The Container Store (TCS) Down 18% on Sales Miss and Lowered Outlook

by Ryan Fitzwater, Director of Research, The Oxford Club
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The Container Store Group (NYSE: TCS) is down over 18% today after missing Wall Street’s sales expectations and lowering its full-year outlook.

The organization and storage products retailer reported revenue of $193.2 million versus analyst expectation of $199.2 million. It also updated its full fiscal year sales outlook to $800 million to $810 million, while Wall Street was expecting over $821 million for the full year.

Same store sales for the quarter were also down 0.4%. Analysts look at same-store sales (also known as S.S.S or comps) frequently in the retail industry to measure sales growth at stores that have been open for at least one year. It is an important metric to gauge since a company can boost sales just by opening several new stores. It helps us differentiate revenue growth that comes from new stores versus growth that is a result of improved operations and management at already existing establishments.

CEO Kip Tindell brushed off the drop in same store sales stating, “We are very excited about our new store growth, with three more openings ahead of us this year. With a 12% minimum annual growth target, The Container Store is among the fastest growers by square footage in the retail industry.”

While Tindell can be optimistic about future sales from new stores, investors should be cautious. Since The Container Store’s Initial Public Offering (IPO) on November 1, 2013, shares have plummeted over 40%. And today it is hitting an all-time low of $17.90.

As you can see in the chart above, it hasn’t been an easy ride for investors.

Of course, today’s drop in price might seem like a tempting opportunity for discount shoppers out there. But you could also be catching a falling knife. Sounds like a perfect time to grade the company from a fundamental perspective with our Investment U Fundamental Factor Test:

Earnings-per-Share (EPS) Growth: Since The Container Store just reported its forth official quarter since going public, we cannot grade it on year-over-year growth. Instead, we will take its -$0.93 EPS over the last 12 months as a negative sign. It is projected to turn this around in the future, but until that happens we will be skeptical.

Price-to-Earnings (P/E) Ratio: As we just mentioned, EPS has been negative over the last 12 months. Since we cannot calculate trailing P/E with negative earnings we will take a look at its forward (expected) earnings. Its forward P/E of 38.96 is almost double the industry average of 19.79. Discount shoppers beware.

Debt-to-Equity : The Container Store’s debt-to-equity of 187.17% is four times higher than the industry average of 45.53%. This overleverage is very concerning.

Free Cash Flow per Share Growth : Once again, we have to refer to trailing 12-month data since the company is a neophyte. Over the last 12 months, free cash flow has clocked in at negative $3.9 million. With a high debt load, it better start turning up the free cash flow sooner rather than later.

Profit Margins Here’s a tiny bit of a silver lining. The company’s profit margins of 3.60% are a point higher than its peer average of 2.47%.

 Return on Equity Unfortunately, The Container Store closes out our last metric with another bad mark. Its ROE of 6.41% is well below the industry average of 10.11%.

*Why did we look at these specific metrics? Find out more here.

Fundamental Factor Test Score

F: Sell (One Key Metric or Less)

Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That's why The Oxford Club offers over a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth. For more details, click here.

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