Container Store Group Inc (TCS) 2014 Q4 法說會逐字稿

Greetings, and welcome to the Container Store fourth-quarter 2014 earnings conference call.

(Operator Instructions)

I would now like to turn the conference over to your host, Farah Soi. Please go ahead.

Thank you, operator. Good afternoon everyone, and thanks for joining us today for the Container Store's fourth-quarter and FY14 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 will up the call to 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.

Those 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 at containerstore.com.

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

Thank you, Farah. And good afternoon, everyone.

As you read in our press release, fourth-quarter sales of $224.3 million were of 3.4%, from fourth quarter 2013. And adjusted EPS was $0.24 as opposed to $0.22 in the fourth quarter last year. For the full year sales were $781.9 million, up 4.5% from FY13, and adjusted EPS was $0.34 as compared to $0.33 in FY13.

Our fourth-quarter comparable store sales decreased 0.8%. Unfortunately the quarter did not conclude our according to the early-in-the-quarter trends. Weather was a contributing factor as we experience winter storms during the vitally important last four days of our annual Elfa sale, when historically about 20% of our 50 day sales, Elfa sales occur. And also during the last week of our 19 days sale extension, when over the past two years over 60% of total Elfa sales during the sale extension have been realized during that final week.

Additionally, the strong US dollar had a significant impact on the conversion of our Elfa subsidiary reported sales. Weather and foreign exchange headwinds aside, our sales performance fell short of our expectations in fourth quarter and in FY14. We can and will do better. Jodi will outline in more detail our financial results for the fourth quarter and FY14 a little later.

We're focused on strengthening our business as we build for the future in order to create long-term value for our stakeholders. We're very confident of and excited about the potential of our three key strategic initiatives: TCS Closets, Contained Home, and POP With FY15 serving as an investment year for these programs in order to bolster their long-term success.

We have committed a sizable amount of resources to TCS Closets in particular, and it may take several quarters for us to see the ever-growing impact. But we're very, very confident and excited about the benefit it would bring to our business.

We expect that like with every one of our major merchandising initiatives that have been successful that we have introduced throughout our history, each month, each quarter, and even each year that they mature, such complicated initiatives become more and more impactful to the business. And as Melissa will tell you in a minute, we're excited about the early traction were already seeing for these three big initiatives.

We are signing up tens of thousands of new POP Stars every week, and we're seeing shopping frequency interesting for these customers enrolled in the POP program. Stores that have had Contained Home the longest are experiencing among the strongest overall sales in the Company.

And TCS Closets in the Dallas/Fort Worth market where we have piloted and now also in Houston, California, and DC has had an average ticket since inception of over $10,000. TCS Closets is experiencing so far an average ticket of over $10,000.

And although it's a relatively small sample size, TCS Closet is having a positive impact on comp store sales growth in those stores that have it. We'll go over a roll-out program for when TCS Closets and these other initiatives hits each of these stores. All in all, this is very encouraging.

We're also working on many shorter-term opportunities to drive the business, to innovate and differentiate. These are initiatives that we're also excited about that focus on driving today's sales and optimizing and enhancing our core business. Things like communicating more frequently and effectively with our best customers. Our top 30% of our customers that give us approximately 83% of our sales.

We're also enhancing our already robust shopping experience through programs like free shipping and new delivery options, as well as through mobile, with further enhanced Click & Pick Up improvements to our online Elfa custom-designed center to include walk-in closets -- improvements to our Elfa custom-designed center that includes walk-in closets that it did not include before, importantly. And we're increasing our focus on the solutions-based in selling and service that our customers have always come to expect from the Container Store that truly differentiates us. We sell solutions, not items.

Through increased measurement of service-oriented metrics, including a specific focus on units per transaction, we'll continue to help our customers in the truest sense of the word by giving her perfect complete solutions. Along with this and our ongoing commitment to training and development, we're also focusing even more on leadership development programs for our employees.

And as a perfect complement to the launch of TCS Closets, we're in the process of developing a customer financing program. That $10,000 average ticket and this financing program we think will go hand-in-hand beautifully to further help TCS Closets.

So these are just a few of the many smaller shorter-term initiatives, in addition to our big three initiatives, that you hear a lot about that we are working on. So again, I'm very optimistic about where we are headed.

We do see FY15 as an investment year. With all of these initiatives continuing to roll out and mature, it's going to take a little time. But we're confident, very confident in our potential.

Melissa's now going to share in more detail about those three major initiatives, as well as a couple of the shorter-term opportunities I just mentioned. Melissa?

You bet. Thanks, Kip. And hi, everyone.

Yes, our three major strategic initiatives, TCS Closets, Contained Home and POP, continue to roll out through the end of FY15. And believe me, that can't come soon enough for us. Our employees are thrilled and ready to continue to support and launch these initiatives as they mature and roll out through the rest of the year. Staying true to our foundation principles and focus on communication and training, we are ensuring these initiatives receive all the attention and focus, fully supported and executed with excellence. So let me give you an update, please, on each of them.

TCS Closets. We launched a pilot of TCS Closets, our new exclusive collection of solid custom built-in solutions in the Dallas/Fort Worth market in November 2014. Each solution is custom built from the floor up, using luxurious 1- inch thick profile construction in exclusive finishes and gorgeous glass or solid doors, locking jewelry doors, beautiful hardware, customizable islands and soft lighting. Every detail of the state-of-the-art customer experience has been designed to differentiate the line from other building closet offerings, including a very quick turnaround from time of design to purchase, delivery, and installation.

These are the newest developments in design technology that we believe highly differentiate TCS Closets from other closet systems on the market. Our press release details our specific roll-out for TCS Closets for the rest of FY15.

We have launched TCS Closets in 18 of the 28 stores planned for the first quarter of this year. In the second quarter 23 stores will roll out with TCS Closets, followed by 9 more in the third quarter. And then the final three in the fourth quarter. We ended FY14 with TCS Closets in seven Dallas/Fort Worth stores. And we're very pleased, as Kip said, with the early results of that launch, again showing an average ticket to date of over $10,000.

To date, just five months into the launch in the Dallas/Fort Worth market with the small sample size of closets sold thus far, we are experiencing a notable impact to the total comp store sales growth in those stores that have it, which is an exciting signal of what the program can do again as it grows into maturity. The Dallas/Fort Worth market was our best-performing one from a comp perspective for fourth quarter and for all of FY14.

We directly attribute this to the fact that the Dallas/Fort Worth market has had Contained Home the longest, and now TCS Closets. As you can imagine because of the highly customized and manufactured-to-order nature, TCS Closets does have a longer selling cycle than the other solutions we sell.

So we expect the most meaningful impact to sales from this initiative will come in FY16 and beyond. We will be supporting the roll-out of TCS Closets with local and national marketing including direct mail, online, in-store events, public relations, social media, and advertising in national home decor and design magazines.

Contained Home, our in-home customized design organization service, was available in 34 of our 70 stores at the end of FY14. Again, we shared our detailed roll-out plans for Contained Home in our press release.

We've launched Contained Home in 7 of the 12 stores planned for the first quarter. And from there we'll roll out 12 more stories in the second quarter, 9 in the third quarter, and the final 3 in the fourth quarter. We are hiring experienced Contained Home organizers in each of our markets with the ability to quickly scale as customer demand increases.

We currently have 100 professional organizers as part of our Contained Home team. And average ticket for the service of Contained Home remains strong at over $2,000 since inception. In general, stronger sales performance is being experienced in stores that have Contained Home the longest, and momentum is continuing to build in those stores with incremental sales directly attributable to the service.

And POP, Perfectly Organized Perks, our customer frequency program, has now reached 2 million customer enrollments since launching in all stores July 2014. And we are steadily enrolling around 30,000 customers a week.

Ongoing analysis of the program shows that customers who have been in the program for over one year have increased their shopping frequence an average by at least one visit since joining the program. And remember, we won't anniversary the program with all stores until this year in July. The deployment of additional technology for the customization of the POP program in FY15 will support deeper one-on-one even more customized connections, offers and conversations with these loyal customers.

In addition to these three key strategic initiatives, Kip mentioned we're working diligently on a number of other shorter-term opportunities design specifically to drive additional traffic and sales. So I'm just going to expand a bit on a couple of them.

For instance, we have an intense focus on communicating more with our best customers and doing so more frequently. These are our top 30%, as Kip said, who have historically generated over 80% of our revenue. This is done by utilizing all marketing channels, incorporating imagery and messaging to communicate the benefits of a truly living an organized life.

Online services. In order for our time-starved customers to more easily shop, we are strengthening our model during FY15 beginning with our most recent introduction of free shipping on purchases, in-store or online, of $75 of more, followed by more click and deliver markets and enhanced deliver-from-store options. We will continue to make it convenient for our customers to shop with us anywhere, anytime, any way she wants.

We are also enhancing our Click & Pick Up experience, making it more convenient for our customers to use their smartphones to tell is it when they are in the parking lot so we can immediately bring their products to them if they choose. And we will continue to enhance our online Elfa custom design center to make it smarter, faster, and more visually engaging, as well as enhancing our Elfa configurator to accommodate an even larger variety of solution opportunities. So those are just a couple of our shorter-term opportunities, coupled with her three key strategic initiatives, that will further energize and grow our business over the medium and long term.

And then our new stores. In FY14 we opened eight new store inclusive of one relocation. We continue to be very pleased with our new store performance. In fact, over the past four years the first year four-wall adjusted EBITDA margin has averaged a very positive 21.4% for stores open more than a year. And the average investor capital has been paid back in just 2.5 years.

We will open 10 stores in FY15, inclusive of one relocation, for square footage growth of 12%. Our press release details the planned opening dates for these new FY15 stores. And all of our new stores will open with a TCS Closets and Contained Home.

Thanks so much for your attention. And I'd now like to turn it over to Jodi, who is going to redo our financial highlights.

Thank you Melissa, and good afternoon everyone. Now I'd like to review our fourth-quarter and full-year results, and then discuss our guidance for FY15.

Net sales in the fourth quarter were $224.3 million, up a 3.4% from the fourth quarter of FY13. Sales in the Container Store retail business were up 5.6% to $204.7 million.

Elfa third party net sales increased by 6.2% in their local currency. However, due to the significant depreciation of the Swedish krona against the US dollar, which was down almost 24% in the fourth quarter, Elfa third-party net sales declined 14.9% in US dollars. The translation of Elfa's net sales from Swedish krona into US dollars negatively impacted Elfa's third-party net sales by approximately $4.9 million in the fourth quarter of FY14.

We ended the quarter with 70 stores and approximately 1.8 million of gross square footage as compared to 63 stores and approximately 1.6 million of gross square footage at the end of the fourth quarter of 2013. Our comparable store sales for the quarter declined by 0.8%.

As Kip said, we had a strong start to the fourth quarter after which the business softened in January and into February, impacted in part by adverse weather in many of our high-volume markets during our highest volume days. In addition, we were impacted by port delays in the fourth quarter. While it's difficult to quantify the exact impact of the port delays, our best estimate is that this cost us approximately 40 basis points in fourth-quarter comparable store sales.

Our TCS gross margin was 57%, an increase of 30 basis points, primarily due to the appreciation of the US dollar against the krona. Elfa segment gross margin was 35.9%, down 470 basis points primarily due to a shift in sales mix as well as higher freight cost. As a result, on a consolidated basis gross margin declined 40 basis points.

As a percentage of sales, consolidated SG&A declined 90 basis points to 43.6% in the fourth quarter of FY14, primarily due to expense savings on marketing and other SG&A cost at Elfa, partially offset by decreased leverage of fixed cost at the Container Store retail business. Our net interest expense in the fourth quarter of FY14 was $4.2 million compared to $4.3 million in the fourth quarter of FY13.

Our effective tax rate for the quarter was 25.2% compared to negative 12.5% in the fourth quarter of last year. The increase in the effective tax rate is primarily due to the release of valuation allowances on certain domestic deferred tax assets during the fourth quarter of FY13.

Net income for the quarter was $13 million, or $0.27 per diluted share, compared to $18.3 million, or $0.38 per diluted share in the fourth quarter of last year. On an adjusted basis, excluding certain non-operating items that are detailed in the reconciliation table in our press release, net income per diluted share for the fourth quarter 2014 was $0.24 compared to adjusted net income per diluted share of $0.22 in the fourth quarter of 2013.

Our press release issued this afternoon includes details of our full-year financial performance, so I'm just going to touch on a few highlights. Sales increased 4.5% to $781.9 million, driven by a 5.7% increase in the Container Store retail business. Elfa third-party sales increased 4.7% in local currency, primarily due to stronger sales in the Nordic market, but they declined 4.5% in US dollars.

Our comparable store sales for the year decreased by 1.4% following a 2.9% increase in FY13. Consolidated gross margins decreased 20 basis points year-over-year to 58.6% of sales, with gross margins at the Container Store increasing 10 basis points and a decline at Elfa drive in the consolidated decline.

Consolidated SG&A as a percentage of sales increased 40 basis points to 47.7% in FY14, primarily due to decreased leverage of fixed cost, increased cost as a result of being a public company, and the implementation of strategic initiatives. Adjusted net income of $0.34 per diluted share based on 48.5 million shares outstanding compared with $0.33 per diluted share based on 48.9 million adjusted diluted shares outstanding last year.

Turning to our balance sheet. We ended FY14 with $25 million in cash, $335 million in outstanding borrowings and combined availability on revolving credit facilities and cash on hand of $98 million. Our merchants continue to manage our inventory with excellence, particularly as sales didn't meet our expectations. We ended the year with inventory down 2% compared to the end of FY13, despite a store count increase of just over 11%.

Inventory at the Container Store retail business was up 4% year-over-year. However, inventory on hand was down 2%. The difference being in transit inventory, largely due to the port situation.

In Swedish krona, Elfa's inventory was down 9%. However, due to the depreciation of the Swedish krona against the US dollar, Elfa's inventory declined 30% in US dollars, leading to the overall 2% decline in consolidated inventory.

We did experience some port-related out-of-stock situations, primarily in February and then into March and early April, although we did our very best to mitigate the impact by rerouting orders to alternative ports and increasing our expected transit times for orders. It is difficult to quantify the precise impact to our business, especially since we offer multi-functional solutions, but our best estimate is approximately 40 basis points of comp impacted fourth quarter, or about $800,000.

March was impacted more, and we expect a first quarter sales impact of approximately $1.5 million, or approximately 1 percentage point of comp. Additionally, we will incur higher transportation costs in the first two quarters of FY15 to get products to our distribution center.

Now turning to our Outlook. For FY15 we expect consolidated net sales to be $800 million to $815 million, comparable store sales to be in the range of negative 2% to flat. And diluted net income per share to be in the $0.30 range to $0.38 range based on the weighted average of 49 million diluted shares outstanding. This Outlook includes an anticipated $0.06 per diluted common share headwind related to the implementation of our initiatives, as well as a $0.01 a drag related to the port delays and higher associated freight costs.

We expect our tax rate for the full year of FY15 to be approximately 39%. And our annual interest expense at today's LIBOR rates to be approximately $17 million.

Now I'd like to provide more color on our guidance for the year. We expect typical seasonality, with the first quarter generating the lowest volume sales and the fourth quarter the highest.

We historically generate a loss in the first quarter, and we expect that to be the case again this year exacerbated by the cost of our initiatives as well as the impact of the port-related delays. Inclusive of an expected approximate $0.02 EPS impact from initiative spend as well as an expected $0.01 EPS impact from lost sales and higher freight costs associated with the port delays for a combined estimated EPS drag of $0.03, we expect our first quarter loss per share to be in the range of $0.12 to $0.14.

With regard to 2015 comps, we have our key strategic initiatives like our TCS Closets, Contained Home and POP that we are ramping, and we remain excited about their potential. Although their impact will begin to be felt more in the back half of the year, based on the roll-out plans and when sales begin to materialize from initial roll-out. Given the fact I've already discussed, we expect first quarter comps to be down approximately 3% to 4%.

We also assume an average SEK rate of approximately 8.7 for our P&L in FY15 as compared to the actual average rate of [SEK]7.15 in FY14. Since Elfa's SEK sales will convert to fewer US dollars, we expect FX to be a drag of approximately $16 million on our consolidated FY15 sales.

This FX outlook, while a sales headwind, is expected to be a tailwind to consolidated gross margins in FY15 as we benefit from TCS purchases of Elfa products in SEK. We are currently hedged has for approximately 55% of our SEK purchases of Elfa products at TCS and are estimating an average rate of approximately [SEK]8.2 in our cost of sales at TCS.

Keep in mind, our inventory turns approximately 4 times a year. So this gross margin benefit from a weaker SEK is realized over time. It will be a minimal impact in the first half of the year, partially offset by the impact of the incremental freight already discussed due to the port situation, and most impactful in the fourth quarter when we sell a considerable amount of Elfa during our annual Elfa sale.

We plan to invest approximately $4.5 million in SG&A in our initiatives in FY15, or $0.06 per diluted common share. This will be disproportionately spent in the first three quarters of the year, as we continue to roll out Contained Home and TCS Closets, and expect to have all in place by December 2015.

Given the investment in our growth initiatives and our expectation for comparable store sales in FY15, we expect SG&A as a percentage of net sales to deleverage approximately 250 basis points in the first two quarters of the year and to be relatively consistent to last year as a percentage of sales in the back half of the year.

In FY15, we expect to incur approximately $49 million in CapEx. The vast majority of this will be set spent in our new store construction and related costs, as well as implication of our initiatives such as TCS Closets. The remainder will primarily go towards our existing stores and our distribution and production facility.

Our outlook assumes that 2015 will be an investment year with regards to initiatives and the full financial impact will not be realized until FY16 and beyond. In summary, external headwinds in Q4 notwithstanding, the business did not perform to our expectations.

As Kip and Melissa went through, we are focused on the implementation of all of the initiatives discussed and look forward to realizing the associated benefit as we move through FY15 and primarily in FY16. And with that, I'd like to turn the call back over to the operator so that we can take your questions.

(Operator Instructions)

Chris Horvers, JPMorgan.

Can you talk about how you would diagnose your traffic problem? Because a year ago you talked about the weather and the customer being in a funk, but the macro is now better. And 4Q aside, ex the weather you're guiding down 2% to 3% in the first quarter, ex the port too.

So can you talk about what -- diagnose that traffic problem? And can you reconcile that against the incremental trip comment? If you are getting that one trip, the average customer visits two to three times per year, then it suggests that non-member visits are down substantially.

Sure, Chris. This is Jodi, and I'll start that. I know you answered several -- or asked several questions there, but let me start first with your traffic question.

Our Q4 comp decline was primarily driven by traffic. As you can imagine, weather was a definitely a factor.

And of course driving traffic is always, always going to be important to us. But with our evolving business model and our initiatives, we are focused, of course, on just driving comp store sales overall. That's really the metric we are aligned to driving, and it's what certainly makes the most sense to us, we believe.

Now, specifically on the weather, and some of the other things that happened in Q4, I think there might be some information there we can additionally share regarding that. And Kip, maybe you'd like to go into that just a little bit more for us.

Well, as we mentioned, and no one likes to talk about the weather, but weather hit during the peak windows of the Elfa sale period this year. We experienced winter storms during the all-important last 4 days of the regular Elfa sale when historically 20% or even slightly more, 20% of the 50-day sales of the Elfa sale occurred.

So during those last 4 days of the 50-day sale, at least 20% of the sales usually occur. And that was when we had that February 9, 10, 11, snowstorm that caused so many store closures for us. And it was particularly bad in our higher volume markets.

And then that pushes sales into the sale extension, which you had during years of bad weather. And so the 19-day sale extension, over 60% of the sale extension sales occur during the final week of the sale extension. And we got weather at that untimely moment as well. So that's kind of the weather story.

We had very little weather and store closures in December and a comp store sales increase of, a slight increase of 2.4%. Kind of middle weather in January, and we were down 0.2%. And then we had a lot of a very timely or untimely weather during February, and the comp for that month was up -- down 5.9%.

So that's a pretty dramatic thing. You have December up over 2% and February down 6%. And weather certainly played a key role in that, even though you hate to talk about weather.

Understood, but as you think about your guide for the first quarter, down 2% to 3% and usually back out the port issue, is there something broader that where there is a problem? Is there a pricing issue with the customer? Is it that you're not getting the online sale like other retailers, and hence the lowering of the free ship threshold? Is it that you depend more on sort of the halo trip when she's out shopping, outside of the Elfa sale timeframe?

Jodi's going to take that. But no, we are pleased with the online sales growth in general. I wanted to make that point. Go ahead, Jodi.

Yes. I mean, Chris, you pointed out obviously the port, which the port was one percentage point approximately, our estimate, for a first quarter hit. And for those -- there really, frankly, is a bit more noise and uncertainty in this first quarter. So we wanted to take that into consideration with our guide for first quarter.

And also remember that first quarter is only about 20% of our full-year sales historically. So it's by far our lowest in terms of general importance.

Okay. Thanks very much.

John Heinbockel, Guggenheim Securities.

Hey, guys. A couple of things. If I think about Dallas/Fort Worth as the future, right, because you've got everything rolled out there and it's the most mature. So how did that -- I know you said it was the best comp in the fourth quarter.

But maybe a little more color, could that have been positive mid single-digit or better? And then if you look at traffic and ticket, did that -- did you have solidly positive traffic in Dallas in the quarter? Just I want to sort of triangulate, if that's the future, what can we look forward to?

Hey, John. It's Melissa.

We are really very happy with what we saw in the Dallas/Fort Worth market with both TCS Closets and Contained Home, and we're not going to get into specifics. But the customers have been responding, as I think you know because you've been in the stores, to our in-store displays and our offerings.

And we continue to really -- I think this is going to be a game-changer, like Kip said on the last call. We're just not getting into specifics on that right now. But we are very pleased and the progress is really, really, really strong.

I think you also have to understand that with that these initiatives, particularly TCS Closets, we are still -- sometimes we talk about a golf analogy. I mean, if you're not quite the golfer in the first month or two that you play, that you are after two or three years. And so this is a very complex sale. It's manufactured to order, it's non-refundable.

We plan on, as we do with these big initiatives, getting better later in the year, in year two, in year three. So the only reason I would mentioned that is I wouldn't look at Dallas/Fort Worth as being the future. But I would save it's the beginnings of the future.

Dallas/Fort Worth and everybody else will get better and better at selling TCS Closets. And it's still part of that test, still part of that roll-out. A little bit like golf.

And we'll continue to build the pipeline, John, as you know. And we're tracking all the engagements and the conversions to sales very carefully by contained -- home organizer as well as by store.

Secondly on the financing initiative, can you go into a little more detail on that? And to what degree -- does that carry any kind of risk in terms of credit risk on your part?

Let me go first. John, it's Melissa. Yes.

We're really excited about this, and we're going to have more detail to share in the future. But rolling out TCS Closets with that high average ticket of over $10,000, we really feel that our customers are going to respond very, very favorably to a very simple customer financing plan that we want to offer.

So, yes. We'll have more to share, but this -- we're hoping to have that in place by the end of the year.

John, just to add real quick here, your question about recourse. And we are looking at a program that would have no recourse.

Okay. And then one last thing.

The 30% of customers, right, that do the 83%. Remind me what their shopping frequency is what? And where do you think that can ultimately improve to?

Yes. John, Melissa again. Yes.

Their shopping frequency, that top 30% is about four -- a little over four times a year. The average customer is still at about 2.5.

So that's -- so comment on that one time per year.

Exactly. So that one time incremental visit by the POP Stars is huge. It really is.

If they're only shopping four and if they all come one more time, which would be great. But the POP Stars are -- most of the POP Stars that are enrolling are our best customers as well.

Okay. Thank you.

Thanks, John.

From Simeon Gutman, Morgan Stanley.

Thanks. It's Simeon Gutman.

Looking forward on TCS Closets, this may have been asked on a prior calls, but can you dimensionalize the market opportunity of higher-end installed closets, just the US size, if you have some estimate? And then in the small sample size you have so far, is that an Elfa customer or is that a new customer to TCS? Is it someone you've seen before or is it entirely a new customer?

Yes. Well, on the market sides of TCS Closets, most of the other, really all of the other manufacturers in that field, kind of agree that it's frustratingly difficult, it's actually sort of impossible to quantify the size of the overall US market. And that's because the overwhelming majority of that market is still contractors and builders and cabinetry work. And it's not something you buy through a service or a retail store.

We certainly intend and hope to -- we'll endeavor to dominate that market and change that to where people are buying it more from us rather than their contractors or their handyman or that type of thing. That makes it hard to quantify. It also allows for a really great opportunity, we think.

But the TCS Closet customer, we believe to be a slightly older, more affluent, a little bit more traditional customer than the Elfa customer. And she will typically, what is designed for her, she will typically -- that customer will use this in her master bedroom closet. And then still use Elfa in the kids' room, in the pantry, in the linen closet, in the guest room even. And there's a little bit less traditional customer that wants Elfa in her master bedroom closet.

So it's -- that's what it's designed for. We've noticed -- actually to go into it a little bit further, the top 30% customer that gives 83% of our sales still buys Elfa at about 102% ratio to average. But she buys everything else at more than 200%.

So she is not the putting Elfa in the master bedroom closet. Early indications are that this is fits exactly what she's looking for for the master bedroom closet and shall continue to buy it for elsewhere the house. It's the same customer. That's why it didn't cannibalize sales during the Elfa sale.

We planned on that. We designed it for that, but we were able to reasonably well confirm that we weren't losing sales to TCS Closet during the Elfa sale. And that was as planned. Does that make sense?

Yes. Do you -- it does. Do you -- but there is a part of the market that is still getting a higher-end closet from other retailers or some of the higher-end franchises, and we know a couple of those by name. Do you know the difference between the direct market, meaning through those stores, like a higher end closet versus the indirect, meaning through the contractor?

Well, no. If I understand the question, nobody's been able to get a grasp for how many builders and contractors and remodel contractors and builders are doing that. That's what our competitors in this field and all of our people would like to be able to quantify, but we can't. That's why I say it's hard to quantify the overall market, but we believe it's huge.

And furthermore, we hope and believe that closet are becoming more and more a thing, a little bit -- we sometimes talk about it in terms of the way that bath and kitchen were in the 70s and 80s, we believe closet [revenues] will move into that type of market size. And if the Container Store's Good Housekeeping Seal of Approval and friendly sales people and approachability and all of that, that should -- that may, in fact, compete very favorably with the complexities of the builder, contractor, special services like that.

Okay. And then, my follow-up question is regarding of the comp outlook for next year.

Can you talk about just some of the assumptions that went in? I mean, you said the port strike, we know it's going to hurt in Q1. Does it assume the backdrop remains the same? And then is there no benefit from TCS Closets or Contained Home within next year's outlook?

Yes. I'm happy to take that.

We, in our comp guidance, Simeon, we conservatively assumed very limited benefit from the initiative roll-outs during FY15. We are assuming the bulk of that benefits going to be achieved in FY16 and beyond, but for that investment expense to occur in FY15.

Seth Sigman, Credit Suisse.

Great. Thanks very much. Good afternoon, guys.

Hello.

Some comments early about SG&A, some marketing savings in the quarter and some cost related to Elfa in Q4. Can you elaborate on the changes that were made in Q4 and if maybe there some opportunities in 2015 to offset some of the investments and some of the traffic trends that you are seeing?

Sure. I'm happy to take that, Seth.

As far as our expenses, we're definitely on top of our expenses. We, if you look at our quarter, we basically had expenses increase 1.5% yet our overall sales increased 3.4%. We understand that staying on top of our expenses is something that is very important.

And we're always trying to balance, making sure that we don't in any way risk the top line by taking cuts that would, in fact, hurt our sales. So we're constantly looking at that. As I think you probably know, about 0.5 of our expenses are variable.

The fixed side of our business, a big part of that is occupancy that we can't change. But as it relates to the remaining fixed cost structure, we're being extremely limited in terms of increases that we're doing to the fixed cost portion of our business. So we definitely have looked at our cost structures as carefully as we can, but layered into it, as I noted, the full expense associated with the roll-out of the initiatives without the benefit per se.

Okay. Understood.

And you outlined a number of online initiatives, free shipping over $75, some delivery options. I know it's early, but have you seen any improvement as you've done that? Or is that something that you've tested in the past where you've seen some strong results? Any color there would be helpful.

Yes, sure, Seth. This is Jodi, and I'm happy to take that.

We have definitely tested free shipping. We have the ability to do a lot of test and learn and A/B testing on our website, and have done that over the course of several years. So that's definitely something that we have some experience in looking at.

We intentionally set the spend threshold to achieve free shipping at a level to encourage incremental average ticket. So while we expected that will see some slight degradation to the gross margin percentage with this move, we expect to more than offset that with the incremental sales gross margins that we will -- the incremental sales and the related gross margin that we'll generate. So of course we'll monitor it, but we had tested it before.

And we just started with this new day in/day out at $75, with the order of $75 free shipping.

Yes. As far as your question on the reactions, so far customers have initially responded very favorably to it. And of course, it's very early. We just rolled it out April 13.

Yes.

Yes. Got it. All right. Thanks, guys.

(Operator Instructions)

Aram Rubinson, Wolfe Research.

Hi, guys. It's Cody Ross filling in for Aram. One high-level question and then one little housekeeping question.

In terms of your strategy, you guys have plenty of initiatives going on. At any time have you guys considered revising your strategy in terms of rolling out fewer stores? Or redoing how you guys merchandise the store? Anything like that?

Well, of course, that's a question you ask yourself every day for decades. What we're looking at is 12% square footage growth. Jodi mentioned that's 11% more stores over the year. 12% more square footage growth. CapEx size and that type of thing plays a role.

How much real estate development is taking place. Therefore, you get more or fewer turnkey new store locations. But the bottom line boils down to, we're getting -- we're experiencing a wonderful, more than 20% of first year four-walls EBITDA on our new stores.

We feel like never before have our new stores been so successful, brought more to the Company. We are doing very well in a little bit smaller size markets like Raleigh and Charlotte, and what we call the Indianapolis thing of the Container Store. Those sales are surprisingly close to what they are in Chicago and LA, and the cost is quite a bit less.

Look, we only have 70 stores in 36 years. So you really don't have to worry about us running the RPM needle into the red.

We're getting great return on these new stores. We've spent much of our history growing at a lot faster than this. And the recession and post-recessionary years, we're a bit like a horse in the barn that was really ready to run.

So we feel like this is well, well within our growth capabilities. That's very much a core competency, having a very easy time with it, not impacting the existing store comp store sales. And just taking advantage of that great business opportunity that we have. 12% seems right, all things considered. And we're confident that's the right growth target for us today.

And Cody, to answer your question about re-merchandising, that's something that we do kind of on an ongoing basis and have for 36 years. And I hope you've had a chance to get into the stores recently that do have TCS Closets and see the displays and how we've made improvements to our Elfa displays, too, in the propping and that styling.

Sharon Tindell, our Chief Merchant, and her team just continue to upgrade the store on an ongoing basis. And they design every new store, which has its own nuances. So that's something that we talk about and look at on an ongoing basis.

And inherent in your question, too, is the sort of art of how fast to roll out TCS Closets. Being public now, should you roll it out faster or slower?

It's a very complicated initiative, manufacturing to order. It's even more complicated than designing somebody's whole Elfa closet. And we also feel very confident that we are hitting the right balance between pressures that we have to roll it out faster and making sure that we optimize success. And I'm very proud of the way the organization is hitting that curve just right.

Thank you for that. And just, I guess, in terms of how you were looking at it last year, if we were to rewind. You guys haven't changed your thinking about any of those strategies, correct? Like you guys are still going on the same path and trajectory that you originally planned on?

Yes.

Okay. And then housekeeping. I think I might have missed this. Did you guys discuss at all your ticket and the components of comp, just how much ticket and traffic were down?

As I, just generally -- of this is Jodi. I had alluded to this yesterday and the first question Chris had asked. The comp decline was primarily driven by traffic, and weather of course played a huge factor into that.

Okay. Thank you very much. I appreciate it.

Thanks, Cody.

Denise Chai, Bank of America Merrill Lynch.

Okay. Thank you. Can we get some color on how your comps performed across geographies? For example in markets that weren't particularly affected by weather, like in the West?

Did you wanted to take that, Kip? Sorry. Hi, Denise. This is Melissa.

Yes. There was a variation in the comp performance by geography due to weather. If we remove just the Boston area stores, our Q4 total comps would improve by 40 basis points.

And if we removed the 13 stores in the Northeast, including Boston and mid-Atlantic, our Q4 comps would have been 150 basis points higher. So it definitely had an impact on our Q4 results. And those of course were the areas that were impacted the most.

Well, you remove Northeast and you get positive comps rather than negative comps. Repeat that, I'm sorry. (inaudible)

Yes.

The Northeast, if you take it out?

If you take out all 13 of those stores, our Q4 comps would have been 150 points, basis points higher. So that would take it up positive.

Okay. Got it. Thank you.

And also we understand that you're working with a luxury developer in the Dallas/Fort Worth market on the closets business. So could we kind of get more color on that? And do see that as a meaningful business in the future? So perhaps if you to talk about some of your B2B sales initiatives and relationships?

I see, the B2B.

We are not really working with a luxury developer in Dallas Fort Worth market for closet business.

No, it's for Elfa.

We spent more than a couple of years developing a new line, what we call TCS Closets, to companion with Elfa. It's manufactured elsewhere.

We went out and found and partnered with the people that we thought did the best job with that type of product. And hence redesigned it.

So it's 20 years newer technology. It's newer designs than other people in the field. And that is starting out in the DFW market, but we are rolling that out, of course, nationwide.

Well, but Denise, in answer your question about B2B. We are continuing to develop that business, working with people like Marriott and some others. But it's very specific right now to Elfa.

Now down the road TCS Closets could come into play. Don't know yet, but we do have some nice partnerships with some of those developers and builders, particularly with -- specific to Elfa.

Okay, great. Thank you very much.

Lee Giordano, Sterne Agee.

Thanks. Good afternoon, everybody. Could you talk a little more about the marketing strategy?

As you are rolling out TCS Closets and Contained Home, how are you getting the word out, particularly to new customers that these are new efforts in your stores? Any color on that would be helpful. Thanks.

You bet. It's Melissa. Hi, Lee.

We have a really robust planned marketing plan for both TCS Closets and Contained Home that will, as I think I said in my opening remarks, it really will include everything from direct mail to social to in-store to public relations to events in store.

We're really excited about hosting what we call Closets & Cocktails. And I think some of you may have even attended some we've already had, to really target those customers that we know will love TCS Closets and will use the Contained Home service.

So yes. We are investing a lot this year in that, and really excited about it. Along with national and local branding on magazines and advertising that we feel it's just perfect for us. So we got a good solid plan in place.

But we also have the key that we have the advantage of having however many millions of transactions customers that we have in our stores each year that our competitors in the space do not have. The few of them that have storefronts have little to no traffic.

So that's where the origination of these stores needs to take place, with our wonderful salesperson recognizing that this one sounds like a TCS possibility, this one sounds like an Elfa one. We're very excited about the fact that these millions of customers that are already in our stores, that already have a propensity for storage and organization and closet and that type of thing. That's a huge leg up over our competitors in that field.

Alan Rifkin, Barclays.

Thank you. As you look at the shopping habits of your customer and the response not only to the Elfa sale, but 60% of those revenues coming in the last week and 20% in the last four days. Have you contemplated any sort of shift in marketing strategy of these sale events, perhaps shortening them in length and increasing them in number, or anything like that?

Yes. And I want to change the holidays, too. Get both of them out of the fourth quarter because we're a little bit like a basketball game. It's all about the fourth quarter.

We've discussed that for 30 years. But the problem, or the good news, is that the Elfa sale has taken on a life of its own. It's -- the customers know of it. They plan on it, and that's okay because Elfa is what we call a potato chip item.

Very few people buy Elfa only once. You can't eat just one. That's why it's a potato chip item.

So we believe it would take four or five years of negative comps against the Elfa sale if we moved to another time because it does have that life of its own. You can almost not market it at all and you still have a pretty good Elfa sale. Also, there's a very definite after the holiday season is over, kind of a natural, now that the tree is down and the relatives are gone, get the house back in order type thing.

So all types of big storage items for us and other people sell unusually well during that period of time. As the Container Store has grown into very much a national chain, we certainly have taken it on the chin a few years.

The year before was what we thought was the worst Elfa weather we have had in our history. And that we thought this year because of the timing of it was even worse than that. So I guess our odds going forward are bound to be somewhat good.

Matt Nemer, Wells Fargo Securities.

Good afternoon. I just had a follow-up question on the closets launch in Texas.

I'm wondering if you could just talk to the consistency of -- I realize it was only been five months, but the consistency across the various stores? When you plug it in, does it sort of look the same in almost every store, or are there differences in terms of each market, the demographics of each market, et cetera?

And you're talking specific to TCS Closets, right?

Exactly.

Again, it's just too soon to talk -- to really address any of the other markets outside of Dallas/Fort Worth. But in the Dallas/Fort Worth market, we have seven stores. And if I look back on the sample size of the closets we've sold, they're across all seven stores. More coming from some than others, as you can imagine, Matt, but yes, all seven stores.

Are you talking consistency in terms of market or sales so far? I think what Melissa is mostly alluded to is sales so far because Dallas has had it so much longer.

We have noted with interest that it takes a period of several weeks for the new -- any new store before the sales really start moving. That happened in Dallas and that's happening with our new stores, as well. And looking at other very large ticket retail products, that's the case with big furniture, big kitchen designs, that type of thing as well.

I'll now turn the call back over to our speakers for closing comments.

Well, thank you very much for joining us today. And we do look forward to talking to you again in July. Thank you again.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.