Container Store Group Inc (TCS) 2016 Q1 法說會逐字稿

Greetings and welcome to The Container Store first-quarter 2016 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 today, Miss Anne Rakunas, at ICR. Please go ahead, ma'am.

Good afternoon, everyone, and thanks for joining us today for The Container Store's first-quarter 2016 earnings results conference call. Speaking today are Melissa Reiff, Chief Executive Officer; and Jodi Taylor, Chief Financial and Administrative Officer. After Melissa and Jodi have made their formal remarks, we'll open the call to questions.

Before we begin, I need to remind you that certain comments made during today's call may constitute forward-looking statements and are pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These 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 undertake any obligation to update the forward-looking statement.

Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call. The 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 Company's website at Containerstore.com.

I'll now turn the call over to Melissa. Melissa?

Thank you, Anne, and hello, everyone. I appreciate you joining us today.

I'm delighted to be talking with you all this afternoon, just 39 days into my new role as CEO at The Container Store. I'm very proud, humbled and excited about our future and thank Chip, Sharon and so many others who have contributed to building our amazing Company. I look forward to working closely with our entire leadership team as we chart the future course for The Container Store to drive improved and sustained top and bottom line performance, and execute a renewed vision and vigor for innovation and excellence on all metrics.

As you may remember, FY15 was an investment year for us. We deployed significant financial, human and operational resources into a number of important initiatives that will help us evolve our business and strengthen our foundation for growth.

The largest initiative by far is our TCS Closets roll out to all stores that concluded December of 2015, followed by our Contained Home, our in-home organization service, that also rolled out to all stores by December 2015.

Another major milestone for us was the completion of our distribution center automation project which went live in April of 2016, and is intended to drive supply chain and payroll efficiencies. We opened 10 new stores last year, including a relocation, and jumped to number 14 from number 27 on Fortune magazine's list of 100 best companies to work for and that was marking our 17th consecutive year.

And as we communicated, we embarked upon a significant cost and efficiency review throughout our entire organization to improve profitability, with those efforts expected to drive sustained and substantial SG&A savings. We remain committed to and confident in our ability to maximize the targeted results of this FY16 SG&A savings program. Before turning to the highlights of our financial results for the first quarter, I would like to remind everyone that what I am sharing represents the 13-week quarter ended July 2, 2016 under our new fiscal year end.

Comp store sales for the first quarter were down 0.2% under our old comp stores sales reporting method, or down 1.4% under our new method. Including a benefit of approximately 1.2% from the Easter timing shift, and Jodi will explain further about that in just a few minutes.

During Q1, we delivered SG&A efficiencies and we achieved a meaningful 230 basis point comp store sales lift from TCS Closets, up from 160 basis points in Q4 of 2015 using our old comp store sales reporting method, both of these being reflective of our recast fiscal year.

Our first-quarter consolidated net sales were $177.4 million in FY16, a 4.4% increase to last year. Consolidated gross margin for the quarter improved 40 basis points year over year. We also improved our consolidated SG&A margin by 350 basis points, of which 130 basis points was largely due to our focused efforts on cost controls and efficiencies.

I'd now like to share a little bit more specifics on our TCS Closets initiative. TCS Closets continues to perform well, as I mentioned, providing that 230 basis point lift to comps in our first quarter, and the average ticket remains consistent at approximately $10,000. We were pleased with the results of our first-quarter Elfa promotion which offered free installation on Elfa purchases of $750 or more.

This year's promotion replaced one from last year during the same time period when we offered a 25% discount on all Elfa purchases and Elfa installations. Customers responded favorably to this year's promotion, leading to strong Elfa sales during the quarter. We will continue throughout the year to explore strategic opportunities like this that support our focus on closet domination.

Also with each passing week and month, we're making incremental operational improvements to the selling and design process of TCS Closets. We will soon roll out a new TCS Closets design tool that is intended to expedite the design process.

We've recently launched a program with salesforce intended to significantly reduce the administrative process time associated with selling TCS Closets. This of course will allow our salespeople to spend more time with customers on the sales floor selling the product, and make for a more efficient and better customer experience. Our goal for these tools and other improvements is to allow us to capitalize more quickly on our customer's enthusiasm for TCS Closets, and draw more customers into the selling process faster while they are in the store or working with a contained home organizer.

Our new stores, we opened one new store in our first quarter in Novi, Michigan, a suburb of Detroit, and we plan to open an additional seven locations including a relocation in the remainder of FY16, Opening two stores in the second quarter, and the remaining five in the second half of FY16.

We continue to see a number of untapped market opportunities, and new stores also allow us to achieve scale on our enterprisewide investments. So we will continue to evaluate our new store growth plan, adjusting it as appropriate in response to the overall retail environment, real estate opportunities and operational priorities.

As we mentioned last quarter, our real estate strategy includes a plan for a pilot of a reduced square footage store to open in Albuquerque, New Mexico during FY17. We believe a smaller footprint will allow us to be even more productive in smaller markets, and we will share more on this as we get closer to FY17.

As you can tell, we have a number of strategies that give us a good foundation for our future, but we want to be more aggressive in driving changes to improve all aspects of our business. One of those strategies is our new customer financing program that we just launched last month, July 12, with Synchrony Financial. Obviously, we're only a few short weeks into the program's launch, however we have high expectations that this new program can be another significant contributor to our focus on closet domination.

We will deploy some new merchandising initiatives beginning with the opening of our Baybrook store in Houston this November, inclusive of an expanded custom closet department and reallocated space for more closet and storage products. We're also continually evaluating and implementing improvements and efficiencies related to non-selling operations of our stores, including things like training, reducing store tasks, and merchandise processing.

And while we have seen a stronger bottom line and continue to make improvements and gain efficiencies across the business, we recognize the need for change and are strongly committed to improving the top line. We must deliver sustained improvement while simultaneously executing with excellence to drive the Company's performance for our customers, for our employees and our shareholders, all of our stakeholders. We are committed to driving our business forward through innovation and experimentation, drawing new and existing customers into our stores and online.

We will continue to work diligently, more swiftly, and more creatively while capitalizing on our many differentiators including our excellent customer service with well-trained employees, our large assortment of unique and proprietary or exclusive products, and our continued commitment to closet domination, all of this and more while supporting our strong culture.

Now, Jodi, I'd like to ask you please to go through our financial results in more detail.

Thank you, Melissa, and good afternoon, everyone. Today, I will be reviewing our first quarter FY16 results, and then discussing our outlook for the remainder of the year.

As you are aware, we changed our fiscal year and from the Saturday closest to February 28 to the Saturday closest to March 31 of each year in order to better align our fiscal year with our business calendar. In our fourth quarter FY15 earnings release, we included recast historical unaudited quarterly financial information for the first three quarters of the new FY16.

In today's earnings release, we provided financial information for the March 2016 stub period, and a recapped fiscal fourth quarter of 2015. These are also posted on our website under the Investor Relations link. In light of the Company's fiscal year change, all references to prior-year results are based on the 13 weeks ended July 4, 2015.

Turning to our first-quarter results. For the three months ended July 2, 2016, our consolidated net sales were $177.4 million, up 4.4% compared to the prior-year first-quarter in US dollars but up 4.2% when using the prior-year conversion rate for both periods. Sales for The Container Store retail business were up 5.1% to $161.2 million, primarily due to new store sales.

As noted in today's earnings release, we've revised the way we calculate our comparable store sales operating measure to reflect the point at which merchandise and service orders are fulfilled and delivered to customers, excluding shipping and delivery. In prior periods, we measured comparable store sales based on merchandise and service orders placed in that period, excluding shipping and delivery, which did not always reflect when a purchase was recognized in our financial statements as net sales.

This revision has no impact on prior or current period reported net sales. I would like to refer you to the recast operating data table in our press release for quarterly and full-year FY15 comparable store sales on this revised basis.

Coming back to our results, as Melissa mentioned, our first-quarter comp was down 0.2% using our prior reporting method or down 1.4% based on the new reporting method. We were very pleased that TCS Closets contributed 230 basis points of comp under both calculation methodologies.

The shift in the timing of Easter benefited our first-quarter 2016 comp by approximately 120 basis points. Our stores are closed on Easter, so this benefit was due to the holiday falling in April of fiscal Q1 last year versus March this year, which was in the stub period as well as in the recast fiscal fourth quarter of 2015. We ended the first quarter with 80 stores and approximately 2 million of gross square footage, as compared to 72 stores and approximately 1.8 million of gross square footage at the end of the recast first quarter of FY15.

Turning to Elfa International AB, Elfa's third-party net sales were down 4.1% in Swedish krona compared to the prior-year period, primarily due to lower sales in Russia. This was partially offset by the positive impact of foreign currency translation in the quarter, as the krona strengthened against the US dollar.

During the first quarter of 2016 on average, the Swedish krona appreciated approximately 2.3% year over year against the US dollar. As a result of this, Elfa's third-party net sales in US dollars declined approximately 1.8%.

Now on to profitability. In the first quarter, consolidated gross profit dollars increased 5.2% to $104.7 million. Consolidated gross margin expanded 40 basis points compared to the prior-year period. This increase was driven by a 330 basis point improvement in Elfa gross margin, primarily due to lower direct materials costs and production efficiencies.

Gross margin at The Container Store retail business was down 10 basis points, reflecting a growing mix of lower margin products and services partially offset by the impact of a stronger US dollar. As a reminder, gross margin at TCS is impacted by prior SEK exchange rates obtained to purchase Elfa products for TCS.

Moving onto SG&A. As a percentage of sales, consolidated SG&A decreased 350 basis points to 52% in the first quarter of FY16 as compared to the prior-year period, primarily due to the impact of employment arrangements entered into with key executives. These arrangements resulted in an associated reversal of accrued deferred compensation net of related costs of $3.9 million. In addition, we began to see the initial benefits from our previously announced SG&A savings program.

Pre-opening expenses decreased by approximately $500,000 to $1.1 million year over year as we opened one store in the current-year period, as compared to two store openings in the prior-year recast quarter. As a result, pre-opening expenses leveraged by 40 basis points year over year as expected.

Our net interest expense in the first quarter FY16 was $4.1 million, in line with the $4.2 million in the prior-year period. The effective tax rate for the quarter was 33.3% compared to 36.8% in the first quarter of last year. The decrease in the effective tax rate is primarily due to a shift in the mix of domestic and foreign earnings.

Our net loss for the quarter was $2.1 million or $0.04 per diluted share, compared to a net loss of $5.8 million or $0.12 per diluted share in the first quarter of last year. This includes a $0.05 per diluted share benefit resulting from the above-mentioned deferred compensation accrual reversal net of related management transition costs and taxes.

Turning to our balance sheet. We ended the quarter with $8.2 million in cash, $338 million in outstanding borrowings net of deferred financing costs, which was down approximately $19 million from this same time last year, and combined availability on revolving credit facilities and cash on hand of approximately $78.6 million.

We ended the quarter with inventory down 4.7% compared to the prior-year period, with the decrease primarily due to last year's port delays and timing of subsequent inventory flow related to merchandise campaigns.

Now turning to our outlook. For FY16, we continue to expect consolidated net sales to be between $830 million and $845 million. We're also maintaining our comp store sales outlook, which is to be down 1.5% to up half a point using our prior reporting method as well as our new reporting method.

We are reiterating our previously provided EPS range of $0.20 to $0.30. While we did have a benefit resulting from the accrual reversal associated with the executive employment arrangements entered into during the quarter, there are additional expense implications from the employment agreements for the remainder of FY16 that will partially offset this first quarter benefit. This EPS range is based on a weighted average of 49 million diluted shares outstanding.

We continue to expect TCS and consolidated operating margins to improve based primarily on the SG&A savings program that we have implemented. We expect our tax rate for the full FY16 to be approximately 39%, and our annual interest expense at today's LIBOR rates to be approximately $17 million. We continue to forecast our FY16 consolidated gross margin to be relatively flat year over year.

On the FX front, we continue to expect minimal impact to gross margin based on current SEK-US dollar purchase levels. However, by quarter, this impact does vary somewhat.

As expected, we experienced a slight benefit to gross margin in the first quarter. We continue to expect moderation in the second half of the year until we've reached the fourth quarter when the benefit is currently expected to dissipate and actually become a slight headwind in the fourth quarter year over year.

We've recently secured SEK contract hedges to purchase approximately 40% of our Elfa products for TCS in SEK at an average rate of 8.5% for FY16. For comparative purposes, our average purchase rate for SEK in FY15 was approximately 8.4%.

Additionally, we anniversaried the introduction of free shipping over $75 in April of 2016. So we do expect the headwind to gross margin rate experienced in FY15 due to free shipping to dissipate and impact considerably. We also currently project minimal impact to gross margin in FY16 as compared to FY15 from promotional activity changes.

Additionally, we expect the gross margin headwinds to continue in FY15 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 products 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 initiative and contribute positively to overall consolidated gross margin year over year, and help to offset the impact to the lower margin services at TCS. It is important to remember that although service gross margin rate is lower than that for our products, the two do go hand-in-hand and together drive higher profits.

As we've previously discussed, in early FY16, we embarked upon a significant SG&A savings program. The actions we've taken include a wage raise for all employees, freezing of our 401(k) 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.

These SG&A savings are expected to become more impactful as the fiscal year progresses. The benefit from these actions expected to be realized in FY16 is embedded in our guidance, where we expect meaningful expense leverage despite the comp store sales outlook.

Now I'd like to provide some color to help you with your quarterly models. As you know, we generally provide an annual and not quarterly guidance. However, with regards to the second quarter, our Q2 comp store sales through the first 5 weeks of the 13-week quarter have started out slower than first quarter and we were down mid-single digits.

While we recognize this will create challenging Q2 sales and earnings, because of the proportion of business that occurs in Q3 and Q4 as well as the merchandise and marketing programs that we plan to put in place for our third and fourth quarters, combined with the expected cadence of our SG&A savings program, we reiterate our full-year guidance.

From a full fiscal year perspective, it is important to remember that historically the vast majority and often all of our net income is derived in the third and fourth quarters. As I mentioned on our call last quarter, with our recast fiscal quarters, EPS results for Q3 and Q4 in FY15 were very similar and we expect that to be the case in FY16 as well. This is because the month of December has moved into the third quarter, which is traditionally a high-volume five-week month that includes the holidays and the beginning of our annual Elfa sale.

We also remain very committed to maximizing our efforts on the cost side of the business through our SG&A savings program and continue to expect that this will have a meaningful improvement to our earnings in FY16 as compared to last year, despite a sluggish sales environment. As I mentioned, we remain comfortable with our 20% to 30% EPS guidance range.

In summary, we're pleased with the improvement we saw in our bottom line performance in first quarter. But we're very focused during FY16 on not only continuing to improve our profitability but also building our top line sales growth. We recognize and see the need to be more aggressive to drive changes to improve all aspects of our business while supporting our strong culture.

Thank you. Now I'd like to turn the call back over to the operator so that we can open the lines up for questions. Operator?

(Operator Instructions)

Seth Sigman, Credit Suisse.

Melissa, congrats on the new role.

Thank you, Seth.

I have two questions I guess. I'll ask two questions up front, then I may get cut off here.

But first just on TCS Closets, I was wondering if you could give us a sense of the sales ramp that you've observed there and how to think about comps in year two when they are up and running, as we start thinking about anniversarying the bigger benefits that you started to see in the second half of last year.

And then the follow-up question is on the rest of the business, down 4%; looks like it was down more than that excluding the Easter benefit. Wondering if you could elaborate on the categories there that are just not performing as well and the steps you are taking to address that, including reallocating space, as I think you alluded to earlier. Thanks.

Hello, Seth, this is Jodi. And I'll start first with the question about the cadence on TCS Closets, your first question. Let me walk through what we saw in terms of comp benefit by quarter last fiscal year, I think that probably would help answer your question.

So if you look at last year's comp benefit that we saw from TCS Closets, it was, and I will do this under the new method of comps. I think that would be less confusing. It was 30 basis points in Q1, it was 50 basis points in Q2, it was 140 basis points in Q3 and it was 190 basis points in Q4.

This is a recast number using the new comp. And then as you heard us say for Q1 in 2016 it was 230 basis points. So that has been the overall impact to our comps from TCS Closets, the ramp that we have seen that you asked about.

Hello, Seth, it is Melissa. And then responding to your question about the rest of the business being down 4%, even with the Easter benefit and elaborating more on the rest of the categories in the store.

First of all, I think it is important to remind you that closet domination is our absolute key priority, and obviously we have a host of other products in the store to offer the complete solution for our customers. But we really do look at our comps holistically, and we're going to have some quarters that drive comps down more in some quarters and up more in others.

So we're going to continue to evaluate with the opening of the Albuquerque, New Mexico store which is a smaller footprint, the merchandising and reallocation changes that we will make there. But just know that we're going to be elevating and expediting this moving forward and looking at all different opportunities for us as we progress throughout the year.

And just one follow up. As you look at the second quarter and the commentary around the slower start, is there anything specific you can attribute that to? And have you seen that slow down in Closets, or is it more broad based across the other parts of the business? Thanks.

It is really more broad based for sure, Seth; it is Melissa. I think like so many other retailers, we're all being challenged with store traffic. So we're working on many strategies to positively impact that.

But one of the things that really differentiates us, I believe, is the fact that we focus on solutions and services that really drive the average ticket up, which is so important and something that we really have an ability to control, especially with Elfa and TCS Closets. I don't know, Jodi, if you had anything else to add to that.

No, I think you've covered it, Melissa. I think at the end of the day, we're not counting on traffic to materially change. We are instead being proactive and assuming that we need to really capitalize on what we know we can control, which is really around that average ticket growth that we can do.

Right. And we're certainly not standing still, that is for sure. And we're not assuming the traffic trends are going to improve, but we're going to continue to work on those strategies to positively impact the rest of the year, and again focus on solutions and services that drive that average ticket up, which is a huge differentiator for us.

Simeon Gutman, Morgan Stanley.

You may hear some background noise, so I'm just going to ask these questions and then jump off. Just following on Seth's question, I was going to ask in general could you comment on the consumer? And then I was particularly interested in that given your comments on the second quarter. It sounds like -- is it macro? Melissa mentioned traffic to stores being challenged. And did you see a fading at the end of the first quarter?

And then my second question is regarding to the expense, I guess the leverage threshold. We're not in positive comp territory today, but can you talk about -- I know that you mentioned that there will be an ongoing benefit to some of the exec comp changes. But if let's say you were to let's say a comp a positive one, would you lever your expenses at that level or are you still a ways off?

Jodi, I just have a couple of comments. Hello, Simeon, it is Melissa.

We definitely saw a different trend in July than what we've reported in Q1, although we're not obviously breaking it out by month, but that is why we are calling it out. It is difficult to try to really speculate the reasons for this change in trend right now. But again, we are going to assume that the traffic remains somewhat challenging, just like I'm sure you're hearing from every retailer.

So we're going to continue to work on in-store experience, making that experience for the customer even more unique and compelling. And we think coupled with our exceptional customer service and our beautiful collection of proprietary exclusive products, again, a big differentiator for us.

The second part of his question, Jodi, do you have that?

Yes, I do. Simeon, I think you were asking about the leveragability that we have with expenses. And I think I want to just reiterate to you our true commitment to the SG&A savings program that we have already articulated, and you can see the results of that already in Q1. And we do expect that benefit to be even more noticeable as the year progresses, because some of the initiatives take a bit more time to really be more noticeable in the cost structure.

As far as the benefit you ask about from the comp changes. There is a partial reversal in those contracts that occurs through Q2 and Q4, specifically around primarily stock compensation expense. So the net look at that throughout the year, we took the $0.05 in Q1. We expect that by the end of the year that is a benefit somewhere in the neighborhood of around $0.03.

So there is maybe another couple cents to come in costs over the remaining three quarters. Then as far as leveraging expenses, we definitely have targeted for this year to be able to leverage expenses in the range of what you spoke to.

Okay, thank you.

John Heinbockel, Guggenheim.

Steve Forbes on for John today. A multi-part question, thinking about the evolution of the box longer term, what you can hear. I know you commented on a pilot for a reduced square footage format. What is the underlying performance of the business telling you about the store-level economics, especially if comp sales don't turn around outside of the payroll freezes this year?

But have you had a chance to break down the varying components, whether it be , you know, the net capital investment in the box or ongoing operating costs, to identify potential long-term cost savings to keep a appropriate threshold for the return on capital?

Hello, Steve, it is Melissa. Yes, we're currently digging into all of that, absolutely all of that. And that is why we are going to test in Albuquerque with that new format, and we're going to continue to be extremely efficient with operations as I mentioned in my remarks in looking at the tasks that our stores perform.

So we are right in the middle of all of that right now. But I'm excited about getting into that and seeing what we could do to improve profitability for any size of the stores that we open going forward.

I think specifically, Melissa, just to add to the smaller market concept stores that we are doing, we do see the smaller footprint as an opportunity to improve our operating profits in those locations, and increase the returns in those markets.

So that is why we are testing that. We think that that is an opportunity in those markets, particularly where we know going in that it may be such that the volumes aren't necessarily at the Company average at maturity. We think there is a good opportunity there to be even more efficient.

And then just as a quick follow on. I believe, if you look historically maybe excluding last year or maybe not, the actual store-level performance relative to your pro forma expectations has typically met or exceeded your expectations. Can you put some color on how the 2015 class is maturing this year, or really any insights you can provide?

I think you will remember that our 2015 class had a heavier mixture of expected lower volume stores, so we didn't expect that class to have the same average total sales volume in first year that we have seen in some classes of years. Not that we didn't target those stores to achieve our financial objectives, but rather just we went into them negotiating expecting that they would do lesser volumes.

So that I think is, in fact we saw, in terms of so far how those classes have matured, and it is a combination of markets that we went into in 2015. We were more heavily weighted to new markets, and this year again more heavily weighted to new markets with us still having a number of markets where we have no presence yet. That is our first priority if something comes up for us to able to go there to a brand new market.

Thank you both.

You're welcome.

Dan Binder, Jefferies.

I was just thinking about your comments on the year-over-year slowdown in the first five weeks, and this obviously coincides with the back to college season. I'm wondering if as you look at the data and the traffic, are you seeing particular weakness in those type of categories? Is the traffic being affected by more of that moving online, do you think?

Hi, Dan, it is Melissa. Back to school and college and dorm and all of that is important to us, but relative to other categories it is not that impactful. But it is something that we definitely focus on. In terms of moving to online, I do not see that, that has really not been an issue.

I think for us, Dan, what -- I know Melissa spoke to it earlier. If you look at the difference in what has occurred between Q1 and moving into the first 5 of the 13-week quarter in Q2, it has been pretty broad.

It is not any specific category callouts to tell you in terms of one or two departments that's driving the difference in trend. It is really more across the board, both geographically as well as departmentally.

My other question was regarding your comments on promotion. It sounds like year over year you've probably promoted maybe a little bit less than last year. In light of the fairly high gross margins to begin with and the negative sales trends, have you given any consideration to maybe not necessarily promoting with more events, but maybe just lower pricing every day to attract more buyers or any tweaking to the pricing program?

Yes, Dan, it is Melissa. That is such a great question. It is absolutely, we feel, a balance.

It is really important to remember too that we achieve our stellar gross margin by buying low, not selling high. And that is due to the incredible vendor relationships that Sharon and our buyers have built over all these years, and that will continue. We do and always have had a commitment to being competitive in pricing on those real, Dan, apples-to-apples products that other retailers may offer.

We have had lots of conversation about price perception. It is very important and we're digging in even more to understand exactly how our customers perceive our pricing, so that we can be really effective in crafting our message in marketing to ensure that our customers really do understand and see the value of our product for like items for sure. So that is a big opportunity for us, and one that we're really digging into, how to communicate that.

So is that more -- are you saying that is more on -- a consideration on how to communicate better, or more of a consideration on trying to maybe in certain markets lower pricing to see the volume reaction?

No, Dan, it is more how to effectively communicate to our customers what makes The Container Store product different and better perhaps so they see the value.

Got you. One last question on Closets, the detail you gave us on the contribution to comps was helpful. But perhaps what might be even more helpful if you could, if you have the data available and are willing to share it, if you could give us the transactions per store per quarter for those stores that had TCS in those last four quarters. And then as a add onto that, since you had the financing, what percentage of those transactions took advantage of financing with Synchrony?

Dan, financing, it is just too soon to give any information because we just launched in July. 14 or 12?

It didn't affect Q1 at all, so we don't have a data on that at all, Dan, yet. We hope to have more, obviously next quarter. But as far as Closet, I think what you are getting at is the stat of Closets sold per store per week, and we did see a slight tick up in that stat from Q4 to Q1. So we are seeing that stat continue to improve slightly as we get better at selling and get more awareness of the product line.

We're also, Dan, continuing to learn and evaluate what impact seasonality may or may not have on this product category. So we're digging into that as well.

Great, thank you.

Thank you.

You're welcome.

Matt Fassler, Goldman Sachs.

A couple of questions if I could. First of all, you obviously spoke about your expectations for the year, the trend quarter to date and the reality that this was a pretty small quarter. Is the improvement that you are baking into the year-on-year trend for your guidance for the rest of the year dependent on the backdrop or dependent on initiatives you have in place that you think can push the business forward at an accelerated pace?

It's both.

I would say it is a combination. Frankly, Matt, it is the actions that we have in place as it relates to or are putting into place as it relates to top line that Melissa spoke to, and then it is absolutely that part of the cost structure that we spoke to that we are very vigilant around and very committed, frankly, to flexing as needed and making sure we do not stand still and we stay flexible and nimble, at the same time still targeting, as you heard me say, a stable gross margin.

Got it, thank you. Secondly, on the financing program, you're probably going to tell me it's premature, but I will try anyway. In terms of who is using this, and I'm not trying to get the impact on the comp per se, but who is using it and where they are attaching it?

Are there any surprises there from what you can tell so far in terms of people whose data you already have, or is it a new source of data for you? And do you find that it is more enhancing to big-ticket purchases, which one would naturally assume? There is a lot of stuff that is financeable within your store that's worth it for the consumer.

Matt, hey, it is Melissa. And yes, it is -- again it's very early, but it is definitely helping with larger-ticket items like Elfa and TCS Closets. So there has not been any big surprise there. And as I said in my remarks, we're very bullish on this program and have high expectations for it being a big contributor, not only to TCS Closets but to Elfa and hopefully the rest of the store as well.

And then one last follow up. I don't think you spoke about the POP! program. If you did I missed it, and if not any updates there in terms of growth?

The good news is, we have over 3.8 million POP! Stars, and we are continuing to enroll over 25,000 a week. So we are continuing, once again, to dig into that program as well and understand how we can evolve the program to drive more sales and traffic moving forward for both online and in our stores.

Great, thank you so much.

Thanks, Matt.

Thank you.

Matthew McClintock, Barclays Capital.

This is Erin Riley on for Matt. I wanted to follow up with you on free shipping, I think your anniversarying it this quarter on orders over $75. And I wanted to see if your sense is that this threshold is meeting consumer expectations, if you are thinking about maybe playing around with different promotions on there? And are you still seeing it driving incremental spend above the average ticket of $60?

Hello, Erin, it is Jodi. And I'll start with that, and Melissa may have something else to add.

Yes, we are still seeing that a customer that is coming in and using free spend is absolutely spending greater than the $75 in a meaningful fashion. So that is continuing to meet our directives, and we are continuing to see it be something that is a positive contributor to profitability for us at that spend threshold. So we think that it is something we will continue to offer for the foreseeable future.

We are always evaluating, we have the ability on a test and learn basis to test a lot of different things behind the scenes and continue to do that. But obviously we're going to make sure whatever we're doing we're always maximizing both sales and profitability at our Company. So right now, we're sticking with what we've now had in place, as you said, for exactly a year in April.

Great, thank you.

You're welcome.

Thank you. At this time, I would like to turn the call back over to management for closing comments.

Thank you, operator, and it is Melissa. Thank you all so much, and we just really appreciate your interest and your time and your support today and we will look forward to speaking with you again next quarter. Thanks so much.

Thank you, everyone.

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