:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||
| January 1, |
| December 26, |
| January 1, |
| December 26, | |||||
2022 | 2020 | 2022 | 2020 | |||||||||
Income before taxes | $ | 18,985 | $ | 27,850 | $ | 78,905 | $ | 33,555 | ||||
Add: |
|
| ||||||||||
Depreciation and amortization |
| 8,667 |
| 8,498 |
| 25,412 |
| 26,270 | ||||
Interest expense, net |
| 3,213 |
| 4,099 |
| 9,584 |
| 13,540 | ||||
Pre-opening costs (a) |
| 20 |
| 95 |
| 686 |
| 111 | ||||
Non-cash lease expense (b) |
| (1,345) |
| (1,762) |
| (6,422) |
| 8,311 | ||||
Stock-based compensation (c) |
| 1,204 |
| 2,177 |
| 3,159 |
| 4,986 | ||||
Management transition costs (d) | — | 1,200 | 473 | 1,200 | ||||||||
Loss on extinguishment of debt (e) |
| — |
| 893 |
| — |
| 893 | ||||
Foreign exchange (gains) losses (f) |
| (39) |
| 73 |
| (34) |
| 202 | ||||
Employee retention credit (g) | — | (1,028) | — | (1,028) | ||||||||
Acquisition-related costs (h) | 692 | — | 692 | — | ||||||||
COVID-19 costs (i) | — | 367 | 192 | 1,863 | ||||||||
COVID-19 severance (j) | — | (17) | — | 1,088 | ||||||||
Adjusted EBITDA | $ | 31,397 | $ | 42,445 | $ | 112,647 | $ | 90,991 |
(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 in fiscal 2020 due to renegotiated terms with landlords due to COVID-19 that resulted in deferral of $11,900 of certain cash lease payments, of which the remaining $400 is expected to be repaid in the fourth quarter of fiscal 2021. |
(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) | Costs related to the transition of key executives including signing bonus, severance, and relocation costs recorded as selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance. |
(e) | Loss recorded as a result of the amendments made to the Senior Secured Term Loan Facility in the third quarter of fiscal 2020, which we do not consider in our evaluation of our ongoing operations. |
(f) | Realized foreign exchange transactional gains/losses our management does not consider in our evaluation of our ongoing operations. |
(g) | Employee retention credit related to the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act recorded in the third quarter of fiscal 2020 as selling, general and administrative expense which we do not consider in our evaluation of ongoing performance. |
(h) | Includes costs incurred in the third quarter of fiscal 2021 associated with the acquisition of Closet Works on December 30, 2021, all of which are recorded as selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance. |
(i) | Includes incremental costs attributable to the COVID-19 pandemic, which consist of sanitization costs in the first quarter of fiscal 2021 and the first through third quarters of fiscal 2020, and hazard pay for distribution center |
21
employees in the first quarter of fiscal 2020, all of which are recorded as selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance. |
(j) | Includes costs primarily incurred in the first half of fiscal 2020 associated with the reduction in workforce as a result of the COVID-19 pandemic and the related temporary store closures in fiscal 2020, which we do not consider in our evaluation of ongoing performance. |
22
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 COVID-19 pandemic, 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 COVID-19 pandemic 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; our payment terms for goods and services, and our negotiation of alternative terms for lease payments and other business contracts, each as a result of 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; 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; risks relating to acquisitions; 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 April 3, 2021 (the “2020 Annual Report on Form 10-K”), filed with the Securities and Exchange Commission (the “SEC”) on June 3, 2021.
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
23
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 2021 ends on April 2, 2022 and will include 52 weeks and fiscal 2020 ended on April 3, 2021 and included 53 weeks. The third quarter of fiscal 2021 ended on January 1, 2022 and the third quarter of fiscal 2020 ended on December 26, 2020, and both included thirteen weeks.
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.
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. On December 30, 2021, we acquired Closet Works for total cash consideration of $21,438, which will expand our manufacturing capabilities to include wood-based spaces and enhance our premium wood-based product offering. Our customers are highly educated, very busy and primarily homeowners with a higher than average household income. Our customers crave discovery, inspiration, and solutions that simplify their lives and maximize their spaces within their homes. Our vision is to deepen our relationship with our customers, expand our reach and strengthen our capabilities, all while transforming lives through the power of organization.
Our operations consist of two reportable segments:
● The Container Store (“TCS”) consists of our retail stores, website and call center (which includes business sales), as well as our installation services business. As of January 1, 2022, we operated 94 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, mobile site, call center, and in-home design consultants. 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 support center and call center, and our second distribution center is located in Aberdeen, Maryland. Closet Parent Company, Inc. (“Closet Works”), a designer, manufacturer and supplier of wood-based custom home storage and organization solutions, was acquired by the Company on December 30, 2021 for total cash consideration of $21,438, which is included in the TCS operating segment. Closet Works, based in Chicago, Illinois, services the United States by offering customized solutions for closets, garages, home offices, pantries, laundry rooms, murphy beds and built-in wall units.
● 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.
24
Business Update Related to Coronavirus
The novel coronavirus (“COVID-19”) pandemic had a negative impact on the Company’s fiscal 2020 operations and financial results. We experienced significant disruptions in store operations, including the temporary closure of all stores to in-store customer traffic, which adversely affected our business, results of operations and financial condition, and saw a significant increase in our curbside pick-up and online selling. During the third quarter of fiscal 2021, all stores were open. We continued to see a shift back to brick and mortar stores and a decrease in online channel sales year-over year. We will continue to review local, state, and federal mandates as we may need to temporarily adjust our operations to comply as COVID-19 and other uncertainties continue to unfold. We continue to prioritize the health and safety of our customers and employees by implementing strict health and safety protocols in our stores. We will continue to monitor guidance from the Centers for Disease 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.
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 11 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | ||||||||||||
| January 1, |
| December 26, |
| January 1, |
| December 26, | ||||||
2022 | 2020 | 2022 | 2020 | ||||||||||
Net sales | $ | 267,304 | $ | 275,478 | $ | 788,573 | $ | 675,405 | |||||
Cost of sales (excluding depreciation and amortization) |
| 114,956 |
| 115,991 |
| 326,363 |
| 291,621 | |||||
Gross profit |
| 152,348 |
| 159,487 |
| 462,210 |
| 383,784 | |||||
Selling, general, and administrative expenses (excluding depreciation and amortization) |
| 120,268 |
| 115,870 |
| 344,478 |
| 303,328 | |||||
Stock-based compensation |
| 1,204 |
| 2,177 |
| 3,159 |
| 4,986 | |||||
Pre-opening costs |
| 20 |
| 95 |
| 686 |
| 111 | |||||
Depreciation and amortization |
| 8,667 |
| 8,498 |
| 25,412 |
| 26,270 | |||||
Other (income) expenses |
| — |
| (13) |
| — |
| 1,089 | |||||
(Gain) loss on disposal of assets |
| (9) |
| 18 |
| (14) |
| 12 | |||||
Income from operations |
| 22,198 |
| 32,842 |
| 88,489 |
| 47,988 | |||||
Interest expense, net | 3,213 | 4,099 | 9,584 | 13,540 | |||||||||
Loss on extinguishment of debt | — |
| 893 |
| — |
| 893 | ||||||
Income before taxes |
| 18,985 |
| 27,850 |
| 78,905 |
| 33,555 | |||||
Provision for income taxes |
| 5,292 |
| 8,181 |
| 20,345 |
| 10,356 | |||||
Net income | $ | 13,693 | $ | 19,669 | $ | 58,560 | $ | 23,199 | |||||
| | | | | | | | | | | | | |
Net income per common share — basic | $ | 0.28 | $ | 0.40 | $ | 1.19 | $ | 0.48 | |||||
Net income per common share — diluted | $ | 0.27 | $ | 0.40 | $ | 1.16 | $ | 0.47 | |||||
Weighted-average common shares — basic | 49,611,468 | 48,570,843 | 49,386,897 | 48,491,286 | |||||||||
Weighted-average common shares — diluted |
| 50,298,101 |
| 49,513,225 |
| 50,310,320 |
| 48,950,253 |
25
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||||
January 1, | December 26, | January 1, | December 26, | |||||||||||
2022 | 2020 | 2022 | 2020 | |||||||||||
Percentage of net sales: |
|
|
|
|
|
|
|
|
| |||||
Net sales |
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||
Cost of sales (excluding depreciation and amortization) |
| 43.0 | % | 42.1 | % | 41.4 | % | 43.2 | % | |||||
Gross profit |
| 57.0 | % | 57.9 | % | 58.6 | % | 56.8 | % | |||||
Selling, general, and administrative expenses (excluding depreciation and amortization) |
| 45.0 | % | 42.1 | % | 43.7 | % | 44.9 | % | |||||
Stock‑based compensation |
| 0.5 | % | 0.8 | % | 0.4 | % | 0.7 | % | |||||
Pre‑opening costs |
| 0.0 | % | 0.0 | % | 0.1 | % | 0.0 | % | |||||
Depreciation and amortization |
| 3.2 | % | 3.1 | % | 3.2 | % | 3.9 | % | |||||
Other (income) expenses |
| — | % | (0.0) | % | — | % | 0.2 | % | |||||
(Gain) loss on disposal of assets |
| (0.0) | % | 0.0 | % | (0.0) | % | 0.0 | % | |||||
Income from operations |
| 8.3 | % | 11.9 | % | 11.2 | % | 7.1 | % | |||||
Interest expense, net |
| 1.2 | % | 1.5 | % | 1.2 | % | 2.0 | % | |||||
Loss on extinguishment of debt | — | % | 0.3 | % | — | % | 0.1 | % | ||||||
Income before taxes |
| 7.1 | % | 10.1 | % | 10.0 | % | 5.0 | % | |||||
Provision for income taxes |
| 2.0 | % | 3.0 | % | 2.6 | % | 1.5 | % | |||||
Net income |
| 5.1 | % | 7.1 | % | 7.4 | % | 3.4 | % | |||||
Operating data: |
|
|
|
|
|
| ||||||||
Number of stores at end of period (1) |
| 94 |
| 93 |
| 94 |
| 93 |
| |||||
Non‑GAAP measures (2): |
|
|
|
|
|
|
|
|
| |||||
Adjusted EBITDA (3) |
| $ | 31,397 |
| $ | 42,445 |
| $ | 112,647 |
| $ | 90,991 |
| |
Adjusted net income (4) |
| $ | 14,275 |
| $ | 20,705 |
| $ | 59,623 |
| $ | 26,112 |
| |
Adjusted net income per common share — diluted (4) |
| $ | 0.28 |
| $ | 0.42 |
| $ | 1.19 |
| $ | 0.53 |
|
(1) | In the thirty-nine weeks ended January 1, 2022, all 94 stores were open with strict health and safety protocols and adherence to local regulations. In the first quarter of fiscal 2020, the Company operated a total of 93 store locations, the majority of which were temporarily closed for at least seven days, as a result of COVID-19, and therefore were not considered comparable. During the second and third quarters of fiscal 2020, all 93 stores were open and operating at close to normalized schedules, with limited capacity. |
(2) | We have presented in the table above Adjusted EBITDA, adjusted net income, and adjusted net income per common share – diluted as supplemental measures of financial performance that are not required by, or presented in accordance with, accounting principles generally accepted in the United States of America (“GAAP”). These non-GAAP measures should not be considered as alternatives to net income or net loss as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. These non-GAAP measures are key metrics used by management, our board of directors, and Leonard Green and Partners, L.P. (“LGP”) to assess our financial performance. We present these non-GAAP measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance and because we believe it is useful for investors to see the measures that management uses to evaluate the Company. These non-GAAP measures are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In evaluating these non-GAAP measures, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of these non-GAAP measures should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using non-GAAP measures supplementally. Our non-GAAP measures are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation. Please refer to footnotes (3) and (4) of this table for further information regarding why we believe each non-GAAP measure provides useful 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. |
26
Additionally, this Management’s Discussion and Analysis also refers to the change in Elfa third-party net sales after the conversion of Elfa’s net sales from Swedish krona to U.S. dollars using the prior year’s conversion rate, which is a financial measure not calculated in accordance with GAAP. The Company believes the disclosure of the change in Elfa third-party net sales without the effects of currency exchange rate fluctuations helps investors understand the Company’s underlying performance.
(3) | EBITDA and Adjusted EBITDA have been presented in this Quarterly Report on Form 10-Q as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as net income before interest, taxes, depreciation, and amortization. Adjusted EBITDA is calculated in accordance with our Secured Term Loan Facility (as defined below) and the Revolving Credit Facility (as defined below) and is one of the components for performance evaluation under our executive compensation programs. Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of certain items, including certain non-cash and other items that we do not consider in our evaluation of ongoing operating performance from period to period as discussed further below. |
EBITDA and Adjusted EBITDA are included in this Quarterly Report on Form 10-Q because they are key metrics used by management, our board of directors and LGP to assess our financial performance. In addition, we use Adjusted EBITDA in connection with covenant compliance and executive performance evaluations, and we use Adjusted EBITDA to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We believe it is useful for investors to see the measures that management uses to evaluate the Company, its executives and our covenant compliance, as applicable. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.
EBITDA and Adjusted EBITDA are not GAAP measures of our financial performance or liquidity and should not be considered as alternatives to net income 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.
27
A reconciliation of net income to EBITDA and Adjusted EBITDA is set forth below:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||
January 1, | December 26, | January 1, | December 26, | |||||||||
2022 | 2020 | 2022 | 2020 | |||||||||
|
|
|
| |||||||||
Net income | $ | 13,693 | $ | 19,669 | $ | 58,560 | $ | 23,199 | ||||
Depreciation and amortization |
| 8,667 |
| 8,498 |
| 25,412 |
| 26,270 | ||||
Interest expense, net |
| 3,213 |
| 4,099 |
| 9,584 |
| 13,540 | ||||
Income tax provision |
| 5,292 |
| 8,181 |
| 20,345 |
| 10,356 | ||||
EBITDA |
| 30,865 |
| 40,447 |
| 113,901 |
| 73,365 | ||||
Pre-opening costs (a) |
| 20 |
| 95 |
| 686 |
| 111 | ||||
Non-cash lease expense (b) |
| (1,345) |
| (1,762) |
| (6,422) |
| 8,311 | ||||
Stock-based compensation (c) |
| 1,204 |
| 2,177 |
| 3,159 |
| 4,986 | ||||
Management transition costs (d) | — | 1,200 | 473 | 1,200 | ||||||||
Loss on extinguishment of debt (e) |
| — |
| 893 |
| — |
| 893 | ||||
Foreign exchange (gains) losses (f) |
| (39) |
| 73 |
| (34) |
| 202 | ||||
Employee retention credit (g) | — | (1,028) | — | (1,028) | ||||||||
Acquisition-related costs (h) | 692 | — | 692 | — | ||||||||
COVID-19 costs (i) | — | 367 | 192 | 1,863 | ||||||||
COVID-19 severance (j) | — | (17) | — | 1,088 | ||||||||
Adjusted EBITDA | $ | 31,397 | $ | 42,445 | $ | 112,647 | $ | 90,991 |
(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 in fiscal 2020 due to renegotiated terms with landlords due to COVID-19 that resulted in deferral of $11,900 of certain cash lease payments, of which the remaining $400 is expected to be repaid in the fourth quarter of fiscal 2021. |
(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) | Costs related to the transition of key executives including signing bonus, severance, and relocation costs recorded as selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance. |
(e) | Loss recorded as a result of the amendments made to the Senior Secured Term Loan Facility in the third quarter of fiscal 2020, which we do not consider in our evaluation of our ongoing operations. |
(f) | Realized foreign exchange transactional gains/losses our management does not consider in our evaluation of our ongoing operations. |
(g) | Employee retention credit related to the CARES Act recorded in the third quarter of fiscal 2020 as selling, general and administrative expense which we do not consider in our evaluation of ongoing performance. |
(h) | Includes costs incurred in the third quarter of fiscal 2021 associated with the acquisition of Closet Works on December 30, 2021, all of which are recorded as selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance. |
28
(i) | Includes incremental costs attributable to the COVID-19 pandemic, which consist of sanitization costs in the first quarter of fiscal 2021 and the first through third quarters of fiscal 2020, and hazard pay for distribution center employees in the first quarter of fiscal 2020, all of which are recorded as selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance. |
(j) | Includes costs primarily incurred in the first half of fiscal 2020 associated with the reduction in workforce as a result of the COVID-19 pandemic and the related temporary store closures in fiscal 2020, which we do not consider in our evaluation of ongoing performance. |
(4) | Adjusted net income and adjusted net income per common share – diluted have been presented in this Quarterly Report on Form 10-Q as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define adjusted net income as net income before restructuring charges, charges related to the impact of COVID-19 on business operations, credits pursuant to the CARES Act, severance charges associated with COVID-19, loss on extinguishment of debt, certain gains on disposal of assets, certain management transition costs incurred and benefits realized, acquisition-related costs, 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 income per common share – diluted as adjusted net income divided by the diluted weighted average common shares outstanding. We use adjusted net income and adjusted net income per common share – diluted to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We present adjusted net income and adjusted net income 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 income and net income per common share – diluted to the non-GAAP financial measures of adjusted net income and adjusted net income per common share – diluted is set forth below:
Thirteen Weeks Ended | Thirty-Nine Weeks Ended | |||||||||||
January 1, | December 26, | January 1, | December 26, | |||||||||
2022 | 2020 | 2022 | 2020 | |||||||||
|
|
|
| |||||||||
Numerator: |
|
|
|
|
|
|
|
| ||||
Net income | $ | 13,693 | $ | 19,669 | $ | 58,560 | $ | 23,199 | ||||
Management transition costs (a) |
| — |
| 1,200 |
| 473 |
| 1,200 | ||||
Loss on extinguishment of debt (b) |
| — |
| 893 |
| — |
| 893 | ||||
Employee retention credit (c) | — | (1,028) | — | (1,028) | ||||||||
Acquisition-related costs (d) | 692 | — | 692 | — | ||||||||
COVID-19 costs (e) | — | 367 | 192 | 1,863 | ||||||||
COVID-19 severance (f) | — | (15) | — | 1,088 | ||||||||
Taxes (g) |
| (110) |
| (381) |
| (294) |
| (1,103) | ||||
Adjusted net income | $ | 14,275 | $ | 20,705 | $ | 59,623 | $ | 26,112 | ||||
Denominator: |
|
|
|
|
|
|
|
| ||||
Weighted-average common shares outstanding — diluted |
| 50,298,101 |
| 49,513,225 |
| 50,310,320 |
| 48,950,253 | ||||
Net income per common share — diluted | $ | 0.27 | $ | 0.40 | $ | 1.16 | $ | 0.47 | ||||
Adjusted net income per common share — diluted | $ | 0.28 | $ | 0.42 | $ | 1.19 | $ | 0.53 |
(a) | Costs related to the transition of key executives including signing bonus, severance, and relocation costs recorded as selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance. |
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(b) | Loss recorded as a result of the amendments made to the Senior Secured Term Loan Facility in the third quarter of fiscal 2020, which we do not consider in our evaluation of our ongoing operations. |
(c) | Employee retention credit related to the CARES Act recorded in the third quarter of fiscal 2020 as selling, general and administrative expense, which we do not consider in our evaluation of ongoing performance. |
(d) | Includes costs incurred in the third quarter of fiscal 2021 associated with the acquisition of Closet Works on December 30, 2021, all of which are recorded as selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance. |
(e) | Includes incremental costs attributable to the COVID-19 pandemic, which consist of sanitization costs in the first quarter of fiscal 2021 and the first through third quarters of fiscal 2020, and hazard pay for distribution center employees in the first quarter of fiscal 2020, all of which are recorded as selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance. |
(f) | Includes costs primarily incurred in the first half of fiscal 2020 associated with the reduction in workforce as a result of the COVID-19 pandemic and the related temporary store closures in fiscal 2020, which we do not consider in our evaluation of ongoing performance. |
(g) | Tax impact of adjustments to net income 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 January 1, 2022 Compared to Thirteen Weeks Ended December 26, 2020
Net sales
The following table summarizes our net sales for each of the thirteen weeks ended January 1, 2022 and December 26, 2020:
| January 1, 2022 |
| % total |
| December 26, 2020 |
| % total | |||||
TCS net sales | $ | 248,618 |
| 93.0 | % | $ | 256,544 |
| 93.1 | % | ||
Elfa third-party net sales |
| 18,686 |
| 7.0 | % |
| 18,934 |
| 6.9 | % | ||
Net sales | $ | 267,304 |
| 100.0 | % | $ | 275,478 |
| 100.0 | % |
Net sales in the thirteen weeks ended January 1, 2022 decreased $8,174, or 3.0%, compared to the thirteen weeks ended December 26, 2020. This decrease was comprised of the following components:
| Net sales | ||
Net sales for the thirteen weeks ended December 26, 2020 | $ | 275,478 | |
Incremental net sales (decrease) increase due to: |
|
| |
TCS net sales (including a $16,644, or 36.0%, decrease in online sales) |
| (7,926) | |
Elfa third-party net sales (excluding impact of foreign currency translation) |
| 19 | |
Impact of foreign currency translation on Elfa third-party net sales |
| (267) | |
Net sales for the thirteen weeks ended January 1, 2022 | $ | 267,304 |
TCS net sales decreased $7,926 or 3.1%, with general merchandise categories down 3.1%, contributing all of the basis points decrease while Custom Closets remained flat. Elfa third-party net sales decreased $248 or 1.3% in the thirteen weeks ended January 1, 2022. 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 January 1, 2022 and the thirteen weeks ended December 26, 2020, Elfa third-party net sales increased 0.3%.
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As a result of the impact of the COVID-19 pandemic on our Company stores and the Company’s policy of excluding extended store closures from its comparable sales calculation, we chose not to provide comparable store sales metrics in the third quarter of fiscal 2021. We do not believe that comparable store sales will be a meaningful metric in fiscal 2021.
Gross profit and gross margin
Gross profit in the thirteen weeks ended January 1, 2022 decreased $7,139, or 4.5%, compared to the thirteen weeks ended December 26, 2020. The decrease in gross profit was primarily the result of decreased consolidated net sales combined with a decrease in consolidated gross margin. The following table summarizes the gross margin for the thirteen weeks ended January 1, 2022 and December 26, 2020 by segment and total. The segment gross margins include the impact of intersegment net sales from the Elfa segment to the TCS segment:
| January 1, 2022 |
| December 26, 2020 | ||
TCS gross margin |
| 57.3 | % | 57.2 | % |
Elfa gross margin |
| 27.0 | % | 40.3 | % |
Total gross margin |
| 57.0 | % | 57.9 | % |
TCS gross margin increased 10 basis points primarily due to decreased shipping costs as a result of a lower mix of online sales, combined with less promotional activity and a favorable mix of sales, partially offset by increased freight and commodity costs in the third quarter of fiscal 2021. Elfa gross margin decreased 1330 basis points primarily due to higher direct material costs and unfavorable product and customer mix. In total, gross margin decreased 90 basis points, primarily due to the decrease in Elfa gross margin in the third quarter of fiscal 2021.
Selling, general and administrative expenses
Selling, general and administrative expenses in the thirteen weeks ended January 1, 2022 increased $4,398, or 3.8%, compared to the thirteen weeks ended December 26, 2020. The following table summarizes SG&A as a percentage of consolidated net sales for the thirteen weeks ended January 1, 2022 and December 26, 2020:
January 1, 2022 | December 26, 2020 |
| |||
| % of Net sales |
| % of Net sales |
| |
TCS selling, general and administrative |
| 42.3 | % | 39.2 | % |
Elfa selling, general and administrative |
| 2.7 | % | 2.9 | % |
Total selling, general and administrative |
| 45.0 | % | 42.1 | % |
Total selling, general and administrative expenses as a percentage of consolidated net sales increased 290 basis points primarily due to increased compensation and benefits costs and other expenses including costs incurred related to the acquisition of Closet Works in the third quarter of fiscal 2021.
Interest expense and loss on extinguishment of debt
Interest expense decreased by $886, or 21.6%, in the thirteen weeks ended January 1, 2022 to $3,213, as compared to $4,099 in the thirteen weeks ended December 26, 2020. The decrease is primarily due to a lower principal balance on the Senior Secured Term Loan Facility (as defined below) combined with lower interest rates. On November 25, 2020, the Company entered into Amendment No. 7 (the “Seventh Amendment”) to the Senior Secured Term Loan Facility. The Seventh Amendment amended the Senior Secured Term Loan Facility to, among other things, allow the applicable interest rate margin to remain at 4.75% for LIBOR loans and 3.75% for base rate loans. We recorded a loss on extinguishment of debt of $893 in the third quarter of fiscal 2020 in conjunction with the Seventh Amendment.
Taxes
The provision for income taxes in the thirteen weeks ended January 1, 2022 was $5,292 as compared to $8,181 in the thirteen weeks ended December 26, 2020. The effective tax rate for the thirteen weeks ended January 1, 2022 was 27.9%, as compared to 29.4% in the thirteen weeks ended December 26, 2020. The decrease in the effective tax rate is
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primarily related to excess tax benefits associated with share-based compensation on lower pre-tax income in the thirteen weeks ended January 1, 2022.
Thirty-Nine Weeks Ended January 1, 2022 Compared to Thirty-Nine Weeks Ended December 26, 2020
Net sales
The following table summarizes our net sales for each of the thirty-nine weeks ended January 1, 2022 and December 26, 2020:
| January 1, 2022 |
| % total |
| December 26, 2020 |
| % total | |||||
TCS net sales | $ | 736,726 |
| 93.4 | % | $ | 628,933 |
| 93.1 | % | ||
Elfa third-party net sales |
| 51,847 |
| 6.6 | % |
| 46,472 |
| 6.9 | % | ||
Net sales | $ | 788,573 |
| 100.0 | % | $ | 675,405 |
| 100.0 | % |
Net sales in the thirty-nine weeks ended January 1, 2022 increased $113,168, or 16.8%, compared to the thirty-nine weeks ended December 26, 2020. This increase was comprised of the following components:
| Net sales | ||
Net sales for the thirty-nine weeks ended December 26, 2020 | $ | 675,405 | |
Incremental net sales increase due to: |
|
| |
TCS net sales (including a $60,606, or 38.8%, decrease in online sales) |
| 107,793 | |
Elfa third-party net sales (excluding impact of foreign currency translation) |
| 2,997 | |
Impact of foreign currency translation on Elfa third-party net sales |
| 2,378 | |
Net sales for the thirty-nine weeks ended January 1, 2022 | $ | 788,573 |
TCS net sales increased $107,793 or 17.1%, with Custom Closets up 22.5%, contributing 1000 basis points of the increase, and general merchandise categories up 12.9%, contributing 710 basis points of the increase. Elfa third-party net sales increased $5,375 or 11.6% in the thirty-nine weeks ended January 1, 2022. 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 thirty-nine weeks ended January 1, 2022 and the thirty-nine weeks ended December 26, 2020, Elfa third-party net sales increased $2,997 or 6.4%.
As a result of the impact of the COVID-19 pandemic on our Company stores and the Company’s policy of excluding extended store closures from its comparable sales calculation, we chose not to provide comparable store sales metrics in the thirty-nine weeks ended January 1, 2022. We do not believe that comparable store sales will be a meaningful metric in fiscal 2021.
Gross profit and gross margin
Gross profit in the thirty-nine weeks ended January 1, 2022 increased $78,426, or 20.4%, compared to the thirty-nine weeks ended December 26, 2020. The increase in gross profit was primarily the result of increased consolidated net sales combined with an increase in consolidated gross margin. The following table summarizes the gross margin for the thirty-nine weeks ended January 1, 2022 and December 26, 2020 by segment and total. The segment gross margins include the impact of intersegment net sales from the Elfa segment to the TCS segment:
| January 1, 2022 |
| December 26, 2020 | ||
TCS gross margin |
| 57.9 | % | 55.7 | % |
Elfa gross margin |
| 31.4 | % | 40.7 | % |
Total gross margin |
| 58.6 | % | 56.8 | % |
TCS gross margin increased 220 basis points primarily due to decreased shipping costs as a result of a lower mix of online sales, combined with less promotional activity and a favorable mix of sales, partially offset by increased freight and commodity costs in the thirty-nine weeks ended January 1, 2022. Elfa gross margin decreased 930 basis points
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primarily due to higher direct material costs and unfavorable product and customer mix. In total, gross margin increased 180 basis points primarily due to the increase in TCS gross margin during the thirty-nine weeks ended January 1, 2022, partially offset by the decrease in Elfa gross margin for the same period. In the fourth quarter of fiscal 2021, we expect year-over-year consolidated gross margin declines associated with continued headwinds from freight and commodity cost increases.
Selling, general and administrative expenses
Selling, general and administrative expenses in the thirty-nine weeks ended January 1, 2022 increased $41,150, or 13.6%, compared to the thirty-nine weeks ended December 26, 2020. The following table summarizes SG&A as a percentage of consolidated net sales for the thirty-nine weeks ended January 1, 2022 and December 26, 2020:
| |||||
January 1, 2022 | December 26, 2020 |
| |||
| % of Net sales |
| % of Net sales |
| |
TCS selling, general and administrative |
| 40.9 | % | 41.9 | % |
Elfa selling, general and administrative |
| 2.8 | % | 3.0 | % |
Total selling, general and administrative |
| 43.7 | % | 44.9 | % |
Total selling, general and administrative expenses as a percentage of consolidated net sales decreased 120 basis points primarily due to leverage of occupancy, marketing and other costs on higher sales, partially offset by increased compensation and benefits in the thirty-nine weeks ended January 1, 2022. In the fourth quarter of fiscal 2021, we expect increases in SG&A as a percentage of consolidated net sales as compared to the prior year due to expected deleverage of fixed costs on lower sales, combined with the restoration of certain compensation and benefits costs that were temporarily suspended during the pandemic.
Interest expense and loss on extinguishment of debt
Interest expense decreased by $3,956, or 29.2%, in the thirty-nine weeks ended January 1, 2022 to $9,584, as compared to $13,540 in the thirty-nine weeks ended December 26, 2020. The decrease is primarily due to a lower principal balance on the Senior Secured Term Loan Facility (as defined below) combined with lower interest rates and decreased average borrowings on the Revolving Credit Facility (as defined below). We recorded a loss on extinguishment of debt of $893 in the thirty-nine weeks ended December 26, 2020 in conjunction with the Seventh Amendment.
Taxes
The provision for income taxes in the thirty-nine weeks ended January 1, 2022 was $20,345 as compared to $10,356 in the thirty-nine weeks ended December 26, 2020. The effective tax rate for the thirty-nine weeks ended January 1, 2022 was 25.8%, as compared to 30.9% in the thirty-nine weeks ended December 26, 2020. The decrease in the effective tax rate is primarily related to excess tax benefits associated with share-based compensation on higher pre-tax income in the thirty-nine weeks ended January 1, 2022.
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.
Our primary cash needs are for merchandise inventories and direct materials, payroll, store leases, capital expenditures associated with opening new stores and updating existing stores, as well as information technology and infrastructure, including our distribution centers, 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. In fiscal
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2021, we expect total capital expenditures to be approximately $45,000 for technology infrastructure and software projects, existing store merchandising and refresh activities, our Elfa business, and new store development inclusive of our new store in Annapolis, Maryland, which opened in the first quarter of fiscal 2021, and another new store anticipated in fiscal 2022. In addition, on December 30, 2021, we acquired Closet Works for total cash consideration of $21,438, partially offset by cash acquired of $1,993. 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 Revolving 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 January 1, 2022, we had $19,008 of cash, of which $12,340 was held by our foreign subsidiaries. In addition, we had $63,830 of additional availability under the Revolving Credit Facility and approximately $12,155 of additional availability under the 2019 Elfa Revolving Facilities (as defined below) as of January 1, 2022. There were $4,111 in letters of credit outstanding under the Revolving Credit Facility and other contracts at that date.
Cash flow analysis
A summary of our key components and measures of liquidity is shown in the following table:
Thirty-Nine Weeks Ended | ||||||
January 1, | December 26, | |||||
| 2022 |
| 2020 | |||
Net cash provided by operating activities | $ | 17,929 | $ | 116,689 | ||
Net cash used in investing activities |
| (43,457) |
| (11,605) | ||
Net cash provided by (used in) financing activities |
| 27,256 |
| (146,304) | ||
Effect of exchange rate changes on cash |
| (407) |
| 1,360 | ||
Net increase (decrease) in cash | $ | 1,321 | $ | (39,860) | ||
Free cash flow (Non-GAAP) (1) | $ | (6,100) | $ | 105,019 |
(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 operating activities
Cash from operating activities consists primarily of net income 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 $17,929 for the thirty-nine weeks ended January 1, 2022 and was comprised of net income of $58,560 and non-cash items of $34,164, partially offset by a net change in operating assets and liabilities of $74,795. The net change in operating assets and liabilities is primarily due to an increase in merchandise inventory due to increased freight and commodity costs, combined with increased unit levels to support increased sales trends and to account for longer lead times resulting from supply chain disruptions.
Net cash provided by operating activities was $116,689 for the thirty-nine weeks ended December 26, 2020 and was comprised of a net change in operating assets and liabilities of $66,091, non-cash items of $27,399 and net income of $23,199. The net change in operating assets and liabilities was primarily due to an increase in accounts payable and accrued liabilities, an increase in taxes payable and a decrease in cash operating lease payments, partially offset by an increase in merchandise inventory purchases. The increase in accounts payable and accrued liabilities was primarily due to timing of inventory receipts and payments combined with a temporary increase in vendor payment terms.
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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, as well as acquisition costs.
Our total capital expenditures for the thirty-nine weeks ended January 1, 2022 were $24,029. We incurred capital expenditures of $13,417 for technology investments and maintenance capital. We incurred capital expenditures of $6,816 for investments in our existing stores and new stores. We opened one new store during the thirty-nine weeks ended January 1, 2022. The remaining capital expenditures of $3,796 related to investments in our distribution centers. In addition, we had net investing cash outflows of $19,445 related to the acquisition of Closet Works.
Our total capital expenditures for the thirty-nine weeks ended December 26, 2020 were $11,670. We incurred capital expenditures of $6,467 for maintenance capital and information technology investments. We incurred capital expenditures of $3,362 related to the distribution centers. The remaining capital expenditures of $1,841 were primarily related to investments in our existing stores. We did not open any new stores during the thirty-nine weeks ended December 26, 2020.
Net cash provided by (used in) 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 provided by financing activities was $27,256 for the thirty-nine weeks ended January 1, 2022. This included net borrowings of $33,000 on the Revolving Credit Facility combined with proceeds of $566 from the exercise of stock options, partially offset by tax payments of $4,677 in connection with the withholding of shares upon vesting of restricted stock awards, and repayments of $1,633 on indebtedness outstanding under the Senior Secured Term Loan Facility and the 2019 Elfa Senior Secured Term Loan Facility.
Net cash used in financing activities was $146,304 for the thirty-nine weeks ended December 26, 2020. This included net repayments of $78,000 on the Revolving Credit Facility and net repayments of $9,910 for the 2019 Elfa Senior Secured Credit Facilities. In addition, the Company made net repayments of $52,281 on indebtedness outstanding under the Senior Secured Term Loan Facility of which $47,172 was in conjunction with the Seventh Amendment, repayments of $122 on indebtedness outstanding under the 2019 Elfa Senior Secured Term Loan Facility, and paid $412 in taxes in connection with the withholding of shares upon vesting of restricted stock awards.
As of January 1, 2022, TCS had a total of $63,830 of unused borrowing availability and $33,000 borrowings outstanding under the Revolving Credit Facility.
As of January 1, 2022, Elfa had a total of $12,155 of unused borrowing availability and zero borrowings outstanding under the 2019 Elfa Revolving Facilities.
Free cash flow (Non-GAAP)
We present free cash flow, which we define as net cash provided by operating activities in a period minus payments for property and equipment made in that period, because we believe it is a useful indicator of the Company’s overall liquidity, as the amount of free cash flow generated in any period is representative of cash that is available for debt repayment, investment, and other discretionary and non-discretionary cash uses. Accordingly, we believe that free cash flow provides useful information to investors in understanding and evaluating our liquidity in the same manner as 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
35
management to calculate our free cash flow may differ from the methods used by other companies to calculate their free cash flow.
Our free cash flow fluctuates as a result of seasonality of net sales, building inventory for key selling periods, and timing of investments in new store openings, existing store remodels, infrastructure, information systems, and our distribution centers, among other things. Historically, our free cash flow has been lower in the first half of the fiscal year, due to lower net sales, operating income, and cash flows from operations, and as such, is not necessarily indicative of the free cash flow for the full year. We generated free cash flow of negative $6,100 for the thirty-nine weeks ended January 1, 2022, which decreased as compared to free cash flow of $105,019 for the thirty-nine weeks ended December 26, 2020. The decrease in free cash flow in the thirty-nine weeks ended January 1, 2022 compared to the thirty-nine weeks ended December 26, 2020, reflects the many actions undertaken by the Company to preserve liquidity in fiscal 2020 as a result of COVID-19, including temporary reductions in inventory purchases, temporary extension of payment terms, and reduced capital expenditures. The Company returned to normal payment terms for most vendors by the end of the third quarter of fiscal 2020. Additionally, during fiscal 2020, the Company renegotiated terms with landlords as a result of the COVID-19 pandemic, which resulted in the deferral of approximately $11,900 of certain cash lease payments, of which the remaining balance of $400 is expected to be repaid in the fourth quarter of fiscal 2021.
The following table sets forth a reconciliation of free cash flow, a non-GAAP financial measure, to net cash provided by operating activities, which we believe to be the GAAP financial measure most directly comparable to free cash flow:
Thirty-Nine Weeks Ended | ||||||
January 1, | December 26, | |||||
| 2022 |
| 2020 | |||
Net cash provided by operating activities | $ | 17,929 | $ | 116,689 | ||
Less: Additions to property and equipment |
| (24,029) |
| (11,670) | ||
Free cash flow | $ | (6,100) | $ | 105,019 |
Senior Secured Term Loan Facility
On April 6, 2012, the Company, 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 November 25, 2020, the Company entered into the Seventh Amendment to the Senior Secured Term Loan Facility. In connection with the Seventh Amendment, the Company (a) paid down approximately $47,200 of the outstanding loans under the Senior Secured Term Loan Facility, which reduced the aggregate principal amount of the loans under the facility to $200,000 and (b) amended the Senior Secured Term Loan Facility to, among other things, extend the maturity date to January 31, 2026 and impose a 1.00% premium if a voluntary prepayment is made from the proceeds of a repricing transaction within the one year anniversary of the Seventh Amendment. The Company is required to make quarterly amortization payments of $500 on the term loan facility, with the balloon payment for the remaining balance due on January 31, 2026. Prior to the date of delivery of a compliance certificate for the fiscal quarter ended January 1, 2022, the applicable interest rate margin for LIBOR loans was 4.75%, subject to a LIBOR floor of 1.00%, and 3.75% for base rate loans and, thereafter, may step up to 5.00% for LIBOR Loans and 4.00% for base rate loans unless the consolidated leverage ratio achieved is less than or equal to 2.75 to 1.00. As of January 1, 2022, the aggregate principal amount in outstanding borrowings under the Senior Secured Term Loan Facility was $165,523, net of deferred financing costs, and the consolidated leverage ratio was approximately 1.10.
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 Company 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
36
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 January 1, 2022, 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 Company, 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”). On November 25, 2020, the Company entered into Amendment No. 5 (the “Fifth Amendment”). The Fifth Amendment amends the Revolving Credit Facility to extend the maturity date to the earlier of (a) November 25, 2025 and (b) October 31, 2025 if any portion of the Senior Secured Term Loan Facility remains outstanding on such date and the maturity date of the Senior Secured Term Loan Facility is not extended.
The aggregate principal amount of the facility is $100,000. Borrowings under the Revolving Credit Facility accrue interest at LIBOR+1.25%. 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 Company and each of The Container Store, Inc.’s U.S. subsidiaries.
The Revolving Credit Facility contains a number of covenants that, among other things, restrict our ability, subject to specified exceptions, to incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves, engage in businesses that are not in a related line of business; make loans, advances or guarantees; engage in transactions with affiliates; and make investments. In addition, the financing agreements contain certain cross-default provisions. We are required to maintain a consolidated fixed-charge coverage ratio of 1.0 to 1.0 if excess availability is less than $10,000 at any time. As of January 1, 2022, 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.
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 $12,155 as of January 1, 2022) revolving credit facility (the “2019 Original Revolving Facility”), (ii) upon Elfa’s request, an additional SEK 115.0 million (approximately $12,707 as of January 1, 2022) revolving credit facility (the “2019 Additional Revolving
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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 $2,762 as of January 1, 2022), 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 January 1, 2022, 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 2020 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 2020 Annual Report on Form 10-K. As of January 1, 2022, there were material changes to our critical accounting policies and estimates as noted below.
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting. The cost of an acquired company is assigned to the tangible and identifiable intangible assets purchased and the liabilities assumed on the basis of their fair values at the date of acquisition. Any excess of the purchase price over the fair value of tangible and intangible assets acquired is assigned to goodwill. The transaction costs associated with business combinations are expensed as they are incurred. We recognize any adjustments to provisional amounts and goodwill that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, with the effect on current period earnings of changes in depreciation, amortization or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date.
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Contractual obligations
There were no material changes to our contractual obligations from those disclosed in our 2020 Annual Report on Form 10-K, other than those shown in the table below, primarily related to borrowings under the Revolving Credit Facility and certain modifications to our operating leases resulting from the exercise of renewal options.
Payments due by period | |||||||||||||||
Within | |||||||||||||||
| Total |
| 1 Year (Remaining) |
| 1 ‑ 3 Years |
| 3 ‑ 5 Years |
| After 5 Years | ||||||
Recorded contractual obligations | |||||||||||||||
Revolving loans | $ | 33,000 | $ | — | $ | — | $ | 33,000 | $ | — | |||||
Operating leases (1) | 537,075 | 22,820 |
| 170,647 |
| 136,801 |
| 206,807 | |||||||
Total | $ | 570,075 | $ | 22,820 | $ | 170,647 | $ | 169,801 | $ | 206,807 |
(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 fiscal 2020, the Company renegotiated terms with landlords as a result of the COVID-19 pandemic, which resulted in the deferral of approximately $11,900 of certain cash lease payments, of which the remaining balance of $400 is expected to be repaid in the fourth quarter of fiscal 2021. |
Off-Balance Sheet Arrangements
There have been no material changes to our off-balance sheet arrangements as disclosed in our 2020 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 January 1, 2022.
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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 January 1, 2022 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
Except as described below, there have been no material changes to our risk factors as previously disclosed in Item 1A of Part I of our 2020 Annual Report on Form 10-K.
We have acquired Closet Works, and may in the future acquire other businesses, which can divert management’s attention and create integration risks and other risks for our business.
We recently completed the acquisition of Closet Works, and we expect that we may continue to pursue future acquisitions. Such acquisitions involve numerous risks, including:
• | integrating the operations, systems, technologies, services and personnel of the acquired companies, including the migration of employees from an acquired company’s platforms to ours; |
• | establishing or maintaining internal controls, procedures and policies relating to the acquired business, including the potential for actual or perceived control weaknesses associated with or arising from the acquisitions and integration of such business; |
• | diversion of management’s attention from other business concerns; |
• | entering markets in which we have no or limited prior experience and may not succeed; |
• | impairment of relationships with customers and employees of the acquired companies or our customers and employees as a result of the integration of acquired operations and new management personnel; |
• | potential loss of key employees of the acquired company; |
• | litigation resulting from activities of the acquired company, including claims from terminated employees, customers, former stockholders and other third parties; |
• | over-valuing and over-paying for acquisitions; |
• | insufficient revenues to offset increased expenses associated with the acquisitions and unanticipated liabilities of the acquired companies; and |
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• | insufficient indemnification or security from the selling parties for legal liabilities that we may assume in connection with our acquisitions. |
If we fail to integrate Closet Works or any other newly acquired business effectively, we might not achieve the growth, service enhancement or operational efficiency objectives of the acquisitions, and our business, results of operations and financial condition could be harmed.
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 | Exhibit Description | Form | File No. | Exhibit | Filing | Filed/ | ||||||
3.1 | Amended and Restated Certificate of Incorporation of The Container Store Group, Inc. | 10-Q | 001-36161 | 3.1 | 01/10/14 | |||||||
3.2 | Amended and Restated Bylaws of The Container Store Group, Inc. | 8-K | 001-36161 | 3.1 | 09/08/21 | |||||||
31.1 | Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) | * | ||||||||||
31.2 | Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) | * | ||||||||||
32.1 | Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 | ** | ||||||||||
32.2 | Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 | ** | ||||||||||
101.INS | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | * | ||||||||||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | * | ||||||||||
101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document | * | ||||||||||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | * | ||||||||||
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | * | ||||||||||
101.PRE | Inline XBRL Taxonomy Extension Presentation | * | ||||||||||
104 | Cover Page Interactive Data File – formatted as Inline XBRL and contained in Exhibit 101 | * |
* 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: February 9, 2022 | \s\ Jeffrey A. Miller |
Jeffrey A. Miller | |
Chief Financial Officer (duly authorized officer and Principal Financial Officer) |
Date: February 9, 2022 | \s\ Kristin Schwertner |
Kristin Schwertner | |
Chief Accounting Officer (Principal Accounting Officer) |
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