Container Store Group Inc (TCS) 2014 Q1 法說會逐字稿

Greetings and welcome to The Container Store first-quarter 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to Ms. Anne Rakunas of ICR. Thank you, Ms. Rakunas, you may begin.

Thank you, operator. Good afternoon, everyone, and thanks for joining us today for The Container Store's first-quarter fiscal year 2014 earnings call. On today's call are Kip Tindell, Chairman and Chief Executive Officer; Melissa Reiff, President and Chief Operating Officer; and Jodi Taylor, Chief Financial Officer. After Kip, Melissa and Jodi have made their formal remarks we'll open up the call to take questions.

I need to remind you that certain comments made during this call may constitute forward-looking statements, and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties are referred to in The Container Store's press release issued today. The forward-looking statements made today are as of the date of this call, and The Container Store does not undertake any obligation to update their forward-looking statements.

Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation schedule showing the GAAP versus non-GAAP financial measures is available in The Container Store's press release issued today. If you do not have a copy of today's press release you may obtain one by visiting the Investor Relations page of the website, thecontainerstore.com.

I will now turn the call over to Kip. Kip?

Thanks, Anne. Hello, everyone. Thank you for joining us today to talk about our results for the first quarter of 2014. And I hope everybody had a great 4th of July.

Net sales for the first quarter were $173.4 million, an increase of 8.6% over first quarter of fiscal 2013. We thought our sluggish sales were all because of weather and calendar shifts in the fourth quarter, going into this first quarter.

We had what everybody had -- weather and calendar shifts for Christmas that began last November and continued into the spring. But now we've come to realize it's more than just weather and calendar. Consistent with so many of our fellow retailers, we're experiencing a retail funk. So many retailers that we talk to are experiencing that. Our comparable store sales declined 0.8% in the first quarter. They declined 0.8%, and that's after 15 consecutive quarters of comp store increases.

It's important to remember that historically the first quarter at The Container Store is by far our lowest quarter from both a sales and profitability standpoint. It's a very small seasonality quarter for us. Simply put, it represents less than 0% of our annual earnings. So, we're disappointed with the first quarter. And, yes, we're surprised by slightly negative comp store sales increase. But the first quarter has very little impact on our full year earnings results.

We are confident that customer enthusiasm for our brand and employee morale are at all-time highs. We continue to experience slight traffic declines in this surprisingly tepid retail environment. But we feel like our brand and employee morale are just as good, actually better than they've ever been.

And consumers seem to be, as you guys know, consumers seem to be buying homes and automobiles and even high-ticket furniture which has been in the doldrums since the great recession. But most segments of retail are a little like us, seeing more challenging sales suddenly than we had hoped for early in 2014. So we're not alone in this.

But we will absolutely not rest until we turn these slight traffic declines we've been experiencing into slight traffic increases. We have exciting initiatives that we feel like will take that slight traffic decline and turn it into a slight traffic increase. And we have very exciting initiatives that Melissa will go into shortly at hand that we think will have a terrific impact on average ticket increase, which is what we're most skillful at doing. In tough times we have a long history of having a great deal of success at raising average ticket.

Regarding our second and third quarters, we believe that these two quarters will improve slightly to flat to slightly positive. We're being cautious about talking about those. But we do feel that there will be some improvement in the second and third quarters.

And then we're, like every retailer, we're very much looking forward to the fourth quarter as we comp against the worst weather we've had in our history last year. And we believe we'll see -- well, we know we'll see marked improvement in our sales trends in the fourth quarter, which is our most important quarter. One thing we know for sure is that chances are very high that we won't have the worst weather in our 36-year history again this fourth quarter. And it was darn unfortunate to have it right after we went public.

Historically, over 60% of our profitability has been derived in the fourth quarter. So, from a profitability perspective, fourth quarter is very important for The Container Store. We joke it's like a basketball game. It's really all about the fourth quarter for us. Wish it wasn't that way but it's always been that way.

We have both our Christmas campaign and our annual elfa sale in the fourth quarter -- our two biggest seasons simultaneously. So, fourth quarter is 60% of our profitability. And this year we expect it to be perhaps even a little more than that total percentage of our total profitability.

We're pleased that during the first quarter, in order to preserve our brand and to protect gross margin, we did not accelerate promotional levels. We recognize that consumers have an inordinate appetite for promotional levels right now and we recognize that this continues to be an incredibly promotional consumer environment. We're very proud and thrilled with our average ticket growth right now, as always, and the service that our wonderful employees provide our customers every day.

As I mentioned, we feel that we're really adept at offsetting occasional traffic declines with average ticket growth. Think about it. Last year our average ticket increased a robust 5.6%. The previous year, average ticket increased 4.2%. All of our employees were so proud of our ability to do this. It's just something that we've always been able to do when traffic levels were not exactly what we wanted.

I think it's a huge differentiator for us. We can flat out raise average ticket with the very best in our industry because of our great salespeople. We won't rest until we turn the traffic slight declines into slight gains. But what we're really anxious to do, what the job before us is to do, is to get those average tickets up truly robustly.

And, so, Melissa, how are we going to do that? Tell us how we're going to do that -- average ticket thing, let's talk about the traffic thing. How are you going to do this average ticket thing?

Okay. We'll talk about it. Thanks, Kip. And hello, everyone.

First, I want to talk about our new stores just for a little bit. We continue to be very pleased with their performance. Our average first-year four-wall adjusted EBITDA margin on new stores has historically averaged 23%. And our investment capital has seen a payback in about two and-a-half years. I think that's really important to reiterate those two points again.

We opened three new stores in our first fiscal quarter -- in King of Prussia, Pennsylvania this past March 8, our second store in the Seattle area April 12, and our first store in Rhode Island in the Providence area May 17. And we just relocated last month our 20-year-old Oak Brook, Illinois, store to a beautiful space at the successful Oak Brook Center, which is right across the street from where our old store was. It's a gorgeous outdoor mall, for those of you not familiar with it. We had a very successful grand opening. We received a glorious welcome from our customers we've had for 20 years, as well as new customers.

The remaining stores that we will open this fiscal year are in Los Angeles, California, August 9 at Farmers Market at The Grove; in Salt Lake City, Utah at Fashion Place Mall, opening October 18; in Chicago in the South Loop area in what's called the Roosevelt Collection, opening November 15.

And you all may remember that last quarter we announced that we have accelerated our annual square footage growth from 10% to 12% minimum. And today we are just super pleased to announce we are also opening our eighth store this fiscal year at the end of January, 2015, in the Phoenix market -- Glendale, to be specific. And that enables us to meet that 12% minimum square footage growth even in this fiscal year.

It normally requires about 8 to 10 months for us to open a new store the way we like to open a store once the lease is signed. So, we really worked diligently to even add that additional store in this current fiscal year. So that's really terrific. So, four more stores to open this year, a total of eight grand openings, seven net new stores by the end of fiscal 2014.

Tomorrow is a big day for us because POP! will be available in all of our stores and online. Yes, it's our new customer engagement program, POP! -- perfectly organized perks, our program that rewards customers with special communications, surprise-and-delight gifts, and exclusive offers that will be available in all 66 stores. Customers simply have to sign up and begin being surprised and delighted by The Container Store. It's so simple, so easy. And if a customer's not in one of our stores to sign up, all they have to do to become a POP! star is to enroll online at containerstore.com.

Some of you on the call may remember that we crafted our POP! program to be simple, relevant, emotionally engaging, and designed specifically to improve customer frequency, traffic. Kip, there's what we're talking about -- traffic. We launched the program in just our California stores almost one year ago and already we know that the program is increasing POP! star traffic. And what's really wonderful, POP! stars have a higher average ticket than non-POP! stars. So, of course, we love that too.

Currently we have around 330,000 POP! stars. But, hey, watch those numbers soar after all stores and online offer the program beginning tomorrow.

In addition, we've expanded the rollout of our ATHOME personalized in-home organization design service beyond just the Texas market, having successfully just launched the service in the Manhattan market with 12 really outstanding organizers. I've met all 12 of them and they're really outstanding.

Again, this has been our most requested service in all of our 36 years. Our customers don't want DIY. They just want someone they can trust to do it for them -- organize every area of their home, a whole soup to nuts, A to Z program which makes their time-starved busy lives obviously more efficient and enjoyable. And that's exactly what we're giving them.

Our ATHOME organizers go directly into our customers' homes and design solutions for them, organizing every space using, of course, The Container Store products. We're bringing the service to additional markets such as LA, Chicago and the Washington, DC market by the end of this calendar year and then to the rest of our stores in 2015.

The results so far with this service are really exciting, with the average customer ticket in excess of $2,000 for ATHOME customers. That's incredible, we think, when our average ticket in our stores is around $60. We really see this having a significant impact in the coming months as we continue rollout in more markets, and certainly of course in the long term.

And, lastly, as many of you know from our last call, we've been talking about closet domination. Actually, for the past several months. And so we wanted to make sure that we are offering our customers many closet solutions, choices, giving her what she wants, when she wants it, anywhere, anytime.

And, so, I bet you probably have been wondering exactly what we mean by that. Well, get ready because we are over-the-moon delighted to announce today that we will launch a brand-new exclusive custom solid drawer-and-shelving closet solution later this fall. The new product collection will be a higher-end offering than our current assortment, and will provide our customers with custom-built solutions, crafted from the highest quality materials and with a variety of choices in wood grain finishes and extras, all the bells and whistles, including lighting and storage options for shoes, jewelry and handbags.

This new closet collection will be custom and made to order with service from our in-store expert salespeople, our ATHOME organizers, and of course our installation service. Our customer's been asking for an even more luxurious closet offering as they think about their dream closets, which we know is an area of their home that they want to be well-appointed, beautifully designed and a reflection of their style, while of course also remaining functional and efficient.

Many customers simply want a more custom built look. And this new collection is just that -- quality, custom solutions with, again, all the bells and whistles and the superb customer service that our customers expect from us to go along with it.

So, as you can hopefully tell, we're very enthusiastic and very optimistic about this collection and service because we know it's going to appeal to our loyal customers but it's also going to attract new customers to our brand. We expect that the average ticket on our new closet collection will be much higher than our over $2,000 current average ticket that we are experiencing with our ATHOME service. And, therefore, we believe it will contribute very meaningfully to comp store sales increases in the long term.

As I said earlier, this new solid drawer-and-shelving closet collection will roll out late this fall in our seven stores in the Dallas/Fort Worth Metroplex, with planned rollout to the rest of our stores beginning in the spring of 2015. We really do believe this is a game-changer for us. It could be our most significant product launch to date in 36 years. So how cool is that? We can't wait to tell you more about it and hopefully maybe even show it to you very soon.

So, a lot is happening here at The Container Store. We will continue to focus on our solutions-based selling as opposed to items, continue to focus on proprietary product like our new solid drawer-and-shelving closet collection I just spoke about, both of which, of course, insulate us from the giant Internet retailers. It's just not a factor because you cannot showroom proprietary exclusive products. And almost no one tries to sell solutions over the Internet. It's not easy but we do it.

So that's it from me today. Thanks for listening. And now, Jodi, you're going to review our first-quarter financial results and discuss, I believe, our outlook for fiscal 2014.

Yes, thank you, Melissa. Good afternoon, everyone. I'd like to begin my remarks with a review of our first-quarter results and then discuss our outlook for the year.

Net sales in the first quarter were $173.4 million, which was up 8.6% from the first quarter of fiscal 2013. Sales in The Container Store retail business were up 8.9% to $149.7 million. And our third-party sales at our Swedish subsidiary elfa were up $1.5 million or 7% from the first quarter of 2013. As we discussed on our fourth-quarter call, the first quarter is historically by far our lowest quarter for both sales and profit contribution.

We ended the quarter with 66 stores and approximately 1.65 million of gross square footage, as compared to 60 stores and approximately 1.5 million of gross square footage at the end of the first quarter of 2013. Our comparable store sales for the quarter decreased by 0.8%, which included a 1.5% increase in average ticket.

The weather-driven extension of the elfa sale that we spoke to in fourth quarter also resulted in a shift of approximately $4 million in sales at our TCS business into the first quarter due to more merchandise deliveries being recorded into first quarter this year. Our comp store sales metric recognizes a sale when the product is purchased, but in the financial statements revenues are recorded when the product is delivered.

In the first quarter of fiscal 2014, approximately 26% of elfa sales were derived from The Container Store, with the balance of sales primarily derived from Scandinavia. The growth in third-party sales in the quarter was primarily related to a promotional campaign, as well as improved market conditions in Scandinavia. We remain cautiously optimistic that these improving trends in Europe will continue.

Consolidated gross margin decreased by 30 basis points to 58.1% from 58.4% in the prior-year period. Gross margin in The Container Store retail business decreased 70 basis points to 58.2%, primarily due to the extension of our annual elfa sale and, to a lesser extent, the appreciation of the Swedish krona versus the US dollar year over year. The Container Store gross margin decline was partially offset by the increase in elfa's gross margin of 60 basis points to 40.9%, primarily driven by leverage of fixed costs during the quarter.

As a percentage of sales, consolidated SG&A increased to 52.6% from 52.3% in the first quarter of fiscal 2013, primarily due to public company costs which we did not incur last year, as well as to a lesser extent due to investments in future growth in strategic initiatives. Our net interest expense in the first quarter of 2013 was $4.3 million, compared to $5.6 million in the first quarter of fiscal 2013, with the year-over-year decline due to lower interest rates achieved through refinancing of our term loan facility at The Container Store last year.

Our tax rate for the quarter was 35%, compared to 29.6% in the first quarter of last year. The increase in the effective tax rate is primarily due to a shift in the mix of projected domestic and foreign earnings, as well as fluctuations in the valuation allowance recorded against domestic earnings in the first quarter of fiscal 2013. Our expectation is that our tax rate for the full year 2014 will still be approximately 38.8%, as outlined on our fourth-quarter conference call.

The net loss for the quarter was $3.6 million, compared with a loss of $4.8 million in the first quarter of last year. And our loss per share was $0.07 compared with a net loss per share attributable to common shareholders of $9.25 last year. Again, our first quarter has historically always been our quarter with lowest sales and a net loss due to seasonality of our business. Last year's net loss per share reflects $22.3 million in preferred distributions.

As a reminder, we did retire our preferred stock in connection with the IPO in late fiscal 2013. On an adjusted basis, net loss per share in the first quarter of 2013 was $0.07.

Turning to our balance sheet, we ended the quarter with $8.6 million in cash on our balance sheet, $361.6 million in outstanding borrowings, and combined availability with cash on hand of $68.8 million. We ended the quarter with well-managed inventory of $94.6 million, as compared to $91.2 million at the end of last year's first quarter, up only 3.8% on a sales increase of 8.6% with six additional new stores. So, we're very proud of that.

Next I'd like to turn to our outlook. We expect consolidated net sales for the year to be $820 million to $830 million, comparable store sales to increase in the 1.5% to 2.5% range, and earnings per share to be in the $0.49 to $0.54 range based on a weighted average of 49 million diluted common shares outstanding.

Included in this outlook is the expected impact of the additional eighth store opening that Kip discussed, which we are very excited to be able to add this year. Since this store will not be opening until January 31 of 2015 it will have limited sales that we can obtain in this fiscal year, but the full amount of pre-opening store costs, which we expect will reduce our 2014 earnings per share by $0.02. We are assuming a tax rate, as I noted, of 38.8%, and annual interest expense at today's LIBOR rates of approximately $17.5 million.

A few additional comments that I have regarding the expected comp and SG&A cadence this year. First, on comps. Our quarterly comp expectation for fiscal 2014 are as follows. Second and third quarter flat to slightly positive and fourth quarter mid single digits. Again, noted, due to the extreme weather of last year.

Two, we expect the impact of the initiatives that we've outlined that we're very excited about to really be most beneficial to sales in the later part of the fiscal year. And as noted last quarter, the impact of the costs associated with these planned initiatives, including the roll-out of the POP! program, the ATHOME roll-out into nearly half of our stores, and the new custom closet program will be most significant in the first half of the year, with some modest impact still into the third quarter.

As a result, we expect consolidated SG&A as a percentage of sales in the second quarter of fiscal 2014 to delever from second quarter of last year by approximately 100 basis points from the 46.7% last year, to delever slightly in third quarter, but to improve considerably as a percentage of sales year over year in the fourth quarter. As we have said before, fourth quarter is seasonally our most important quarter. And in fiscal 2014, we expect to deliver nearly 70% of our full-year earnings per share in the fourth quarter.

And, third, in fiscal 2014, please remember we will also have the incremental costs including additional payroll and professional fees associated with becoming a public company, which is approximately $1.5 million beyond what was incurred in fiscal 2013.

So with that I'd like to turn the call back over to the operator so that we can take your questions. Operator?

(Operator Instructions)

Gary Balter of Credit Suisse.

Thank you. Just on the stuff that you're doing, the exclusive custom, like the higher end that you're going to be introducing in the store, how does the pricing compare to elfa?

We're introducing a higher-end product than elfa. What we discovered is that that customer that really represents 83% of our sales -- 30% of our customers represent 83% of our sales -- and she buys everything in the store at around a 200% ratio to average, but she buys elfa at only low to mid 100% ratio to average.

She's not putting it in the master bedroom closet. She's putting it in the kids' room. She's putting it in the laundry room. She's putting it in the guest room. And we believe that she wants a more upper end product for her bedroom, particularly that best customer.

So this is our -- we refer to it as a Lexus added to the Toyota line. Elfa's the best closet system in the world but it needs this Lexus added to the Toyota. It is more expensive. It's not going to be branded elfa. It would be branded The Container Store. It will not be on sale when elfa's on sale.

It's not elfa. It's The Container Store. And we think it will go hand in hand with our Toyota that is elfa and bring in this customer, and tempt some of the other customers to go to this new -- it's hard to describe over the telephone -- you might call it Texas closet, we joke.

People have been asking for it for years and, frankly, we said -- no, we want you to buy elfa. And now we're saying -- let's let her buy what she wants to buy. If she wants that solid, built in, more wooden look rather than that more metal look, let's let her have that. It's the best quality system we believe ever. We have that Good Housekeeping Seal of Approval that is elfa to compete against the other several people that are doing something somewhat similar.

The same gross margin pretty much we're trying to get. And I think we're going to succeed at having it be the same very high gross margin we have on elfa. So, while we don't know what the cannibalization will be, we think it will be like a Lexus-Toyota, hand in hand, not much cannibalization at all, and just allowing us to better dominate, as we should, all of the closet business in the United States, whether she wants solid, that look or see-through, more ventilated elfa look.

Hi, Gary. It's Melissa. It's about giving her choices, Kip. It's about giving her, as I said earlier, what she wants. And it is going to be more expensive. But I think it's going to be an incredible collection and really round out our assortment.

Just one follow-up. You brought down the guidance for comps in Q2 and Q3. Could you talk about your thoughts behind doing that?

Sure, Gary. We're certainly doing everything we think we should and can do to try to both improve traffic and average ticket. But in this more tepid environment that we're in, we really felt as though the appropriate thing to do was to really lower that guidance for the next two quarters, particularly in light of the fact that some of these great initiatives we're talking about don't really have much of an impact to the shorter term. So that was really what drove our thinking. We didn't want to unrealistically expect that trends would dramatically turn quickly.

These initiatives will absolutely impact average ticket. The average ticket on these goods are 60, 70, 80 times what our overall average ticket is. So, you get a few percentage points of sales on something that's 70 times your existing average ticket, you move that needle.

Comp store sales have only two components, is traffic and average ticket. So, what we're trying to outline for everybody is -- here's what we're doing about traffic and we really believe that POP! will move the needle on traffic. What we really think we can do something about is this average ticket thing. We're really excited about it. Melissa, can you go over the timetable again of both the --?

POP!, again it will be rolled out to all stores and online tomorrow. And already the response has been --.

Sales being what they are in the first quarter we wish everything was rolled out this quarter. But it's a phased-in thing.

Tomorrow, right. And then we've got ATHOME in the Manhattan market and all of Texas. And we're going to be rolling that out to Chicago and LA and DC, as I said earlier, by the end of the year. And then we'll roll out the rest of the markets for ATHOME next year.

And then, again, we're going to be piloting this new exclusive custom solid drawers-and-shelfing closet solution, we're going to be piloting that this fall. So, I do think that's going to impact more the longer term than the short term because we're going to be piloting that in the Dallas/Fort Worth Metroplex. But the plan is for it to also impact, at least in those Texas stores, this fourth quarter coming up.

But I think we're planning to roll that out in the first or second quarter of the new fiscal year.

2015, yes, exactly.

Thank you very much.

John Heinbockel of Guggenheim.

Hi, guys. Just going back to the new closet product, what are the thoughts early on here about creating space for it in the store, the training that you're going to have to provide, incremental training to the folks in the store, and then marketing and getting the word out? Thoughts on all of those as you think about the Texas pilot. And then I have a follow-up on the closet.

I'll let Melissa answer that. But we've had major elfa introductions before and so we have a lot of experience at introducing new products of this significance. This is probably the biggest ever. With that kind of average ticket, we'll be able to find plenty of square footage for that. There's a lot of duplicity, if you will, in some of the elfa closet things, so I think there's some room there.

Another thing that I meant to mention earlier and did not is that the way this product will work, there's no inventory on it. And so profit in retail, I believe, is volume plus margin plus annual turn. This thing has sort of an infinity annual term because there's no inventory on it. But I'm sorry, go ahead, Melissa.

Hi, John, it's Melissa. Yes, we are working right now on crafting. Sharon Tindell, our Chief Merchant, and our visual team and others -- training -- we're working on the displays in our store right now for this product collection. And we don't see any problem with that at all.

We're working on the training program. Everybody in our store will be trained on this collection. And then, of course, we'll go into even more man-in-the-desert in-depth selling with our salespeople who will absolutely have all the knowledge to sell this product to our customers.

It's going to go hand in hand, John, with our ATHOME organizers and our installation service because we will sell the customer on this collection in the store, but then the ATHOME organizer and the installer will go to the customer's home, do all the measurements. Because this is custom, custom, custom. And then the product will ship directly from the manufacturer to the installer, and they will install it. And then the organizer will organize it or do whatever needs to be done.

We also have what I think is a quite robust marketing plan to support this, albeit the pilot is in the Dallas/Fort Worth area. But I have always been of the opinion in my marketing career that you've got one chance to make that big volcano, big impression happen. And we want to do that. And we're working very diligently on the public relations, because you know we're quite adept at that so we've got a whole plan there.

We will talk about this on social. We will use every medium of our magical marketing mix that we can, and of course be prudent and strategic in doing so. We're very excited about it and I can't wait for you to see it.

Then as a follow-up, if you think about it, does this do anything for you on the B2B side? Because we've talked in the past working with maybe home builders to have your product, the elfa product or other product, put into a newly-built home or remodeled home. Does this do much for you on the B2B side in getting this product eventually into the hands of developers for their houses?

B2B is going really well. And as we said before, it's bound to be the most rapidly growing part of our business for the foreseeable future. What we're discovering is that people throughout different industries are very excited to talk to us because we're The Container Store. They're very excited to have the opportunity to buy B2B from us.

Elfa is a major, perhaps even a majority, of our B2B sales so far. We certainly want it to be the whole store. And we don't have this particular solid closet planned to be a major component of the B2B. But we just don't know yet. I'm certain it will be.

It's got the margin for us to play in that arena, as well. And as strong as the sales have been for elfa with B2B, I think that's something that certainly can make a lot of sense and give them the same option we're giving the consumer.

But this is really just meant to be our top customer who's in there buying the coat hangers and the shoe boxes and everything else. She's our best customer and she's not putting elfa in her master bedroom closet. And we are confident that this will be the nicest system on the planet and she'll put this in there.

Everything we know after 36 years of designing closets. If we do anything well, we design great closets. And, so, we're finally, as Melissa says, giving her what she wants.

And then, lastly, you talk about the funk. When you look at geographies, categories, talk to your customer, is there anything more than just a consumer malaise? Because, again, you're not low income, right? You would think you'd side step it a little bit more. What's your best guess as to the source of this?

What we know from our involvement in National Retail Federation and all of that is that over the past several months, this funk, this retail funk, seems to be not just limited to lower-end retail. It's also hitting the higher-end retailers, and certainly us to a surprising extent all of a sudden. We don't see any geographical differences between it. It seems to be all over the place.

We have a pretty robust database. Our highest end customer seems to be a little bit infrequently shopping us, for some darn reason, and so does the -- we have a very uneven economic recovery still. So, for a long time it was the lower-end retailers were suffering and the higher end were doing better, and we were doing better. Now it seems to be more democratic. It seems to be across the board.

So, all we know to do is to accelerate our efforts to increase traffic with initiatives designed to do that, and to really hit the average ticket thing because even if the traffic stayed -- even if it was zero, if you can have a 5% or 6% or better percent average ticket increase, you're going to have some nice 3%, 3.5% comp store sales increase.

One of our biggest differentiators, John, as you know, is our expert salespeople who we provide so much training and so much confidence building and so much knowledge. That just drives that average ticket. I don't know of any other retailer that can do that quite like we can.

Thank you.

Simeon Gutman of Morgan Stanley.

Good afternoon. This is Patrick O'Brien on for Simeon. Perhaps you could talk about the future pipeline past the stores that you've called out. Can you talk maybe about the availability of sites and the quality of locations? Basically are you seeing some marginal improvement on the real estate side of things?

We're not seeing a lot more real estate development, unfortunately. That's not really happening. But it doesn't matter. We're very excited about the new store locations that we have in the pipeline.

We're even more excited about the experience of our newest stores. Never before, still, have our new stores contributed so much to the profitability of the Company. We're still getting this 23%, maybe even a little better.

First-year four walls EBITDA, which is -- that's why we're opening so many stores -- 12% is s a lot compared to what most retailers are doing right now. But if you can get 23% first-year four-walls EBITDA, that's a wonderful business opportunity.

The Internet sales are growing. We don't really believe that people are going to quit going to bricks and mortar and it's all about Internet. Internet sales aren't that great across the retail specter either.

As long as these Indianapolis-level locations yield even more profitability than our exciting LA and Chicago locations, I think we're going to try to pick up the pace on at least 12% sales. And we emphasized in the last call, another thing that's happened is that we've come of age.

After 36 years, we truly are the first call a developer will make for this type of retail. And we're getting what used to be considered department store anchor pricing and location within the few centers that are being developed. And we're perfectly happy to go in and redo a book store or something else on our own CapEx dollars, if that's what we need.

But we remain as picky as ever about locations. We really want the corner of Main and Main. We're just delighted to learn that the corner of Main and Main in Kansas City costs a lot less than it does in LA, and our sales are pretty much close to the same.

It's Simeon. I was able to jump on. Just a follow-up. In looking at the POP! program, now that you have a growing list of emails, granted from the markets where you've been in, and I can see from my own inbox a greater flow of communication, can you talk about the response or the conversion rate, how closely you're tracking it, who's clicking through to the website, or someone ends up buying something in the store are you able to track that, as well?

Simeon, hi. We actually don't have that data here in front of us to be able to speak specifically. But, yes, we do have the ability to track any and all communications that we're doing to each and every one of our POP! members. I'm not sure what the click-through rate it. We're still continuing to sign up. Almost half of the sales in those markets that have the POP! program are coming from POP! members. I think it's up to 48%, if I'm not mistaken, Melissa?

Yes, POP! stars. 48% of the POP! store sales are from our POP! stars.

That's a mouthful.

It is. 48% of POP! store sales are from our wonderful POP! stars.

And you'll remember, Simeon, to date really the primary market that we've had POP! in has been California. So, it's just now starting to move further beyond California.

We need another --.

Yes, we're not quite to where we've got any experiences other than California, but we're very excited to know have this rolled out, based on what we've seen so far.

You pilot in California because they have the weirdest privacy laws. If you can do it there you can do it anywhere.

And, also, the sign-up ratios are so much higher than we planned. I think that people signed up better in Iowa and Texas than they did in California. We're delighted with the ratios we've got in California.

Yes, we're already seeing -- I'm sorry, Simeon, I'm just going to comment that we're already seeing, because we're in Scottsdale and Vegas and a few other stores, that those customers are really sharing with us not only their email address -- because this is an email-based program, you have to give us your email so we can track the perks, so we can surprise and delight you every month. But they're giving us their phone number, they're giving us their mailing address. The percentage that we are receiving is incredibly gratifying.

Got it. So, presuming where you have the ability to directly communicate or direct market, are you seeing that it is driving traffic, going back to the traffic drivers that we talked earlier? Are you seeing a direct impact when you send some emails out and you're able to bring people into the store?

We are, Simeon. They are coming back. It's amazing. In the test in California, one of the perks for the month was we partnered with one of our vendors and we gave our POP! stars a little goody bag of free product. And you just wouldn't believe these people would drive two and three hours to receive that little goody bag of product. And then, of course, they shop. And their average ticket is higher than non-POP! stars.

Yes, it's not really designed for average ticket. But wonderfully enough it has a positive impact there, as well.

Thank you.

(Operator Instructions)

Dan Binder of Jefferies.

Hi. Good afternoon. It's Dan Binder. My question was around the comp guidance for Q4. Given your current view that maybe it's not all weather and we're in a bit of a funk, it's a pretty big stretch to get to mid single from where we just finished. Just trying to understand how much of that is -- if you could pars it to how much of it is easy comparison versus initiatives versus some underlying assumption in the core.

I'm going to let Jodi answer that question, but something I want to just comment on is there's a 7% comp store sales differential between stores that had a lot of weather and stores that had some weather in the fourth quarter. And so we're just up against the easiest comps in our entire history. But go ahead.

Yes, Dan, it would be primarily due to the expectation of improving weather since it had been such a significant impact to us in the fourth quarter. Secondarily would be the impact of the initiatives. But far more because of the weather.

And on your earlier comments about not promoting, I'm just curious, in this kind of environment why not promote a little bit more to try and get the traffic?

We do some promotions. What we're trying to emphasize is we did not do more promotions this period than we did a year ago. We are beginning to feel like our consumer -- everybody is reacting more to -- I mean, retailers are just training -- it's the most promotional environment I've ever seen in my career, I think. We're not stubborn. We're not overly proud.

We have the best relationships with our vendors in the industry and we can gain their participation. And if we need to do more of that, we'll do more of that. We're still doing some of it, but if we need to do more of it we will. We're flex flexible about that.

When we hit the weather last year we kept elfa on sale for an additional period of time. We're not foolishly proud on that. We're very confident of our ability to get our vendors to work with us to pass on those discounts when and as needed.

My wife, Sharon, is our Chief Merchant. We're looking at that. We're looking at SG&A reduction. We're looking at limited impact gross margin, more price promotion. We're doing everything that we've learned to be able to do in our careers when we get a little unexpected patch of sluggish sales.

I think the point, Kip, is that we're strategic with that. We're certainly not proud. We'll do what we need to do without harming the brand. But I think we're very strategic with our sales and our promotions.

If you were in our store right now, most of the time throughout the year we had either a collection or a section of the store or something on sale. Which, again, we've worked with our vendors to pass that on so it makes it very profitable.

And then just finally, if I could, can you give us any kind of definition on success in these new initiatives, whether it's where you see those businesses for the custom closets, the ATHOME initiative? How would you define success in the first year? Is it maybe a level of sales or a percentage of the mix or number of transactions? Any help you can give us on that, on what your expectations look like?

I guess we've avoided in the call, in the quarterly call, getting too specific on that since we're still in the test mode. But you've got a product that we think is the biggest thing we've done maybe in our history. It's got 60 or 70 times to the overall average ticket. And, so, if it amounts to very many percent at all of total sales, it really raises your average ticket and that falls straight to your comp store sales increase. So, let's say we're able to take traffic from minus 0.5 to plus 0.5, and then if you add some points to this average ticket thing, you get back to where we need to be.

Yes. I think the short answer to your question, Dan, is, with regards to both ATHOME and the new custom closet offering that we'll have, those are both going to be -- the report card, so to speak, will be average ticket, without a doubt, seeing that grow. As we said, it has always grown at this Company. That's not a new phenomenon for us. We are very proud of our average ticket growth that we've seen.

5.6% last year?

5.6% and 4.2% the last two fiscal years. So, certainly it has been growing nicely.

And that's without this kind of initiative.

Right. And then you get all the frequency from the POP! stars, introduce them to all this new wonderful collection, there you go.

So, for us, it's easier to raise average ticket than it is to raise traffic because we have these well-paid, well-trained salespeople. And then we have -- the average tenure in our buyers is like 17 or 18 years. So, we're bringing in higher end product that the customer's been asking for. Gosh, the average first-year employee at The Container Store gets trained how many hours, Melissa?

Over 280 hours.

280 hours. And industry average is less than 10. We're good at training.

This product is like a lot of products out there. That's why I jokingly call it -- you can call this the Texas closet. It's just a matter of expediting the roll-out of it because sales are a little more sluggish than we thought.

And they're a little more sluggish than we thought in the first quarter. We'll see about the second and third quarter. We're trying to be very conservative and mindful of how they were in the first quarter by lowering the second and third comp estimate. But like everybody, we've had comp store sales in the double digits and we've had them negative. But not very often. So we'll see how long this persists.

Thanks.

Thank you. We have no further questions at this time. I would like to turn the floor back over to management for any closing remarks.

Okay. I think this retail funk is real. Yes, we're a little surprised by it but we're not immune to it. We are very mindful of our employee morale and our customer morale.

People haven't stopped loving us. They seem to love us more than they ever have. We're very confident of that. And I think it's important to remember the first quarter is our least important quarter. Simply put, it represents less than 0% of our annual earnings.

We believe the second and third quarters will improve. We're trying to be very modest and conservative in how we project that but we're confident they will improve for a lot of reasons. But we're, of course, looking forward to that fourth quarter as we comp against the worst weather we've had in our history, but also believe that everything that we're doing will help a little bit more in the second quarter, a little bit more in the third quarter, a little bit more in the fourth quarter. And with the historical 60% of the earnings occurring in the fourth quarter, and as Jodi mentioned this year we expect that to be 70% of the earnings in the fourth quarter, that's when it counts.

We wish we weren't like a basketball game where all that matters is the fourth quarter but that's just the way our business is. We'll take it. We're going to maximize that fourth quarter.

We're attacking the slight traffic declines with other initiatives besides just POP! POP! is just the main one. And we're increasing average ticket with all of our abilities. But the ATHOME and closet domination things, I think, will really give us tailwinds on that.

We're very pleased to get to 12% minimum square footage growth even this fiscal year. It normally takes us 8 or 10 months to open a store. But we wanted to get that one signed and illustrate that we're not just doing the 12% next year, we're doing 12% right now.

We're proud of our employees pitching in. It's like the family around the dinner table where you're holding hands and we're saying -- okay, we're going to grow at 12% square footage or better, and we're going to somehow get that stubborn traffic thing up to slightly positive.

We're going to do what we do best with this average ticket thing. And we're going to really make some inroads there. The Container Store's not designed to have a minus 0.8% comp store sales increase.

Decrease.

Decrease. We get 3%, 4%, 5% or better. We do fabulously well. It's almost joyful. It's like going to war together and doing that thing that we do best, which is average ticket growth.

Thank you again for all of your time and your interest today. Look forward to updating you again next quarter, particularly on that average ticket thing. Thank you again.

Thanks everyone.

Thank you.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.