IPO Report: The Container Store Group (TCS)

The Container Store Group ($TCS) is the leading specialty retailer of storage and organization products in the United States.  In 2013 TCS will open five new stores and projects six new stores in 2014.

Eight other company IPOs are scheduled for this week. The full IPO calendar can be found at IPOpremium.

TCS scheduled a $188 million IPO with a market capitalization of $729 million at a price range midpoint of $15 for Friday, November 1, 2013.

S-1 filed October 21, 2013.

Manager, Joint Managers: J.P. Morgan, Barclays, Credit Suisse, Morgan Stanley, BofA Merrill Lynch, Wells Fargo and Jefferies.
Co-Manager: Guggenheim Securities

According to a market research firm there is the potential of 300 TCS stores in the US, but TCS paid for that research report, probably for the IPO SEC filing.

Valuation

There is some ‘hair’ on this beast.

. TCS has an accumulated deficit of -$572, which means its never made money.
. And IPO investors will suffer a -$21.25 per share dilution at the IPO mid-range price of $15.

Comparing June 30 ’13 six months with June 30 ’12 six months

. Same store sales increase declined to 2.9% from 5.6%, not good
. EBIDTA margin declined to 9.5% from 9.6%, not good
. Loss rate improved to -.2% from -2.9%
. Interest as a % of operating income declined to 98% from 177%. 
. Companies who pay all their operating income out to interest usually get strangled by the interest payments, unless they sell more stock (which dilutes shareholders) to pay debt & reduce interest charges.

Glossary

Conclusion

Institutional investors probably will become fixated on the 300 store potential in the US, not realizing that’s a paid by TCS number.  Also, institutions do like growth companies selling at 1.1 times sales, but what if 98% of their operating earnings go to pay interest?

So the TCS IPO is ok to take.  The rating is buy.

Business

TCS is the leading specialty retailer of storage and organization products in the United States, with over $700 million of net sales in fiscal 2012.

TCS is the original storage and organization specialty retailer and the only national retailer solely devoted to the category.

Overview

As of October 1, 2013, TCS operated 62 stores with an average size of approximately 19,000 selling square feet in 22 states and the District of Columbia.

In fiscal 2012, TCS net sales were derived from approximately 10,500 unique SKUs organized into 16 distinct lifestyle departments sourced from approximately 700 vendors around the world.

The core customers are predominantly female, affluent, highly educated and busy.

Two reporting segments

TCS, which consists of retail stores, website and call center.  In fiscal 2012, TCS had net sales of $613 million, which represented 87% of total net sales.

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.

TCS began selling elfa® products in 1978 and acquired Elfa in 1999. Today the TCS segment is the exclusive distributor of elfa® products in the U.S. and represented 34% of Elfa's total sales in fiscal 2012. Elfa also sells its products on a wholesale basis to various retailers in more than 30 countries

Growth plan — expand the store base  

TCS expects to open six new stores during fiscal 2013 (including one store relocation), five of which have already opened, and an additional seven new stores in fiscal 2014 (including one store relocation).

Based on research conducted for TCS by eSite, TCS believes that it can grow the current U.S. store footprint to at least 300 stores in the current format by adding more stores in new and existing markets.

TCS does not currently have an anticipated timeframe for such expansion.

Store opening philosophy

TCS seeks to locate its stores in highly desirable retail developments surrounded by dense concentrations of its core customers.

TCS maintains a disciplined approach to new store development and perform comprehensive market research before selecting a new site based on customer demographics from eSite, an independent customer analytics research firm, and data from its customer database to identify existing customers.

Additionally, TCS maintains a flexible cost structure that allows the company to achieve consistent four-wall Adjusted EBITDA margins across a range of store sales volumes and successfully operate stores in a variety of markets.

Its data-driven approach, premium locations and flexible new store model have resulted in strong performance across its store base. TCS has never closed or relocated a store due to underperformance.

Seasonality

The business is moderately seasonal in nature, with a higher portion of net sales, operating income and cash flows from operations in the fourth fiscal quarter, attributable primarily to the impact of our Annual elfa® Sale (which starts on December 24th and runs through early February).

Competition

TCS operates within the storage and organization category, which extends across many retail segments including housewares, office supplies and travel, among others.

This category is highly fragmented and The Container Store is the only national retailer solely devoted to it.

TCS has little direct competition from other national or regional retailers in the storage and organization market.

Certain national mass merchants, specialty, and online retailers carry some storage and organization products. However, they typically devote only a limited portion of their merchandise to the category comprising a small subset of the products offered by The Container Store.

TCS believes the category is growing and will continue to grow due, in part, to several favorable demographic trends, including (1) the desire for efficiency and organization of Baby Boomers as they become "empty nesters," (2) the generation of Baby Boomers' children driving demand for organizational products as they move into their first homes and (3) the increase of dual-income families with a need for solutions to organize and simplify their busy lives

5% stockholders

Green Equity Investors V, L.P. Green Equity Investors Side V, L.P. and TCS Co-Invest, LLC and William A. "Kip" Tindell, III, Sharon Tindell and Melissa Reiff, as a group 91.9%

Use of Proceeds

TCS expects to net $171 million from its IPO.  Proceeds are allocated to repay debt.