Container Store Group Inc (TCS) 2015 Q1 法說會逐字稿

Greetings and welcome to The Container Store first-quarter 2015 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Farah Soi, Investor Relations from ICR. Thank you. You may begin.

Thank you, operator. Good afternoon, everyone, and thanks for joining us today for the Container Store's first-quarter FY15 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 open 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 saw in our press release, our comparable store sales for the first quarter of FY15 were down 0.9% compared to the first quarter of FY14, exceeding our outlook for the first quarter of down 3% to 4%. If you exclude lost sales due to West Coast port delays, which were estimated at about 1 percentage point, comparable store sales would have been approximately flat for the quarter.

Consolidated net sales were $169.8 million, down 2.1%; however, they were up 0.9% when you exclude the impact of currency. We exceeded our stated outlook for the first quarter of a loss of $0.12 to $0.14 per share, and consensus estimates of a loss of $0.13, with a net loss of $0.11, compared to a net loss of $0.07 for the first quarter of FY14. Net loss of approximately $0.03 per share for the quarter is attributable to spending on key strategic initiatives, the big three key strategic initiatives, and lost sales due to the West Coast port delays.

As we've mentioned before, our first quarter historically represents about 20%, only about 20% of our annual sales, and typically those generate a net loss. Our first-quarter financial performance exceeded our expectations, as we delivered better than forecasted comparable store sales and improved gross margin. Jodi will cover all the financial highlights a bit later.

The continued implementation of our three major strategic initiatives, TCS Closets, Contained Home, and POP remain on track, just as planned, and we're encouraged by the start of the snowballing effect on the results of these three big initiatives. As we expected, we've seen that our stores with the strongest comp store sales are the ones that have had TCS Closets and Contained Home the longest.

In fact, if we isolate our seven Dallas area stores, TCS Closets alone added 3 percentage points to incremental comparable store sales to those stores in this recently, just-completed quarter. So while it's early, we are encouraged by these initial results, and expect this positive impact on our business to continue, and to be more apparent in the second half of 2015 and into 2016. We have a laser-like focus on our customer experience, which begins with ensuring that our employees are well trained, informed, happy, and productive.

We've sustained very high ranks on both Fortune and Forbes Magazine's best employers list for many, many years, as well as on many, many local market media top workplace lists. We remain passionate in our devotion to nurturing our employees and culture, so that our customers, in turn, feel loved and delighted with their TCS experience and organizational solutions. Herb Kelleher of Southwest Airlines always said, we take great care of our people, they take great care of our customers, and our customers take great care of our shareholders, and we whole heartedly agree.

With our second quarter in full swing, we want every customer, no matter where she's shopping, in our stores, online, via a mobile device to be delighted with both the solutions that we're providing her, and the service that she expects, wants, and deserves. Our customers look to us as the experts who can deliver on the promise of an organized life, and all the wonderful benefits that come with an organized life. Less stress, more productivity, and more time to live life to the fullest.

Whether it's a beautiful custom TCS closet, an in-home visit from of our Contained Home organizers, or an efficient, enjoyable mobile experience, we look for every opportunity to enhance and improve each facet of our customers' experience and thus our business, through employee training, product differentiation, and innovative technology. So we're optimistic about where we're headed, with FY15 serving as an investment year, with the implementation of our major strategic initiatives continuing to roll out and mature.

We remain confident in and are maintaining our previously-stated sales and EPS outlook for the fiscal year. Melissa will now give you updates on our major initiatives, and some notable operational highlights. Melissa?

You bet. Thanks, Kip, and hey, everyone. Appreciate you joining us this afternoon.

Yes, as Kip mentioned, we are very pleased with the rollout of our fabulous new custom closet collection, with the average ticket continuing to exceed $10,000 since launch, which greatly is exceeding our day-to-day average ticket of approximately $60, and as TCS Closets rolls out in each of our stores, we are experiencing more rapid acceptance and action by customers and our employees. This is very encouraging, and again really speaks to that snowballing effect, Kip, that you talked about.

We believe the shorter time frame between launch and when sales are achieved is a direct result of the continued refinements and enhancements we are making in our training support, in-store displays, the selling process, and the overall customer's experience. In addition, more than 90% of TCS Closets' customers have made a subsequent purchase since buying a TCS closet, which is also pretty darn encouraging.

You may remember too that from a merchandising, marketing and training standpoint, we are filling a void in our closet offering, with the addition of an exclusive higher-end custom built-in solution for our customers, and as we thought, and planned for, there is a synergistic relationship between TCS Closets and our best selling elfa shelving and drawer system, both of which are located in the custom closet section of our stores. We've experienced the positive sales trends in both elfa sales and elfa average tickets in our stores that have had TCS Closets the longest.

As expected, our customers are buying both TCS Closets and elfa, as we are now able to offer them robust, custom closet options for all areas of their home. It's about that closet domination that I think I talked about last time. We want everyone to think of The Container Store first when thinking of purchasing any type of closet solution.

We're also excited that we have launched or national marketing campaign to support TCS Closets, that includes beautiful ads in the following magazines: Elle Decor, Traditional Home, Veranda, Departures and Architectural Digest. Our marketing plan also includes direct mail support, and select closets and cocktails influencer events in some of our stores. These in-store events are designed to debut our new TCS Closets collection to highly-targeted customers.

In addition, the campaign includes online presence, social media and public relations. TCS Closets was available in the planned 36 stores at the end of our first quarter, and is on track as we communicated to roll out to all other existing stores and new stores by the end of FY15. You can reference our press release for the specific roll-out schedule.

At the end of our first quarter, Contained Home, our in-home organization service, was available in the planned 47 stores, and is also on track to roll out to all stores by the end of FY15, and that specific schedule is also in the press release. The Contained Home average ticket is approximately $2,500, again, much higher than our everyday average ticket of approximately $60.

We are rapidly contracting with more and more Contained Home organizers in each of our markets, and we're now up to 130 fabulous experienced organizers to date. And satisfaction with our Contained Home service and our organizers is high, with over 90% of our customers giving our service a 4 or 5 out of 5 stars on our follow-up survey. Contained Home will also be supported by a national marketing campaign that includes advertising in home design magazines and direct mail, online presence, social media, and public relations.

And on to POP, Perfectly Organized Perks. We have reached in excess of two million members, our POP Stars, we call them, since launching in July of 2014, and we are adding about 25,000 Stars each week. As we enter this next phase of POP we will further capitalize on our customer data to create even deeper and more one-on-one customized connections and offers and conversations with our POP Stars, and in order to support the surprise and delight component of POP, we're continuing to work with our wonderful vendors to create unique, special, and exciting opportunities to interact with our POP Stars.

POP, it really is more than an initiative. It's becoming kind of the new way in which we most effectively communicate with and engage with and inspire our customers. It will become the center of our customers' experience with our brand.

We will use the insights we have from each customer to guide them along their organization journey through personalized tips and product solutions most relevant to their individual lifestyle, and we're going to continue to entice them to shop with us and reward them along the way, with exclusive access, perks, events and insight into their favorite brand, in order to really deepen our engagement and loyalty.

Onto our new stores, we continue to open with much fanfare and excitement. During the first quarter, we opened in Tucson, Arizona. We are selectively opening in some great smaller markets like Tucson, and while sales volume may be lower, so are occupancy costs, and we are able to generate very attractive profitability and return on invested capital.

We are comfortable. We are comfortable with our growth rate, and believe we have a rare business opportunity here. Opening these new stores doesn't hurt our existing operations. We have the opening process perfected.

We're also achieving superb financial terms, impressive payback, and an extremely strong first-year adjusted EBITDA. We also recently opened in Overland Park, Kansas at Hawthorne Plaza, another successful opening. It was terrific with a party attended by more than 2,000 guests, lines around the building on grand opening morning, eager to shop, and we had fantastic media coverage.

Both Tucson and Kansas City had fantastic opening weekends, and are performing to our expectations. You can see the rest of our planned stores in our press release, as we will open 10 new stores this fiscal year, including one relocation.

And last time we talked with you all, we spoke about the fact that in addition to our key strategic initiatives, we're also working diligently on many other shorter-term opportunities designed specifically to drive comparable store sales. I'd like to review a few of those opportunities now, knowing too that we will continue to look under every rock for additional ways to drive comp store sales.

One of these is our intense focus on communicating more with our best customers, and doing so more frequently. These are our top 30% who have historically generated over 80% of our revenue. As we launched our summer sale a couple of weeks ago, our marketing strategy will reflect this focus, with multiple targeted direct mail touches, communicating our sale message and our hundreds of products on sale to help our customers live life organized.

We're also utilizing all marketing channels featuring imagery and messaging to communicate the benefit of truly living an organized life. You'll see this not only in our direct mail, but also in our national magazine ads in Real Simple, HGTV and House Beautiful. You will also see this approach communicated in our new lifestyle blog, Container Stories, which is a wonderful opportunity for our customers to becoming even more emotionally connected to our brand, as they will see our innovative solutions at work, in not only their lives, but our employees' lives as well. We expect the blog to stir our customers' imagination with relevant content and fresh ideas for organization.

In conjunction with our summer sale, we also launched our newly designed website with enhanced navigation. TCS Closets, Contained Home and POP now have more prominent presence on the home page with this redesign.

And we continue to strengthen our online services model, in order for our time-starved customers to more easily shop. We are pleased with the initial results of our introduction of free shipping on purchases in-store and online of $75 or more. And we're continuing to work on our launching click and deliver in more of our markets, as well as enhanced deliver from store options. We want to make it easy and convenient for our customer to shop with us anywhere, anytime, anyway she wants.

And our customers are really loving our new click and pick up enhancements that allow them to use their smartphones to tell us when they're in the parking lot of our store, so we can immediately bring their products, their solutions out to the car. I mean, talk about convenience.

And then speaking of a mobile shopping experience, I just have to share what retail icon Walter Loeb mentioned in a Forbes article a couple weeks ago, citing a survey that was done from last year's holiday period by FitForCommerce. They shopped 300 websites, mobile sites, and stores. And Walter shared that the best mobile site performance was by us, The Container Store.

Saying, and I quote, Walter said, I know how attentive the Container Store staff is, so this best-in-class performance is no surprise to me. We thought that was pretty cool, so thank you Walter. Just today we launched some exciting enhancements to our elfa custom design center that will improve our customers' experience and allow our elfa designers to move through the design and selling process more quickly and effectively.

Okay. Jodi, I think it's your turn now. Thank you so much for listening, and Jodi's going to do our financial highlights.

Thank you, Melissa, and good afternoon, everyone. Now I'd like to review our first-quarter results and then discuss our outlook.

Net sales in the first quarter were $169.8 million, a 2.1% decline from the first quarter of FY14. However, consolidated net sales were up 0.9%, after converting elfa's net sales results from Swedish krona into US dollars, using last year's conversion rate for both periods. As Kip said, our first-quarter comparable store sales were ahead of our expectations.

Sales for The Container Store retail business were up 2% to $152.7 million. Our Q1 comp was down 0.9%, which included the anticipated approximate 1 percentage point impact from disruptions related to the West Coast port situation. Excluding the port disruption to sales, our comp store sales were approximately flat for the quarter.

It is very important to note that starting in FY15, our comparable store sales definition includes installation and organization service revenues. Our TCS Closets offering is priced and sold inclusive of installation services, which is the driver for this change. Our Q1 and FY15 outlook provided in April contemplated this change, which simply represents a reallocation of revenues from the non-comp bucket to the comp bucket, both in FY14 and FY15 numbers, for purposes of calculating the FY15 comp store change, so we added services to both last year and this year for the calculation. We assumed the comparable store sales benefit for the full FY15 from this reallocation is about 40 basis points, which again, had already been factored into our guidance from April.

Turning to elfa, elfa third-party net sales were down 5.8% from the first quarter FY14 in Swedish krona, primarily driven by weakness in the Russian marketplace, where in FY14, elfa derived approximately 10% of their third-party sales, combined this with lower sales in Norway. Additionally, the strengthening of the US dollar against the Swedish krona led to a negative conversion impact of $5.2 million in the first quarter of FY15.

The Swedish krona depreciated approximately 31% against the US dollar during first quarter of FY15. Largely as a result of this conversion impact, elfa's third-party net sales in US dollars declined approximately 28%. We ended the quarter with 71 stores and approximately 1.8 million of gross square footage, as compared to 66 stores and approximately 1.65 million of gross square footage at the end of the first quarter of 2014.

Now on to profitability. On a consolidated basis, gross margin increased 40 basis points, due to the higher mix of TCS sales when compared to the prior-year period. Our TCS gross margin was 58.2%, in line with the first quarter of FY14. As the modest increase in gross margin, due to the strengthening of the US dollar against the krona, was offset by a shift in timing of elfa product offers, the introduction of everyday free shipping on orders over $75, combined with the shift in product and services mix.

elfa segment gross margin was 39.3%, down 160 basis points, primarily due to higher freight costs. As a percentage of sales, consolidated SG&A increased 290 basis points to 55.3% in the first quarter of FY15, which was largely in line with our expectations. The 290 basis point change was primarily due to the impact of a larger percentage of total net sales coming from The Container Store retail business, combined with increased healthcare costs, the expected increased cost related to strategic initiatives, and deleveraging of occupancy costs.

Our net interest expense in the first quarter of FY15 was $4.2 million, compared to $4.3 million in the first quarter of FY14. Our effective tax rate for the quarter was 36.7%, compared to 35% in the first quarter of last year.

Net loss for the quarter was $5.2 million or $0.11 per diluted share, compared to net loss of $3.6 million or $0.07 per diluted share in the first quarter of last year. This is inclusive of the approximate $0.01 EPS drag from the port-related disruptions that led to lost sales and higher freight costs in first quarter, as well as the approximate $0.02 Q1 drag from spend on our initiatives, both of which were contemplated in our Q1 EPS guidance that we shared with you back in April.

Turning to our balance sheet, we ended the first quarter with $10 million in cash, $346 million in outstanding borrowings, and combined availability on revolving credit facilities and cash on hand of $83 million. We ended the quarter with inventory up 9.5%, compared to the end of first quarter of 2014, due to new stores, catch-up of receipts of inventory associated with the port delays, and timing of receipts associated with merchandise campaigns.

Since TCS Closets is custom manufactured at our supplier's facility for each customer, and delivered direct to the customer, it has virtually no impact on our inventory ownerships. We hold no inventory in our stores, or our distribution center.

Now, turning to our outlook. We remain confident in the full-year outlook we provided in April. We continue to expect consolidated net sales to be $800 million to $815 million, and comparable store sales in the range of negative 2% to 0%. Diluted net income per share is still expected to be in the $0.30 to $0.38 range, based on the weighted average of 49 million diluted shares outstanding.

This outlook still includes an anticipated $0.06 per diluted common share headwind related to the implementation of our initiatives, $0.02 of which was realized in Q1. It also includes the $0.01 drag related to the Q1 port delays, and higher associated freight costs. We continue to 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.

Our average SEK rate assumptions for this year remains very close to what we originally articulated. We expect a conversion rate of approximately 8.6 for our P&L in FY15, as compared to the actual average rate of SEK7.15 in FY14. For the second quarter specifically, we expect an average SEK rate of 8.6.

Since elfa's SEK sales will convert to fewer US dollars, we expect FX to be a drag of approximately $15 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.

As a reminder, we have currently hedged for approximately 55% of our SEK purchases of elfa products at TCS, and are estimating an average rate of approximately SEK8.2 in our cost of sales at TCS. We continue to expect this to be most impactful in the fourth quarter, when we sell a considerable amount of elfa during our annual elfa sale.

We still plan to invest approximately $4.5 million in SG&A in our initiatives in FY15, or $0.06 per diluted common share. After spending $0.02 of this in first quarter, and an estimated $0.02 in second quarter, we are assuming $0.01 per share will be spent in Q3. We continue to expect to complete the roll-out of our initiatives in fourth quarter. Given this investment in our growth initiatives, and our expectation that the sales impact of these initiatives will become even more impactful in the second half of the year, we currently expect SG&A as a percentage of net sales to deleverage similar to the magnitude of first quarter.

So in summary, we're pleased to exceed what we said we would accomplish financially in first quarter. As Kip and Melissa discussed today in their remarks, we are on schedule with the rollout of our strategic initiatives, and are very encouraged with the early progress being made. We are maintaining the FY15 outlook first provided on our fourth-quarter call, and look forward to realizing the benefit of our initiatives, as we move into the second half of FY15 and into 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)

Our first question comes from the line of Chris Horvers with JPMorgan. Please proceed.

Thanks. Good afternoon. Wanted to talk a little bit more about the POP, you gave a lot of wonderful details around Contained Home and TCS Closets, and the snowball effect. Can you talk about what you're seeing in the POP program?

You mentioned sign-up rates. How about the return rate in terms of follow-up shopping? And how far, similar on a similar trend, how far are you along in customizing the marketing to the POP Star and how will that -- what will that look like, by the time we get to the fourth quarter?

Chris, this is Jodi. I'll take the first part, and I think Melissa will take your second part of the question. You'll recall that all stores primarily came online with POP in just over a year ago, or just about a year ago, actually, it was in July, about a week ago. So we will not yet have the information for people that have fully been in the program for more than a year except for states other than -- except for the states that rolled out prior to that.

However, we were able to confirm, once again, the same information we previously had provided, which if you continue to look at those individuals who have been in our database prior to enrolling in POP, and they've now been on the POP program for one year, so we look at their one-year POP behavior and we compare to their one-year pre-POP behavior, we're continuing to see at least one incremental visit and incremental spend as well, so we're confirming the same statistics we've previously said. We look forward to having a whole lot more stores and customers reach that mark when we move into the next quarter.

And higher average tickets. This is Melissa. And higher average ticket, as well. So once -- since we're anniversarying this month, we'll be able to have a much better analysis, and be able to communicate more.

But in terms, Chris, of customizing and communicating to our POP Stars, we are utilizing our Adobe campaign tools, and we're real excited about the data that we're collecting. We're doing a lot of test and learn, and we've recently, with our summer sale, we've launched a lot of customized e-mails to our POP Stars, so the program is really excelling. We're happy about -- the excess of 25,000 POP Stars a week.

Now, obviously, that will go down as the program continues to mature, but we're also going to get a lot of new POP Stars from new stores. So yes, we're very encouraged about the program, and really do feel like it is going to be the center of our brand, so to speak, in terms of the way we engage our best and loyal customers.

And then as a follow-up question, I think last quarter, you talked about a deferred financing program that you were going to roll out. Can you talk about where you are in that process, and whether it will be out in time for the elfa sale in 4Q?

Yes, Chris, we're not ready yet to get into specifics on the timing of that, or the specifics of the exact program we're going to offer, but we do remain very excited about the potential of this, given our large ticket on TCS Closets and Contained Home, and are looking very forward to be able to be more specific on that when we have that finalized.

Thank you. Our next question comes from the line of John Heinbockel with Guggenheim Securities. Please proceed.

So, I wanted to drill down a little bit on the TCS impact. The 300 basis point lift in the Dallas stores, is the bulk of that direct TCS Closets, as opposed to halo for elfa, and people coming back? And then I know 90% have come back. Do you have a sense of what percent of TCS buyers were not loyal or frequent Container Store customers before?

John, it's Jodi. I'll take the first part of that question. The 3 point comp lift was solely associated with TCS Closets, so in those seven stores collectively. So that was specific only to TCS Closets.

What was the second question again, John? It's Melissa.

The 90% and do we know how many were TCS customers prior to purchasing TCS Closets?

How many were not?

How many were not. How many are new.

Yes.

I don't have that number in front of me.

We do have that data and --

We do?

But not in front of us. We'll have to get back to you on that.

John, can we get back to you on that number?

Sure. As a follow-up, if you think about -- I guess the math on that would work out to be a little less than -- a bit less than one TCS Closet sold, right, per store, per week. When you think about that 300 basis point maturation, are you seeing that, 300 for the quarter, or I guess with 300 now, is that going 300, 350, 400, how is that progressing by, I guess, by month maybe, or how do you think it progresses by quarter, as it matures?

Well, you know, it's the snowball image to keep in mind. We're not as good at this yet as we will be next month, and next quarter, and next year, and it's a bit like learning to play golf. Who knows what you're going to score the first month, the first week, the first year?

And in fact with similar big, hairy merchandising initiatives in the past, they tend to give us lifts for about three years, and then level off. So we're happy with that snowball so far, but we do believe it continues to build. Jodi?

And John, just as a reminder for everyone, we started March 1 this fiscal year with just the seven Dallas Fort Worth stores. That is truly, for the entire quarter, the only group of stores that were there for the entire quarter. And of course, those stores rolled out right around Thanksgiving in November.

So as of today, we're very proud of the fact that we have already 46 stores as of this day when I'm speaking to you and plan to have 49 at the end of the second quarter. So we've been rolling it out quite rapidly into the marketplace, as you've seen in the rollout schedule. But some of those have still been for a relatively short period of time. So we think it's a bit premature to speak to cadence of number of closets sold, with frequency, yet since this is continuing, as Kip, said to build in many markets.

Snowball, golf game.

Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed.

First, a follow-up to John's questions. The 90% who are returning, can you say if -- I guess they are buying from a different department, just because you can't buy an individual item from the TCS Closet. And then I'm sure you take the tradeoff of $10,000 versus $60 any day, but can you talk about traffic in the Dallas market? Is that materially better as well than other markets?

Yes, I'm happy to take the question about traffic. We're not going to get specific, as much as you might like us to, with regards to that. Our focus is clearly, as a team, all about driving comps, and we absolutely don't not focus on traffic, it's always going to be important to us. But what's most important with our initiatives is just driving our overall comp store sales, so that's our focus.

Clearly, to your point, there's a relative -- a large relativity comparison there between the $10,000 average ticket, in excess of $10,000 and the $60. So it clearly is having an impact on the overall sales, as we've outlined.

Okay. And then my follow-up -- sorry.

No, no. Go ahead.

So my follow-up, not to be too fine in details but I believe in Kip's script and then Jodi, in yours, you mentioned that these initiatives should help, especially in the back half of this year, and into 2016. And again, not to be too cute here, but is there any seasonality in the business such that -- why shouldn't we see this momentum continue to build, even in the next quarter, or am I reading too much into how it was worded?

Simeon, it's Melissa. I think we absolutely will, and that is, again, the snowballing. I don't think it's seasonal. I think that we're going to continue to market this collection, and right along with Contained Home, and it's going to continue to build.

I think, Simeon, the key point here is that it's collectively still in a small group of stores long enough to see the snowball start to change materially the overall answer yet. So in terms of how we're thinking about that, we definitely see the snowballs getting bigger, as you move through the second half.

We're evolving each aspect of it as we live with this thing, it really is like learning to play the game of golf. You're not very good the first week or month, and you learn adjustments to make. We're adjusting the displays, we've adjusted -- we're adjusting everything that we do with these three big initiatives, weekly, really probably almost daily, particularly the training, and we're --

Training.

We're getting better and better at it. We're still not very good at it, is the good news. We're going to be a whole lot better at it in the future.

The design process, the props, the displays, the signage, we continue to refine and enhance, and just learn every day, and make it better and better.

I say we're not very good at it, we're not very good at it compared to what we'll be next month, next year, even two years from now, but this is our wheel house. This is custom closet design. That's what we do with elfa. That's what we're all about. This is exactly what we should be focusing on.

And yes, $10,000 is more than $70, or $60. So we're thrilled with the average ticket contribution, and encouraged by the fact that there's still a long runway for us to perfect this thing. It's truly a custom closet, that is manufactured per customer. And it's a lot to bite off to chew. We're just delighted with the early results.

That said, I think one thing that we're very proud of is that for our size company, we've taken on this initiative to roll out this TCS Closet offering, and redo the entire custom closet selection section of every store, including all new displays, all new props, training for all our employees, all our installers, et cetera. And we've not missed a single launch date, and it has really gone very, very smoothly, which we're proud of, and optimistic that we'll continue.

Thank you. Our next question comes from the line of Denise Chai with Bank of America. Please proceed.

Thank you. Another question on closets in Dallas. Just simple math, if that's 10% of your stores, seeing a 300 basis point comp lift, should we've think of the lift to the overall comp being around 30 basis points?

We're not getting into the specifics, but I know I noted, Denise, that it's not a significant impact yet to comps. So yes, we'll be more specific when we have more stores, and it's moving the dial more materially.

Okay. And just in terms of currency, what was the gross margin benefit in the fourth quarter, and also what is embedded in your guidance, given the exchange rates that you're assuming?

Sure. It might be helpful for me to outline a couple things. One is, what the last year rates were on the P&L for SEK rates, because that certainly comes into bearing as you're thinking about the numbers for converting the elfa P&L, so I'll start with that, even though it's not specific to gross margin.

First quarter of this year was the most significant. It was a 6.5 rate last year, versus an 8.5 actual this year. That's the 31% difference I spoke to.

Then in second quarter, last year's actual average rate on the P&L was 6.8. Third quarter it was 7.3, and in fourth quarter it was 8.0. For the full year being the number I spoke to, which is the 7.15.

So as you can see with that, there is a bigger difference in FX on the P&L expected in the first quarter than there is, as you proceed through to the fourth quarter, to get to that total of $15 million of impact for conversion of their sales, of which we realized $5.2 million in first quarter. So almost a third of it came from the first quarter.

On the margin side, I noted, I know in my remarks that it was a modest number. It was approximately 50 basis points, neutralized by the other items I spoke of in detail, so that our gross margin at TCS segment was flat at 59.2% year-over-year.

Thank you. Our next question comes from the line of Dan Binder with Jefferies. Please proceed.

Thank you. I was wondering if you could talk a little bit about the timing differences in the elfa business, specifically that you mentioned in the formal remarks. And then my second question was around the Closet and Contained Home profitability, versus the corporate average, how that looks, better, worse, similar?

Sure. I can take that. Your question on the timing, are you specifically talking about the comments related to gross margin? Is that what you're referring to, Dan? I want to make sure I'm clear on your question.

Yes.

Okay. Yes, what that is pertaining to is, we do what is called an elfa preferred promotion, and we do that in May and June of each year. And this year, the timing of that was such that customers were allowed the opportunity to use their offers when it was initially mailed, both in May and June, whereas last year, we had split the database and a portion had May, and a portion had June. We took a bit of a different strategy, so that's what we were referring to with regards to that specific.

And then your second question I think was related to the Contained Home and TCS Closets profitability. Is that what you were talking about there?

Right.

The distinction to give you there is the service component versus the product component. The product component is the same products as what we're selling elsewhere in the store, so they're going to have the same retail gross margin that we sell anywhere in any one of our 72 stores. The service component is lower. Our installation business, which is predominantly the majority of the service component, runs approximately half of our product gross margin.

And there's no inventory. The annual turn is something close to infinity, so if retail profit is volume plus margin plus annual turn, it's a bit of an Uber-type business model in that there's no inventory really at all, and the margins on TCS Closets are very, very good and somewhat comparable to what we do with elfa, and our other closet organization goods.

(Operator Instructions)

Our next question comes from the line of Aram Rubinson with Wolfe Research. Please proceed.

This is Cody Ross on for Aram Rubinson. Quick question regarding your free shipping, that's now over -- under I should say $75. How has that behavior changed with online customers? Have you seen an uptick in traffic and sales, or has it remained steady since?

Cody, this is Jodi, and great question. We always kind of joke around here that customers wildly overvalue free shipping these days, and consistent with what Melissa said, we want to make sure we can give our customers what they want, whenever and however they want, at their convenience.

So and, we spoke to this a bit last quarter. When we designed our free shipping, everyday free shipping status, we intentionally set it at $75, in order to drive incremental spend. We had that in mind, thinking that if we set it at that level based on tests we had done, that we could cover the costs of free shipping and gain incremental sales, and of course it's been a short period of time.

We rolled it out in mid-April, just so we're clear from a relativity perspective, it was only about six weeks in the quarter, but we have seen -- we're very pleased with the initial response to it. Our customers clearly like to have this option, and we're confident that ultimately it's going to be something that will drive some net incremental sales, and net incremental profit.

You're cautious when you're selling empty boxes to be as cavalier with free freight as many retailers, so we weren't the first on the block to do this, but it's been met with a great reaction by the customers. The margin differential between accommodating that free freight is greatly outweighed by the incremental -- truly incremental volume increase, and I don't guess we have precise numbers on that yet, but we're very, very comfortable that this has been a great thing for us to do.

Great. Thank you. If I can just follow up with one more. If I our calculations are correct, we saw an NSP that dropped pretty significantly in this quarter. Have you seen a reason for that, or can you just explain what might be going on with the new stores?

Cody, it's Jodi again. Remember what I said, if you will, about the service revenues, and that has moved from the non-comp side of the coin to the comp side of the coin, because of TCS Closets, and that being one combined price. I think you need to take that into consideration, because on the surface that may make your calculation appear a bit worse.

We really have had no change in our views on our new stores since we issued our outlook in 2015. As Melissa noted, they've opened well. What does come into play, of course, is just the market in which we're putting a store, and we've got some great smaller markets like a Providence or a Tucson where we've opened, sales volumes targeted to be a bit lower, but with the profitability still expected to be very attractive, and returns to be very well -- very strong, as well.

Thank you. Our next question comes from the line of Matt Nemer with Wells Fargo Securities. Please proceed.

I didn't hear anything on the call about second-quarter comp guidance, so I'm just wondering if there's a reason that was omitted. And then also, can you talk about the quarterly impact of the reallocation of installation into comps? Is it about 40 BPs per quarter? Is there any variability around that?

Matt, it's Jodi. I'll take the second one first. The quarterly impact of services, we don't expect to be significantly different quarter to quarter, so the approximate 40 basis point estimate is our best one to provide.

As far as the outlook, you'll recall that it hadn't been our practice to provide quarterly guidance on any regular basis. When we were doing our April outlook, and releasing Q4, in thinking about the significant reset that we had to perform, with regards to our strategic rebuilding initiatives, and the rollout of those, and all it was going to take from an investment perspective, we really felt as though we had to, to not only give specific guidance for the year, but also significantly reset the first quarter, because the first quarter for us, as you know, is our lowest in terms of sales and profitability contribution.

So our approach is just to stick to our annual guidance. We reiterated that, as you heard today. We did speak to the fact that we expect the impact of our initiatives to be more apparent in the second half of the year, and into FY16, and we certainly have reflected that in our reiteration of our annual outlook for the year.

Okay. I've got it. Thanks. That's helpful. Just one more follow-up on the model, Jodi.

There was some mention of a number of marketing campaigns for Closets, Contained Home, as well as increased communication with best customers. In terms of marketing spend dollars for the year, can you give us any guidance for that number? Is it still kind of the mid-$30 million number? Does it start to tick higher?

I'll answer you this way. If you look at the $4.5 million of spend that we have for the initiatives, that's the $0.06 that we've outlined for the year, approximately half of that is marketing-related. The majority of the balance is more training, recruiting.

Training.

Ultimately when we get to the end of the year, for us its a year where we now have the POP database growing and that allows us to communicate with our best customers in a cost effective way. And allows us to reassess how we allocate our marketing pool. So we're trying to continue to be smart and efficient and analyze it carefully, but don't anticipate any sort of massive incremental spend on marketing at all.

And still have that magical mix of marketing and a lot of support, again, behind TCS Closets and the Contained Home, as I outlined in the remarks.

Thank you. Our next question comes from the line of Lee Giordano with Sterne Agee. Please proceed.

On Contained Home, it looks like the average ticket is actually going up, now it's around $2,500, used to be closer to $2,000. Just maybe any color on what's driving the increase there? And then secondly, 130 contractors or organizers to date, how many do you think you'll get to eventually? And can you just remind us how those organizers are allocated, are they on the P&L as employees, or are they individual contractors? Thanks.

Jodi, you'll take the first?

Yes, I will. I'll take the first part. Hello. As it relates to your first question, which is the Contained Home average ticket, we had previously -- now keep in mind that this program has now been in place for a couple of years, so this is a much more mature program, Contained Home.

And we've got over 50 stores to date.

50 of our stores, as of today, right? Exactly 50 stores as of today. It's much more mature, been around much longer.

So we, program to date, have consistently been trending at approximately $2,500 average ticket, when you include the service that the customer has elected to do, which is primarily installation. This over $2,000 number we were putting out previously was not inclusive of the service component. So we wanted to be more precise in giving you what the exact number is, that would impact our comp store sales calculation, since both of those numbers are part of comps.

And then in terms of the number of Contained Home organizers, as I reported to date, we have about 130. There's not a specific number. We're going to continue to hire as many as we need, as the demand just continues to increase, and snowball. So my guess is, I don't know, by the end of the year it could be 200-plus for sure.

I think the most important question is, to be clear, that these people are not employees. They're professional organizers. These professional organizers exist in every market in the country, and they're independent contractors being professional organizers, and they're already experts in this field, and many of them don't quite have the sales volume that they would like to have, but when they partner with the Container Store, of course, that's wonderful for them.

It's wonderful for us. They're already experts, and we train and develop them with this product, which we feel and they feel is the best in the marketplace for that type of closet. And one of the great -- two of the great things about TCS Closet is there's virtually no inventory, and the employees are not all employees. The sales force is not all employees.

So that adds to the profitability of it, and we've been delighted in the quality of these people. They're great customers because they're buying our goods for their business anyway and this really makes it to where they're employees without being on the payroll, and just paid a commission upon performance.

And the Contained Home organizers sell the complete store, inclusive, of course, of TCS Closets.

Great. Thank you very much.

Thank you. At this time, I'd like to turn the floor back over to management for any closing remarks.

Well, thank you very much, everyone. We have really enjoyed speaking with you today, and we look forward to speaking with you next time, to give you some more updates on the initiatives and overall business. Thank you all very much.

Thank you. Bye-bye.

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