Container Store Group Inc (TCS) 2017 Q1 法說會逐字稿

Greetings, and welcome to The Container Store First Quarter Fiscal Year 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

It is now my pleasure to introduce your host, Ms. Shannon Devine of ICR. Thank you. Ms. Devine, you may begin.

Good afternoon, everyone, and thanks for joining us today for The Container Store's First Quarter Fiscal Year 2017 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 will open the call to questions.

Before we begin, I need to remind you that certain comments made during this call regarding our plans, strategies and goals and our anticipated financial performance 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 important factors are referred to in The Container Store's press release issued today and in our annual report on Form 10-K filed with the SEC on June 1, 2017. 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 of the non-GAAP financial measures to the most directly comparable GAAP measures is also 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 Melissa. Melissa?

Thank you, Shannon, and thank you all for joining our call today. I'm happy to share the highlights of our first fiscal quarter performance and then I'll review the progress we are making against many of our key initiatives. Jodi will then share our financial results in more detail and discuss our outlook.

First quarter fiscal '17 results were largely as we expected, from both a top and bottom line perspective, with our Custom Closets business continuing to contribute positively to our sales and profitability. In addition, just like we experienced in Q4 of fiscal '16, in Q1, we saw ongoing notable improvement in our sales from our other product categories versus what we experienced in the first 3 quarters of fiscal '16.

In first quarter '17, our comp store sales improved as the quarter progressed, moving into slightly positive territory by June and continuing into July, our first month of Q2. Our results reflect some of the benefits of the key sales revitalizing initiatives we are working on that include many test-and-learn activities as well as the savings and efficiency program we launched last year and continue to build upon this year.

Our first quarter consolidated net sales were $183.1 million, a 3.2% increase compared to the same period last year. Comp store sales for the first quarter were down 1.2%, with the timing Easter shift contributing 70 basis points to this decline. Elfa's third-party sales were down 1.2%, primarily due to the negative impact of foreign currency translation of 7.2%. We are pleased with our leadership changes at Elfa Sweden and intend to further strengthen our collaboration and synergies between Elfa and The Container Store.

From a bottom line perspective, loss per share in the first quarter was $0.16 compared to a loss per share of $0.04 in first quarter last year. On an adjusted basis, loss per share was $0.11 in this year's first quarter compared to an adjusted loss per share of $0.09 in first quarter last year. This year's first quarter included an approximate $0.01 per share negative impact from the Easter timing shift, and Jodi will discuss this in more detail in just a moment.

Before I speak about our progress in some of our key initiatives, I want to mention that you may have seen our recent announcement that we have launched a refinancing of our senior secured term loan facility that's due in 2019 and our revolving credit facility that's due in 2020. Our transaction is currently in market and we are targeting to close mid-August. We'll update you further once final details are known.

Last quarter, I outlined on our call our 4-part optimization plan that we are executing against as well as the central elements of our mid- to long-term strategic plan. I'd like to give you a few updates now.

We are on track with our projected savings for our 4-part optimization plan. And as a reminder, we estimate annual savings of approximately $20 million, of which approximately $12 million to $15 million is expected to be realized this fiscal year. We expect to incur $0.09 to $0.11 -- $9 million to $11 million in cost, or approximately $0.12 to $0.14 per share in the first half of this fiscal year, with the associated benefits heavily weighted to the second half of fiscal 2017. All of this was and continues to be reflected in our full year outlook that we are reiterating today.

We have also made progress around the central elements of our strategic plan and they include customer experience in our new stores. Our first fiscal '17 new store opened in Cleveland, Ohio during our first quarter and we were very pleased with the opening sales performance. We plan to open a total of 4 stores this fiscal year, plus 1 store relocation.

Our Albuquerque, New Mexico store opened early in second quarter, on July 8. We were delighted to see the customer response during grand opening weekend and to-date. We tested a slightly different grand opening marketing strategy and are pleased with the results. As a reminder, the Albuquerque store is 18,000 square feet, which is approximately 25% smaller than our typical size store and is part again of our many test-and-learn plans as we explore new layouts and formats for our stores.

Another focus -- area of focus for us has been the redesign of our flagship Dallas store. As many of you are aware, we are deep into this project with a top-tier design firm to create what we call The Container Store of the future today. We're working through many details and decisions as well as the related time line for the project and will share more as we have the full picture.

We do expect hopefully to launch the project in the very near future. Among other strategic changes, this redesign will most certainly place appropriate focus and presence around our Custom Closets and we will evolve, tweak and refine this redesign, utilizing what we learn and applying those learnings to existing and future stores.

As we look beyond fiscal 2017, we envision our real estate expansion plan in specific markets to be one that utilizes formats that potentially look different than our historical 25,000 square-foot size store. Developing new formats that optimize space, store productivity and profitability, while continuing to deliver outstanding customer service and experience is the overarching goal of our store format test-and-learn efforts.

I do want to emphasize, however, that we have been and are very pleased with the performance of our new stores. This work we are undertaking reflects our belief that there is an opportunity to enhance and maximize new store performance even further.

Our products -- our Custom Closets business continues to be a key focus, contributing 50 basis points to our first quarter comp. As a reminder, we define our Custom Closets business to include TCS Closets, Elfa, our closet department products and installation services.

New products are the lifeblood of our business, and in mid-June, we launched a beautiful collection of new Elfa products in all stores and online. And I'm happy to share that the customer response already has been very encouraging.

These new and exclusive products include solid wood drawer fronts and frames, something that our customers have been asking for, that will give them the option to completely conceal clothing and accessories behind these sophisticated and innovative drawers, as compared to the more open look of our traditional Elfa solutions. Both options offer the flexibility and functionality that Elfa is known for.

The mutual development of Elfa new product is and always has been critical to our growth and success at our consolidated business, and we will continue our focus and strategy on developing further new Elfa products.

Specific to our merchandise campaigns, we made several changes during the first quarter. We replaced our traditional office campaign with the kitchen campaign. And we replaced our traditional spring organization campaign with the closet essentials campaign. We're currently in the middle of another new merchandise campaign we call our Customer Favorites.

We will continue to add freshness and newness to our merchandising and marketing campaigns where it makes sense for us to do so. Additionally, during May and June, we also repeated the free installation offer on Elfa purchases over $750 and we repeated our annual travel campaign. Overall customer reaction to our refreshed merchandise and marketing campaign have been positive.

We are continuing our work in close collaboration with a third party on a consumer insight project, merchandise and cost of goods project and a SKU rationalization and pricing strategy project. It is still too early to share more specifics on this; however, I can assure you that we plan to utilize all the intel we learn to improve all initiatives and priorities, including our Dallas flag store -- flagship store redesign and our strategic plan going forward that impacts every area of our business.

Customer acquisition and retention. We are continuing to see a positive impact on sales from our media mix, primarily from increased spending and digital channels like display and search and affiliates and product listing ads and e-mails.

Based on the recommendations from our media mix model, we are testing ways to increase spend further in digital channels and closely monitoring the performance to see the impact on sales. At the same time, we are exploring methods that will optimize our traditional channels like direct mail, billboard, newspaper and national magazine.

In addition, we're super excited to announce that, on August 7, we begin a national television campaign on both HGTV and DIY cable networks. A 30-second commercial will air on HGTV and DIY Network during their hit shows and generate 69 million impressions or views and -- on HGTV and 27 million impressions on DIY Network through November 5.

The TV commercial is part of an integrated partnership that includes sponsoring the 2017 DIY Network's Ultimate Retreat home, selling HGTV Magazine in our stores, running full-page print ads in the magazine through January as well as e-mails and digital banner ads. We believe in this partnership and really look forward to updating you as it progresses.

And with our POP! program, we now have over 5.1 million customers who've enrolled, and we continue to use this valuable customer data in an even more targeted fashion now that we have the program in place for about 3 years. This includes ongoing efforts around targeted offers to lapsed customers, which again had a positive impact on our sales during Q1.

We've also made several enhancements to the program to increase engagement. We launched a new online interface that allows our POP! Stars to both easily access their perks that they have earned and quickly see when they will expire. We improved our POP! spend and gift offers by allowing POP! Stars to redeem their own perks 2 days after earning, instead of waiting to the first day of the following month. We saw an increase in redemption of the perks from this change, resulting in incremental sales.

Our online business or direct-to-customer during first quarter increased 20.1% compared to last year, as our digital marketing investment and refreshed merchandise and marketing campaigns resonated well with our online customers.

Total website-generated sales, which includes direct to customer, but also Click & Pickup and deliver, increased 26.7% during first quarter. Again, we are channel-agnostic, but of course, we'll continue to make necessary and compelling improvements to our site and invest in its look, feel, navigation and other enhancements.

Investing in our people. Moving on to the heart of our organization, our employees. As announced on our fourth quarter call, we completed a very difficult step of eliminating certain positions throughout our company that we just didn't need any longer due to our operational efficiency gains. As tough as this was, it was the right decision, and we made sure that we treated every affected employee in a caring, compassionate and generous way.

We since have had extensive communication with all employees and we believe they understand why this decision was made and that it was the right thing to do for the ongoing success of our company and all stakeholders. I believe that overall morale is good.

We are also pleased that we were able to announce the lift of our wage freeze a few months ago with the resuming of wage increases effective this September.

In summary, we are pleased to have delivered first fiscal quarter '17 financial results that were right in line with our expectations and we are particularly encouraged by the improving comp store sales we experienced as the quarter progressed, leading again to a slightly positive comp sales in June, with these positive comp sales continuing in July.

We are making good progress against our key initiatives. We have much work still to do and we look forward to building on our progress throughout the remainder of the fiscal year and beyond as we continue to execute on our sales and efficiency initiatives and work to fully optimize our profitability.

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

Thank you, Melissa, and good afternoon, everyone. For the first quarter ended July 1, 2017, our consolidated net sales were $183.1 million, which was up 3.2% compared to the prior year period. Sales for The Container Store retail business were up 3.6% to $167.1 million, primarily due to new store sales. Our first quarter comp store sales were down 1.2%, with the Easter shift contributing 70 basis point of this decline.

Custom Closets continue to positively contribute to our comp store sales performance with a 50 basis point comp contribution to our first quarter. As Melissa mentioned, our comp store sales improved as the quarter progressed, moving into slightly positive territory in June and continuing positive in July, the first month of our fiscal second quarter.

We ended the quarter with 87 stores and approximately 2.2 million of gross square footage as compared to 80 stores and approximately 2 million of gross square footage at the end of the first quarter of fiscal 2016.

Now turning to Elfa International AB. Elfa's third-party net sales were down 1.2% in US dollars, primarily due to the negative impact of foreign currency translation of 7.2%, partially offset by higher sales in Russia. In the first quarter, consolidated gross profit dollars decreased slightly to $103.6 million.

Consolidated gross margins declined 240 basis points compared to the prior year period. We anticipated a decline in gross margin during the first quarter as we do not expect to see the benefits of the cost of goods sold project we outlined in our optimization plan until the second half of the year. Gross margin at The Container Store retail business was down 210 basis points, reflecting primarily sales mix factors.

From that standpoint, we saw strong customer response to our refresh campaigns and experienced a nice increase in business-to-business sales. While the combined impact of the sales mix changes had a negative gross margin impact of approximately 135 basis points, we are pleased that our refresh campaigns are resonating with our customers and ultimately drove a greater portion of sales than anticipated.

Similarly, business-to-business sales, which have a lower SG&A structure and strong bottom line contribution, represent a compelling long-term opportunity for us. And we're very encouraged by the early traction we are seeing with business-to-business.

In addition to sales mix factors, gross margin at The Container Store retail business was also negatively impacted by higher costs associated primarily with our installation services business. We've modified our installation model, which has resulted in a higher cost of goods, but partially offset by lower SG&A expenses associated with these services.

Elfa gross margin was down 310 basis points, primarily due to an increase in raw material costs, specifically steel and aluminum during the quarter. Elfa more than made up the shortfall through other business efficiencies to deliver an increase in its operating profitability during the quarter.

Now moving on to SG&A. As a percentage of sales, consolidated SG&A increased 80 basis points to 52.8% in the first quarter of fiscal '17 as compared to the prior year period. This was primarily due to the reversal of deferred compensation expense realized in first quarter fiscal '16, which resulted in 220 basis points of year-over-year SG&A deleverage in first quarter fiscal '17.

This 220 basis points of deleverage as a result of the prior period benefit was partially offset by a 140 basis point improvement in SG&A expense as a percentage of sales. This improvement was primarily due to the ongoing benefits of our 2016 savings and efficiency program that drove payroll savings and some marketing cost efficiencies, combined with lower self-insurance costs during the quarter, partially offset by deleverage on our fixed occupancy costs associated with our negative 1.2% comp store sales as well as increased other SG&A costs. As a reminder, we expect the benefits of our 2017 optimization plan to be realized largely in the second half of this fiscal year.

New store preopening expenses increased this quarter to approximately $1.4 million from $1.1 million in the first quarter last year. We opened 1 store in Cleveland, Ohio in the current year period compared to 1 store opening in the prior-year period. The increase year-over-year is primarily attributable to a shift in timing of new store openings, as we incurred some preopening costs in first quarter of '17 associated with the opening of the Albuquerque store on July 8, 2017, which occurred early in our fiscal second quarter.

We incurred $3.5 million in severance-related costs associated with our optimization plan in the first quarter this year. Our net interest expense in the first quarter fiscal '17 was $4.2 million, up slightly from the prior year period. The effective tax rate for the quarter was 37.4% compared to 33.3% in the first quarter of last year. The increase in the effective tax rate is primarily due to a shift in the mix of projected domestic and foreign earnings.

Our net loss for the quarter was $7.7 million or $0.16 per share as compared to a net loss of $2.1 million or $0.04 per share in the first quarter of last year. On an adjusted basis, the net loss was $5.5 million or $0.11 per share as compared to an adjusted net loss of $4.2 million or $0.09 per share in first quarter last year.

The net loss per share and adjusted net loss per share in the first quarter of fiscal '17 include a negative impact of approximately $0.01 per share from the Easter shift. As a reminder, first quarter has historically been a loss quarter at TCS. Since this is our lowest quarter for sales, and further in Q1 this year, we are burdened with the optimization plan costs for which the associated benefits will be realized in the second half of the year.

Now turning to our balance sheet. We ended the quarter with $7.2 million in cash, $324.6 million in outstanding borrowings net of deferred financing cost, which was down $13.4 million from the same time last year, and combined availability on revolving credit facilities and cash on hand of approximately $87.7 million.

We ended the quarter with inventory up just 0.8%, despite the increase in stores opened from 80 at the end of the first quarter last year to 87 at the end of the first quarter this year. On a per store basis, inventory levels at TCS were down 8.7%, with the decline partially due to improved inventory management.

Given that our first quarter results were largely in line with our expectations, we are reiterating our outlook for fiscal '17. As a reminder, that outlook called for consolidated net sales between $830 million and $850 million, 4 planned new store openings, comp store sales decrease in the low single-digit range, EPS of $0.25 to $0.35 based on a weighted average of 49 million diluted shares outstanding.

This EPS outlook is inclusive of $0.12 to $0.14 of cost per share as well as $0.15 to $0.19 of benefits per share associated with our optimization plan. On an adjusted basis, EPS is therefore expected to be $0.37 to $0.49 per year -- per share, excuse me.

We continue to expect TCS and consolidated operating margin improvement in fiscal '17, driven by our SG&A savings and efficiency program, of which we expect to realize some benefits in fiscal '17 as well as the impact of the optimization plan. We still expect our tax rate for the full fiscal '17 to be approximately 39% and our annual interest expense using forward LIBOR rates, but not assuming a debt refinancing between now and year-end, to be approximately $18 million. CapEx is still expected to be approximately $33 million.

As Melissa mentioned, we are currently in market with the refinancing of our senior secured term loan facility due in 2019 and our revolving credit facility due in 2020. The proposed term loan refinancing includes a 4-year tenor extension and will result in an increase in the interest rate. While we don't know at this time how much that increase will be, we'll provide an update once final details are known.

Looking to the second quarter, specifically. We anticipate incurring approximately $0.07 to $0.09 per share in optimization plan costs associated with third-party assistance for the next phase of our savings and efficiency efforts. These anticipated costs are expected to be recorded in SG&A during the second quarter.

In summary, we're pleased with our first-- that our first quarter top and bottom line financial performance was largely in line with our expectations. There remains more work to be done, but we are very encouraged by the progress we are making with our test-and-learn efforts and all of our strategic work. We look forward to updating you on the second quarter fiscal '17 earnings call.

Thank you. Now I'd like to turn the call back over to Michelle, so that we can open up the line for questions. Michelle?

(Operator Instructions) Our first question comes from the line of Steve Forbes with Guggenheim Securities.

I wanted to focus on gross margin, and I guess, the change in gross profit dollars during the quarter. So the mix impact you called out during the call here, was that related to category mix or channel mix? And I guess, were the promotional changes that you also mentioned planned? And can you just comment on how your POP! members responded to those changes during the period?

Sure, Steve. We did expect a meaningful decline in our gross margins for first quarter, because we knew that the benefits from the optimization plan around cost of goods would not be seen until later in the fiscal year.

As far as your question about category versus channel, it's a combination, frankly. The decline was a combination of channel between retail and business-to-business. Business-to-business, as I mentioned, we saw some strong growth there. And while they have strong contribution from a bottom line perspective, they have a lower SG&A structure. They did have a -- they do have a slightly lower gross margin profile.

Additionally, we saw good success around our refreshed merchandise campaign, so that a greater portion of our sales within retail and online were driven by campaigns. And that resulted in some degradation to gross margin percent. All of that combined, just to clarify it a bit, from a sales mix perspective, was about a 135 basis point impact on the gross margin at TCS during the quarter.

Also, just -- as a reminder, we don't expect to see the impact, again, from our vendor cost concessions that we're doing until later in the year. And that's really part of that broader project. And business-to-business, I mentioned, has a lower cost structure.

And then just as a follow-up, right, because I think gross profit dollars here were down for the first time, I guess, in recent history that we have. So how do all those changes, right, impact your thought process about managing gross profit dollar growth for the rest of the year, just given what you're seeing right in the business and how the customer is responding and so forth? If you can -- if you try to help us out there, that would be great.

Absolutely, Steve. We would expect to continue to see some headwinds from sales mix with growth in the lower gross margin categories around business sales and installation services. And it's always also going to be possible that our refreshed merchandise and marketing test-and-learn activities may resonate more strongly than we anticipate and particularly stronger than the category or the campaign of the prior year.

But we would fully expect that any such increase should come with incremental gross profit dollar generation and bottom line profit contribution. Remember, again, we don't expect that gross margin savings from the optimization plan to be seen until the second half of the fiscal year. And we expect that to help mitigate product mix and service cost to gross margin as we look at the full fiscal '17.

And then longer term, you're absolutely right, we're going to be focused on driving gross profit dollars and not just gross margin percent, particularly when we've got components of our business that, like business sales, that have a lower gross margin percent but a lower SG&A base to offset.

Our next question comes from the line of Matt McClintock with Barclays.

I was wondering if we could focus a little bit on comps. Seems encouraging signs here as the comps sequentially improved throughout the quarter and going into the following quarter. Could you talk a little bit about what actually drove that? What was the underlying, either products, success products or was it the campaigns? Or what actually drove that improvement from your perspective?

Right. Matt, first of all, I just want to say that we did not change our promotional cadence to drive the results that we have recognized. And honestly, it wasn't just one thing. It was a combination of many things, many changes that we are making across really the whole business but specifically in merchandising and marketing and visual presentation.

And frankly, Matt, it's also the hard work and focused work, I think, of really the entire organization and our team in terms of just really doing everything that we say we're going to do. Doing it quickly, executing against our strategy effectively and just working really, really hard these past 12 months.

And it is true, we are encouraged. But it is still really too early, particularly given the uncertain retail backdrop that we just want to be prudent with our outlook. That's why we're reiterating it. But we are encouraged and we will continue to test and learn and continue to try new things and see what happens.

Okay. And then as a follow-up, kind of separate topic, but Albuquerque has been open for a little less than a month. Can you maybe talk about your experience to-date in that store, how that might be different than some store openings in the past, and maybe initial, like, takeaways that you've drawn from that store opening?

Right. And again, it opened July 8. So it's fairly -- obviously, hasn't been opened very long. But as I said in my remarks, Matt, we were really pleased with the opening of the store and it's exceeding our expectations to-date.

We did -- it is a smaller store format. It is 25% less with 18,000 square feet; however, all departments are represented, but there are less SKUs. And perhaps some products you buy online or you Click & Pickup and pick it up in the store.

For the grand opening strategy, we did a couple of things different this year with Albuquerque that we wanted to test. One, was we partnered with a local PR agency that really offered us, and we partnered with them on a real integrated outreach program to all different kinds of media. So we had a lot of support there, really got the buzz out.

We also did a private Custom Closets VIP event one day -- or one afternoon for influencers and bloggers and professionals. And we feel like that was successful, because Albuquerque, a lot of those people were not familiar with us. So those were 2 big things that we did differently. We also did some radio and we got really great reaction from the media in terms of TV. So they were out at the store on grand opening weekend, which was great.

And for this store, typically, in the past, we have done -- we always partner with a nonprofit, and we did here as well, a charity called the Garrity Group. But in the past, what we've done is a pretty, pretty, pretty fun, pretty wonderful grand opening party on a Thursday night. So it's a private event also for the nonprofit and our employees and customers.

And this year, we just -- for Albuquerque, we decided not to try that. We were going to not do that. We were going to try something different. And we were pleased. We are very pleased with the results. It's a really good team there and so far so good.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

It's Joshua Siber, on for Simeon. So you have a good purview into discretionary high-ticket spending. Can you describe the spending environment you're seeing and any read-through to how the consumer spending patterns are changing?

Let me start it -- I mean, I think we can tell you that we saw some solid ongoing growth come from our Custom Closets part of our business, which would be our higher-ticket part of our business. So I think we're of the opinion that the customer is still spending. And as long as you give them a good service experience and have the right products and all the other elements it takes, that they're still buying.

I mean, we don't, Simeon (sic - Joshua), as you know, we don't break out kind of the comp drivers, but we're seeing across the board that the comp metric is improving. And it's not just ticket and transactions, but it is -- traffic is improving, albeit still very challenging.

So we're pleased, particularly that our customer is not only shopping TCS Closets or Custom Closets, in general, but as I said in my remarks, the other product categories are also continuing to improve, which is really, really, really important because that's part of our many key differentiators. We sell solutions and we want to sell all the other product solutions and completion products around an organized space.

Okay. So my follow-up, you mentioned good service experience. I'm curious on the payroll reductions. How much of that is at the corporate and much of it is in stores and customer-facing?

It's 0 customer-facing, but Jodi, if you want to go ahead and talk more.

Yes, I think that's the key, Melissa. When we did our position eliminations, and any of our SG&A efficiency efforts that we have done, it's not been around customer-facing payroll allocation. We are making sure that that's preserved.

Where we're cutting is behind that. It's really through efficiencies that we're gaining throughout our entire business, through just, as Melissa said, hundreds of actions and task force and other efforts that we have underway throughout the whole company to make ourselves even more efficient.

Okay. And just one unrelated one on the digital marketing. You mentioned you're stepping it up. Are you concerned at all that you might be alienating your core customer by moving more towards online? Or do you see that the core customer actually does browse online and then come into the stores?

Absolutely the latter, Simeon, absolutely the latter.

Yes. Our customer is doing lots of research online first and then coming in. And we certainly -- we're agnostic channel-wise to us.

And Simeon, we know that for a fact because, again, we're in the middle still of a really deep customer insight project with a third party, as I mentioned, and we're learning that that is indeed fact, which I think it is for a lot of retailers.

Our next question comes from Matt Fassler with Goldman Sachs.

My first question is just want to try to put some tighter contours around the performance of closets. If you could give us a sense as to what the growth looked like, and just to make sure we're still talking on the same in terms of the same category terms that we have been in prior quarters. Did the growth accelerate, decelerate similar to last quarter?

Absolutely. I can answer that for you, Matt. We did see very, very comparable growth in our closet categories this quarter that we had seen. So you heard us talk about Custom Closets contributing 50 basis points. And Melissa mentioned that that includes everything we define as custom closets for the last few quarters, which is TCS Closets, which, not surprisingly, is the largest driver because that is still not a mature product line as well as Elfa-related services and our closet completion department. So that drove 50 basis points of growth.

We think it's going to be more helpful for you this fiscal year if we actually provide that full category of sales metrics, which is over 40% of our sales at The Container Store versus just TCS Closets. But I can tell you, TCS Closets grew at a comparable rate to what it had Q4. Remember that it was in all stores as of December of 2015. So we've now anniversaried being up against any store that had no sales in the prior year before they got the launch into their store.

Okay, understood. And then I know you touched on some elements of this, but you obviously have the investments in your restructuring and then the anticipated benefits of the restructuring. And I know that the first part of the year of the fiscal year is tilted towards the cost.

Can you just remind us if you gave us a number on the expenses that you've booked against an annual total and whether you've started to make headwind, any of the benefits to-date, just so we can sort of track the progress of this financial initiative?

Absolutely. We still have the same expectations that we laid out last quarter. So we're expecting the benefits to be $12 million to $15 million that impact fiscal '17. Annualized, we expect those to be approximately $20 million. We expect those benefits to be very heavily weighted to the second half of the year and to be split relatively evenly between SG&A and cost of goods.

On the cost side, we did incur approximately $3.5 million or $0.05 a share in first quarter. Out of the total, we expect to incur for the year of $9 million to $11 million. All those costs are currently expected to be incurred in the first half of the fiscal year. The second quarter is expected to incur $0.07 to $0.09, which is about $5.5 million to $7.5 million of the remaining expenses.

So the severance was the totality of the cost and it sounds like any benefits derived so far from the restructuring have been de minimis?

That's exactly right, Matt. That's a good summary.

Our next question comes from the line of Dan Binder with Jefferies.

It's Dan Binder. Just wanted to go back to the sales revitalization efforts. Could you just give a little more detail around what you did specifically? And I know you said you expected the gross margin decline, it was probably a little bit more than the rest of us were expecting.

Can you give us a little bit more color on how to think about gross margin levels through the balance of the year? And then, finally, you mentioned the B2B was this lower margin category. How big is that business today?

I can answer the B2B and then we'll go backwards with your -- I think there's maybe 3 questions in there, I think, Dan, if I got it right. But B2B, yes, online only, which, of course, is direct-to-consumer. We were up 20.1% in Q1. But the whole web generated, which includes direct-to-consumer plus Click & Pickup and deliver, we were up 26.7%.

And truly, we believe that these were driven by, again, what we talked about, our refreshed merchandising marketing campaigns. And we also had a higher allocation of marketing spend to these digital channels that I talked about, like affiliates and product listing ads, et cetera, et cetera.

So online, we're pleased with that growth. Again, as Jodi said earlier and I said in opening remarks, we're channel-agnostic, but we certainly are going to continue to invest in our online business and our online site.

And then, Matt -- I'm sorry, Dan, on the B2B side, it's still not a significant portion of our total sales, but it is growing at a greater rate than the rest of the company and we do think it has a large business opportunity for us. So B2B is something that we're committed to and have put more resources around. So we do expect this year to continue to see some ongoing growth from that channel.

Because we have an in-house, Dan, sales team for B2B as well as we're partnering with manufacturing sales representative firms around the country. So we're going to be focusing on hospitality and new home construction and contractors and hospitals and schools, et cetera.

And then, Dan, around the sales revitalization, Melissa, you're probably going to want to add to this, but it's a combination, as Melissa said, of many, many things. But certainly, the reallocation, and it's not incremental, the reallocation of spend that we're doing between traditional channels and digital channels in marketing is driving some quantifiably increased sales. And that really is also in tandem with refreshing merchandise campaigns. So it all is kind of playing together.

Additionally, the POP! program, which was launched almost exactly 3 years ago into all of our stores and now has over 5.1 million customers in that program. Now that it's in 3 years, I think we mentioned this on the fourth quarter call. And that has continued as we expected into first quarter where we're able to really have some great data now with some key patterns.

We can differentiate amongst -- or discern among our customers so that we can then approach any customer who's falling out of pattern and with a slight discount incent them to come back and reengage. So again, we're able to quantify some incremental sales there as well. So it's not any one particular thing, it's a wide variety of efforts that are driving the improvement in comps that we're seeing.

And then on the gross margin front, all of that kind of mixed together goes to the discussion that I think we had earlier, which is we would expect that the sales mix will continue to persist as we go through the rest of the fiscal year, where we'll see a greater portion of sales that are weighted to B2B. And also we -- so there should be some mix headwind there that we see as the rest of the year proceeds.

And then, additionally, there is always the possibility that our refreshed merchandise marketing customer and campaign offers may resonate greater and drive maybe more incremental gross margin dollars and sales than we envisioned, but slightly impact the gross margin percent.

But again, the gross margin savings from our optimization plan, we're just wrapping that project up that we referred to this month. And so we'll start purchasing at lower cost and that'll flow through our inventory as it turns about 4x a year.

The remainder of the year, so that's only going to benefit us in the second half of the year. So again, we do believe that that should offset the impact of comp mix and services that we see the gross margin for this fiscal year. And as we pivot forward, we're going to continue to be focused on gross profit dollars, not just percent.

Great. If I could just sneak one last in. Back to college categories, how are they performing since we're in the heat of that season?

Yes. And we just finished this past weekend our college program and our product offerings and we're very encouraged with what we saw.

That's another great example, Melissa, of where we're really trying new things and are seeing success where we partnered with a third-party agency and used social media and our digital channel very, very heavily and have seen some good success.

And we changed the marketing of it this year. Again, we've made a lot of changes. We're testing and learning on so many fronts. And the college one, we were very pleased with.

This concludes our question-and-answer session. I would like to turn the call back over to Melissa Reiff for closing remarks.

Thank you, Michelle. And I just want to say, Jodi and I thank you all for so much for your interest. And we really do look forward to updating you on our progress at our second earnings quarterly call. Thanks so much.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.