Container Store Group Inc (TCS) 2015 Q4 法說會逐字稿

Good afternoon, everyone, and thanks for joining us today for a pre-recording of management remarks pertaining to The Container Store's fourth quarter and fiscal 2015 earnings results. Speaking today are Kip Tindell, Chairman and Chief Executive Officer; Melissa Reiff, President and Chief Operating Officer; and Jodi Taylor, Chief Financial Officer. In addition to posting a press release with our fourth quarter and fiscal year 2015 results to our website, we have posted a written transcript of management's prepared remarks on our website as well. A live Q&A session will follow today at 5PM Eastern time and a replay of the Q&A session can be accessed at containerstore.com later this evening.

Before we begin, I need to remind you that certain comments made during this recording 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 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 [undergo] 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 the 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.

With that, I will now turn the call over to Kip. Kip?

Hello. Thanks to all of you for joining us for our pre-recorded remarks on The Container Store's fourth quarter and 2015 fiscal year prior to our live Q&A. Fiscal 2015, an investment year for The Container Store, was met with both success and challenge. I'm proud of what we accomplished this year, with a key callout being on our on-time rollout of the single biggest and most innovative initiative in our Company's history, TCS Closets. We also conducted an exhaustive analysis of our cost structure, which is expected to drive substantial SG&A savings in fiscal 2016. With the heavy lifting we did in fiscal 2015, we believe we have strategically positioned our company to succeed long term amidst an evolving retail landscape.

Now, specific to the fourth quarter, we exceeded our stated expectations on total consolidated fourth-quarter sales and delivered earnings in line with our previously provided outlook. From a comp store sales standpoint, we performed much better than we projected for the fourth quarter, ending up 0.2% comp store sales versus stated guidance of down 3% to down 5%, marking the third consecutive quarter of positive comp store sales.

Importantly, we saw improved and positive comp store sales across non-TCS Closets and non-elfa areas of the store during the last two months of the fiscal year for the first time since the fourth quarter of 2014. Our TCS Closets initiative was again a key driver of fourth-quarter performance, providing a 140 basis point lift to overall comp store sales. Specifically, consolidated net sales for the fourth quarter of fiscal 2015 were $232.1 million, up 3.5% compared to the fourth quarter of fiscal 2014, after converting the elfa International AB portion of consolidated net sales from Swedish kronor to US dollars.

Net sales in The Container Store retail business for fourth quarter of fiscal 2015 were $214.2 million, up 4.7% as compared to the fourth quarter of fiscal 2014. Elfa International AB third-party net sales for the fourth quarter of fiscal 2015 were SEK151.9 million, down 4.4% compared to the fourth quarter of fiscal 2014. Converting elfa International AB third-party net sales to US dollars reduced the consolidated net sales results by 0.4% from 3.9% to 3.5% or $0.9 million for the fourth quarter of fiscal 2015 compared to the fourth quarter of fiscal 2014 using the prior-year conversion rate for both periods.

Earnings per share were $0.20 for the fourth quarter of fiscal 2015, which was in line with previously stated expectations and included approximately $0.02 per share in spend for key strategic initiatives. This compares to adjusted EPS of $0.24 in the fourth quarter of fiscal 2014.

For fiscal 2015, we executed and delivered on our stated initiatives and achieved just slightly positive comp store sales growth, but it rounds to flat. We also exceeded our most recent annual comp store sales outlook of minus 1% to minus 1.6%. We view this as an improvement in trend after having started the year with an outlook of minus 2% to flat for comp store sales, then raising its floor upon release of our second-quarter earnings to minus 1% to flat, and in fact completing the year at just slightly positive to 0% in comp store sales.

As we have consistently said, fiscal 2015 was an investment year for our company as we strategically and importantly put extremely focused and significant financial, human and operational resources into key initiatives designed to transform our business, in order to address the changing retail landscape and set the stage for long-term growth. We took our quarterly comp store sales trend from slightly negative to slightly positive, and as I mentioned earlier, we successfully rolled out our TCS Closets and Contained Home on time, to each and every store.

I want to thank our entire organization for an extraordinary effort in achieving this major, major milestone. It was a significant undertaking for a company our size.

We also introduced free shipping on orders over $75 and are realizing incremental sales and profitability. We increased our POP Stars by approximately 1.6 million to over 3.3 million at the end of fiscal 2015. And specific to the fourth quarter for POP, we executed many test and learn marketing communications with our POP Stars, which we believe resulted in incremental sales and engagement. We also saw positive incremental success of our multi-channel strategy that reached our customers in a variety of ways, including email, personalization of messages served up when these customers visited our website, re-targeting messaging that identified a targeted customer and served up messaging about our offer to them as they visited other online sites and use all of our other social channels. So we are touching our customers several times, through various channels, as opposed to a single-channel marketing touch.

We implemented a number of enhancements to the Company's digital platform, including more strategic targeting and organic search programs in our continued effort to "win before the store," upgrades to the native search platform and we also launched a lifestyle blog, ContainerStories. As you know, content is king and this blog helps to improve our organic search results. In fact, our top referring digital source over the last quarter was organic search, which saw an estimated 19% improvement over the prior quarter and made up about 40% of our traffic hitting our site.

We also expanded our presence by opening 10 wonderful new stores, including one relocation, and extended our reach into seven brand new markets while adding stores to two existing markets. We remain very pleased with our overall new store performance.

We executed our distribution center automation project that successfully went live this month, two weeks ahead of schedule and on budget. I'd like to really thank our distribution center team for executing on this important initiative, which is intended to drive supply chain and payroll efficiencies for the rest of our future.

And we jumped to number 14 from number 27 on Fortune magazine's list of the "100 Best Companies to Work For in America," marking the Company's seventeenth consecutive year on that list. I'm so incredibly proud that as our business has evolved, we've been able to ensure our employees continue to feel motivated and inspired to serve each other, our customers and the Company.

As we head into fiscal 2016, we see great opportunity to leverage the investments we made in fiscal 2015, to really give them wings, while also taking an even closer look at our expense structure. Expense management, of course, has always been a priority. But as we announced on our third-quarter call just recently, we have embarked on an SG&A savings program, a robust program. We are focused on cutting costs in a comprehensive manner but in a way that does not compromise the success of our custom closet focus or harm our company culture. We are doing this through a combination of actions, including a company-wide salary and wage freeze and also a 401k match freeze, a reduction in payroll expense and continuous and extensive efforts to drive costs out of each and every area of the business. As I mentioned, we're focused on maximizing the potential of our key initiatives while leveraging our many strengths in order to innovate, differentiate and continue to position The Container Store for decades to come as the loved, relevant and much-needed retailer it has always been.

I'm going to turn it over to Melissa to provide more specifics about fiscal 2016 and the initiatives we're prioritizing for this year. Melissa?

Thanks, Kip and hi, everyone. As Kip shared, we did do some heavy lifting in fiscal 2015 in addition to carefully evaluating our expense structure as we head into fiscal 2016. In combination with a prudent plan for comp store sales and moderating new store growth, these expense initiatives are expected to contribute to our projected earnings per share for fiscal 2016 at nearly double or triple the level that we achieved in fiscal 2015. And yes, we do have an intense focus on closet domination. We absolutely intend to maximize TCS Closets, elfa and closet completion product sales through continued improvements to our custom closet selling process and employee selling skills training, as well as an enhanced online and in-store experience, new product development and a robust marketing plan. The benefit of the investment and launch of TCS Closets is expected to be realized in fiscal 2016 and beyond, as we leverage all of these continuous improvement efforts.

Closet-related solutions are the dominant category for The Container Store, making it our primary area of expertise and the most natural and strategic area for enhanced focus and continued differentiation. We know closets and intend to lead the custom closet market. We will continue to leverage our online and in-store demand and traffic in addition to our network of Contained Home Organizers to sell these solutions, while also more strategically and overtly positioning The Container Store as the ultimate resource for custom closet organization systems.

In addition, we'll maintain our focus on having our customers choose to have their elfa solution installed versus purchasing their solution and installing it themselves. In fiscal 2015, approximately 66% of our elfa spaces sold were installed, versus approximately 53% in fiscal 2014. In our experience, the faster the customer gets their new elfa space installed, the more likely they'll be back sooner to purchase another space. Our installers know what they are doing and install elfa with expertise.

Our customer financing program is expected to launch this summer and is intended to drive incremental spend and increased conversion of our higher average ticket in elfa and TCS Closets solutions. We will provide more details on this program with our first-quarter release in fiscal 2016 but we're excited to have Synchrony as our customer financing partner.

And specific to TCS Closets, our $10,000 TCS Closets average ticket has sustained itself. We did complete the rollout of TCS Closets to all stores on December 19, 2015 and the fourth quarter represented the first time for all of our stores to sell the line during the holiday season and during our annual elfa sale, albeit not all stores had the line the entire quarter. The benefit to the quarter's comp store sales from TCS Closets was 140 basis points, just below the 180 basis points that we realized in the third quarter. We did experience some anticipated seasonality during that time and believe our customers were focused on perhaps something other than installing closets in December, which is understandable. After the holidays, the volume of elfa sold during our ever-important elfa sale muted the impact of TCS Closets as a percentage of overall sales. In fact, if you take the stores that had TCS Closets in the third quarter, these stores had a 5.1% increase in their TCS Closets sales from the third to the fourth quarter. So we did see an increase in total TCS Closets sales, but since the non-TCS Closets sales are so much greater in fourth quarter during our Annual elfa sale and the holidays, again, this muted the benefit to comp store sales that I mentioned earlier.

As we continue to gain momentum, with all our stores now selling TCS Closets, we anticipate that experienced selling will be more effective against those two events -- the holiday time period and our annual elfa sale. We are pleased to see that after the fourth quarter closed, during fiscal March and April to date, early results have indicated a return to the TCS Closets sales contributions of third quarter and continue to build. We have a robust pipeline of engaged TCS Closets customers and we continue to remain very excited about the initiative's potential.

As it relates to our new stores, we are committed to their importance and continue to see an abundance of untapped market opportunities, which allows us to achieve scale on our enterprise-wide investments. We are pulling back just a little this year, as we digest our key initiatives that we launched last year and implement the cost savings program Kip spoke of.

And while on the topic of new stores, we're going to use fiscal 2016 to plan for a pilot of a reduced square footage format to open in fiscal 2017. While we're still pleased with our new store performance, we believe this format will further optimize and maximize future, smaller market productivity. We will evaluate our store growth plan each year, adjusting it as appropriate, in response to the overall retail environment, real estate opportunities and our operational priorities.

For fiscal 2016, we plan to open a total of 8 new stores, inclusive of one relocation. 4 of these stores will open in the first half of the fiscal year, with the first store of the fiscal year opening in June. 3 new stores plus the relocated store will open in the second half of the fiscal year. These markets include Novi, Michigan; Palm Beach Gardens, Florida; Pittsburgh, Pennsylvania; Des Moines, Iowa; Troy, Michigan; Omaha, Nebraska; Baybrook, Texas; and a relocation of our Chestnut Hill, Massachusetts store.

Another project for fiscal 2016 that we're undertaking is an integrated campaign designed to communicate to our customers the "TCS Difference," surrounding the value and differentiation of our products, our services and what we stand for as a company -- all compelling reasons, we believe, to shop with us. We can and should do an even better job of communicating these messages to our customers through a variety of platforms, initially beginning online.

Now I will hand it over to Jodi to go through our financial results and outlook in more detail.

Thank you, Melissa, and good afternoon, everyone. Today I'll be reviewing our fourth quarter and full fiscal 2015 results and then discuss our guidance for fiscal 2016. Before I do, however, I'd like to touch upon our previously announced change in our fiscal year end. Our fiscal year end has changed from the Saturday closest to February 28 to the Saturday closest to March 31 of each year. This change is effective beginning with our current 2016 fiscal year, which began on April 3 and will end on April 1, 2017. We have included recast historical unaudited financial information for the first three quarterly periods of 2015 in today's press release and these are also posted on our website under the Investor Relations link. We expect to report results for the March 2016 fiscal month transition period, as well as the recast historical unaudited financial information for the fourth quarter of 2015, when we release our results for the first quarter that ends July 2, 2016.

Turning to our fourth-quarter results, the consolidated net sales were $232.1 million, up 3.5% compared to the fourth quarter of fiscal 2014 but up 3.9% when using the prior-year conversion rate for both periods. Sales for The Container Store retail business were up 4.7% to $214.2 million, primarily due to new store sales. Overall, our fourth-quarter comp was up 0.2%, which reflects a slow start to the fourth quarter, slightly improving sales trends post-holiday and notable strength in the last few weeks of the annual elfa sale. Also, as Kip mentioned, we saw a 140 basis point lift to our fourth-quarter comps from TCS Closets.

I want to spend a moment discussing the revenue impact of the strong end to our annual elfa sale. This year, the sale ended on February 27, which is the last day of our fiscal year. Last year, the sale ended two days after the fiscal year ended. Typically we see very strong sales at the end of the annual elfa sale, and this year was no exception and was even more pronounced than last year.

While we recognize comp store sales, an operating measure, when sales are placed and rung at the register, in accordance with accounting rules we cannot recognize revenue in our financial statements until the product is received by the customer, including not until product is installed in the home. So until then, the associated sales remain in deferred revenue on our balance sheet. This deferred revenue balance was $16 million in the fourth quarter of fiscal 2015, a $4.6 million increase over the prior-year period, with the increase largely reflecting the end-of-quarter sales that were delivered and installed in March. However, we still incur all expenses associated with completing the sale in the store at the time the transaction is rung up. The good news is, with our fiscal year change, all of these timing shifts and dynamics should now happen intra-quarter in our new fiscal fourth quarter, limiting shifts between the quarters.

Now, moving on. We ended the quarter with 79 stores and approximately 2 million of gross square footage, as compared to 70 stores and approximately 1.8 million of gross square footage at the end of the fourth quarter of fiscal 2014. We continue to be pleased with our new store performance. As a reminder, the composition of our fiscal 2015 class of stores was more heavily weighted to smaller markets, resulting in a projected average sales in year one for the fiscal 2015 class of stores of approximately $6 million, which was as expected. This compares to approximately $8 million, which is the simple average sales volume for our store fleet for stores open a full year in fiscal 2015, excluding the high-volume Manhattan stores. In addition, we had more new store openings in the second half of fiscal 2015, with 6 out of the 9 new stores opening in the second half, compared to 3 out of 7 in the second half of fiscal 2014. So there was a difference in both the mix of the openings as well as the timing of the openings when compared to the prior year.

Turning to elfa International AB, elfa's third-party net sales were down 4.4% from the fourth quarter of fiscal 2014 in Swedish kronor. Additionally, the strengthening of the US dollar against the Swedish krona led to a negative conversion impact of $900,000 in the fourth quarter of fiscal 2015. The Swedish krona depreciated approximately 4.8% year over year against the US dollar during the fourth quarter of 2015 on average. As a result of this conversion impact, elfa's third-party net sales in US dollars declined approximately 8.8%.

Now, on to profitability. In the fourth quarter, we maintained strong TCS gross margins of 57%, in line with the prior-year period. On a consolidated basis, gross profit dollars increased 3.6% to $134.3 million. Consolidated gross margin expanded 10 basis points, as strength in the US Dollar against the Swedish krona benefited consolidated gross margin by approximately 160 basis points and, together with the higher gross margin at elfa International AB, more than offset the expected approximate 65 basis point impact from free shipping, an increase in lower-margin service sales in the mix and the higher spend related to our strategic marketing and promotional strategy.

We continue to generate incremental sales and profitability from our everyday free shipping on orders over $75. In fact, for fiscal 2015, we saw a $203 average ticket on those free shipping over $75 orders compared to our everyday average ticket for online orders in fiscal 2015 of $118. This outcome validates our decision to invest a portion of the FX benefit behind this initiative.

Elfa International AB gross margin improved 330 basis points to 39.2%, primarily due to improved production efficiencies and stabilization of freight costs, partially offset by increased direct materials costs. Elfa has been vigilant in seeking and achieving supply chain and logistics efficiencies, as evidenced by these results.

Moving on to SG&A, as a percentage of sales, consolidated SG&A increased 140 basis points to 45% in the fourth quarter of fiscal 2015, as compared to the fourth quarter of fiscal 2014. The increase in the year-over-year rate primarily reflects the following factors:

- Expense incurred of $0.02 per diluted share related to our strategic initiatives, slightly above our expectations of $0.01 per share. This results in incremental expense of approximately 40 basis points of SG&A expense.

- A larger percentage of total net sales coming from The Container Store retail business, as expenses at TCS are higher as a percentage of sales than those at elfa. This creates approximately 30 basis points of deleverage year over year.

- As expected, we incurred an increase in DC payroll costs compared to the fourth quarter of last year associated with fulfillment of an increased number of orders shipped directly to customers. This contributed approximately 30 basis points of expense deleverage.

- Also, given the revenue implications of the strong end to the elfa sale I discussed earlier, we incurred the expenses for those deferred revenues -- primarily store payroll-related -- without the corresponding revenue recognition, which contributed approximately 20 basis points of expense deleverage.

New store pre-opening expenses increased approximately $800,000 year over year, due to the opening of two stores in the fourth quarter of this year, compared to one store opening in the fourth quarter last year. As a result, pre-opening expenses deleveraged by 30 basis points year over year, as expected.

Our net interest expense in the fourth quarter of fiscal 2015 was $4.2 million, roughly in line with the prior-year period. The effective tax rate for the quarter was 33.9%, compared to 25.2% in the fourth quarter of last year. The increase in the effective tax rate is primarily due to a shift in the mix of domestic and foreign earnings. Our net income for the quarter was $9.4 million or $0.20 per diluted share, compared to adjusted net income of $11.8 million or $0.24 per diluted share in the fourth quarter of last year.

Now, turning to full fiscal year results. Our press release issued this afternoon includes details of our fiscal 2015 financial performance. Sales increased 1.6% over the previous year to $794.6 million, driven by a 3.8% increase in The Container Store retail business. Elfa third-party sales decreased 0.6% in local currency, primarily due to a combination of some weaker sales in Russia and to a lesser degree in Norway, partially offset by improved sales in Sweden. The US dollar strengthened against the Swedish krona by 18.6% on average during fiscal 2015, resulting in a negative conversion impact of $13.1 million in fiscal 2015. As a result of this conversion impact, elfa third-party sales declined 16.2% in US dollars.

Our comparable store sales for the year were flat in fiscal 2015, following a 1.4% decrease in fiscal 2014. Consolidated gross margin decreased 30 basis points year over year to 58.3% of sales. Gross margin at The Container Store decreased 60 basis points during fiscal 2015.

The consolidated gross margin decline was primarily due to the following:

- First, a higher response to other promotional activities, with an approximate 70 bps reduction to gross margin rate year over year.

- Second, the April 2015 introduction of everyday free shipping on orders over $75, contributing to a reduction of gross margin of approximately 65 basis points.

- Third, a growing mix of lower-margin service sales in fiscal 2015 as compared to fiscal 2014. This resulted in an approximate 30 basis point reduction to gross margin year over year.

- These reductions were partially offset by the impact of the stronger US dollar, which increased gross margin year over year by approximately 105 basis points during fiscal 2015.

- Additionally, the gross margin decline at The Container Store was partially offset by an improvement in elfa gross margin of 110 basis points, which aided consolidated gross margin by approximately 20 basis points.

Consolidated SG&A as a percentage of sales increased 190 basis points to 49.6% in fiscal 2015, primarily due to the following year-over-year changes:

1. Incremental spending associated with our major initiatives, resulting in approximately 65 basis points of deleverage.

2. A larger percentage of total net sales coming from The Container Store, which has a higher SG&A as a percentage of sales. This resulted in approximately 50 basis points of deleverage.

3. Unusually high healthcare claims at The Container Store, resulting in approx 35 basis points of deleverage.

4. Increased investment in store payroll for enhanced sales floor coverage, contributing approximately 20 basis points of deleverage.

5. Distribution payroll due to fulfillment of an increased number of orders shipped directly to customers, resulting in approximately 20 basis points of deleverage.

Net income was $0.11 per diluted share, based on 48 million shares outstanding, and includes $0.08 per diluted share in annual strategic initiative spend as well as $0.01 in port delay expense in the first quarter of fiscal 2015. This compares to adjusted net income of $0.34 per diluted share, based on 48.5 million shares outstanding last year.

Turning to our balance sheet, we ended the year with $13.6 million in cash, $327.9 million in outstanding borrowings and combined availability on revolving credit facilities and cash on hand of approximately $104 million. As a reminder, we use the strong cash flow generated in our fourth quarter to pay down all of the balance on our revolving credit facility at The Container Store at the end of each fiscal year. Our peak utilization of our $100 million revolving credit facility throughout fiscal 2015 was $28 million.

We ended the quarter with inventory up 3.2% compared to the end of fiscal 2014, with the increase primarily due to new stores. On a per-store basis, TCS retail inventories actually decreased approximately 8.5%.

Now, turning to our outlook. For fiscal 2016 we expect consolidated net sales to be between $830 million and $845 million, comp store sales to be down 1.5% to up 0.5% and diluted net income per share to be between $0.20 and $0.30, based on a weighted average of 49 million diluted shares outstanding. We expect TCS and consolidated operating margins to improve, based primarily on the expense savings program Kip and Melissa discussed that we have implemented. We expect our tax rate for the full year of fiscal 2016 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 outlook for the year. It's important to remember that we have changed our fiscal year, which will affect the quarterly cadence of our financial results. Again, please refer to the recast results included within our press release. The most affected quarters will be our fiscal third and fourth quarters.

When recasting our historical results into the new quarterly cadence, Q3 and Q4 have historically been more equal in terms of financial results. This is because the month of December will move into third quarter, which is a large 5-week month that includes the holidays and the beginning of the annual elfa sale.

In terms of foreign exchange, our guidance assumes an average SEK rate of approximately 8.15 in our cost of goods sold at TCS for fiscal 2016, which is approximately the current SEK rate. This compares to the actual average SEK rate of approximately 8.1 in cost of goods sold in fiscal 2015. We are currently projecting limited impact to elfa's third-party sales due to the conversion of the US dollar against the Swedish krona. FX is also expected to have minimal impact to gross margin at the current rate of SEK to US dollar. As a reminder, TCS purchases elfa products in SEK. While the fiscal year impact to gross margin is projected to be relatively flat year over year at the current FX levels, within the year it is expected to be a slight tailwind to the first quarter, moderating in the second half of the year and expected to completely dissipate and actually become a slight headwind at the current SEK levels in the fourth quarter year over year. We currently have no SEK contract hedges for fiscal 2016 and will be purchasing all elfa products for TCS in SEK at the current spot rate at the time of purchase.

Using these FX assumptions, we currently forecast our fiscal 2016 consolidated gross margin to be relatively flat year over year. We anniversaried the introduction of free shipping over $75 this month in April of 2016, so we expect that headwind associated to gross margin rate experienced in fiscal 2015 due to free shipping to dissipate in impact considerably. We also currently project no incremental impact to gross margin in fiscal 2016 as compared to fiscal 2015 from promotional activity changes. Additionally, we expect the gross margin headwind to continue in fiscal 2016 and slightly accelerate related to the growing mix of lower-margin services as we continue to grow the amount of TCS Closets sales, which overall currently achieve a lower gross margin rate, due to the product being comprised of a larger portion of lower-margin installation and delivery services. However, we project that elfa will continue with their supply chain improvement initiatives and contribute positively to overall consolidated gross margin year over year and help to offset the impact of the lower-margin services. It's important to remember that although service gross margin rate is lower than that for our products, the two go hand-in-hand and together drive higher profits.

As Kip mentioned, in early fiscal 2016 we embarked upon a significant SG&A savings program, carefully approaching it so as not to impact the success of the key initiatives we have launched or to harm our corporate culture. The actions we have taken include a wage freeze for all employees, freezing of our 401k match, both of which were enacted in early March; reductions in payroll expenses throughout the business; as well as numerous efforts to drive costs down throughout the entire company. The benefit from these actions expected to be realized in fiscal 2016 is embedded in our guidance, where we expect significant expense leverage despite conservative comp store sales outlook. It is important to note that these SG&A savings actions represent a reduction to SG&A from the level we would have incurred absent these moves.

In fiscal 2016 we expect to incur approximately $35 million in CapEx. Nearly half of this will be related to opening 7 new stores and relocating one store. This store growth of 8.3% is a moderation from the approximately 12% square footage level growth of fiscal 2015. We continue to believe in the long-term opportunity to more than double our current chain size, but have prudently lowered planned store growth for fiscal 2016, as we execute our SG&A savings program and maximize the benefit of our key TCS Closets initiative.

Looking at the first quarter specifically, or the period starting April 3 and that ends July 2, there are a few key points to share:

1. We introduced free shipping over $75 in April of 2015 and experienced strong sales upon that launch. We will be anniversarying that strong introduction in first quarter of fiscal 2016.

2. We expect a slight benefit to gross margin from FX, as previously outlined.

3. We expect the SG&A savings program, while in place now with cost-cutting initiatives like the wage and 401K match freeze enacted in early March, to become more impactful as the year progresses.

4. Note that the port delays we experienced in the first quarter of fiscal 2015 primarily impacted the month of March, which is no longer in the fiscal first quarter in light of our fiscal year change, so we don't expect that to benefit our first quarter of fiscal 2016 in our outlook.

Regarding the March stub period, which will be reported along with our first-quarter results, as I mentioned earlier, we had a meaningful increase of $4.6 million in deferred revenue at the end of fiscal 2015 compared to the prior-year period, the majority of which was recognized in our income statement in the month of March. This allows us to largely offset the impact of the shift of timing of the conclusion of the elfa sale between the two fiscal years, as well as the Easter holiday closing shift from April last year into March this year. As a result, we expect to be able to realize EPS and adjusted EBITDA at a similar level to last year in fiscal March, despite the Easter closing and elfa sale shifts that occurred in March this year.

In summary, during fiscal 2015 we made significant investments in our strategic initiatives and expect to see meaningful benefit from these in fiscal 2016 and beyond. We've looked critically at our cost structure and taken the necessary steps to cut expenses and forego certain cost increases, without jeopardizing the health and success of our strategic initiatives or harming our company culture. We believe we have positioned our company to achieve a meaningful improvement in profitable sales growth in fiscal 2016.

That concludes my portion. Thank you. Kip?

Thank you. We believe that the important investments we made in fiscal 2015, coupled with our fiscal 2016 SG&A savings program, will contribute significantly to our efforts to meaningfully improve financial results. And we thank you all for joining us for these remarks. Thank you very much.