Yesterday, after reporting a slightly disappointing quarter with losses of $0.07 per share versus expectations of $0.06 on revenues of $173.4 million, also slightly below the $174.2 expected, shares of The Container Store (TCS) plummeted. The stock is indicating an opening this morning around $23, over 15% lower than yesterday’s close. It wasn’t those numbers that caused the big drop, though. It was the fact that the company dramatically cut its full year guidance for both revenues and profits. Even more worrying for overall market implications was the assertion by CEO Kip Tindell that this was all as a result of what he termed a “retail funk.”
The reaction in the stock of The Container Store itself is understandable, but those drawing conclusions for the broader market should probably be a little cautious. They should bear in mind that Tindell’s comments were addressing disappointing results. His job in that situation is to offer an excuse. The fact that other retailers have been reporting similarly weak same store sales and other numbers for a couple of months lends some support to the “retail funk” argument, but a big picture consideration and detailed look at the numbers suggests that the CEO’s comments are not a reliable indicator of overall economic trends.
Firstly, Tindell’s comments were specific to retail, and it is no secret that the entire retail landscape is changing. The “internet retailing revolution” that we have been promised for about fifteen years is now here and in full swing. Mobile has speeded up the process, with consumers less inclined to make impulse purchases than before. Whereas you had to exercise discipline in order to delay a purchase and check competitive pricing in days gone by, it is now a simple matter of whipping out your phone and checking things out while you are looking at the desired product.
This could explain why Tindell also said that “…consumers have an inordinate appetite for promotional levels right now and we recognize that this continues to be an incredibly promotional consumer environment.” In less delicate terms, we consumers aren’t as stupid as we used to be.
In that environment, cost control is obviously of paramount importance. TCS is still a rapidly growing company, so a nine percent increase in selling, general and administrative costs is no surprise, but it doesn’t help when margins are being squeezed by those annoyingly smart and informed customers.
The Container Store is also still carrying a heavy debt burden as a result of the 2007 buyout by private equity firm Leonard Green. Debt servicing costs actually decreased in the last quarter, and the burden doesn’t look overlarge given the rapid expansion of the company, but it is still a cost, and has an oversized effect when prices are under pressure.
I would maintain that these company specific things are weighing more heavily on TCS’s results than any general economic malaise. In the long term, though, I believe that TCS is a decent investment. They are investing in new product lines and a consumer rewards program. The benefits of those investments will not be immediately obvious, but by the all important fourth quarter they should be evident. For now, as the market digests the news, the stock is probably best left alone, but should the drop continue to near the original $18 offer price I would be interested.
To return to the implications of TCS’s results for the broader market and economy, this looks to me like another incarnation of a common phenomenon. Commentators, probably myself included, place far too much importance on individual results early in earnings season and focus on the ones that confirm our bias. A couple of weeks ago, I wrote that the market was ready for a correction, and so it has turned out.
When the general sentiment is a little bearish it is no surprise to see commentary last night and this morning focus on the bad result and forecast. If that correction had happened a week ago, however, and we were now back to a climbing market, do you think it would be the same?
I don’t... in that scenario the focus would probably be on a great quarter from Alcoa (AA) and the consensus would be that those results indicate strength in manufacturing and are therefore good for the overall picture. Actually in that case too, company specific factors (a focus on engineered products) have more bearing on the results than anything, but conclusions would still be drawn.
It could well be that Kip Tindell is right in his assessment and that retail in general is going through a difficult time. Common sense would indicate that he probably is, but that doesn’t mean anything for the broader market or economy. Those that imply that it does are reaching a little and their feelings are more about confirming their current view than predicting the future. Retail funk or not, I’ll wait for a few more earnings numbers before drawing broad conclusions from them.