ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary note regarding forward-looking statements
This report, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements included in this Quarterly Report, including without limitation statements regarding expectations for our business, anticipated financial performance and liquidity, anticipated interest expense, and expectations regarding our Optimization Plan, are only predictions and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These include, but are not limited to: a decline in the health of the economy and the purchase of discretionary items; risks related to new store openings; our inability to source and market our products to meet customer preferences or inability to offer customers an aesthetically pleasing shopping environment; the risk that our operating and financial performance in a given period will not meet the guidance we provided to the public; the risk that significant business initiatives may not be successful; our dependence on a single distribution center for all of our stores; risks related to opening a second distribution center; our reliance on third-party web service providers; the vulnerability of our facilities and systems to natural disasters and other unexpected events; risks related to our reliance on independent third-party transportation providers for substantially all of our product shipments; our dependence on our brand image and any inability to protect our brand; our failure to successfully anticipate consumer demand and manage inventory commensurate with demand; our failure to effectively manage our growth; our inability to lease space on favorable terms; fluctuations in currency exchange rates; risks related to a security breach or cyber-attack of our website or information technology systems, and other damage to such systems; our inability to effectively manage online sales; effects of competition on our business; risks related to our inability to obtain capital on satisfactory terms or at all; disruptions in the global financial markets leading to difficulty in borrowing sufficient amounts of capital to finance the carrying costs of inventory to pay for capital expenditures and operating costs; our inability to obtain merchandise from our vendors on a timely basis and at competitive prices; the risk that our vendors may sell their products to our competitors; our dependence on key executive management, and the transition in our executive leadership; our inability to find, train and retain key personnel; labor activities and unrest; rising health care and labor costs; risks associated with our dependence on foreign imports; risks related to violations of anti-bribery and anti-kickback laws; risks related to our indebtedness; risks related to our fixed lease obligations; material damage to or interruptions in our information technology systems; risks related to litigation; product recalls and/or product liability and changes in product safety and consumer protection laws; changes in statutory, regulatory, accounting and other legal requirements; risks related to changes in estimates or projections used to assess the fair value of our intangible assets; impacts to our business as a result of the Tax Cuts and Jobs Act; seasonal fluctuations in our operating results; material disruptions in one of our Elfa manufacturing facilities; our inability to protect our intellectual property rights and claims that we have infringed third parties’ intellectual property rights; risks related to our status as a controlled company; significant fluctuations in the price of our common stock; substantial future sales of our common stock, or the perception that such sales may occur, which could depress the price of our common stock; risks related to being a public company; anti-takeover provisions in our governing documents, which could delay or prevent a change in control; reduced disclosure requirements applicable to emerging growth companies, which could make our stock less attractive to investors; and our failure to establish and maintain effective internal controls. Other important risk factors that could affect the outcome of the events set forth in these statements and that could affect our operating results and financial condition are described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended March 31, 2018, filed with the Securities and Exchange Commission (the “SEC”) on May 31, 2018.
We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this report. Because forward-looking statements are inherently subject to risks and uncertainties, you should not rely on these forward-looking statements as predictions of future
events. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein after the date of this report, whether as a result of any new information, future events or otherwise.
Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to the “Company,” “we,” “us,” and “our” refer to The Container Store Group, Inc. and, where appropriate, its subsidiaries.
We follow a 4-4-5 fiscal calendar, whereby each fiscal quarter consists of thirteen weeks grouped into two four-week “months” and one five-week “month”, and our fiscal year is the 52- or 53-week period ending on the Saturday closest to March 31. Fiscal 2018 ends on March 30, 2019 and fiscal 2017 ended on March 31, 2018. The second quarter of fiscal 2018 ended on September 29, 2018 and the second quarter of fiscal 2017 ended on September 30, 2017, and both included thirteen weeks.
Overview
The Container Store® is the original and leading specialty retailer of storage and organization products and solutions in the United States and the only national retailer solely devoted to the category. We provide a collection of creative, multifunctional and customizable storage and organization solutions that are sold in our stores and online through a high-service, differentiated shopping experience. Our vision is to be a beloved brand and the first choice for customized organization solutions and services. Our customers are highly educated, very busy and primarily homeowners with a higher than average household income. We service them with storage and organization solutions that help them accomplish projects, maximize their space, and make the most of their home.
Our operations consist of two operating segments:
The Container Store
(“
TCS”),
which consists of our retail stores, website and call center, as well as our installation and organizational services business. As of September 29, 2018, we operated 92 stores with an average size of approximately 25,000 square feet 19,000 selling square feet) in 33 states and the District of Columbia. We allow our customers to shop with us in a variety of ways
—
anywhere, anytime, any way they want through a multi-channel shopping experience. Our stores receive substantially all of our products directly from our distribution center co-located with our corporate headquarters and call center in Coppell, Texas.
Elfa,
The Container Store, Inc.’s wholly-owned Swedish subsidiary, Elfa International AB (“Elfa”), which designs and manufactures component-based shelving and drawer systems and made-to-measure sliding doors. Elfa was founded in 1948 and is headquartered in Malmö, Sweden. Elfa’s shelving and drawer systems are customizable for any area of the home, including closets, kitchens, offices and garages. Elfa operates three manufacturing facilities with two located in Sweden and one in Poland. The Container Store began selling elfa® products in 1978 and acquired Elfa in 1999. Today our TCS segment is the exclusive distributor of elfa® products in the U.S. Elfa also sells its products on a wholesale basis to various retailers in approximately 30 countries around the world, with a concentration in the Nordic region of Europe.
Optimization Plan
As previously announced in fiscal 2017, we launched a four-part optimization plan to drive improved sales and profitability (the “Optimization Plan”). This plan includes sales initiatives, certain full-time position eliminations at TCS, organizational realignment at Elfa and ongoing savings and efficiency efforts.
In fiscal 2018, we expect to complete the Optimization Plan through the execution of a price optimization initiative. The price optimization initiative is designed to maximize sales and gross profit. We incurred approximately $4.9 million of pre-tax charges associated with the implementation of the price optimization initiative in the first quarter of fiscal 2018 and do not currently expect to incur additional costs for the Optimization Plan in the remainder of fiscal 2018.
Note on Dollar Amounts
All dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are in thousands, except per share amounts and unless otherwise stated.
Results of Operations
The following data represents the amounts shown in our unaudited consolidated statements of operations expressed in dollars and as a percentage of net sales and operating data for the periods presented. For segment data, see Note 10 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
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|
|
|
September 29,
|
|
September 30,
|
|
September 29,
|
|
September 30,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Net sales
|
|
$
|
224,453
|
|
$
|
218,410
|
|
$
|
420,276
|
|
$
|
401,478
|
|
Cost of sales (excluding depreciation and amortization)
|
|
|
93,878
|
|
|
92,036
|
|
|
174,930
|
|
|
171,494
|
|
Gross profit
|
|
|
130,575
|
|
|
126,374
|
|
|
245,346
|
|
|
229,984
|
|
Selling, general, and administrative expenses (excluding depreciation and amortization)
|
|
|
105,656
|
|
|
106,332
|
|
|
212,261
|
|
|
202,972
|
|
Stock-based compensation
|
|
|
769
|
|
|
510
|
|
|
1,355
|
|
|
1,004
|
|
Pre-opening costs
|
|
|
881
|
|
|
1,418
|
|
|
1,227
|
|
|
2,804
|
|
Depreciation and amortization
|
|
|
9,128
|
|
|
9,505
|
|
|
18,465
|
|
|
19,047
|
|
Other expenses
|
|
|
24
|
|
|
623
|
|
|
217
|
|
|
4,157
|
|
Loss on disposal of assets
|
|
|
—
|
|
|
102
|
|
|
40
|
|
|
153
|
|
Income (loss) from operations
|
|
|
14,117
|
|
|
7,884
|
|
|
11,781
|
|
|
(153)
|
|
Interest expense, net
|
|
|
7,377
|
|
|
5,873
|
|
|
15,285
|
|
|
10,098
|
|
Loss on extinguishment of debt
|
|
|
2,082
|
|
|
2,369
|
|
|
2,082
|
|
|
2,369
|
|
Income (loss) before taxes
|
|
|
4,658
|
|
|
(358)
|
|
|
(5,586)
|
|
|
(12,620)
|
|
Provision (benefit) for income taxes
|
|
|
1,417
|
|
|
517
|
|
|
(2,063)
|
|
|
(4,068)
|
|
Net income (loss)
|
|
$
|
3,241
|
|
$
|
(875)
|
|
$
|
(3,523)
|
|
$
|
(8,552)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
|
|
September 29,
|
|
September 30,
|
|
September 29,
|
|
September 30,
|
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of net sales:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Cost of sales (excluding depreciation and amortization)
|
|
|
41.8
|
%
|
|
42.1
|
%
|
|
41.6
|
%
|
|
42.7
|
%
|
|
Gross profit
|
|
|
58.2
|
%
|
|
57.9
|
%
|
|
58.4
|
%
|
|
57.3
|
%
|
|
Selling, general, and administrative expenses (excluding depreciation and amortization)
|
|
|
47.1
|
%
|
|
48.7
|
%
|
|
50.5
|
%
|
|
50.6
|
%
|
|
Stock‑based compensation
|
|
|
0.3
|
%
|
|
0.2
|
%
|
|
0.3
|
%
|
|
0.3
|
%
|
|
Pre‑opening costs
|
|
|
0.4
|
%
|
|
0.6
|
%
|
|
0.3
|
%
|
|
0.7
|
%
|
|
Depreciation and amortization
|
|
|
4.1
|
%
|
|
4.4
|
%
|
|
4.4
|
%
|
|
4.7
|
%
|
|
Other expenses
|
|
|
0.0
|
%
|
|
0.3
|
%
|
|
0.1
|
%
|
|
1.0
|
%
|
|
Loss on disposal of assets
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
Income (loss) from operations
|
|
|
6.3
|
%
|
|
3.6
|
%
|
|
2.8
|
%
|
|
0.0
|
%
|
|
Interest expense, net
|
|
|
3.3
|
%
|
|
2.7
|
%
|
|
3.6
|
%
|
|
2.5
|
%
|
|
Loss on extinguishment of debt
|
|
|
0.9
|
|
|
1.1
|
|
|
0.5
|
|
|
0.6
|
|
|
Income (loss) before taxes
|
|
|
2.1
|
%
|
|
(0.2)
|
%
|
|
(1.3)
|
%
|
|
(3.1)
|
%
|
|
Provision (benefit) for income taxes
|
|
|
0.6
|
%
|
|
0.2
|
%
|
|
(0.5)
|
%
|
|
(1.0)
|
%
|
|
Net income (loss)
|
|
|
1.4
|
%
|
|
(0.4)
|
%
|
|
(0.8)
|
%
|
|
(2.1)
|
%
|
|
Operating data:
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|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable store sales growth for the period (1)
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|
|
1.3
|
%
|
|
1.9
|
%
|
|
2.9
|
%
|
|
0.4
|
%
|
|
Number of stores open at end of period
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|
|
92
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|
|
88
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|
|
92
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|
|
88
|
|
|
Non‑GAAP measures (2):
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|
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|
|
|
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|
|
|
|
|
Adjusted EBITDA (3)
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|
$
|
24,347
|
|
$
|
26,516
|
|
$
|
36,738
|
|
$
|
32,946
|
|
|
Adjusted net income (4)
|
|
$
|
4,748
|
|
$
|
5,544
|
|
$
|
736
|
|
$
|
70
|
|
|
Adjusted net income per common share—diluted (4)
|
|
$
|
0.10
|
|
$
|
0.12
|
|
$
|
0.02
|
|
$
|
$
0.00
|
|
|
|
(1)
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A store is included in the comparable store sales calculation on the first day of the sixteenth full fiscal month following the store’s opening. Comparable store sales reflect the point at which merchandise and service orders are fulfilled and delivered to customers, excluding shipping and delivery, and are net of discounts and returns. When a store is relocated, we continue to consider net sales from that store to be comparable store sales. Website, call center and business-to-business net sales are also included in calculations of comparable store sales.
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(2)
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We have presented EBITDA, Adjusted EBITDA, adjusted net income, and adjusted net income per diluted share as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. These non-GAAP measures should not be considered as alternatives to net income (loss) as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. These non-GAAP measures are key metrics used by management, our board of directors, and LGP to assess our financial performance. We present these non-GAAP measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance and because we believe it is useful for investors to see the measures that management uses to evaluate the Company. These non-GAAP measures are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In evaluating these non-GAAP measures, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of these non-GAAP measures should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using non-GAAP measures supplementally. Our non-GAAP measures are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation. Please refer to footnotes (3) and (4) of this table for further information regarding why we believe each non-GAAP measure provides useful information to investors regarding our financial condition and results of operations, as well as the additional purposes for which management uses each non-GAAP financial measure.
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Additionally, this Management’s Discussion and Analysis also refers to Elfa third-party net sales after the conversion of Elfa’s net sales from Swedish krona to U.S. dollars using the prior year’s conversion rate. The Company believes the disclosure of Elfa third-party net sales without the effects of currency exchange rate fluctuations helps investors understand the Company’s underlying performance.
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(3)
|
|
EBITDA and Adjusted EBITDA have been presented in this Quarterly Report on Form 10-Q as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as net income before interest, taxes, depreciation, and amortization. Adjusted EBITDA is calculated in accordance with our Secured Term Loan Facility and the Revolving Credit Facility and is one of the components for performance evaluation under our executive compensation programs. Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of certain items, including certain non-cash and other items that we do not consider in our evaluation of ongoing operating performance from period to period as discussed further below.
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EBITDA and Adjusted EBITDA, are included in this Quarterly Report on Form 10-Q because they are key metrics used by management, our board of directors and LGP to assess our financial performance. In addition, we use Adjusted EBITDA in connection with covenant compliance and executive performance evaluations, and we use Adjusted EBITDA to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We believe it is useful for investors to see the measures that management uses to evaluate the Company, its executives and our covenant compliance, as applicable. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.
EBITDA and Adjusted EBITDA are not GAAP measures of our financial performance or liquidity and should not be considered as alternatives to net income (loss) as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Additionally, EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as they do not reflect certain cash requirements such as tax payments, debt service requirements, capital expenditures, store openings and certain other cash costs that may recur in the future. EBITDA and Adjusted EBITDA contain certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation, such as pre-opening costs and stock compensation expense. Our presentation of Adjusted EBITDA should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using EBITDA and Adjusted EBITDA supplementally. Our measures of EBITDA and Adjusted EBITDA margin are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.
A reconciliation of net income (loss) to EBITDA and Adjusted EBITDA is set forth below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
|
September 29,
|
|
September 30,
|
|
September 29,
|
|
September 30,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,241
|
|
$
|
(875)
|
|
$
|
(3,523)
|
|
$
|
(8,552)
|
|
Depreciation and amortization
|
|
|
9,128
|
|
|
9,505
|
|
|
18,465
|
|
|
19,047
|
|
Interest expense, net
|
|
|
7,377
|
|
|
5,873
|
|
|
15,285
|
|
|
10,098
|
|
Income tax provision (benefit)
|
|
|
1,417
|
|
|
517
|
|
|
(2,063)
|
|
|
(4,068)
|
|
EBITDA
|
|
|
21,163
|
|
|
15,020
|
|
|
28,164
|
|
|
16,525
|
|
Pre-opening costs (a)
|
|
|
881
|
|
|
1,418
|
|
|
1,227
|
|
|
2,804
|
|
Non-cash rent (b)
|
|
|
(581)
|
|
|
(276)
|
|
|
(1,218)
|
|
|
(737)
|
|
Stock-based compensation (c)
|
|
|
769
|
|
|
510
|
|
|
1,355
|
|
|
1,004
|
|
Loss on extinguishment of debt (d)
|
|
|
2,082
|
|
|
2,369
|
|
|
2,082
|
|
|
2,369
|
|
Foreign exchange losses (e)
|
|
|
9
|
|
|
130
|
|
|
47
|
|
|
54
|
|
Optimization Plan implementation charges (f)
|
|
|
—
|
|
|
6,786
|
|
|
4,864
|
|
|
10,320
|
|
Elfa manufacturing facility closure (g)
|
|
|
—
|
|
|
517
|
|
|
—
|
|
|
517
|
|
Other adjustments (h)
|
|
|
24
|
|
|
42
|
|
|
217
|
|
|
90
|
|
Adjusted EBITDA
|
|
$
|
24,347
|
|
$
|
26,516
|
|
$
|
36,738
|
|
$
|
32,946
|
|
|
(a)
|
|
Non-capital expenditures associated with opening new stores and relocating stores, including rent, marketing expenses, travel and relocation costs, and training costs. We adjust for these costs to facilitate comparisons of our performance from period to period.
|
|
(b)
|
|
Reflects the extent to which our annual GAAP rent expense has been above or below our cash rent payment due to lease accounting adjustments. The adjustment varies depending on the average age of our lease portfolio (weighted for size), as our GAAP rent expense on younger leases typically exceeds our cash cost, while our GAAP rent expense on older leases is typically less than our cash cost.
|
|
(c)
|
|
Non-cash charges related to stock-based compensation programs, which vary from period to period depending on volume and vesting timing of awards. We adjust for these charges to facilitate comparisons from period to period.
|
|
(d)
|
|
Loss recorded as a result of the amendments made to the Senior Secured Term Loan Facility in September 2018 and the amendments made to the Senior Secured Term Loan Facility and the Revolving Credit Facility in August 2017, which we do not consider in our evaluation of our ongoing operations.
|
|
(e)
|
|
Realized foreign exchange transactional gains/losses our management does not consider in our evaluation of our ongoing operations.
|
|
(f)
|
|
Charges incurred to implement our Optimization Plan, which include certain consulting costs recorded in selling, general and administrative expenses in the first quarter of fiscal 2018 and the first and second quarters of fiscal 2017, cash severance payments associated with the elimination of certain full-time positions at the TCS segment recorded in other expenses in the first and second quarters of fiscal 2017, and cash severance payments associated with organizational realignment at the Elfa segment recorded in other expenses in the first and second quarters of fiscal 2017, which we do not consider in our evaluation of ongoing performance.
|
|
(g)
|
|
Charges related to the closure of an Elfa manufacturing facility in Lahti, Finland in December 2017, recorded in other expenses, which we do not consider in our evaluation of our ongoing performance.
|
|
(h)
|
|
Other adjustments include amounts our management does not consider in our evaluation of our ongoing operations, including certain severance and other charges.
|
|
(4)
|
|
Adjusted net income and adjusted net income per diluted share have been presented in this Quarterly Report on Form 10-Q as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define adjusted net income as net income (loss) before distributions accumulated to preferred
|
shareholders, stock-based compensation and other costs in connection with our IPO, restructuring charges, impairment charges related to intangible assets, losses on extinguishment of debt, certain gains on disposal of assets, certain management transition costs incurred and benefits realized, charges incurred as part of the implementation of our Optimization Plan, charges associated with an Elfa manufacturing facility closure, and the tax impact of these adjustments and other unusual or infrequent tax items. We define adjusted net income per diluted share as adjusted net income divided by the diluted weighted average common shares outstanding. We use adjusted net income and adjusted net income per diluted share to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We present adjusted net income and adjusted net income per diluted share because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance and because we believe it is useful for investors to see the measures that management uses to evaluate the Company.
|
A reconciliation of the GAAP financial measures of net income (loss) and net income (loss) per diluted share to the non-GAAP financial measures of adjusted net income and adjusted net income per diluted share is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Weeks Ended
|
|
Twenty-Six Weeks Ended
|
|
|
|
September 29,
|
|
September 30,
|
|
September 29,
|
|
September 30,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,241
|
|
$
|
(875)
|
|
$
|
(3,523)
|
|
$
|
(8,552)
|
|
Elfa manufacturing facility closure (a)
|
|
|
—
|
|
|
517
|
|
|
—
|
|
|
517
|
|
Loss on extinguishment of debt (b)
|
|
|
2,082
|
|
|
2,369
|
|
|
2,082
|
|
|
2,369
|
|
Optimization Plan implementation charges (c)
|
|
|
—
|
|
|
6,786
|
|
|
4,864
|
|
|
10,320
|
|
Taxes (d)
|
|
|
(575)
|
|
|
(3,253)
|
|
|
(2,687)
|
|
|
(4,584)
|
|
Adjusted net income
|
|
$
|
4,748
|
|
$
|
5,544
|
|
$
|
736
|
|
$
|
70
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding—diluted
|
|
|
48,519,166
|
|
|
48,058,231
|
|
|
48,138,907
|
|
|
48,053,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
—
diluted
|
|
$
|
0.07
|
|
$
|
(0.02)
|
|
$
|
(0.07)
|
|
$
|
(0.18)
|
|
Adjusted net income per common share—diluted
|
|
$
|
0.10
|
|
$
|
0.12
|
|
$
|
0.02
|
|
$
|
0.00
|
|
|
(a)
|
|
Charges related to the closure of an Elfa manufacturing facility in Lahti, Finland in December 2017, recorded in other expenses, which we do not consider in our evaluation of our ongoing performance.
|
|
(b)
|
|
Loss recorded as a result of the amendments made to the Senior Secured Term Loan Facility in September 2018 and the amendments made to the Senior Secured Term Loan Facility and the Revolving Credit Facility in August 2017, which we do not consider in our evaluation of our ongoing operations.
|
|
(c)
|
|
Charges incurred to implement our Optimization Plan, which include certain consulting costs recorded in selling, general and administrative expenses in the first quarter of fiscal 2018 and the first and second quarters of fiscal 2017, cash severance payments associated with the elimination of certain full-time positions at the TCS segment recorded in other expenses in the first and second quarters of fiscal 2017, and cash severance payments associated with organizational realignment at the Elfa segment recorded in other expenses in the first and second quarters of fiscal 2017, which we do not consider in our evaluation of ongoing performance.
|
|
(d)
|
|
Tax impact of adjustments to net income (loss), as well as the estimated impact of the Tax Cuts and Jobs Act enacted in fiscal 2017 and the tax benefit recorded in the first quarter of fiscal 2018 as a result of a reduction in the Swedish tax rate, which are considered to be unusual or infrequent tax items, all of which we do not consider in our evaluation of ongoing performance.
|
Thirteen Weeks Ended September 29, 2018 Compared to Thirteen Weeks Ended September 30, 2017
Net sales
The following table summarizes our net sales for each of the thirteen weeks ended September 29, 2018 and September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2018
|
|
% total
|
|
September 30, 2017
|
|
% total
|
|
TCS net sales
|
|
$
|
208,915
|
|
93.1
|
%
|
$
|
202,321
|
|
92.6
|
%
|
Elfa third party net sales
|
|
|
15,538
|
|
6.9
|
%
|
|
16,089
|
|
7.4
|
%
|
Net sales
|
|
$
|
224,453
|
|
100.0
|
%
|
$
|
218,410
|
|
100.0
|
%
|
Net sales in the thirteen weeks ended September 29, 2018 increased by $6,043, or 2.8%, compared to the thirteen weeks ended September 30, 2017. This increase is comprised of the following components:
|
|
|
|
|
|
Net sales
|
Net sales for the thirteen weeks ended September 30, 2017
|
|
$
|
218,410
|
Incremental net sales increase (decrease) due to:
|
|
|
|
Comparable stores (including a $3,082, or 18.4%, increase in online sales)
|
|
|
2,639
|
New stores
|
|
|
3,850
|
Elfa third party net sales (excluding impact of foreign currency translation)
|
|
|
934
|
Impact of foreign currency translation on Elfa third party net sales
|
|
|
(1,485)
|
Shipping and delivery
|
|
|
105
|
Net sales for the thirteen weeks ended September 29, 2018
|
|
$
|
224,453
|
In the thirteen weeks ended September 29, 2018, comparable stores generated a $2,639, or 1.3%, increase in net sales. Additionally, six new stores generated $3,850 of incremental net sales, four of which were opened during fiscal 2017 and two of which were opened in the first twenty-six weeks of fiscal 2018. Elfa third party net sales decreased $551 in the thirteen weeks ended September 29, 2018. After converting Elfa’s third party net sales from Swedish krona to U.S. dollars using the prior year’s conversion rate for both the thirteen weeks ended September 29, 2018 and thirteen weeks ended September 30, 2017, Elfa third party net sales increased $934 primarily due to higher net sales in Nordic markets.
Gross profit and gross margin
Gross profit in the thirteen weeks ended September 29, 2018 increased by $4,201, or 3.3%, compared to the thirteen weeks ended September 30, 2017. The increase in gross profit was primarily the result of increased consolidated net sales, combined with an increase in consolidated gross margin. The following table summarizes the gross margin for the thirteen weeks ended September 29, 2018 and September 30, 2017 by segment and total. The segment gross margins include the impact of inter-segment net sales from the Elfa segment to the TCS segment:
|
|
|
|
|
|
|
|
September 29, 2018
|
|
September 30, 2017
|
|
TCS gross margin
|
|
57.8
|
%
|
57.1
|
%
|
Elfa gross margin
|
|
34.9
|
%
|
38.2
|
%
|
Total gross margin
|
|
58.2
|
%
|
57.9
|
%
|
TCS gross margin increased 70 basis points primarily due to lower cost of goods associated with the Optimization Plan, partially offset by higher promotional activities and increased costs associated with shipping services. Elfa gross margin decreased 330 basis points primarily due to higher direct materials costs attributable to a shift in product mix and a weaker Swedish krona during the quarter. In total, gross margin increased 30 basis points primarily due to the increase in TCS gross margin during the quarter.
Selling, general and administrative expenses
Selling, general and administrative expenses (“SG&A”) in the thirteen weeks ended September 29, 2018 decreased by $676, or 0.6%, compared to the thirteen weeks ended September 30, 2017. As a percentage of consolidated net sales, SG&A decreased by 160 basis points. The following table summarizes SG&A as a percentage of total net sales for the thirteen weeks ended September 29, 2018 and September 30, 2017:
|
|
|
|
|
|
|
|
September 29, 2018
|
|
September 30, 2017
|
|
|
|
% of Net sales
|
|
% of Net sales
|
|
TCS selling, general and administrative
|
|
44.1
|
%
|
45.0
|
%
|
Elfa selling, general and administrative
|
|
3.0
|
%
|
3.7
|
%
|
Total selling, general and administrative
|
|
47.1
|
%
|
48.7
|
%
|
TCS selling, general and administrative expenses decreased by 90 basis points as a percentage of consolidated net sales. This was primarily due to consulting costs incurred as part of the implementation of the Optimization Plan in the second quarter of fiscal 2017, which contributed 310 basis points to the decrease in the second quarter of fiscal 2018. This was partially offset by a 220 basis points increase in SG&A expense as a percentage of net sales, primarily due to increased marketing expense associated with the branding campaign launch in the second quarter of fiscal 2018, as well as higher payroll and self-insurance costs.
Elfa selling, general and administrative expenses decreased by 70 basis points as a percentage of consolidated net sales, primarily due to ongoing savings and efficiency efforts.
Pre-opening costs
Pre-opening costs decreased by $537, or 37.9%, in the thirteen weeks ended September 29, 2018 to $881, as compared to $1,418 in the thirteen weeks ended September 30, 2017. The decrease is primarily due to the incurrence of pre-opening costs in the second quarter of fiscal 2017 for two stores that opened early in the third quarter of fiscal 2017. We opened one store in the thirteen weeks ended September 29, 2018, and we opened one store in the thirteen weeks ended September 30, 2017.
Other expenses
Other expenses of $24 were recorded in the thirteen weeks ended September 29, 2018, as compared to $623 in the thirteen weeks ended September 30, 2017. The $599 decrease in other expenses is primarily due to expenses incurred in the first half of fiscal 2017 in connection with the closure of the Elfa manufacturing facility in Lahti, Finland in December 2017.
Interest expense and loss on extinguishment of debt
Interest expense increased by $1,504, or 25.6%, in the thirteen weeks ended September 29, 2018 to $7,377, as compared to $5,873 in the thirteen weeks ended September 30, 2017. On September 14, 2018, we entered into a fifth amendment (the “Fifth Amendment”) to the Credit Agreement dated as of April 6, 2012 (“Senior Secured Term Loan Facility”). The Fifth Amendment amended the Senior Secured Term Loan Facility to, among other things, decrease the applicable interest rate margin to 5.00% for LIBOR loans and 4.00% for base rate loans. The lower interest expense as a result of the Fifth Amendment partly offset the higher interest expense resulting from a previous amendment in August 2017, which increased the applicable interest rate margins. As a result of entering the Fifth Amendment, we expect to incur approximately $28,000 of total interest expense in fiscal 2018.
Additionally, we recorded a loss on extinguishment of debt of $2,082 and $2,369 in the second quarters of fiscal 2018 and 2017, respectively, as a result of the amendments to the Senior Secured Term Loan Facility.
Taxes
The provision for income taxes in the thirteen weeks ended September 29, 2018 was $1,417 as compared to $517 in the thirteen weeks ended September 30, 2017. The effective tax rate for the thirteen weeks ended September 29, 2018 was
30.4%, as compared to -144.4% in the thirteen weeks ended September 30, 2017. The increase in the effective tax rate is primarily due to
the impact of a pre-tax income position in the second quarter of fiscal 2018, as compared to a pre-tax loss position in the second quarter of fiscal 2017
.
Twenty-Six Weeks Ended September 29, 2018 Compared to Twenty-Six Weeks Ended September 30, 2017
Net sales
The following table summarizes our net sales for each of the twenty-six weeks ended September 29, 2018 and September 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 29, 2018
|
|
% total
|
|
September 30, 2017
|
|
% total
|
|
TCS net sales
|
|
$
|
388,997
|
|
92.6
|
%
|
$
|
369,380
|
|
92.0
|
%
|
Elfa third party net sales
|
|
|
31,279
|
|
7.4
|
%
|
|
32,098
|
|
8.0
|
%
|
Net sales
|
|
$
|
420,276
|
|
100.0
|
%
|
$
|
401,478
|
|
100.0
|
%
|
Net sales in the twenty-six weeks ended September 29, 2018 increased by $18,798, or 4.7%, compared to the twenty-six weeks ended September 30, 2017. This increase is comprised of the following components:
|
|
|
|
|
|
Net sales
|
Net sales for the twenty-six weeks ended September 30, 2017
|
|
$
|
401,478
|
Incremental net sales increase (decrease) due to:
|
|
|
|
Comparable stores (including a $6,710, or 21.9%, increase in online sales)
|
|
|
10,368
|
New stores
|
|
|
9,129
|
Elfa third party net sales (excluding impact of foreign currency translation)
|
|
|
423
|
Impact of foreign currency translation on Elfa third party net sales
|
|
|
(1,243)
|
Shipping and delivery
|
|
|
121
|
Net sales for the twenty-six weeks ended September 29, 2018
|
|
$
|
420,276
|
In the twenty-six weeks ended September 29, 2018, comparable stores generated a $10,368, or 2.9%, increase in net sales. Additionally, six new stores generated $9,129 of incremental net sales, four of which were opened during fiscal 2017 and two of which were opened in the first twenty-six weeks of fiscal 2018. Elfa third party net sales decreased $820 in the twenty-six weeks ended September 29, 2018. After converting Elfa’s third party net sales from Swedish krona to U.S. dollars using the prior year’s conversion rate for both the twenty-six weeks ended September 29, 2018 and twenty-six weeks ended September 30, 2017, Elfa third party net sales increased $423 primarily due to higher net sales in Nordic markets.
Gross profit and gross margin
Gross profit in the twenty-six weeks ended September 29, 2018 increased by $15,362, or 6.7%, compared to the twenty-six weeks ended September 30, 2017. The increase in gross profit was primarily the result of increased consolidated net sales, combined with an increase in consolidated gross margin. The following table summarizes the gross margin for the twenty-six weeks ended September 29, 2018 and September 30, 2017 by segment and total. The segment gross margins include the impact of inter-segment net sales from the Elfa segment to the TCS segment:
|
|
|
|
|
|
|
|
September 29, 2018
|
|
September 30, 2017
|
|
TCS gross margin
|
|
57.9
|
%
|
56.8
|
%
|
Elfa gross margin
|
|
36.0
|
%
|
38.6
|
%
|
Total gross margin
|
|
58.4
|
%
|
57.3
|
%
|
TCS gross margin increased 110 basis points primarily due to lower cost of goods associated with the Optimization Plan, partially offset by increased costs associated with shipping services and higher promotional activities. Elfa gross margin decreased 260 basis points primarily due to higher direct materials costs attributable to a shift in product mix and a
weaker Swedish krona during the first half of fiscal 2018. In total, gross margin increased 110 basis points primarily due to the increase in TCS gross margin during the first half of fiscal 2018.
Selling, general and administrative expenses
SG&A in the twenty-six weeks ended September 29, 2018 increased by $9,289, or 4.6%, compared to the twenty-six weeks ended September 30, 2017. As a percentage of consolidated net sales, SG&A decreased by 10 basis points. The following table summarizes SG&A as a percentage of total net sales for the twenty-six weeks ended September 29, 2018 and September 30, 2017:
|
|
|
|
|
|
|
|
September 29, 2018
|
|
September 30, 2017
|
|
|
|
% of Net sales
|
|
% of Net sales
|
|
TCS selling, general and administrative
|
|
47.0
|
%
|
46.4
|
%
|
Elfa selling, general and administrative
|
|
3.5
|
%
|
4.2
|
%
|
Total selling, general and administrative
|
|
50.5
|
%
|
50.6
|
%
|
TCS selling, general and administrative expenses increased by 60 basis points as a percentage of consolidated net sales. The increase is primarily due to increased marketing expense associated with the branding campaign launch in the second quarter of fiscal 2018, as well as higher self-insurance and payroll costs during the first half of the year. These increases were partially offset by a 50 basis points decrease related to consulting costs as part of the implementation of the Optimization Plan in the first twenty-six weeks of fiscal 2018 compared to the prior year comparable period. Elfa selling, general and administrative expenses decreased by 70 basis points as a percentage of consolidated net sales, primarily due to ongoing savings and efficiency efforts.
Pre-opening costs
Pre-opening costs decreased by $1,577, or 56.2%, in the twenty-six weeks ended September 29, 2018 to $1,227, as compared to $2,804 in the twenty-six weeks ended September 30, 2017. We opened two stores in the twenty-six weeks ended September 29, 2018, and we opened two stores in the twenty-six weeks ended September 30, 2017. The decrease is primarily due to the incurrence of pre-opening costs in the twenty-six weeks ended September 30, 2017 for two stores that opened early in the third quarter of fiscal 2017.
Other expenses
Other expenses of $217 were recorded in the twenty-six weeks ended September 29, 2018, as compared to $4,157 in the twenty-six weeks ended September 30, 2017. The $3,940 decrease in other expenses is primarily due to severance costs incurred in the first twenty-six weeks of fiscal 2017 associated with the Optimization Plan.
Interest expense and loss on extinguishment of debt
Interest expense increased by $5,187, or 51.4%, in the twenty-six weeks ended September 29, 2018 to $15,285, as compared to $10,098 in the twenty-six weeks ended September 30, 2017. The increase is primarily due to the amendment of our Senior Secured Term Loan Facility in the second quarter of fiscal 2017, which increased the applicable interest rate margins.
Additionally, we recorded a loss on extinguishment of debt of $2,082 and $2,369 in the second quarters of fiscal 2018 and 2017, respectively, as a result of the amendments to the Senior Secured Term Loan Facility.
Taxes
The benefit for income taxes in the twenty-six weeks ended September 29, 2018 was $2,063 as compared to a benefit of $4,068, in the twenty-six weeks ended September 30, 2017. The effective tax rate for the twenty-six weeks ended September 29, 2018 was 36.9%, as compared to 32.2% in the twenty-six weeks ended September 30, 2017. The increase
in the effective tax rate is primarily due to the benefit for the remeasurement of deferred tax balances recorded in the first quarter of fiscal 2018 as a result of a change in the Swedish tax rate.
Liquidity and Capital Resources
We rely on cash flows from operations, our $100,000 asset-based revolving credit agreement (the “Revolving Credit Facility” as further discussed under “Revolving Credit Facility” below), and the SEK 140.0 million (approximately $15.8 million as of September 29, 2018) 2014 Elfa revolving credit facility (the “2014 Elfa Revolving Credit Facility” as further discussed under “2014 Elfa Senior Secured Credit Facilities” below) as our primary sources of liquidity. Our primary cash needs are for merchandise inventories, direct materials, payroll, store rent, capital expenditures associated with opening new stores and updating existing stores, as well as information technology and infrastructure, including our existing and future distribution centers, and Elfa manufacturing facility enhancements. The most significant components of our operating assets and liabilities are merchandise inventories, accounts receivable, prepaid expenses and other assets, accounts payable, other current and non-current liabilities, taxes receivable and taxes payable. Our liquidity fluctuates as a result of our building inventory for key selling periods, and as a result, our borrowings are generally higher during these periods when compared to the rest of our fiscal year. Our borrowings generally increase in our second and third fiscal quarters as we prepare for Our Annual Shelving Sale, the holiday season, and Our Annual elfa® Sale. We believe that cash expected to be generated from operations and the availability of borrowings under the Revolving Credit Facility and the 2014 Elfa Revolving Credit Facility will be sufficient to meet liquidity requirements, anticipated capital expenditures, and payments due under our existing credit facilities for at least the next 12 months. In the future, we may seek to raise additional capital, which could be in the form of loans, bonds, convertible debt or equity, to fund our operations and capital expenditures. There can be no assurance that we will be able to raise additional capital on favorable terms.
At September 29, 2018, we had $7,212 of cash, of which $3,327 was held by our foreign subsidiaries. In addition, we had $58,945 of additional availability under the Revolving Credit Facility and approximately $14,641 of additional availability under the 2014 Elfa Revolving Credit Facility as of September 29, 2018. There were $3,852 in letters of credit outstanding under the Revolving Credit Facility and other contracts at that date.
Pursuant to the Tax Act, we will be required to pay a
one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. We recorded a provisional amount of $8,521 for the one-time transition tax in fiscal 2017, which is required to be paid in installments over 8 years. Future amounts earned in our foreign subsidiaries are not expected to be subject to federal income taxes upon transfer to the United States.
However, if these funds were transferred to the United States, we may be required to pay taxes in certain international jurisdictions as well as certain states. It is our intent to indefinitely reinvest these funds outside the United States.
Cash flow analysis
A summary of our operating, investing and financing activities are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twenty-Six Weeks Ended
|
|
|
|
September 29,
|
|
September 30,
|
|
|
|
2018
|
|
2017
|
|
Net cash provided by operating activities
|
|
$
|
8,136
|
|
$
|
22,956
|
|
Net cash used in investing activities
|
|
|
(10,662)
|
|
|
(13,111)
|
|
Net cash provided by (used in) financing activities
|
|
|
1,774
|
|
|
(10,824)
|
|
Effect of exchange rate changes on cash
|
|
|
(435)
|
|
|
388
|
|
Net decrease in cash
|
|
$
|
(1,187)
|
|
$
|
(591)
|
|
Free cash flow (Non-GAAP)(1)
|
|
$
|
(2,533)
|
|
$
|
9,827
|
|
|
(1)
|
|
See below for a discussion of this non-GAAP financial measure and reconciliation to its most directly comparable GAAP financial measure
|
Net cash provided by operating activities
Cash from operating activities consists primarily of net income (loss) adjusted for non-cash items, including depreciation and amortization, deferred taxes and the effect of changes in operating assets and liabilities.
Net cash provided by operating activities was $8,136 for the twenty-six weeks ended September 29, 2018. Non-cash items of $20,433 were partially offset by net loss of $3,523 and a net change in operating assets and liabilities of $8,774. The net change in operating assets and liabilities is primarily due to an increase in merchandise inventory and a decrease in income taxes payable, partially offset by a decrease in accounts payable and accrued liabilities during the twenty-six weeks ended September 29, 2018.
Net cash provided by operating activities was $22,956 for the twenty-six weeks ended September 30, 2017. Non-cash items of $19,664 and a net change in operating assets and liabilities of $11,844, primarily due to an increase in accounts payable and accrued liabilities, were partially offset by net loss of $8,552 during the twenty-six weeks ended September 30, 2017.
Net cash used in investing activities
Investing activities consist primarily of capital expenditures for new store openings, existing store remodels, infrastructure, information systems, and our distribution centers.
Our total capital expenditures for the twenty-six weeks ended September 29, 2018 were $10,669 with new store openings, relocations and existing store remodels accounting for slightly less than half of spending at $5,099. We opened two stores during the twenty-six weeks ended September 29, 2018. The remaining capital expenditures of $5,570 were primarily for investments in our distribution centers and information technology.
Our total capital expenditures for the twenty-six weeks ended September 30, 2017 were $13,129 with new store openings, relocations and existing store remodels accounting for more than half of spending at $7,844. We opened two new stores during the twenty-six weeks ended September 30, 2017. The remaining capital expenditures of $5,285 were primarily for investments in information technology, our corporate offices and distribution center enhancements.
Net cash provided by financing activities
Financing activities consist primarily of borrowings and payments under the Senior Secured Term Loan Facility, the Revolving Credit Facility, and the Elfa Revolving Credit Facility.
Net cash provided by financing activities was $1,774 for the twenty-six weeks ended September 29, 2018. This included proceeds of $25,000 from borrowings under the Revolving Credit Facility combined with net proceeds of $1,137 from borrowings under the 2014 Elfa Revolving Credit Facility to support higher working capital needs. The net proceeds of the revolver borrowings were partially offset by net payments of $21,997 for repayment of long-term indebtedness, debt issuance costs of $2,244, and $122 for taxes paid with the withholding of shares upon vesting of restricted stock awards.
Net cash used in financing activities was $10,824 for the twenty-six weeks ended September 30, 2017. This included $11,234 for payment of debt issuance costs, net payments of $19,551 for repayment of long-term indebtedness, and $39 for taxes paid with the withholding of shares upon vesting of restricted stock awards partially offset by net proceeds of $20,000 from borrowings under the Revolving Credit Facility.
As of September 29, 2018, TCS had a total of $58,945 of unused borrowing availability under the Revolving Credit Facility, and $25,000 of borrowings outstanding under the Revolving Credit Facility.
As of September 29, 2018, Elfa had a total of $14,641 of unused borrowing availability under the 2014 Elfa Revolving Credit Facility and $1,128 borrowings outstanding under the 2014 Elfa Revolving Credit Facility.
Free cash flow (Non-GAAP)
We present free cash flow, which we define as net cash provided by (used in) operating activities in a period minus payments for property and equipment made in that period, because we believe it is a useful indicator of the Company's overall liquidity, as the amount of free cash flow generated in any period is representative of cash that is available for debt repayment, investment, and other discretionary and non-discretionary cash uses. Accordingly, we believe that free cash flow provides useful information to investors in understanding and evaluating our liquidity in the same manner as management. Our definition of free cash flow is limited in that it does not solely represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other contractual obligations. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our Consolidated Statements of Cash Flows. Although other companies report their free cash flow, numerous methods may exist for calculating a company's free cash flow. As a result, the method used by our management to calculate our free cash flow may differ from the methods used by other companies to calculate their free cash flow.
Our free cash flow fluctuates as a result of seasonality of net sales, building inventory for key selling periods, and timing of investments in new store openings, existing store remodels, infrastructure, information systems, and our distribution center, among other things. Historically, our free cash flow has been lower in the first half of the fiscal year, due to lower net sales, operating income, and cash flows from operations, and as such, is not necessarily indicative of the free cash flow for the full year.
The following table sets forth a reconciliation of free cash flow, a non-GAAP financial measure, to net cash provided by operating activities, which we believe to be the GAAP financial measure most directly comparable to free cash flow:
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Twenty-Six Weeks Ended
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September 29,
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September 30,
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2018
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2017
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Net cash provided by operating activities
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$
|
8,136
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$
|
22,956
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Less: Additions to property and equipment
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(10,669)
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(13,129)
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Free cash flow
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$
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(2,533)
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$
|
9,827
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Senior Secured Term Loan Facility
On April 6, 2012, The Container Store Group, Inc., The Container Store, Inc. and certain of our domestic subsidiaries entered into the Senior Secured Term Loan Facility. On September 14, 2018 (the “Effective Date”), the Company entered into a Fifth Amendment to the Senior Secured Term Loan Facility. The Fifth Amendment amended the Senior
Secured Term Loan Facility to, among other things, (i) extend the maturity date of the loans under the Senior Secured Term Loan Facility to September 14, 2023, (ii) decrease the applicable interest rate margin to 5.00% for LIBOR loans and 4.00% for base rate loans and, beginning from the date that a compliance certificate is delivered to the administrative agent for the fiscal year ending March 30, 2019, allow the applicable interest rate margin to step down to 4.75% for LIBOR loans and 3.75% for base rate loans upon achievement of a consolidated leverage ratio equal to or less than 2.75:1.00, and (iii) impose a 1.00% premium if a voluntary prepayment is made from the proceeds of a repricing transaction within 12 months after the Effective Date.
In connection with the Fifth Amendment, we repaid $20,000 of the outstanding loans under the Senior Secured Term Loan Facility, which reduced the aggregate principal amount of the Senior Secured Term Loan Facility to $272,500. We drew down a net amount of approximately $10,000 on our revolving credit facility in connection with the closing of the Fifth Amendment.
The Senior Secured Term Loan Facility is secured by (a) a first priority security interest in substantially all of our assets (excluding stock in foreign subsidiaries in excess of 65%, assets of non-guarantors and certain other exceptions) (other than the collateral that secures the Revolving Credit Facility described below on a first-priority basis) and (b) a second priority security interest in the assets securing the Revolving Credit Facility described below on a first-priority basis. Obligations under the Senior Secured Term Loan Facility are guaranteed by The Container Store Group, Inc. and each of The Container Store, Inc.’s U.S. subsidiaries. The Senior Secured Term Loan Facility contains a number of covenants that, among other things, restrict our ability, subject to specified exceptions, to incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves, engage in businesses that are not in a related line of business; make loans, advances or guarantees; engage in transactions with affiliates; and make investments. In addition, the financing agreements contain certain cross-default provisions and also require certain mandatory prepayments of the Senior Secured Term Loan Facility, among these an Excess Cash Flow requirement (as such term is defined in the Senior Secured Term Loan Facility). As of September 29, 2018, we were in compliance with all covenants and no Event of Default (as such term is defined in the Senior Secured Term Loan Facility) had occurred.
Revolving Credit Facility
On April 6, 2012, The Container Store Group, Inc., The Container Store, Inc. and certain of our domestic subsidiaries entered into an asset-based revolving credit agreement with the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and Wells Fargo Bank, National Association, as Syndication Agent (as amended, the “Revolving Credit Facility”). The maturity date of the loans under the Revolving Credit Facility is the earlier of (i) August 18, 2022 and (ii) May 18, 2021 if any portion of the Senior Secured Term Loan Facility remains outstanding on such date and the maturity date of the Senior Secured Term Loan Facility is not extended.
The aggregate principal amount of the facility is $100,000. Borrowings under the Revolving Credit Facility accrue interest at LIBOR+1.25%. In addition, the Revolving Credit Facility includes an uncommitted incremental revolving facility in the amount of $50,000, which is subject to receipt of lender commitments and satisfaction of specified conditions.
The Revolving Credit Facility provides that proceeds are to be used for working capital and other general corporate purposes, and allows for swing line advances of up to $15,000 and the issuance of letters of credit of up to $40,000.
The availability of credit at any given time under the Revolving Credit Facility is limited by reference to a borrowing base formula based upon numerous factors, including the value of eligible inventory, eligible accounts receivable, and reserves established by the administrative agent. As a result of the borrowing base formula, the actual borrowing availability under the Revolving Credit Facility could be less than the stated amount of the Revolving Credit Facility (as reduced by the actual borrowings and outstanding letters of credit under the Revolving Credit Facility).
The Revolving Credit Facility is secured by (a) a first-priority security interest in substantially all of our personal property, consisting of inventory, accounts receivable, cash, deposit accounts, and other general intangibles, and (b) a second-priority security interest in the collateral that secures the Senior Secured Term Loan Facility on a first-priority
basis, as described above (excluding stock in foreign subsidiaries in excess of 65%, and assets of non-guarantor subsidiaries and subject to certain other exceptions). Obligations under the Revolving Credit Facility are guaranteed by The Container Store Group, Inc. and each of The Container Store, Inc.’s U.S. subsidiaries.
The Revolving Credit Facility contains a number of covenants that, among other things, restrict our ability, subject to specified exceptions, to incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves, engage in businesses that are not in a related line of business; make loans, advances or guarantees; engage in transactions with affiliates; and make investments. In addition, the financing agreements contain certain cross-default provisions. We are required to maintain a consolidated fixed-charge coverage ratio of 1.0 to 1.0 if excess availability is less than $10,000 at any time. As of September 29, 2018, we were in compliance with all covenants and no Event of Default (as such term is defined in the Revolving Credit Facility) had occurred.
2014 Elfa Senior Secured Credit Facilities
On April 1, 2014, Elfa entered into a master credit agreement with Nordea Bank AB (“Nordea”), which consists of a SEK 60.0 million (approximately $6,758 as of
September 29, 2018
) term loan facility (the “2014 Elfa Term Loan Facility”) and a SEK 140.0 million (approximately $15,769 as of
September 29, 2018
) revolving credit facility (the “2014 Elfa Revolving Credit Facility,” and together with the 2014 Elfa Term Loan Facility, the “2014 Elfa Senior Secured Credit Facilities”). The 2014 Elfa Senior Secured Credit Facilities term began on August 29, 2014 and matures on August 29, 2019, or such shorter period as provided by the agreement.
The remaining balance of the 2014 Elfa Term Loan Facility was paid on February 18, 2018, which was prior to the maturity date.
Elfa was required to make quarterly principal payments under the 2014 Elfa Term Loan Facility in the amount of SEK 3.0 million (approximately $338 as of
September 29, 2018
). The 2014 Elfa Revolving Credit Facility bears interest at Nordea’s base rate + 1.4%.
In the fourth quarter of fiscal 2016, Elfa and Nordea agreed that the stated rates would apply through maturity.
The 2014 Elfa Senior Secured Credit Facilities contain a number of covenants that, among other things, restrict Elfa’s ability, subject to specified exceptions, to incur additional liens, sell or dispose of assets, merge with other companies, engage in businesses that are not in a related line of business and make guarantees. In addition, Elfa is required to maintain (i) a consolidated equity ratio (as defined in the 2014 Elfa Senior Secured Credit Facilities) of not less than 30% in year one and not less than 32.5% thereafter and (ii) a consolidated ratio of net debt to EBITDA (as defined in the 2014 Elfa Senior Secured Credit Facilities) of less than 3.2, the consolidated equity ratio tested at the end of each calendar quarter and the ratio of net debt to EBITDA tested as of the end of each fiscal quarter. As of September 29, 2018, Elfa was in compliance with all covenants and no Event of Default (as defined in the 2014 Elfa Senior Secured Credit Facilities) had occurred.
Critical accounting policies and estimates
The preparation of financial statements in accordance with generally accepted accounting principles in the United States requires management to make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. A summary of our significant accounting policies is included in Note 1 to our annual consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended March 31, 2018
, filed with the SEC on
May 31, 2018.
Certain of our accounting policies and estimates are considered critical, as these policies and estimates are the most important to the depiction of our consolidated financial statements and require significant, difficult, or complex judgments, often about the effect of matters that are inherently uncertain. Such policies are summarized in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the fiscal year ended March 31, 2018
, filed with the SEC on
May 31, 2018. As of September 29, 2018, there were no significant changes to any of our critical accounting policies and estimates, with the exception of the adoption of ASU 2014-09,
Revenue from Contracts with Customers
, as discussed in Note 1 of our unaudited consolidated financial statements.
Contractual obligations
There have been no material changes to our contractual obligations as disclosed in our Annual Report on Form 10-K for the fiscal year ended March 31, 2018, filed with the SEC on May 31, 2018, other than those shown in the table below, as a result of the Fifth Amendment to our Senior Secured Term Loan Facility executed in the second quarter of fiscal 2018. The table below has been updated to reflect our contractual obligations as of September 29, 2018 related to the Fifth Amendment.
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Payments due by period
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Within
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Total
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1 Year
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1 ‑ 3 Years
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3 ‑ 5 Years
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After 5 Years
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Recorded contractual obligations
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Term loans
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$
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272,500
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$
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6,813
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$
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20,439
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$
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245,248
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$
|
—
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Revolving loans
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26,128
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1,128
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25,000
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—
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—
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Unrecorded contractual obligations
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Estimated interest (1)
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93,877
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20,448
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|
56,652
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|
16,777
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—
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Total
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$
|
392,505
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$
|
28,389
|
|
$
|
102,091
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|
$
|
262,025
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|
$
|
—
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(1)
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For purposes of this table, interest has been estimated based on interest rates in effect for our indebtedness as of September 29, 2018, and estimated borrowing levels in the future. Actual borrowing levels and interest costs may differ.
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Off Balance Sheet Arrangements
We are not party to any off balance sheet arrangements.
Recent Accounting Pronouncements
Please refer to Note 1 of our unaudited consolidated financial statements for a summary of recent accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk profile as of September 29, 2018 has not materially changed since March 31, 2018. Our market risk profile as of March 31, 2018 is disclosed in our Annual Report on Form 10-K filed with the SEC on May 31, 2018. See Note 8 of Notes to our unaudited consolidated financial statements included in Part I, Item 1, of this Form 10-Q, for disclosures on our foreign currency forward contracts.
ITEM 4. CONTROLS AND PROCEDURES
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 29, 2018.
Changes in Internal Control
There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended September 29, 2018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.