UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, ~~D.C.~~DC 20549

Form 10-Q

(Mark One)


☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended ~~December~~June 29, ~~2018~~2019

ORor


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-36161

THE CONTAINER STORE GROUP, INC.

(Exact name of registrant as specified in its charter)


Delaware			26-0565401
(State or other jurisdiction of incorporation or organization)			(~~IRS~~I.R.S Employer Identification No.)


500 Freeport Parkway, Coppell, TX	75019
(Addresses of principal executive offices)		(Zip ~~Codes)~~Code)

Registrant’s telephone number, ~~in the United States,~~ including area ~~code, is:~~code: (972) 538-6000

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	TCS	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐	Accelerated filer ☑	Non-accelerated filer ☐
Smaller reporting company ☑	Emerging growth company ☑☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☑☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

The registrant had ~~48,912,177~~49,233,210 shares of its common stock outstanding as of ~~February 1,~~July 26, 2019.

Table of Contents

TABLE OF CONTENTS



PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Unaudited Consolidated Balance Sheets as of ~~December~~June 29, ~~2018,~~2019, March ~~31,~~30, 2019, and June 30, 2018 ~~and December 30, 2017~~	3

	Unaudited Consolidated Statements of Operations for the Thirteen ~~and Thirty-Nine~~ Weeks ended ~~December~~June 29, ~~2018~~2019 and ~~December~~June 30, ~~2017~~2018	5

	Unaudited Consolidated Statements of Comprehensive ~~Income~~Loss for the Thirteen ~~and Thirty-Nine~~ Weeks ended ~~December~~June 29, ~~2018~~2019 and ~~December~~June 30, ~~2017~~2018	6

	Unaudited Consolidated Statements of Cash Flows for the ~~Thirty-Nine~~Thirteen Weeks ended ~~December~~June 29, ~~2018~~2019 and ~~December~~June 30, ~~2017~~2018	7

	Unaudited Consolidated Statements of Shareholders’ Equity for the Thirteen Weeks ended June 29, 2019 and June 30, 2018	8

	Notes to the Unaudited Consolidated Financial Statements	89

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2018

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3631

Item 4.	Controls and Procedures	3631

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	3832

Item 1A.	Risk Factors	3832

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3832

Item 3.	Default Upon Senior Securities	3832

Item 4.	Mine Safety Disclosures	3832

Item 5.	Other Information	3832

Item 6.	Exhibits	3933

Table of Contents


PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

The Container Store Group, Inc.

Consolidated balance sheets


	December 29,		March 31,		December 30,		June 29,		March 30,		June 30,
(In thousands)	2018		2018		2017		2019		2019		2018
Assets	(unaudited)				(unaudited)		(unaudited)				(unaudited)
Current assets:
Cash	$	20,969	$	8,399	$	22,653	$	11,404	$	7,364	$	14,102
Accounts receivable, net		29,549		25,528		29,548		27,821		25,568		24,840
Inventory		116,006		97,362		110,391		120,512		108,650		104,135
Prepaid expenses		8,877		11,281		11,668		11,129		10,078		10,842
Income taxes receivable		640		15		1,450		1,124		1,003		812
Other current assets		10,404		11,609		10,338		11,867		11,705		12,577
Total current assets		186,445		154,194		186,048		183,857		164,368		167,308
Noncurrent assets:
Property and equipment, net		151,860		158,389		160,836		152,448		152,588		151,455
Noncurrent operating lease assets								353,490		—		—
Goodwill		202,815		202,815		202,815		202,815		202,815		202,815
Trade names		226,996		229,401		230,379		225,182		225,150		226,613
Deferred financing costs, net		259		312		329		223		241		294
Noncurrent deferred tax assets, net		1,898		2,404		2,308		1,898		1,912		2,101
Other assets		1,749		1,854		1,684		1,607		1,670		1,777
Total noncurrent assets		585,577		595,175		598,351		937,663		584,376		585,055
Total assets	$	772,022	$	749,369	$	784,399	$	1,121,520	$	748,744	$	752,363

See accompanying notes.

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The Container Store Group, Inc.

Consolidated balance sheets (continued)


	December 29,		March 31,		December 30,		June 29,		March 30,		June 30,
(In thousands, except share and per share amounts)	2018		2018		2017		2019		2019		2018
Liabilities and shareholders’ equity	(unaudited)				(unaudited)		(unaudited)				(unaudited)
Current liabilities:
Accounts payable	$	59,571	$	43,692	$	53,757	$	55,387	$	58,734	$	52,215
Accrued liabilities		67,708		70,494		73,539		68,507		67,163		71,817
Revolving lines of credit								9,951		5,511		889
Current portion of long-term debt		7,018		7,771		9,465		6,931		7,016		7,780
Current operating lease liabilities								58,664		—		—
Income taxes payable		1,589		4,580		1,690		2,011		2,851		2,019
Other current liabilities		67		—		—
Total current liabilities		135,953		126,537		138,451		201,451		141,275		134,720
Noncurrent liabilities:
Long-term debt		297,895		277,394		304,638		272,556		254,960		291,038
Noncurrent operating lease liabilities								327,221		—		—
Noncurrent deferred tax liabilities, net		50,397		54,839		56,706		50,182		51,702		49,378
Deferred rent and other long-term liabilities		36,339		41,892		32,941
Other long-term liabilities								8,903		36,114		41,337
Total noncurrent liabilities		384,631		374,125		394,285		658,862		342,776		381,753
Total liabilities		520,584		500,662		532,736		860,313		484,051		516,473
Commitments and contingencies (Note 6)
Shareholders’ equity:
Common stock, $0.01 par value, 250,000,000 shares authorized; 48,142,319 shares issued at December 29, 2018; 48,072,187 shares issued at March 31, 2018; 48,072,187 shares issued at December 30, 2017		481		481		481
Common stock, $0.01 par value, 250,000,000 shares authorized; 48,283,197 shares issued at June 29, 2019; 48,142,319 shares issued at March 30, 2019; 48,138,907 shares issued at June 30, 2018								483		481		481
Additional paid-in capital		863,119		861,263		860,827		864,386		863,978		861,726
Accumulated other comprehensive loss		(22,646)		(17,316)		(14,323)		(25,929)		(26,132)		(24,239)
Retained deficit		(589,516)		(595,721)		(595,322)		(577,733)		(573,634)		(602,078)
Total shareholders’ equity		251,438		248,707		251,663		261,207		264,693		235,890
Total liabilities and shareholders’ equity	$	772,022	$	749,369	$	784,399	$	1,121,520	$	748,744	$	752,363

See accompanying notes.

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The Container Store Group, Inc.

Consolidated statements of operations


lunch

	Thirteen Weeks Ended				Thirty-Nine Weeks Ended				Thirteen Weeks Ended
	December 29,		December 30,		December 29,		December 30,		June 29,		June 30,
(In thousands, except share and per share amounts) (unaudited)	2018		2017		2018		2017		2019		2018
Net sales	$	221,637	$	222,986	$	641,913	$	624,464	$	209,520	$	195,823
Cost of sales (excluding depreciation and amortization)		91,580		92,425		266,510		263,919		89,713		81,052
Gross profit		130,057		130,561		375,403		360,545		119,807		114,771
Selling, general, and administrative expenses (excluding depreciation and amortization)		108,688		103,894		320,949		306,866		109,029		106,605
Stock-based compensation		632		585		1,987		1,589		811		586
Pre-opening costs		691		1,872		1,918		4,676		477		346
Depreciation and amortization		8,887		9,477		27,352		28,524		9,706		9,337
Other expenses		80		751		297		4,908
Other (income) expenses										(27)		193
(Gain) loss on disposal of assets		(324)		83		(284)		236		(4)		40
Income from operations		11,403		13,899		23,184		13,746
Loss from operations										(185)		(2,336)
Interest expense, net		6,008		7,300		21,293		17,398		5,709		7,908
Loss on extinguishment of debt		—		—		2,082		2,369
Income (loss) before taxes		5,395		6,599		(191)		(6,021)
Loss before taxes										(5,894)		(10,244)
Benefit for income taxes		(3,926)		(21,780)		(5,989)		(25,848)		(1,795)		(3,480)
Net income	$	9,321	$	28,379	$	5,798	$	19,827
Net loss									$	(4,099)	$	(6,764)

Net income per common share — basic and diluted	$	0.19	$	0.59	$	0.12	$	0.41
Net loss per common share—basic and diluted									$	(0.08)	$	(0.14)

Weighted-average common shares — basic		48,139,582		48,067,754		48,139,132		48,057,974
Weighted-average common shares — diluted		48,381,455		48,167,882		48,407,337		48,128,682
Weighted-average common shares—basic and diluted										48,231,148		48,138,907

See accompanying notes.

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The Container Store Group, Inc.

Consolidated statements of comprehensive ~~income~~loss

Thirteen Weeks Ended

Thirty-Nine Weeks Ended

December 29,

December 30,

December 29,

December 30,

(In thousands) (unaudited)

2018

2017

2018

2017

Net income

$
9,321

$
28,379

$
5,798

$
19,827

Unrealized gain (loss) on financial instruments, net of tax provision (benefit) of $216, ($595), ($196) and $951

660

(713)

(687)

1,687

Pension liability adjustment

(3)

5

132

(175)

Foreign currency translation adjustment

(136)

480

(4,775)

6,808

Comprehensive income

$
9,842

$
28,151

$
468

$
28,147



	Thirteen Weeks Ended
	June 29,		June 30,
(In thousands) (unaudited)	2019		2018
Net loss	$	(4,099)	$	(6,764)
Unrealized loss on financial instruments, net of tax benefit of $(18) and $(566)		(128)		(1,785)
Pension liability adjustment, net of tax provision		(2)		153
Foreign currency translation adjustment		333		(5,291)
Comprehensive loss	$	(3,896)	$	(13,687)

See accompanying notes.

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~~The~~CoThe Container Store Group, Inc.

Consolidated statements of cash flows



	Thirty-Nine Weeks Ended				Thirteen Weeks Ended
	December 29,		December 30,		June 29,		June 30,
(In thousands) (unaudited)	2018		2017		2019		2018
Operating activities
Net income	$	5,798	$	19,827
Adjustments to reconcile net income to net cash provided by operating activities:
Net loss					$	(4,099)	$	(6,764)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		27,352		28,524		9,706		9,337
Stock-based compensation		1,987		1,589		811		586
(Gain) loss on disposal of assets		(284)		236		(4)		40
Loss on extinguishment of debt		2,082		2,369
Deferred tax benefit		(3,959)		(27,255)		(1,891)		(3,874)
Non-cash interest		1,886		1,905		465		759
Other		(35)		326
Changes in operating assets and liabilities:
Accounts receivable		(4,655)		(727)		(2,200)		110
Inventory		(22,013)		(2,665)		(11,923)		(9,975)
Prepaid expenses and other assets		4,853		233		(670)		(198)
Accounts payable and accrued liabilities		13,475		19,627		2,275		10,030
Net change in lease assets and liabilities						(152)		—
Income taxes		(3,564)		(2,461)		(1,009)		(3,303)
Other noncurrent liabilities		(5,100)		(2,136)		370		(68)
Net cash provided by operating activities		17,823		39,392
Net cash used in operating activities						(8,321)		(3,320)

Investing activities
Additions to property and equipment		(21,328)		(20,101)		(8,703)		(4,456)
Proceeds from sale of property and equipment		915		19		4		1
Net cash used in investing activities		(20,413)		(20,082)		(8,699)		(4,455)

Financing activities
Borrowings on revolving lines of credit		40,256		47,054		17,961		7,581
Payments on revolving lines of credit		(40,256)		(47,054)		(13,599)		(6,663)
Borrowings on long-term debt		326,500		335,000		19,000		15,000
Payments on long-term debt and capital leases		(308,251)		(331,885)
Payment of debt issuance costs		(2,384)		(11,246)
Payments on long-term debt						(1,741)		(1,954)
Payment of taxes with shares withheld upon restricted stock vesting		(128)		(39)		(347)		(122)
Net cash provided by (used in) financing activities		15,737		(8,170)
Net cash provided by financing activities						21,274		13,842

Effect of exchange rate changes on cash		(577)		777		(214)		(364)

Net increase in cash		12,570		11,917		4,040		5,703
Cash at beginning of fiscal period		8,399		10,736		7,364		8,399
Cash at end of fiscal period	$	20,969	$	22,653	$	11,404	$	14,102

Supplemental information for non-cash investing and financing activities:
Purchases of property and equipment (included in accounts payable)	$	2,619	$	894	$	1,590	$	852
Capital lease obligation incurred	$	169	$	178

See accompanying notes.

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The Container Store Group Inc.

Consolidated statements of shareholder’s equity


								Accumulated
						Additional		other				Total
(In thousands, except share amounts)	Par		Common stock			paid-in		comprehensive		Retained		shareholders’
(unaudited)	value		Shares	Amount		capital		loss		deficit		equity
Balance at March 30, 2019	$	0.01	48,142,319	$	481	$	863,978	$	(26,132)	$	(573,634)	$	264,693
Net loss			—		—		—		—		(4,099)		(4,099)
Stock-based compensation			—		—		811		—		—		811
Vesting of restricted stock awards			140,878		2		(56)		—		—		(54)
Taxes related to net share settlement of restricted stock awards			—		—		(347)		—		—		(347)
Foreign currency translation adjustment			—		—		—		333		—		333
Unrealized gain on financial instruments, net of ($18) tax benefit			—		—		—		(128)		—		(128)
Pension liability adjustment, net of $0 tax benefit			—		—		—		(2)		—		(2)
Balance at June 29, 2019	$	0.01	48,283,197		483		864,386		(25,929)		(577,733)		261,207

Balance at March 31, 2018	$	0.01	48,072,187	$	481	$	861,263	$	(17,316)	$	(595,721)	$	248,707
Net loss			—		—		—		—		(6,764)		(6,764)
Stock-based compensation			—		—		586		—		—		586
Vesting of restricted stock awards			66,720		—		(1)		—		—		(1)
Taxes related to net share settlement of restricted stock awards			—		—		(122)		—		—		(122)
Cumulative adjustment for adoption of ASC 606			—		—		—		—		407		407
Foreign currency translation adjustment			—		—		—		(5,291)		—		(5,291)
Unrealized gain on financial instruments, net of ($566) tax benefit			—		—		—		(1,785)		—		(1,785)
Pension liability adjustment, net of $39 tax provision			—		—		—		153		—		153
Balance at June 30, 2018	$	0.01	48,138,907		481		861,726		(24,239)		(602,078)		235,890

See accompanying notes.

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The Container Store Group, Inc.

Notes to consolidated financial statements (unaudited)

(In thousands, except share amounts and unless otherwise stated)

~~December~~June 29, ~~2018~~2019

1. Description of business and basis of presentation

These financial statements should be read in conjunction with the financial statement disclosures in our Annual Report on Form 10-K for the fiscal year ended March ~~31, 2018,~~30, 2019, filed with the Securities and Exchange Commission on May ~~31, 2018.~~30, 2019 (the “2018 Annual Report on Form 10-K”). The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). We use the same accounting policies in preparing quarterly and annual financial ~~statements.~~statements, with the exception of lease accounting as discussed further below. All adjustments necessary for a fair presentation of quarterly operating results are reflected herein and are of a normal, recurring nature. Certain items in these consolidated financial statements have been reclassified to conform to the current period presentation.

All references herein to “fiscal 2019” refer to the 52-week fiscal year ending March 28, 2020, “fiscal 2018” refer to the 52-week fiscal year ended March 30, 2019, and “fiscal 2017” refer to the 52-week fiscal year ended March 31, 2018.

Description of business

The Container Store, Inc. was founded in 1978 in Dallas, Texas, as a retailer with a mission to provide customers with storage and organization solutions through an assortment of innovative products and unparalleled customer service. In 2007, The Container Store, Inc. was sold to The Container Store Group, Inc. (the “Company”), a holding company, of which a majority stake was purchased by Leonard Green and Partners, L.P. (“LGP”), with the remainder held by certain employees of The Container Store, Inc. On November 6, 2013, the Company completed its initial public offering (the “IPO”). As the majority shareholder, LGP retains a controlling interest in the Company. As of ~~December~~June 29, ~~2018,~~2019, The Container Store, Inc. (“TCS”) operates 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. The Container Store, Inc. also offers all of its products directly to its customers ~~including business-to-business customers,~~(including business customers), through its website and call center. The Container Store, Inc.’s wholly-owned Swedish subsidiary, Elfa International AB (“Elfa”), designs and manufactures component-based shelving and drawer systems and made-to-measure sliding doors. elfa® branded products are sold exclusively in the United States in The Container Store retail stores, website and call center, and Elfa sells to various retailers on a wholesale basis in approximately 30 countries around the world, with a concentration in the Nordic region of Europe.

Seasonality

The Company’s business is moderately seasonal in nature and, therefore, the results of operations for the ~~thirty-nine~~thirteen weeks ended ~~December~~June 29, ~~2018~~2019 are not necessarily indicative of the operating results for the full year. The Company has historically realized a higher portion of net sales, operating income, and cash flows from operations in the fourth fiscal quarter, attributable primarily to the timing and impact of Our Annual elfa® Sale, which traditionally starts in late December and runs into February.

~~Revenue recognition~~Recent accounting pronouncements

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ~~2014-09,~~ ~~Revenue from Contracts with Customers~~, an updated standard on revenue recognition. The Company adopted this standard in the first quarter of fiscal 2018 and elected to use the modified-retrospective approach for implementation of the standard. The core principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the Company expects to be entitled in exchange for those goods or services.

The Company has identified certain impacts to our accounting for gift cards given away for promotional or marketing purposes. Under previous GAAP, the value of promotional gift cards was recorded as selling, general, and administrative (“SG&A”) expense. The new standard requires these types of gift cards to be accounted for as a reduction of revenue (i.e. a discount). Additionally, ASU 2014-09 disallows the capitalization of direct-response advertising costs which will impact the timing of recognition of certain advertising production and distribution costs.

~~Table of Contents~~

Upon transition on April 1, 2018, the Company recorded a cumulative adjustment to increase retained earnings/(deficit) and to decrease accrued liabilities by approximately $400. The Company also reclassified the asset balance for the estimate of future returned merchandise, which was approximately $900 as of March 31, 2018, from the “Inventory” line to the “Other current assets” line on the balance sheet. Overall, the adoption of ASU 2014-09 did not result in a material impact to the Company’s financial statements. Note 10 provides the related disaggregated revenue disclosures.

We recognize revenues and the related cost of goods sold for our TCS segment when merchandise is received by our customers. We recognize revenues and the related cost of goods sold for our Elfa segment upon shipment. We recognize shipping and handling fees as revenue when the merchandise is delivered to the customer. Costs of shipping and handling are included in cost of goods sold. We recognize fees for installation and other services as revenue upon completion of the service to the customer. Costs of installation and other services are included in cost of goods sold. Sales tax collected is not recognized as revenue as it is ultimately remitted to governmental authorities. We reserve for projected merchandise returns based on historical experience and various other assumptions that we believe to be reasonable. The reserve reduces sales and cost of sales, accordingly. Merchandise exchanges of similar product and price are not considered merchandise returns and, therefore, are excluded when calculating the sales returns reserve.

~~Contract Balances~~

Contract balances as a result of transactions with customers primarily consist of trade receivables included in Accounts receivable, net, unearned revenue included in Accrued liabilities, and gift cards and store credits outstanding included in Accrued liabilities in the Company's Consolidated Balance Sheets. Note 2 provides the Company's trade receivables, unearned revenue, and gift cards and store credits outstanding with customers as of December 29, 2018, March 31, 2018, and December 30, 2017.

Below is a rollforward of contract liability balances from March 31, 2018 to December 29, 2018, which illustrates the amount of contract liability as of March 31, 2018 which was subsequently recognized into revenue in the thirty-nine weeks ended December 29, 2018:

Contract liability

Revenue recognized

Contract liabilities

Contract liability

balance at

from beginning

added during

balance at

March 31, 2018 (1)

liability

period (2)

December 29, 2018

Unearned revenue

$
11,080

$
(10,735)

$
10,596

$
10,941
Gift cards and store credits outstanding

$
8,470

$
(2,623)

$
3,715

$
9,562

~~(1)~~

~~Gift cards and store credits outstanding balance is net of revenue recognition transition adjustment~~

~~(2)~~

~~Net of estimated breakage~~

~~Recent accounting pronouncements~~

~~In February 2016, the FASB issued ASU~~ 2016-02, Leases (Topic 842), to revise lease accounting guidance. The update requires most leases to be recorded on the balance sheet as a lease liability, with a corresponding right-of-use asset, whereas these leases ~~currently have~~previously had an off-balance sheet classification. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, and interim periods within those ~~years, with early adoption permitted.~~years. The Company ~~currently intends to adopt~~adopted this standard in the first quarter of fiscal 2019 and ~~expects to elect~~elected certain practical expedients permitted under the transition guidance, including the package of practical expedients; however, the Company ~~does~~did not ~~intend to~~ elect the hindsight practical expedient. Additionally, the Company ~~will elect~~elected the optional transition method that ~~allows~~allowed for a cumulative-effect adjustment in the period of adoption and ~~will~~did not restate prior periods. ~~In fiscal 2018, the Company implemented a new lease system to assist with its compliance with~~The adoption of ASU 2016-02 resulted in fiscal 2019, and has a project team focused on identifying a complete population of leases, evaluating accounting policy elections, and establishing new processes and internal controls. The Company is still evaluating the impact of implementation of this standard on its financial statements, but expects that adoption will have a material impact to the Company’san increase in total assets and total liabilities ~~given the Company has a significant number~~ of ~~operating leases not currently recognized on its balance sheet.~~$352,059 at transition. However,

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this standard isdid not ~~expected to~~ have a material impact on the consolidated statement of operations or the consolidated statement of cash flows.

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See Note 3 for further discussion on leases.

In ~~October~~July 2016, the FASB issued ASU ~~2016-16,~~2016-13, ~~Income Taxes~~Financial Instruments – Credit Losses (Topic ~~740)~~326): ~~Intra-Entity Transfers~~Measurement of ~~Assets Other Than Inventory~~Credit Losses on Financial Instruments~~, which requires entities~~. ASU 2016-13 changes how to recognize expected credit losses on financial assets. The standard requires a more timely recognition of credit losses on loans and other financial assets and also provides additional transparency about credit risk. The current credit loss standard generally requires that a loss actually be incurred before it is recognized, while the ~~income tax effects~~new standard will require recognition of ~~intercompany sales~~full lifetime expected losses upon initial recognition of the financial instrument. The Company is required to adopt ASU 2016-13 for fiscal years, and ~~transfers of assets, other than inventory, in the period in which the transfer occurs. This~~for interim periods within those fiscal years, beginning after December 15, 2019 on a modified retrospective basis. Early adoption is a change from current GAAP, which requires entities to defer the income tax effects of intercompany transfers of assets until the asset has been sold to an outside party or otherwise recognized (i.e. depreciated, amortized, impaired). The income tax effects of intercompany sales and transfers of inventory will continue to be deferred until the inventory is sold to an outside party. This ASU is effectivepermitted for fiscal years beginning after December 15, ~~2017, and interim periods within those years, with early adoption permitted. The Company adopted ASU 2016-16 in~~2018. An entity should apply the ~~first quarter of fiscal 2018.~~ standard by recording a cumulative effect adjustment to retained earnings upon adoption. The adoption of this standard ~~did not result in a material impact to the Company’s financial statements.~~

~~In March 2017, the FASB issued ASU 2017-07,~~ ~~Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~, which provides guidance that requires an employer to present the service cost component separate from the other components of net periodic benefit cost. The update requires that employers present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered by participating employees during the period. The other components of the net periodic benefit cost are required to be presented separately from the line item that includes service cost and outside of the subtotal of income from operations. If a separate line item is not used, the line item used in the income statement must be disclosed. In addition, only the service cost component is eligible for capitalization in assets. The Company adopted ASU 2017-07 in the first quarter of fiscal 2018 on a retrospective basis. The adoption of this standard did not result in a material impactexpected to ~~the Company’s financial statements.~~

~~In May 2017, the FASB issued ASU 2017-09,~~ ~~Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting~~, which clarifies when modification accounting should be applied for changes to terms or conditions of a share-based payment award. The Company adopted ASU 2017-09 in the first quarter of fiscal 2018 on a prospective basis. The adoption of this standard did not result in a material impact to the Company’s financial statements.

In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which is intended to improve and simplify hedge accounting and improve the disclosures of hedging arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The adoption of this standard isdid not ~~expected to~~ result in a material impact to the Company’s financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under this ASU, the guidance on share-based payments to nonemployees would be aligned with the requirements for share-based payments granted to employees, with certain exceptions. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those ~~years, with early~~years. The adoption ~~permitted. The Company is currently evaluating the impact~~ of ~~adopting the new~~this standard ~~on its financial statements, but does~~did not ~~expect it to have~~result in a material impact to the Company’s financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification (“ASC”) 350-40 to determine which implementation costs to capitalize as assets. A customer’s accounting for the costs of the hosting component of the arrangement are not affected by the new guidance. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. The adoption of this standard is not expected to result in a material impact to the Company’s financial statements.

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2. Detail of certain balance sheet accounts


	December 29,		March 31,		December 30,		June 29,		March 30,		June 30,
	2018		2018		2017		2019		2019		2018
Accounts receivable, net:
Trade receivables, net	$	15,150	$	15,968	$	14,934	$	15,366	$	16,730	$	12,898
Credit card receivables		10,407		6,939		11,221		10,677		7,244		10,054
Tenant allowances		2,186		998		1,681		325		110		235
Other receivables		1,806		1,623		1,712		1,453		1,484		1,653
	$	29,549	$	25,528	$	29,548	$	27,821	$	25,568	$	24,840
Inventory:
Finished goods	$	110,769	$	91,970	$	104,714	$	115,536	$	103,774	$	98,851
Raw materials		4,762		4,840		5,139		4,321		4,282		4,663
Work in progress		475		552		538		655		594		621
	$	116,006	$	97,362	$	110,391	$	120,512	$	108,650	$	104,135
Accrued liabilities:
Accrued payroll, benefits and bonuses	$	21,406	$	23,833	$	25,847	$	21,057	$	19,771	$	25,177
Unearned revenue		10,941		11,080		10,197		15,297		10,744		14,643
Accrued transaction and property tax		9,767		12,846		12,621		11,484		12,249		9,366
Gift cards and store credits outstanding		9,562		8,891		9,984		9,010		8,777		8,685
Accrued lease liabilities		4,793		5,105		6,329		—		4,882		4,619
Accrued interest		1,844		292		156		1,796		209		258
Other accrued liabilities		9,395		8,447		8,405		9,863		10,531		9,069
	$	67,708	$	70,494	$	73,539	$	68,507	$	67,163	$	71,817

3~~. Long-term debt~~Contract balances as a result of transactions with customers primarily consist of trade receivables included in Accounts receivable, net, Unearned revenue included in Accrued liabilities, and ~~revolving lines of credit~~

~~On September 14, 2018 (the “Effective Date”),~~Gift cards and store credits outstanding included in Accrued liabilities in the ~~Company entered into a fifth amendment (the “Fifth Amendment”) to the Credit Agreement dated~~Company's Consolidated Balance Sheets provided above. Unearned revenue was $10,744 as of April 6, 2012 (“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%~~and $9,337 was subsequently recognized into revenue 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, the Company 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. The Company drew down a net amount of approximately $10,000 on its $100,000 asset-based revolving credit agreement (the “Revolving Credit Facility”) in connection with the closing of the Fifth Amendment. In addition, the Company recorded a loss on extinguishment of debt of $2,082 in the thirteen weeks ended ~~September~~June 29, ~~2018 associated with~~2019. Gift cards and store credits outstanding was $8,777 as of March 30, 2019, and $1,083 was subsequently recognized into revenue for the ~~Fifth Amendment.~~thirteen weeks ended June 29, 2019. See Note 10 for disaggregated revenue disclosures.

The Company capitalizes certain costs associated with issuance of various debt instruments. These deferred financing costs are amortized to interest expense on a straight-line method, which is materially consistent with the effective interest method, over the terms of the related debt agreements. In the thirty-nine weeks ended December 29, 2018, the Company capitalized $2,384 of fees associated with the Fifth Amendment which will be amortized through September 14, 2023.3. Leases

We conduct all of our U.S. operations from leased facilities that include corporate headquarters, warehouse facilities, and 92 store locations. The corporate headquarters, warehouse facilities, and stores are under operating leases that will expire over the next 1 to 20 years. We also lease computer hardware under operating leases that expire over the next few years. In most cases, management expects that in the normal course of business, leases will be renewed or replaced by other leases. The Company also has finance leases at our Elfa segment which are immaterial.

Lease expense on operating leases is recorded on a straight‑line basis over the term of the lease, commencing on the date the Company takes possession of the leased property and is recorded in selling, general and administrative expenses (“SG&A”).

We consider lease payments that cannot be predicted with reasonable certainty upon lease commencement to be variable lease payments, which are recorded as incurred each period and are excluded from our calculation of lease liabilities. Our variable lease payments include lease payments that are based on a percentage of sales.

Upon lease commencement, we recognize the lease liability measured at the present value of the fixed future minimum lease payments. We have elected the practical expedient to not separate lease and non-lease components. Therefore, lease payments included in the measurement of the lease liability include all fixed payments in the lease arrangement. We record a right-of-use asset for an amount equal to the lease liability, increased for any prepaid lease costs and initial direct costs and reduced by any lease incentives. We remeasure the lease liability and right-of-use asset when a change to our future minimum lease payments occurs. Key assumptions and judgments included in the determination of the

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lease liability include the discount rate applied to present value the future lease payments, and the exercise of renewal options.

~~Long-term debt~~

Many of our leases contain renewal options. The option periods are generally not included in the lease term used to measure our lease liabilities and ~~revolving lines of credit consist~~right-of-use assets upon commencement as exercise of the ~~following:~~options is not reasonably certain. We remeasure the lease liability and right-of-use asset when we are reasonably certain to exercise a renewal option.

Discount Rate

Our leases do not provide information about the rate implicit in the lease. Therefore, we utilized an incremental borrowing rate to calculate the present value of our future lease obligations. The incremental borrowing rate represents the rate of interest we would have to pay on a collateralized borrowing, for an amount equal to the lease payments, over a similar term and in a similar economic environment.

The components of lease costs for the thirteen weeks ended June 29, 2019 were as follows:

December 29,

March 31,

December 30,


2018

2018

2017

Senior secured term loan facility

$
270,797

$
294,375

$
296,250

2014 Elfa term loan facility

—

—

2,569

2014 Elfa revolving credit facility

—

—

—

Obligations under capital leases

474

662

865

Other loans

—

16

49

Revolving credit facility

42,000

—

25,000

Total debt

313,271

295,053

324,733

Less current portion

(7,018)

(7,771)

(9,465)

Less deferred financing costs (1)

(8,358)

(9,888)

(10,630)

Total long-term debt

$
297,895

$
277,394

$
304,638


Operating lease costs	$	22,364
Variable lease costs		472
Total lease costs	$	22,836

We do not have sublease income and do not recognize lease assets or liabilities for short-term leases, defined as operating leases with initial terms of less than 12 months. Our short-term lease costs were not material for the thirteen weeks ended June 29, 2019.

Supplemental cash flow information related to our leases for the thirteen weeks ended June 29, 2019 were as follows:


Cash paid for amounts included in the measurement of operating lease liabilities	$	22,168
Additions to right-of-use assets	$	15,565

Weighted average remaining operating lease term and incremental borrowing rate as of June 29, 2019 were as follows:

	~~(1)~~	~~Represents deferred financing costs related to our Senior Secured Term Loan Facility, which are presented net of long-term debt in the consolidated balance sheet.~~
Weighted average remaining lease term (years)		7.3
Weighted average incremental borrowing rate		8.8	%

As of June 29, 2019, future minimum lease payments under our operating lease liabilities were as follows:


	Operating leases
Within 1 year (remaining)	$	66,973
2 years		87,235
3 years		73,111
4 years		65,601
5 years		57,573
Thereafter		181,773
Total lease payments	$	532,266
Less amount representing interest		(146,381)
Total lease liability	$	385,885
Less current lease liability		(58,664)
Total non-current lease liability	$	327,221

4. Net ~~income~~loss per common share

Basic net ~~income~~loss per common share is computed as net ~~income~~loss divided by the weighted-average number of common shares for the period. ~~Diluted net income~~Net loss per common share – diluted is computed as net ~~income~~loss divided by the weighted-average number of common shares for the period plus common stock equivalents consisting of shares subject to stock-based awards with exercise prices less than or equal to the average market price of the Company’s common stock for the period, to the

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extent their inclusion would be dilutive. Potentially dilutive securities are excluded from the computation of ~~diluted~~ net ~~income~~loss per common share – diluted if their effect is anti-dilutive.

The following is a reconciliation of net ~~income~~loss and the number of shares used in the basic and diluted net ~~income~~loss per common share calculations:


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended				Thirteen Weeks Ended
	December 29,		December 30,		December 29,		December 30,		June 29,		June 30,
	2018		2017		2018		2017		2019		2018
Numerator:
Net income	$	9,321	$	28,379	$	5,798	$	19,827
Net loss									$	(4,099)	$	(6,764)
Denominator:
Weighted-average common shares — basic		48,139,582		48,067,754		48,139,132		48,057,974
Options and other dilutive securities		241,873		100,128		268,205		70,708
Weighted-average common shares — diluted		48,381,455		48,167,882		48,407,337		48,128,682
Weighted-average common shares—basic and diluted										48,231,148		48,138,907

Net income per common share — basic and diluted	$	0.19	$	0.59	$	0.12	$	0.41
Net loss per common share—basic and diluted									$	(0.08)	$	(0.14)
Antidilutive securities not included:
Stock options outstanding		2,408,068		3,157,843		2,450,246		3,016,359		2,497,573		2,598,505
Nonvested restricted stock awards		148,310		42,541		29,251		40,643		197,687		123,001

5. Income taxes

The benefit for income taxes in the thirteen weeks ended ~~December~~June 29, ~~2018~~2019 was ~~$3,926~~$1,795 as compared to ~~a benefit of $21,780~~$3,480 in the thirteen weeks ended ~~December~~June 30, ~~2017.~~2018. The effective tax rate for the thirteen weeks ended ~~December~~June 29, ~~2018~~2019 was ~~-72.8%~~30.5%, as compared to ~~-330.1%~~34.0% in the thirteen weeks ended ~~December~~June 30, ~~2017.~~2018. During the thirteen weeks ended ~~December~~June 29, 2018, the effective tax rate fell below the U.S statutory rate primarily due to the finalization of the one-time transition tax on foreign earnings related to the Tax Cuts and Jobs Act (the “Tax Act”)

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enacted in fiscal 2017. During the thirteen weeks ended December 30, 2017, the effective tax rate fell below the blended U.S. statutory rate of 31.5% primarily due to the estimated impact of the Tax Act, which was primarily driven by the remeasurement of deferred tax balances.

The Company’s effective income tax rate for the thirty-nine weeks ended December 29, 2018 was 3135.6% compared to 429.3% for the thirty-nine weeks ended December 30, 2017. During the thirty-nine weeks ended December 29, 2018,2019, the effective tax rate rose above the U.S. statutory rate of 21% primarily due to the ~~finalization~~impact of the ~~one-time transition~~global intangible low-taxed income (“GILTI”) provision from the Tax Cuts and Jobs Act (the “Tax Cuts and Jobs Act”) enacted in fiscal 2017 and U.S. state income taxes. During the thirteen weeks ended June 30, 2018, the effective tax ~~on foreign earnings and other Tax Act items, and~~rate rose above the U.S. statutory rate primarily due to the recognition of a $604 tax benefit for the remeasurement of deferred tax balances as a result of a change in the Swedish tax rate ~~combined~~ with a ~~year-to-date~~ pre-tax ~~loss. During~~loss in the ~~thirty-nine weeks ended December 30, 2017,~~quarter, the ~~effective tax rate rose above the blended U.S. statutory rate of 31.5% primarily due to the estimated~~ impact of the ~~Tax Act, which was primarily driven by~~GILTI provision from the ~~remeasurement of deferred tax balances.~~

Tax Cuts and Jobs Act,

Pursuant to Staff Accounting Bulletin (“SAB”) No. 118 (“SAB 118”), the Company’s measurement period for implementing the accounting changes required by the Tax Act closed on December 22, 2018 and ~~the Company completed the accounting under ASC Topic 740,~~ U.S. state income taxes~~Income Taxes~~. ~~(“ASC 740”) in the third quarter of fiscal 2018.~~

In the fourth quarter of fiscal 2017, the Company recorded a provisional expense of $8,521 related to the one-time transition tax on foreign earnings. Upon further analysis of certain aspects of the Tax Act and refinement of its calculations, the Company recorded a benefit of $5,903 in the third quarter of fiscal 2018, which is included as a component of income tax benefit in the consolidated statement of operations, related to the one-time transition tax on foreign earnings. The final calculated one-time transition tax on foreign earnings is $2,618 which is net of foreign tax credit utilization of $833. Additionally, the Company has $1,331 of foreign tax credits which it does not expect to utilize to offset future foreign taxable income. As such, the Company has recorded a full valuation allowance related to these credits, the effect of which is included within the net transition tax liability. As of December 29, 2018, the Company has a remaining transition tax liability of $1,819, which will be paid in installments over the next seven years as elected.

As of December 30, 2017, the Company remeasured deferred tax assets and liabilities based on the rates at which they were expected to reverse in the future, which was generally 21%, by recording a provisional benefit of $24,210. Upon further analysis of certain aspects of the Tax Act and refinement of its calculations, the Company adjusted its provisional amount by $224 of tax expense in the thirty-nine weeks ended December 29, 2018, which is included as a component of income tax benefit in the consolidated statement of operations. The final net impact related to the remeasurement of deferred tax assets and liabilities pursuant to the Tax Act is a benefit of $23,986.

The Tax Act creates a new requirement that certain global intangible low-taxed income (“GILTI”) earned by controlled foreign corporations (“CFC”) must be included currently in the taxable income of the CFC’s U.S. shareholder. The Company became subject to the GILTI provisions beginning in fiscal 2018. The Company has elected an accounting policy to recognize GILTI as a period cost when incurred.

6. Commitments and contingencies

In connection with insurance policies and other contracts, the Company has outstanding standby letters of credit totaling ~~$3,826~~$4,450 as of ~~December~~June 29, ~~2018.~~2019.

The Company is subject to ordinary litigation and routine reviews by regulatory bodies that are incidental to its business, none of which is expected to have a material adverse effect on the Company’s financial condition, results of operations, or cash flows on an individual basis or in the aggregate.

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7. Accumulated other comprehensive loss

Accumulated other comprehensive loss (“AOCL”) consists of changes in our foreign currency forward contracts, pension liability adjustment, and foreign currency translation. The components of AOCL, net of tax, are shown below for the ~~thirty-nine~~thirteen weeks ended ~~December~~June 29, ~~2018:~~2019:

Foreign

currency

Pension

Foreign

hedge

liability

currency


instruments

adjustment

translation

Total
Balance at March 31, 2018

$
(102)

$
(1,793)

$
(15,421)

$
(17,316)

Other comprehensive (loss) income before reclassifications, net of tax

(1,408)

132

(4,775)

(6,051)
Amounts reclassified to earnings, net of tax

721

—

—

721
Net current period other comprehensive (loss) income

(687)

132

(4,775)

(5,330)

Balance at December 29, 2018

$
(789)

$
(1,661)

$
(20,196)

$
(22,646)


	Foreign
	currency		Pension		Foreign
	hedge		liability		currency
	instruments		adjustment		translation		Total
Balance at March 30, 2019	$	(967)	$	(1,833)	$	(23,332)	$	(26,132)

Other comprehensive loss before reclassifications, net of tax		(250)		(2)		333		81
Amounts reclassified to earnings, net of tax		122		—		—		122
Net current period other comprehensive loss		(128)		(2)		333		203

Balance at June 29, 2019	$	(1,095)	$	(1,835)	$	(22,999)	$	(25,929)

Amounts reclassified from AOCL to earnings for the foreign currency forward contracts category are generally included in cost of sales in the Company’s consolidated statements of operations. For a description of the Company’s use of foreign currency forward contracts, refer to Note 8.

8. Foreign currency forward contracts

The Company’s international operations and purchases of inventory products from foreign suppliers are subject to certain opportunities and risks, including foreign currency fluctuations. In the TCS segment, we utilize foreign currency forward contracts in Swedish krona to stabilize our retail gross margins and to protect our domestic operations from downward currency exposure by hedging purchases of inventory from our wholly-owned subsidiary, Elfa. Forward contracts in the TCS segment are designated as cash flow hedges, as defined by ASC 815. In the Elfa segment, we utilize foreign currency forward contracts to hedge purchases, primarily of raw materials, that are transacted in currencies other than Swedish krona, which is the functional currency of Elfa. Forward contracts in the Elfa segment are economic hedges and are not designated as cash flow hedges as defined by ASC 815.

During the ~~thirty-nine~~thirteen weeks ended ~~December~~June 29, ~~2018~~2019 and ~~December~~June 30, ~~2017,~~2018, the TCS segment used forward contracts for ~~97% and~~ 100% of inventory purchases in Swedish krona, respectively. During the thirty-nine weeks ended December 29, 2018 and December 30, 2017, the Elfa segment used forward contracts to purchase U.S. dollars in the amount of $0 and $1,648, which represented 0% and 27% of the Elfa segment’s U.S. dollar purchases, respectively.krona. Generally, the Company’s foreign currency forward contracts have terms from 1 to 12 months and require the Company to exchange currencies at agreed-upon rates at settlement.

The counterparties to the contracts consist of a limited number of major domestic and international financial institutions. The Company does not hold or enter into financial instruments for trading or speculative purposes. The Company records its foreign currency forward contracts on a gross basis and generally does not require collateral from these counterparties because it does not expect any losses from credit exposure.

The Company records all foreign currency forward contracts on its consolidated balance sheet at fair value. The Company accounts for its foreign currency hedging instruments in the TCS segment as cash flow hedges, as defined. Changes in the fair value of the foreign currency hedging instruments that are considered to be effective, as defined, are recorded in other comprehensive income (loss) until the hedged item (inventory) is sold to the customer, at which time the deferred gain or loss is recognized through cost of sales. Any portion of a change in the foreign currency hedge instrument’s fair value that is considered to be ineffective, as defined, or that the Company has elected to exclude from its measurement of effectiveness, is immediately recorded in earnings as cost of sales. The Company assessed the effectiveness of the foreign currency hedge instruments and determined the foreign currency hedge instruments were highly effective during the ~~thirty-nine~~thirteen weeks ended ~~December~~June 29, ~~2018~~2019 and ~~December~~June 30, ~~2017.~~2018. Forward contracts not

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designated as hedges in the Elfa segment are adjusted to fair value as SG&A ~~expenses~~ on the consolidated statements of operations; however, during the ~~thirty-nine~~thirteen weeks ended ~~December~~June 29, ~~2018,~~2019, the Company did not recognize any amount associated with the change in fair value of forward contracts not designated as hedging instruments, as the Company had none of these instruments outstanding.

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The Company had a ~~$789~~$1,095 loss in accumulated other comprehensive loss related to foreign currency hedge instruments at ~~December~~June 29, ~~2018,~~2019, of which ~~$740~~$405 represents an unrealized loss for settled foreign currency hedge instruments related to inventory on hand as of ~~December~~June 29, ~~2018.~~2019. The Company expects the unrealized loss of ~~$740,~~$405, net of taxes, to be reclassified into earnings over the next 12 months as the underlying inventory is sold to the end customer.

The change in fair value of the Company’s foreign currency hedge instruments that qualify as cash flow hedges and are included in accumulated other comprehensive loss, net of taxes, are presented in Note 7 of these financial statements.

9. Fair value measurements

Under GAAP, the Company is required to a) measure certain assets and liabilities at fair value or b) disclose the fair values of certain assets and liabilities recorded at cost. Accounting standards define fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. Fair value is calculated assuming the transaction occurs in the principal or most advantageous market for the asset or liability and includes consideration of non-performance risk and credit risk of both parties. Accounting standards pertaining to fair value establish a three-tier fair value hierarchy that prioritizes the inputs used in measuring fair value. These tiers include:

Level 1—Valuation inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

Level 2—Valuation inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3—Valuation inputs are unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are determined using model-based techniques that include option pricing models, discounted cash flow models and similar techniques.

As of ~~December~~June 29, ~~2018,~~2019, March ~~31,~~30, 2019 and June 30, 2018, ~~and December 30, 2017,~~ the Company held certain items that are required to be measured at fair value on a recurring basis. These included the nonqualified retirement plan, ~~and foreign currency forward contracts. The nonqualified retirement plan~~which consists of investments purchased by employee contributions to retirement savings accounts. The Company’s foreign currency hedging instruments consist of over-the-counter (OTC) contracts, which are not traded on a public exchange. See Note 8 for further information on the Company’s hedging activities.

~~The~~ fair ~~values~~value amount of the nonqualified retirement plan is measured at fair value using the net asset value per share practical expedient, and ~~foreign currency forward contracts are determined based on~~therefore, is not classified in the market approach which utilizes inputs that are readily available in public markets or can be derived from information available in publicly quoted markets for comparable assets. Therefore, the Company has categorized these items as Level 2.fair value hierarchy. The Company also considers counterparty credit risk and its own credit risk in its determination of all estimated fair values. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of contracts it holds.

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The following items are measured at fair value on a recurring basis, subject to the disclosure requirements of ASC 820, Fair Value Measurements:

December 29,

March 31,

December 30,

Description



Balance Sheet Location

2018

2018

2017

Assets

Nonqualified retirement plan (1)

N/A

Other current assets

$
5,156

$
5,848

$
5,782

Foreign currency forward contracts

Level 2

Other current assets

35

—

—

Total assets

$
5,191

$
5,848

$
5,782

~~(1)~~

The fair value amount of the nonqualified retirement plan is measured at fair value using the net asset value per share practical expedient, and therefore, is not classified in the fair value hierarchy.


			June 29,		March 30,		June 30,
Description		Balance Sheet Location	2019		2019		2018
Assets
Nonqualified retirement plan	N/A	Other current assets	$	5,673	$	5,810	$	5,999
Total assets			$	5,673	$	5,810	$	5,999

The fair value of long-term debt was estimated using quoted prices as well as recent transactions for similar types of borrowing arrangements (Level 2 valuations). As of ~~December~~June 29, ~~2018,~~2019, March ~~31,~~30, 2019 and June 30, 2018, ~~and December 30, 2017,~~ the estimated fair value of the Company’s long-term debt, including current maturities, was ~~$292,961, $295,605,~~$295,942, $274,753, and ~~$313,068,~~$312,876, respectively.

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10. Segment reporting

The Company’s reportable segments were determined on the same basis as how management evaluates performance internally by the Chief Operating Decision Maker (“CODM”). The Company has determined that the Chief Executive Officer is the CODM and the Company’s two reportable segments consist of TCS and Elfa. The TCS segment includes the Company’s retail stores, website and call center, as well as the installation and organization services business.

The Elfa segment includes the manufacturing business that produces the elfa® brand products that are sold domestically exclusively through the TCS segment, as well as on a wholesale basis in approximately 30 countries around the world with a concentration in the Nordic region of Europe. The intersegment sales in the Elfa column represent elfa® product sales to the TCS segment. These sales and the related gross margin on merchandise recorded in TCS inventory balances at the end of the period are eliminated for consolidation purposes in the Eliminations column. The net sales to third parties in the Elfa column represent sales to customers outside of the United States.

The Company has determined that adjusted earnings before interest, tax, depreciation, and amortization (“Adjusted EBITDA”) is the profit or loss measure that the CODM uses to make resource allocation decisions and evaluate segment performance.

Adjusted EBITDA assists management in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management believes do not directly reflect our core operations and, therefore, are not included in measuring segment performance. Adjusted EBITDA is calculated in accordance with the Senior Secured Term Loan Facility and the Revolving Credit Facility and we define Adjusted EBITDA as net income before interest, taxes, depreciation and amortization, certain non-cash items, and other adjustments that we do not consider in our evaluation of ongoing operating performance from period to period.

Thirteen weeks ended December 29, 2018

TCS

Elfa

Eliminations

Total
Net sales to third parties

$
204,899

$
16,738

$
—

$
221,637
Intersegment sales

—

22,369

(22,369)

—
Adjusted EBITDA

19,014

4,994

(2,192)

21,816
Interest expense, net

5,957

51

—

6,008
Assets (1)

671,865

105,491

(5,334)

772,022

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Thirteen weeks ended December 30, 2017	TCS		Elfa		Eliminations		Total
Thirteen Weeks Ended June 29, 2019									TCS		Elfa		Eliminations		Total
Net sales to third parties	$	203,881	$	19,105	$	—	$	222,986	$	195,076	$	14,444	$	—	$	209,520
Intersegment sales		—		23,495		(23,495)		—		—		11,550		(11,550)		—
Adjusted EBITDA		22,550		6,374		(3,363)		25,561		10,234		2,088		(1,679)		10,643
Interest expense, net		7,232		68		—		7,300		5,614		95		—		5,709
Assets (1)		673,489		116,779		(5,869)		784,399		1,018,984		107,678		(5,142)		1,121,520

Thirty-nine weeks ended December 29, 2018

TCS

Elfa

Eliminations

Total
Net sales to third parties

$
593,896

$
48,017

$
—

$
641,913
Intersegment sales

—

47,414

(47,414)

—
Adjusted EBITDA

50,345

10,432

(2,223)

58,554
Interest expense, net

21,097

196

—

21,293
Assets (1)

671,865

105,491

(5,334)

772,022


Thirty-nine weeks ended December 30, 2017	TCS		Elfa		Eliminations		Total
Thirteen Weeks Ended June 30, 2018									TCS		Elfa		Eliminations		Total
Net sales to third parties	$	573,261	$	51,203	$	—	$	624,464	$	180,082	$	15,741	$	—	$	195,823
Intersegment sales		—		46,036		(46,036)		—		—		10,395		(10,395)		—
Adjusted EBITDA		51,760		10,965		(4,218)		58,507		10,103		1,599		689		12,391
Interest expense, net		17,189		209		—		17,398		7,845		63		—		7,908
Assets (1)		673,489		116,779		(5,869)		784,399		649,190		106,446		(3,273)		752,363

(1)

Tangible assets in the Elfa column are located outside of the United States.

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A reconciliation of ~~income (loss)~~loss before taxes to Adjusted EBITDA is set forth below:

Thirteen Weeks Ended

Thirty-Nine Weeks Ended


December 29,

December 30,

December 29,

December 30,


2018

2017

2018

2017

Income (loss) before taxes

$
5,395

$
6,599

$
(191)

$
(6,021)

Add:

Depreciation and amortization

8,887

9,477

27,352

28,524

Interest expense, net

6,008

7,300

21,293

17,398

Pre-opening costs (a)

691

1,872

1,918

4,676

Non-cash rent (b)

101

(714)

(1,117)

(1,451)

Stock-based compensation (c)

632

585

1,987

1,589

Loss on extinguishment of debt (d)

—

—

2,082

2,369

Foreign exchange losses (gains) (e)

22

(360)

69

(306)

Optimization Plan implementation charges (f)

—

422

4,864

10,742

Elfa manufacturing facility closure (g)

—

335

—

852

Other adjustments (h)

80

45

297

135

Adjusted EBITDA

$
21,816

$
25,561

$
58,554

$
58,507


		Thirteen Weeks Ended
	June 29,		June 30,
	2019		2018
Loss before taxes	$	(5,894)	$	(10,244)
Add:
Depreciation and amortization		9,706		9,337
Interest expense, net		5,709		7,908
Pre-opening costs (a)		477		346
Non-cash lease expense (b)		(64)		(637)
Stock-based compensation (c)		811		586
Foreign exchange (gains) losses (d)		(75)		38
Optimization Plan implementation charges (e)		—		4,864
Other adjustments (f)		(27)		193
Adjusted EBITDA	$	10,643	$	12,391

(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~~operating lease expense has been above or below our cash ~~rent payment due to~~operating lease ~~accounting adjustments.~~payments. The ~~adjustment~~amount varies depending on the average age of our lease portfolio (weighted for size), as our GAAP ~~rent~~operating lease expense on younger leases typically exceeds our cash ~~cost,~~operating lease payments, while our GAAP ~~rent~~operating lease expense on older leases is typically less than our cash ~~cost.~~operating lease payments.

(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.

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(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)~~(e)

Charges incurred to implement our ~~Optimization Plan,~~four-part optimization plan to drive improved sales and profitability, launched during fiscal 2017 (the “Optimization Plan”), which include certain consulting costs recorded in SG&A ~~expenses~~ in the first quarter of fiscal 2018, and in fiscal 2017, cash severance payments associated with the elimination of certain full-time positions at the TCS segment recorded in other expenses in fiscal 2017, and cash severance payments associated with organizational realignment at the Elfa segment recorded in other expenses in 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)~~(f)

Other adjustments include amounts our management does not consider in our evaluation of our ongoing operations, including certain severance and other charges.

11. ~~Subsequent Event~~Stock-based compensation

On ~~January 24,~~June 1, 2019, ~~as part of its ongoing long-term succession planning,~~ the Company ~~announced that Melissa Reiff, Chief Executive Officer, will succeed William A. “Kip” Tindell, III as Chairman of the Board effective as of the conclusion of~~granted time-based and performance-based restricted stock awards under the Company’s ~~2019 Annual Meeting of Shareholders (the “2019 Annual Meeting”).~~

~~The Company also announced that Sharon Tindell, President~~Amended and Chief Merchandising Officer, will retire from her role as President and Chief Merchandising Officer at the conclusion of the 2019 Annual Meeting. At that time, John Gehre, who joined The Container Store in June 2018 as Executive Vice President of Merchandising and Planning, will succeed Ms. Tindell as the Company’s Chief Merchandising Officer, and Melissa Reiff will add President to her title. In addition, the Company announced that Jodi Taylor will continue to serve as the Company’s Chief Financial Officer, Chief Administrative Officer and Secretary until a mutually agreed upon date after March 1, 2020 but before September 1, 2020, at which point she will no longer serve as the Company’s Chief Financial Officer and a successor Chief Financial Officer will be named, but Ms. Taylor will continue to serve as the Company’s Chief Administrative Officer and Secretary.

~~In connection with the management changes described above, the Company entered into amended and restated employment agreements on January 23, 2019 with Ms. Reiff, Ms. Tindell, and Ms. Taylor.~~

~~Each of the employment agreements continue to provide for annual grants of equity awards subject to the Company's~~Restated 2013 Incentive Award Plan to certain officers and ~~award agreements thereunder.~~employees of the Company. The total number of restricted shares granted was 605,927 with a grant-date fair value of $7.03 per share. The time-based restricted stock awards will vest over 3 years. The performance-based restricted stock awards vest based on achievement of fiscal 2019 performance targets and are also subject to time-based vesting requirements over 3 years.

~~Each employment agreement~~Unrecognized compensation expense related to outstanding restricted stock awards to employees as of June 29, 2019 is expected to be $4,900, and recognized over a weighted average period of 1.8 years. As of June 29, 2019, the total number of nonvested restricted stock awards was modified to provide that (i) upon a termination of employment by the Company without Cause (as defined in the applicable employment agreement), by the executive for Good Reason (as defined in the applicable employment agreement), or due to death or Disability (as defined in the applicable employment agreement), all equity awards subject to solely service-based vesting (rather than only stock options and performance-based restricted shares for which the performance period has ended) will vest (intended to reflect changes in the types of equity awards that have been granted by the Company recently), (ii) in the event of a termination of employment by the Company without Cause or by the executive for Good Reason within the two years following the date of a Change in Control (as defined in the applicable employment agreement), all restricted share awards subject to performance-based vesting with ongoing performance periods will fully vest in the amount that would have otherwise vested if the performance targets underlying such equity awards had been achieved at maximum levels, and (iii) upon a termination of employment due to expiration of the term, each executive will receive (a) in the case of Ms. Reiff and Ms. Taylor, severance that is substantially similar to that which such executive would receive in the event of a termination of950,013.

1817

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employment by the Company without Cause or by the executive for Good Reason outside the Change in Control Context, with the exception that the severance multiple of annual base salary and annual bonus will be one rather than two, and (b) in the case of Ms. Tindell, accelerated vesting of the portion of Ms. Tindell’s outstanding performance-based restricted share award granted on July 1, 2016 that is scheduled to time-vest on April 1, 2020 (in the amount determined based on actual performance).

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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 capital expenditures and interest expense, and expectations regarding our ~~Optimization Plan,~~second distribution center, 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;~~a security breach or cyber-attack of our ~~inability~~website or information technology systems, and other damage to ~~source and market~~such systems; effects of competition on our ~~products to meet customer preferences or inability to offer customers an aesthetically pleasing shopping environment;~~business; 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 inability to source and market our products to meet customer preferences or inability to offer customers an aesthetically pleasing shopping environment; risks related to our indebtedness; our inability to effectively manage online sales; 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; risks associated with our dependence on foreign imports; material damage to or interruptions in our information technology systems; our inability to lease space on favorable terms; the vulnerability of our facilities and systems to natural disasters and other unexpected events; our reliance on third-party web service providers; our failure to successfully anticipate consumer demand and manage inventory commensurate with demand; our ability to control increasing costs, including fluctuations in currency exchange rates and rising health care and labor costs; risks related to new store openings; 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; fluctuations in our tax obligations and effective tax rate and realization of our deferred tax 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,~~30, 2019, filed with the Securities and Exchange Commission (the “SEC”) on May ~~31, 2018.~~30, 2019.

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

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subject to risks and uncertainties, you should not rely on these forward-looking statements as predictions of future

~~Table of Contents~~

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~~2019 ends on March ~~30, 2019~~28, 2020 and fiscal ~~2017~~2018 ended on March ~~31, 2018.~~30, 2019. The ~~third~~first quarter of fiscal 2019 ended on June 29, 2019 and the first quarter of fiscal 2018 ended on ~~December 29,~~June 30, 2018, ~~and the third quarter of fiscal 2017 ended on December 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. We feature The Container Store Custom Closets consisting of our elfa® Classic, elfa® Décor, Avera™ and Laren™ closet lines. 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 (which includes business sales), as well as our installation and organizational services business. As of ~~December~~June 29, ~~2018,~~2019, we operated 92 stores with an average size of approximately 25,000 square feet ~~19,000~~(19,000 selling square feet) in 33 states and the District of Columbia. We ~~allow~~offer our customers their choice of how to ~~shop with us in a variety of ways~~—~~anywhere, anytime, any way they want~~shop—in-store, online or through ~~a multi-channel shopping experience.~~our in-home services. 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.~~Texas and we are currently in the process of opening a second distribution center in Aberdeen, Maryland, which is expected to be fully operational in late fiscal 2019.

 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.

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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.

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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.


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended				Thirteen Weeks Ended
	December 29,		December 30,		December 29,		December 30,		June 29,		June 30,
	2018		2017		2018		2017		2019		2018
Net sales	$	221,637	$	222,986	$	641,913	$	624,464	$	209,520	$	195,823
Cost of sales (excluding depreciation and amortization)		91,580		92,425		266,510		263,919		89,713		81,052
Gross profit		130,057		130,561		375,403		360,545		119,807		114,771
Selling, general, and administrative expenses (excluding depreciation and amortization)		108,688		103,894		320,949		306,866		109,029		106,605
Stock-based compensation		632		585		1,987		1,589		811		586
Pre-opening costs		691		1,872		1,918		4,676		477		346
Depreciation and amortization		8,887		9,477		27,352		28,524		9,706		9,337
Other expenses		80		751		297		4,908
Other (income) expenses										(27)		193
(Gain) loss on disposal of assets		(324)		83		(284)		236		(4)		40
Income from operations		11,403		13,899		23,184		13,746
Loss from operations										(185)		(2,336)
Interest expense, net		6,008		7,300		21,293		17,398		5,709		7,908
Loss on extinguishment of debt		—		—		2,082		2,369
Income (loss) before taxes		5,395		6,599		(191)		(6,021)
Loss before taxes										(5,894)		(10,244)
Benefit for income taxes		(3,926)		(21,780)		(5,989)		(25,848)		(1,795)		(3,480)
Net income	$	9,321	$	28,379	$	5,798	$	19,827
Net loss									$	(4,099)	$	(6,764)

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	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	December 29,			December 30,			December 29,			December 30,			Thirteen Weeks Ended
	2018			2017			2018			2017			June 29,			June 30,
													2019			2018
Percentage of net sales:
Net sales		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales (excluding depreciation and amortization)		41.3	%		41.4	%		41.5	%		42.3	%		42.8	%		41.4	%
Gross profit		58.7	%		58.6	%		58.5	%		57.7	%		57.2	%		58.6	%
Selling, general, and administrative expenses (excluding depreciation and amortization)		49.0	%		46.6	%		50.0	%		49.1	%		52.0	%		54.4	%
Stock‑based compensation		0.3	%		0.3	%		0.3	%		0.3	%		0.4	%		0.3	%
Pre‑opening costs		0.3	%		0.8	%		0.3	%		0.7	%		0.2	%		0.2	%
Depreciation and amortization		4.0	%		4.3	%		4.3	%		4.6	%		4.6	%		4.8	%
Other expenses		0.0	%		0.3	%		0.0	%		0.8	%
Other (income) expenses														(0.0)	%		0.1	%
(Gain) loss on disposal of assets		(0.1)	%		0.0	%		(0.0)	%		0.0	%		(0.0)	%		0.0	%
Income from operations		5.1	%		6.2	%		3.6	%		2.2	%
Loss from operations														(0.1)	%		(1.2)	%
Interest expense, net		2.7	%		3.3	%		3.3	%		2.8	%		2.7	%		4.0	%
Loss on extinguishment of debt		—	%		—	%		0.3	%		0.4	%
Income (loss) before taxes		2.4	%		3.0	%		(0.0)	%		(1.0)	%
Loss before taxes														(2.8)	%		(5.2)	%
Benefit for income taxes		(1.8)	%		(9.8)	%		(0.9)	%		(4.1)	%		(0.9)	%		(1.8)	%
Net income		4.2	%		12.7	%		0.9	%		3.2	%
Net loss														(2.0)	%		(3.5)	%
Operating data:
Comparable store sales growth for the period (1)		(0.8)	%		(0.2)	%		1.5	%		0.2	%		7.8	%		4.7	%
Number of stores open at end of period		92			90			92			90			92			91
Non‑GAAP measures (2):
Adjusted EBITDA (3)	$	21,816		$	25,561		$	58,554		$	58,507		$	10,643		$	12,391
Adjusted net income (4)	$	3,543		$	5,083		$	4,279		$	5,153
Adjusted net income per common share — diluted (4)	$	0.07		$	0.11		$	0.09		$	0.11
Adjusted net loss (4)													$	(4,099)		$	(4,012)
Adjusted net loss per common share—diluted (4)													$	(0.08)		$	(0.08)

(1)

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,~~A store temporarily closed for more than seven days is not considered comparable in the fiscal month it is closed. The store then becomes comparable on the first day of the following fiscal month in which it reopens. Net sales from our website and call center ~~and business-to-business net sales~~(which includes business sales) are also included in calculations of comparable store sales.

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(2)

We have presented EBITDA, Adjusted EBITDA, adjusted net ~~income,~~loss, and adjusted net ~~income~~loss per common share – diluted ~~share~~ as supplemental measures of financial performance that are not required by, or presented in accordance with, ~~GAAP.~~accounting principles generally accepted in the United States of America (“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~~Leonard Green and Partners, L.P. (“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.

(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.

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 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

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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.

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A reconciliation of net ~~income~~loss to EBITDA and Adjusted EBITDA is set forth below:


	Thirteen Weeks Ended				Thirty-Nine Weeks Ended				Thirteen Weeks Ended
	December 29,		December 30,		December 29,		December 30,		June 29,		June 30,
	2018		2017		2018		2017		2019		2018

Net income	$	9,321	$	28,379	$	5,798	$	19,827
Net loss									$	(4,099)	$	(6,764)
Depreciation and amortization		8,887		9,477		27,352		28,524		9,706		9,337
Interest expense, net		6,008		7,300		21,293		17,398		5,709		7,908
Income tax benefit		(3,926)		(21,780)		(5,989)		(25,848)		(1,795)		(3,480)
EBITDA		20,290		23,376		48,454		39,901		9,521		7,001
Pre-opening costs (a)		691		1,872		1,918		4,676		477		346
Non-cash rent (b)		101		(714)		(1,117)		(1,451)
Non-cash lease expense (b)										(64)		(637)
Stock-based compensation (c)		632		585		1,987		1,589		811		586
Loss on extinguishment of debt (d)		—		—		2,082		2,369
Foreign exchange losses (gains) (e)		22		(360)		69		(306)
Optimization Plan implementation charges (f)		—		422		4,864		10,742
Elfa manufacturing facility closure (g)		—		335		—		852
Other adjustments (h)		80		45		297		135
Foreign exchange (gains) losses (d)										(75)		38
Optimization Plan implementation charges (e)										—		4,864
Other adjustments (f)										(27)		193
Adjusted EBITDA	$	21,816	$	25,561	$	58,554	$	58,507	$	10,643	$	12,391

(a)

(b)

(c)

(d)

Loss recorded as a result of the amendment 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)~~(e)

Charges incurred to implement our four-part optimization plan to drive improved sales and profitability, launched during fiscal 2017 (the “Optimization ~~Plan,~~Plan”), which include certain consulting costs recorded in selling, general and administrative expenses (“SG&A”) in the first quarter of fiscal 2018, and in fiscal 2017, cash severance payments associated with the elimination of certain full-time positions at the TCS segment recorded in other expenses in fiscal 2017, and cash severance payments associated with organizational realignment at the Elfa segment recorded in other expenses in 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 fiscal 2017, recorded in other expenses, which we do not consider in our evaluation of our ongoing performance.~~

~~(h)~~(f)

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~~loss and adjusted net ~~income~~loss per common share – 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~~loss as net ~~income~~loss before restructuring charges, ~~impairment charges related~~

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~~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

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adjusted net ~~income~~loss per common share – diluted ~~share~~ as adjusted net ~~income~~loss divided by the diluted weighted average common shares outstanding. We use adjusted net ~~income~~loss and adjusted net ~~income~~loss per common share – 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~~loss and adjusted net ~~income~~loss per common share – 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 common share – diluted ~~share~~ to the non-GAAP financial measures of adjusted net ~~income~~loss and adjusted net ~~income~~loss per common share – diluted ~~share~~ is set forth below:

Thirteen Weeks Ended

Thirty-Nine Weeks Ended

December 29,

December 30,

December 29,

December 30,

2018

2017

2018

2017










Numerator:









Net income

$
9,321

$
28,379

$
5,798

$
19,827

Elfa manufacturing facility closure (a)

—

335

—

852

Gain on disposal of real estate (b)

(387)

—

(387)

—

Loss on extinguishment of debt (c)

—

—

2,082

2,369

Optimization Plan implementation charges (d)

—

422

4,864

10,742

Taxes (e)

(5,391)

(24,053)

(8,078)

(28,637)

Adjusted net income

$
3,543

$
5,083

$
4,279

$
5,153

Denominator:









Weighted-average common shares outstanding — diluted

48,381,455

48,167,882

48,407,337

48,128,682

Net income per common share — diluted

$
0.19

$
0.59

$
0.12

$
0.41

Adjusted net income per common share — diluted

$
0.07

$
0.11

$
0.09

$
0.11


	Thirteen Weeks Ended
	June 29,		June 30,
	2019		2018

Numerator:
Net loss	$	(4,099)	$	(6,764)
Optimization Plan implementation charges (a)		—		4,864
Taxes (b)		—		(2,112)
Adjusted net loss	$	(4,099)	$	(4,012)
Denominator:
Weighted-average common shares outstanding — diluted		48,231,148		48,138,907

Net loss per common share — diluted	$	(0.08)	$	(0.14)
Adjusted net loss per common share — diluted	$	(0.08)	$	(0.08)

~~(a)~~

~~(b)~~

Gain recorded as a result of the sale of a building in Lahti, Finland in fiscal 2018, recorded in (gain) loss on disposal of assets, which we do not consider in our evaluation of our ongoing operations.

~~(c)~~

~~(d)~~(a)

Charges incurred to implement our Optimization Plan, which include certain consulting costs recorded in ~~selling, general and administrative expenses~~SG&A in the first quarter of fiscal 2018, and in fiscal 2017, cash severance payments associated with the elimination of certain full-time positions at the TCS segment recorded in other expenses in fiscal 2017, and cash severance payments associated with organizational realignment at the Elfa segment recorded in other expenses in fiscal 2017, which we do not consider in our evaluation of ongoing performance.

~~(e)~~(b)

Tax impact of adjustments to net ~~income, as well as the estimated impact of the Tax Cuts~~loss and ~~Jobs Act recorded in fiscal 2017,~~ the tax benefit recorded in the first quarter of fiscal 2018 as a result of a reduction in the Swedish tax rate, ~~and the tax benefit recorded in the third quarter of fiscal 2018 as a result of the finalization of the impact of the Tax Cuts and Jobs Act,~~ which are considered to be unusual or infrequent tax items, all of which we do not consider in our evaluation of ongoing performance.

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Thirteen Weeks Ended ~~December~~June 29, ~~2018~~2019 Compared to Thirteen Weeks Ended ~~December~~June 30, ~~2017~~2018

Net sales

The following table summarizes our net sales for each of the thirteen weeks ended ~~December~~June 29, ~~2018~~2019 and ~~December~~June 30, ~~2017:~~2018:



	December 29, 2018		% total		December 30, 2017		% total		June 29, 2019		% total		June 30, 2018		% total
TCS net sales	$	204,899	92.4	%	$	203,881	91.4	%	$	195,076	93.1	%	$	180,082	92.0	%
Elfa third party net sales		16,738	7.6	%		19,105	8.6	%		14,444	6.9	%		15,741	8.0	%
Net sales	$	221,637	100.0	%	$	222,986	100.0	%	$	209,520	100.0	%	$	195,823	100.0	%

Net sales in the thirteen weeks ended ~~December~~June 29, ~~2018 decreased~~2019 increased by ~~$1,349,~~$13,697, or ~~0.6%~~7.0%, compared to the thirteen weeks ended ~~December~~June 30, ~~2017.~~2018. This ~~decrease is~~increase was comprised of the following components:


	Net sales		Net sales
Net sales for the thirteen weeks ended December 30, 2017	$	222,986
Net sales for the thirteen weeks ended June 30, 2018			$	195,823
Incremental net sales increase (decrease) due to:
Comparable stores (including a $1,711 or 9.9%, increase in online sales)		(1,685)
Comparable stores (including a $5,108, or 29.2%, increase in online sales)				13,826
New stores		2,604		754
Elfa third party net sales (excluding impact of foreign currency translation)		(949)		(14)
Impact of foreign currency translation on Elfa third party net sales		(1,417)		(1,283)
Shipping and delivery		98		414
Net sales for the thirteen weeks ended December 29, 2018	$	221,637
Net sales for the thirteen weeks ended June 29, 2019			$	209,520

In the thirteen weeks ended ~~December~~June 29, ~~2018,~~2019, comparable stores generated a ~~decrease of $1,685,~~$13,826, or ~~0.8%,~~7.8% increase in net sales. Additionally, ~~five~~two new stores generated ~~$2,604~~$754 of incremental net sales, ~~three~~both of which were opened during ~~fiscal 2017 and two of which were opened in the first thirty-nine weeks of~~ fiscal 2018. Elfa third party net sales decreased ~~$2,366~~$1,297 in the thirteen weeks ended ~~December~~June 29, ~~2018.~~2019. 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 ~~December~~June 29, ~~2018~~2019 and thirteen weeks ended ~~December~~June 30, ~~2017,~~2018, Elfa third party net sales decreased ~~$949 primarily due to lower net sales in Nordic and Russian markets.~~$14.

Gross profit and gross margin

Gross profit in the thirteen weeks ended ~~December~~June 29, ~~2018 decreased~~2019 increased by ~~$504,~~$5,036, or ~~0.4%~~4.4%, compared to the thirteen weeks ended ~~December~~June 30, ~~2017.~~2018. The ~~decrease~~increase in gross profit was primarily the result of ~~decreased~~increased consolidated net sales, partially offset by ~~an increase~~a decrease in consolidated gross margin. The following table summarizes the gross margin for the thirteen weeks ended ~~December~~June 29, ~~2018~~2019 and ~~December~~June 30, ~~2017~~2018 by segment and total. The segment gross margins include the impact of inter-segment net sales from the Elfa segment to the TCS segment:


	December 29, 2018		December 30, 2017		June 29, 2019		June 30, 2018
TCS gross margin	58.4	%	58.1	%	57.4	%	57.9	%
Elfa gross margin	32.4	%	36.3	%	36.3	%	37.3	%
Total gross margin	58.7	%	58.6	%	57.2	%	58.6	%

TCS gross margin ~~increased 30~~decreased 50 basis points primarily due to ~~lower cost~~marketing and merchandising campaigns that drove a higher mix of ~~goods associated with the Optimization Plan,~~campaign driven sales, partially offset by ~~higher promotional activities and a negative impact from~~an improvement in foreign ~~currency.~~currency translation. Elfa gross margin ~~declined 390~~decreased 100 basis points primarily due to higher direct materials costs attributable to ~~a shift in product mix~~higher raw materials prices and a weaker Swedish ~~krona during the quarter.~~krona. In total, gross margin ~~increased 10~~decreased 140 basis points primarily due to a higher mix of lower margin products and services sold in the ~~increase in TCS gross margin during the quarter.~~first quarter of fiscal 2019.

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Selling, general and administrative expenses

Selling, general and administrative expenses ~~(“SG&A”)~~ in the thirteen weeks ended ~~December~~June 29, ~~2018~~2019 increased by ~~$4,794,~~$2,424, or ~~4.6%~~2.3%, compared to the thirteen weeks ended ~~December~~June 30, ~~2017.~~2018. As a percentage of consolidated net sales, SG&A ~~increased~~decreased by 240

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basis points. The following table summarizes SG&A as a percentage of ~~total~~consolidated net sales for the thirteen weeks ended ~~December~~June 29, ~~2018~~2019 and ~~December~~June 30, ~~2017:~~2018:


	December 29, 2018		December 30, 2017		June 29, 2019		June 30, 2018
	% of Net sales		% of Net sales		% of Net sales		% of Net sales
TCS selling, general and administrative	45.4	%	42.7	%	48.5	%	50.2	%
Elfa selling, general and administrative	3.6	%	3.9	%	3.5	%	4.2	%
Total selling, general and administrative	49.0	%	46.6	%	52.0	%	54.4	%

TCS selling, general and administrative expenses ~~increased~~decreased by ~~270~~170 basis points as a percentage of consolidated net sales. This was primarily due to ~~the deleverage of occupancy and payroll costs associated with negative comparable store sales, as well as increased marketing expense~~Optimization Plan expenses incurred in the ~~third~~first quarter of fiscal 2018 that were not incurred in the first quarter of fiscal 2019, partially offset by increased Custom Closets marketing expenses and costs associated with ~~a shift in~~ the ~~timing of recognition of campaign-related marketing costs from the fourth fiscal quarter to the third fiscal quarter due to accounting changes.~~second distribution center. Elfa selling, general and administrative expenses decreased by 30 basis points as a percentage of consolidated net sales, primarily due to a higher percentage of consolidated net sales attributable to the TCS segment in the thirteen weeks ended December 29, 2018 as compared to the thirteen weeks ended December 30, 2017.

~~Pre-opening costs~~

Pre-opening costs decreased by $1,181, or 63.1%, in the thirteen weeks ended December 29, 2018 to $691, as compared to $1,872 in the thirteen weeks ended December 30, 2017. We opened two relocation stores in the thirteen weeks ended December 29, 2018, and we opened three stores, including one relocation store, in the thirteen weeks ended December 30, 2017.

~~Other expenses~~

Other expenses of $80 were recorded in the thirteen weeks ended December 29, 2018, as compared to $751 in the thirteen weeks ended December 30, 2017. The $671 decrease in other expenses is primarily due to expenses incurred in the thirteen weeks ended December 30, 2017 in connection with the Optimization Plan, as well as the closure of the Elfa manufacturing facility in Lahti, Finland in December 2017.

~~Interest expense~~

Interest expense decreased by $1,292, or 17.7%, in the thirteen weeks ended December 29, 2018 to $6,008, as compared to $7,300 in the thirteen weeks ended December 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, which resulted in lower interest expense during the thirteen weeks ended December 29, 2018. As a result of entering the Fifth Amendment, we expect to incur approximately $28,000 of total interest expense in fiscal 2018.

~~Taxes~~

The benefit for income taxes in the thirteen weeks ended December 29, 2018 was $3,926 as compared to the benefit for income taxes of $21,780 in the thirteen weeks ended December 30, 2017. The effective tax rate for the thirteen weeks ended December 29, 2018 was -72.8%, as compared to -330.1% in the thirteen weeks ended December 30, 2017. During the thirteen weeks ended December 29, 2018, the effective tax rate fell below the U.S statutory rate primarily due to the finalization of the one-time transition tax on foreign earnings related to the Tax Cuts and Jobs Act (the “Tax Act”) enacted in fiscal 2017. During the thirteen weeks ended December 30, 2017, the effective tax rate fell below the blended

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~~U.S. statutory rate of 31.5% primarily due to the estimated impact of the Tax Act, which was primarily driven by the remeasurement of deferred tax balances.~~

~~Thirty-Nine Weeks Ended December 29, 2018 Compared to Thirty-Nine Weeks Ended December 30, 2017~~

~~Net sales~~

~~The following table summarizes our net sales for each of the thirty-nine weeks ended December 29, 2018 and December 30, 2017:~~

December 29, 2018

% total

December 30, 2017

% total

TCS net sales

$
593,896

92.5
%
$
573,261

91.8
%
Elfa third party net sales

48,017

7.5
%

51,203

8.2
%
Net sales

$
641,913

100.0
%
$
624,464

100.0
%

Net sales in the thirty-nine weeks ended December 29, 2018 increased by $17,449, or 2.8%, compared to the thirty-nine weeks ended December 30, 2017. This increase is comprised of the following components:

Net sales
Net sales for the thirty-nine weeks ended December 30, 2017

$
624,464
Incremental net sales increase (decrease) due to:

Comparable stores (including a $8,421, or 17.5%, increase in online sales)

8,683
New stores

11,733
Elfa third party net sales (excluding impact of foreign currency translation)

(526)
Impact of foreign currency translation on Elfa third party net sales

(2,660)
Shipping and delivery

219
Net sales for the thirty-nine weeks ended December 29, 2018

$
641,913

In the thirty-nine weeks ended December 29, 2018, comparable stores generated an increase of $8,683, or 1.5%, in net sales. Additionally, six new stores generated $11,733 of incremental net sales, four of which were opened during fiscal 2017 and two of which were opened in the first thirty-nine weeks of fiscal 2018. Elfa third party net sales decreased $3,186 in the thirty-nine weeks ended December 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 thirty-nine weeks ended December 29, 2018 and thirty-nine weeks ended December 30, 2017, Elfa third party net sales decreased $526 primarily due to lower net sales in Russian markets.

~~Gross profit and gross margin~~

Gross profit in the thirty-nine weeks ended December 29, 2018 increased by $14,858, or 4.1%, compared to the thirty-nine weeks ended December 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 thirty-nine weeks ended December 29, 2018 and December 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:

December 29, 2018

December 30, 2017

TCS gross margin

58.0
%
57.3
%
Elfa gross margin

34.5
%
37.6
%
Total gross margin

58.5
%
57.7
%

~~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 declined 310 basis points primarily due to higher direct materials costs attributable to a shift in product mix and a weaker Swedish krona during the first thirty-nine weeks of fiscal 2018. In total, gross margin increased 80 basis points primarily due to the increase in TCS gross margin during the first thirty-nine weeks of fiscal 2018.

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~~Selling, general and administrative expenses~~

SG&A in the thirty-nine weeks ended December 29, 2018 increased by $14,083, or 4.6%, compared to the thirty-nine weeks ended December 30, 2017. As a percentage of consolidated net sales, SG&A increased by 90 basis points. The following table summarizes SG&A as a percentage of total net sales for the thirty-nine weeks ended December 29, 2018 and December 30, 2017:

December 29, 2018

December 30, 2017


% of Net sales

% of Net sales

TCS selling, general and administrative

46.4
%
45.1
%
Elfa selling, general and administrative

3.6
%
4.0
%
Total selling, general and administrative

50.0
%
49.1
%

TCS selling, general and administrative expenses increased by 130 basis points as a percentage of consolidated net sales. The increase was primarily attributable to deleverage of occupancy costs, higher payroll costs, and increased marketing expense associated with the branding campaign launch in the second quarter of fiscal of 2018. Elfa selling, general and administrative expenses decreased by 40 basis points as a percentage of consolidated net sales, primarily due to ongoing savings and efficiency efforts.

~~Pre-opening costs~~Interest expense

~~Pre-opening costs~~Interest expense decreased by ~~$2,758,~~$2,199, or ~~59.0%~~27.8%, in the ~~thirty-nine~~thirteen weeks ended ~~December~~June 29, ~~2018~~2019 to ~~$1,918,~~$5,709, as compared to ~~$4,676~~$7,908 in the ~~thirty-nine~~thirteen weeks ended ~~December~~June 30, 2017. We opened four stores, including two relocations, in the thirty-nine weeks ended December 29, 2018, and we opened five stores, including one relocation, in the thirty-nine weeks ended December 30, 2017.

~~Other expenses~~

~~Other expenses of $297 were recorded in the thirty-nine weeks ended December 29, 2018, as compared to $4,908 in the thirty-nine weeks ended December 30, 2017. The~~2018. This decrease is primarily due to ~~severance costs incurred in the first thirty-nine weeks of fiscal 2017 to implement the Optimization Plan and related to the closure of~~ an ~~Elfa manufacturing facility in Lahti, Finland.~~

~~Interest expense and loss on extinguishment of debt~~

Interest expense increased by $3,895, or 22.4%, in the thirty-nine weeks ended December 29, 2018 to $21,293, as compared to $17,398 in the thirty-nine weeks ended December 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 prior to the subsequent amendment of our Senior Secured Term Loan Facility in September 2018.

~~Additionally, we recorded a loss on extinguishment of debt of $2,082 and $2,369 in the thirty-nine weeks ended December 29, 2018 and December 30, 2017, respectively, as a result of amendments~~ (the “Fifth Amendment”) to the Senior Secured Term Loan Facility ~~in each~~(as defined below) that was entered into during the second quarter of fiscal ~~period.~~2018, pursuant to which, among other things, the applicable interest rate margin was decreased to 5.00% for LIBOR loans and 4.00% for base rate loans.

Taxes

The benefit for income taxes in the ~~thirty-nine~~thirteen weeks ended ~~December~~June 29, ~~2018~~2019 was ~~$5,989~~$1,795 as compared to ~~a benefit of $25,848,~~$3,480 in the ~~thirty-nine~~thirteen weeks ended ~~December~~June 30, ~~2017.~~2018. The effective tax rate for the ~~thirty-nine~~thirteen weeks ended ~~December~~June 29, ~~2018~~2019 was ~~3135.6%~~30.5%, as compared to ~~429.3%~~34.0% in the ~~thirty-nine~~thirteen weeks ended ~~December~~June 30, ~~2017. During the thirty-nine weeks ended December 29, 2018,~~2018. The decrease in the effective tax rate ~~rose above the U.S. statutory rate~~is primarily due to ~~the finalization of the one-time transition tax on foreign earnings and other Tax Act items, and recognition of a $604 tax benefit for~~ the remeasurement of deferred tax balances in the first quarter of fiscal 2018 as a result of a change in the Swedish tax ~~rate, combined with a year-to-date pre-tax loss. During the thirty-nine weeks ended December 30, 2017, the effective tax rate rose above the~~

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~~blended U.S. statutory rate of 31.5% primarily due to the estimated impact of the Tax Act, which was primarily driven by the remeasurement of deferred tax balances.~~rate.

Liquidity and Capital Resources

We ~~rely~~have relied on cash flows from operations, ~~our~~a $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 December 29, 2018) 2014 Elfa revolving credit facility (the “2014 Elfa Revolving Credit Facility” as further discussed under “2014~~2019 Elfa Senior Secured Credit ~~Facilities”~~Facilities (as defined below) as our primary sources of liquidity. Our primary cash needs are for merchandise inventories, direct materials, payroll, store ~~rent,~~leases, capital expenditures associated with opening new stores and updating existing stores, as well as information technology and infrastructure, including building our ~~existing and future~~second distribution ~~centers,~~center, 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, operating lease assets and liabilities, 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~~2019 Elfa ~~Revolving~~Senior Secured Credit ~~Facility~~Facilities 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.~~terms or at all.

At ~~December~~June 29, ~~2018,~~2019, we had ~~$20,969~~$11,404 of cash, of which ~~$8,661~~$3,852 was held by our foreign subsidiaries. In addition, we had ~~$53,295~~$57,029 of additional availability under the Revolving Credit Facility and approximately ~~$15,792~~$14,276 of additional

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availability under the ~~2014~~2019 Elfa Revolving Credit Facility (as defined below) as of ~~December~~June 29, ~~2018.~~2019. There were ~~$3,826~~$4,450 in letters of credit outstanding under the Revolving Credit Facility and other contracts at that date.

~~Pursuant to the Tax Act, we are required to pay a~~ one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred. As of December 29, 2018, we have $$1,819 recorded as a liability on our consolidated balance sheet for the one-time transition tax, which is required to be paid in installments over the next 7 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.

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Cash flow analysis

A summary of our ~~operating, investing~~key components and ~~financing activities~~measures of liquidity are shown in the following table:




	Thirty-Nine Weeks Ended				Thirteen Weeks Ended
	December 29,		December 30,		June 29,		June 30,
	2018		2017		2019		2018
Net cash provided by operating activities	$	17,823	$	39,392
Net cash used in operating activities					$	(8,321)	$	(3,320)
Net cash used in investing activities		(20,413)		(20,082)		(8,699)		(4,455)
Net cash provided by (used in) financing activities		15,737		(8,170)
Net cash provided by financing activities						21,274		13,842
Effect of exchange rate changes on cash		(577)		777		(214)		(364)
Net increase in cash	$	12,570	$	11,917	$	4,040	$	5,703
Free cash flow (Non-GAAP)(1)	$	(3,505)	$	19,291
Free cash flow (Non-GAAP) (1)					$	(17,024)	$	(7,776)

(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~~used in 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~~used in operating activities was ~~$17,823~~$8,321 for the ~~thirty-nine~~thirteen weeks ended ~~December~~June 29, ~~2018.~~2019. Non-cash items of ~~$29,029~~$9,087 and net income of ~~$5,798~~$4,099 were partially offset by a net change in operating assets and liabilities of ~~$17,004.~~$13,309. The net change in operating assets and liabilities is primarily due to an increase in merchandise inventory due to new product introductions and inventory build-up related to the new distribution center as well as timing of credit card receivables, partially offset by an increase in accounts payable and accrued liabilities primarily driven by timing of inventory receipts during the ~~thirty-nine~~thirteen weeks ended ~~December~~June 29, ~~2018.~~2019.

Net cash ~~provided by~~used in operating activities was ~~$39,392~~$3,320 for the ~~thirty-nine~~thirteen weeks ended ~~December~~June 30, ~~2017.~~2018. Net ~~income~~loss of ~~$19,827~~$6,764 and ~~non-cash items of $7,694 were combined with~~ a net change in operating assets and liabilities of ~~$11,871.~~$3,404 were partially offset by non-cash items of $6,848. 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 ~~partially offset by an increase in merchandise inventory and decreases in income taxes payable and other noncurrent liabilities,~~ during the ~~thirty-nine~~thirteen weeks ended ~~December~~June 30, ~~2017.~~2018.

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 ~~thirty-nine~~thirteen weeks ended ~~December~~June 29, ~~2018~~2019 were ~~$21,328~~$8,703 with new store openings, relocations and existing store remodels accounting for less than half of spending at ~~$8,703.~~$2,303. We ~~opened four~~did not open any stores ~~including two relocations,~~ during the ~~thirty-nine~~thirteen weeks ended ~~December~~June 29, ~~2018.~~2019. We incurred ~~$5,674~~$4,416 of capital expenditures for distribution centers, the majority of which is related to the new distribution center in Aberdeen, Maryland, which is expected to be ~~operating~~operational in late fiscal 2019. The remaining capital expenditures of ~~$6,951~~$1,984 were primarily for investments in information technology and new product rollouts. ~~We recorded proceeds from the sale of property, plant and equipment of $915, the majority of which is related to a sale of a building in Lahti, Finland in the third quarter of fiscal 2018.~~

Our total capital expenditures for the ~~thirty-nine~~thirteen weeks ended ~~December~~June 30, ~~2017~~2018 were ~~$20,101~~$4,456 with new store openings, relocations and existing store remodels accounting for more than half of spending at ~~$11,466.~~$2,388. We opened ~~five stores, including~~ one ~~relocation,~~store during the ~~thirty-nine~~thirteen weeks ended ~~December~~June 30, ~~2017.~~2018. The remaining capital expenditures of ~~$8,635~~$2,068 were primarily for investments in ~~information technology,~~ our ~~corporate offices and~~ distribution center ~~enhancements.~~

and information technology.

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Net cash provided by ~~(used in)~~ financing activities

Financing activities consist primarily of borrowings and payments under the Senior Secured Term Loan Facility, the Revolving Credit Facility, and the 2019 Elfa ~~Revolving~~Senior Secured Credit ~~Facility.~~Facilities.

Net cash provided by financing activities was ~~$15,737~~$21,274 for the ~~thirty-nine~~thirteen weeks ended ~~December~~June 29, ~~2018.~~2019. This included ~~net~~ proceeds of ~~$42,000~~$19,000 from borrowings under the Revolving Credit Facility, and net proceeds of $4,362 from borrowings under the 2019 Elfa Senior Secured Credit Facilities, partially offset by net payments of ~~$23,751~~$1,741 for repayment of long-term indebtedness, ~~debt issuance costs of $2,384,~~ and ~~$128~~$347 for taxes paid with the withholding of shares upon vesting of restricted stock awards.

Net cash ~~used in~~provided by financing activities was ~~$8,170~~$13,842 for the ~~thirty-nine~~thirteen weeks ended ~~December~~June 30, ~~2017.~~2018. This included ~~$11,246 for payment~~$15,000 from borrowings under the Revolving Credit Facility combined with net proceeds of ~~debt issuance costs,~~$918 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 payments of ~~$21,885~~$1,954 for repayment of long-term indebtedness and ~~$39~~$122 for taxes paid with the withholding of shares upon vesting of restricted stock ~~awards partially offset by net proceeds of $25,000 from borrowings under the Revolving Credit Facility.~~awards.

As of ~~December~~June 29, ~~2018,~~2019, TCS had a total of ~~$53,295~~$57,029 of unused borrowing availability under the Revolving Credit Facility, and ~~$42,000~~$31,000 of borrowings outstanding under the Revolving Credit Facility.

As of ~~December~~June 29, ~~2018,~~2019, Elfa had a total of ~~$15,792~~$14,276 of unused borrowing availability under the ~~2014~~2019 Elfa Revolving Credit Facility and ~~zero~~$9,951 borrowings outstanding under the ~~2014~~2019 Elfa ~~Revolving~~Senior Secured Credit ~~Facility.~~Facilities.

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,~~centers, among other things. Historically, our free cash flow has been lower in the first ~~half of the~~ fiscal ~~year,~~quarter, 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.

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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:



	Thirty-Nine Weeks Ended				Thirteen Weeks Ended
	December 29,		December 30,		June 29,		June 30,
	2018		2017		2019		2018
Net cash provided by operating activities	$	17,823	$	39,392
Net cash used in operating activities					$	(8,321)	$	(3,320)
Less: Additions to property and equipment		(21,328)		(20,101)		(8,703)		(4,456)
Free cash flow	$	(3,505)	$	19,291	$	(17,024)	$	(7,776)

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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 a credit agreement with JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and the ~~Senior~~lenders party thereto (the “Senior Secured Term Loan ~~Facility.~~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~~ended 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~~the Revolving Credit Facility in connection with the closing of the Fifth Amendment. As of ~~December~~June 29, ~~2018,~~2019, the aggregate principal amount ofin outstanding borrowings under the Senior Secured Term Loan Facility was ~~$270,797.~~$255,688 and the interest rate on such borrowings is LIBOR +4.75%, subject to a LIBOR floor of 1.00%. The Senior Secured Term Loan Facility provides that we are required to make quarterly principal repayments of $1,703 through June 30, 2023, with a balloon payment for the remaining balance due on September 14, 2023.

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 subject to 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). requirement. As of ~~December~~June 29, ~~2018,~~2019, we were in compliance with all covenants under the Senior Secured Term Loan Facility 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

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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.~~2022.

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

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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 ~~December~~June 29, ~~2018,~~2019, we were in compliance with all covenants under the Revolving Credit Facility and no Event of Default (as such term is defined in the Revolving Credit Facility) had occurred.

~~2014~~2019 Elfa Senior Secured Credit Facilities

On ~~April 1, 2014,~~March 18, 2019, Elfa ~~entered into a~~ refinanced its master credit agreement with Nordea Bank AB entered into on April 1, 2014 and the senior secured credit facilities thereunder, and entered into a new master credit agreement with Nordea Bank Abp, filial i Sverige (“~~Nordea”~~Nordea Bank”), which consists of a(i) an SEK ~~60.0~~110.0 million (approximately ~~$6,768~~$11,845 as of ~~December~~June 29, ~~2018) term loan facility (the “2014 Elfa Term Loan Facility”) and a SEK 140.0 million (approximately $15,792 as of~~ ~~December 29, 2018~~)2019) revolving credit facility (the ~~“2014 Elfa~~“2019 Original Revolving ~~Credit Facility,”~~Facility”), (ii) upon Elfa’s request, an additional SEK 115.0 million (approximately $12,383 as of June 29, 2019) revolving credit facility (the “2019 Additional Revolving Facility” and together with the ~~2014 Elfa Term Loan~~2019 Original Revolving Facility, the ~~“2014~~“2019 Elfa Revolving Facilities”), and (iii) an uncommitted term loan facility in the amount of SEK 25.0 million (approximately $2,692 as of June 29, 2019), which is subject to receipt of Nordea Bank’s commitment and satisfaction of specified conditions (the “Incremental Term Facility”, together with the 2019 Elfa Revolving Facilities, the “2019 Elfa Senior Secured Credit Facilities”). The ~~2014~~term for the 2019 Elfa Senior Secured Credit Facilities ~~term~~ began on ~~August 29, 2014~~April 1, 2019 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~~April 1, 2024. Loans borrowed under the ~~2014 Elfa Term Loan Facility in the amount of SEK 3.0 million (approximately $338 as of~~ ~~December 29, 2018). The 2014~~2019 Elfa Revolving ~~Credit Facility bears~~Facilities bear interest at ~~Nordea’s~~Nordea Bank’s base rate ~~+ 1.4%~~+1.40%. InAny loan borrowed under the ~~fourth quarter of fiscal 2016, Elfa and Nordea agreed that the stated rates~~Incremental Term Facility would ~~apply through maturity.~~bear interest at Stibor +1.70%.

The ~~2014~~2019 Elfa Senior Secured Credit Facilities ~~contain~~are secured by the majority of assets of Elfa. The 2019 Elfa Senior Secured Credit Facilities contains 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~~Group Equity Ratio (as defined in the ~~2014~~2019 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~~2019 Elfa Senior Secured Credit Facilities) of less than ~~3.2, the consolidated equity ratio tested at the end~~

Table of ~~each calendar quarter and the ratio of net debt to EBITDA tested as of the end of each fiscal quarter.~~Contents

3.20. As of ~~December~~June 29, ~~2018,~~2019, Elfa was in compliance with all covenants under the 2019 Elfa Senior Secured Credit Facilities and no Event of Default (as defined in the ~~2014~~2019 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~~GAAP 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~~30, 2019, filed with the SEC on May ~~31, 2018.~~30, 2019.

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

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~~“Management’s~~ “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~~30, 2019, filed with the SEC on May ~~31, 2018.~~30, 2019. As of ~~December~~June 29, ~~2018,~~2019, there were no significant changes to any of our critical accounting policies and estimates, with the exception of the adoption of ASU ~~2014-09,~~2016-02, ~~Revenue from Contracts with Customers~~Leases, which is updated below.

Leases

We recognize a lease liability upon lease commencement, measured at the present value of the fixed future minimum lease payments over the lease term. We have elected the practical expedient to not separate lease and non-lease components. Therefore, lease payments included in the measurement of the lease liability include all fixed payments in the lease arrangement. We record a right-of-use asset for an amount equal to the lease liability, increased for any prepaid lease costs and initial direct costs and reduced by any lease incentives. We remeasure the lease liability and right-of-use asset when a change to our future minimum lease payments occurs. Lease expense on operating leases is recorded on a straight-line basis over the term of the lease and is recorded in SG&A.

Key assumptions and judgments included in the determination of the lease liability include the discount rate applied to the present value of the future lease payments, and the exercise of renewal options. Our leases do not provide information about the rate implicit in the lease; therefore, we utilize an incremental borrowing rate to calculate the present value of our future lease obligations. The incremental borrowing rate represents the rate of interest we would have to pay on a collateralized borrowing, for an amount equal to the lease payments, over a similar term and in a similar economic environment. Additionally, many of our leases contain renewal options. The option periods are generally not included in the lease term used to measure our lease liabilities and right-of-use assets upon commencement as ~~discussed in~~exercise of the options is not reasonably certain. We remeasure the lease liability and right-of-use asset when we are reasonably certain to exercise a renewal option.

For further discussion about leases see Note 1 ~~of our unaudited~~and Note 3 in the Notes to 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,~~30, 2019, filed with the SEC on May ~~31, 2018,~~30, 2019, other than those ~~shown~~which occur in the ~~table below, as a result~~normal course of the Fifth Amendment to our Senior Secured Term Loan Facility executed in the second quarter of fiscal 2018, as well as the finalization of the one-time transition tax on foreign earnings in the third quarter of fiscal 2018. The table below has been updated to reflect our contractual obligations as of December 29, 2018 related to the Fifth Amendment and the one-time transition tax on foreign earnings.business.

Payments due by period

Within


Total

1 Year

1 ‑ 3 Years

3 ‑ 5 Years

After 5 Years
Recorded contractual obligations

Term loans

$
270,797

$
6,813

$
13,626

$
250,358

$
—
Revolving loans

42,000

—

42,000

—

—
Other long-term obligations (1)

1,819

199

398

573

649
Unrecorded contractual obligations










Estimated interest (2)

93,215

21,282

40,184

31,749

—
Total

$
407,831

$
28,294

$
96,208

$
282,680

$
649

~~(1)~~

~~One-time transition tax on foreign earnings that will be paid over 7 years.~~

~~(2)~~

For purposes of this table, interest has been estimated based on interest rates in effect for our indebtedness as of December 29, 2018, and estimated borrowing levels in the future. Actual borrowing levels and interest costs may differ.

~~Off Balance~~Off-Balance Sheet Arrangements

~~We are not party~~There have been no material changes to ~~any off balance~~our off-balance sheet ~~arrangements.~~arrangements as disclosed in our Annual Report on Form 10-K for the fiscal year ended March 30, 2019, filed with the SEC on May 30, 2019.

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Recent Accounting Pronouncements

Please refer to Note 1 of our unaudited consolidated financial statements for a summary of recent accounting pronouncements.

~~ITEM~~oklITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk profile as of ~~December~~June 29, ~~2018~~2019 has not materially changed since March ~~31, 2018.~~30, 2019. Our market risk profile as of March ~~31, 2018~~30, 2019 is disclosed in our Annual Report on Form 10-K filed with the SEC on May ~~31, 2018.~~30, 2019. 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

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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 ~~December~~June 29, ~~2018.~~2019.

Changes in Internal Control

~~There~~During the first quarter of fiscal 2019, the Company implemented controls related to its adoption of ASU 2016-02, Leases(Topic 842), and the related financial statement reporting. Other than the foregoing, 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 ~~December~~June 29, ~~2018~~2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are subject to various legal proceedings and claims, including employment claims, wage and hour claims, intellectual property claims, contractual and commercial disputes and other matters that arise in the ordinary course of business. While the outcome of these and other claims cannot be predicted with certainty, management does not believe that the outcome of these matters will have a material adverse effect on our business, results of operations or financial condition on an individual basis or in the aggregate.

ITEM 1A. RISK FACTORS

There have been no material changes to our risk factors as previously disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended March ~~31, 2018,~~30, 2019, filed with the SEC on May ~~31, 2018.~~30, 2019.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULT UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Incorporated by Reference
Exhibit
Number

Exhibit Description

Form

File No.

Exhibit

Filing
Date

Filed/
Furnished
Herewith
3.1

Amended and Restated Certificate of Incorporation of The Container Store Group, Inc.

10-Q

001-36161

3.1

1/10/14

3.2

Amended and Restated By-laws of The Container Store Group, Inc.

10-Q

001-36161

3.2

1/10/14

10.1

Fourth Amended and Restated Employment Agreement, dated January 23, 2019, between Melissa Reiff and The Container Store Group, Inc.

8-K

001-36161

10.1

1/24/19

10.2

Fourth Amended and Restated Employment Agreement, dated January 23, 2019, between Sharon Tindell and The Container Store Group, Inc.

8-K

001-36161

10.2

1/24/19

10.3

Amended and Restated Employment Agreement, dated January 23, 2019 between Jodi Taylor and The Container Store Group, Inc.

8-K

001-36161

10.3

1/24/19

31.1

Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)

*

31.2

Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)

*

32.1

Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

**

32.2

Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

**

101.INS

XBRL Instance Document

*

101.SCH

XBRL Taxonomy Extension Schema Document

*

101.CAL

XBRL Taxonomy Calculation Linkbase Document

*

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

*

~~Table of Contents~~

~~101.LAB~~

~~XBRL Taxonomy Extension Label Linkbase Document~~

~~101.PRE~~

~~XBRL Taxonomy Extension Presentation~~

Incorporated by Reference

Exhibit
Number

Exhibit Description

Form

File No.

Exhibit

Filing
Date

Filed/
Furnished
Herewith

3.1

Amended and Restated Certificate of Incorporation of The Container Store Group, Inc.

10-Q

001-36161

3.1

1/10/14

3.2

Amended and Restated Bylaws of The Container Store Group, Inc.

10-Q

001-36161

3.2

1/10/14

31.1

Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)

31.2

Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)

32.1

Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

32.2

Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

XBRL Taxonomy Extension Presentation

* Filed herewith.

** Furnished herewith.

4033

Table of Contents

SIGNATURES

Pursuant to the requirements ~~of Section 13 or 15(d)~~ of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

The Container Store Group, Inc.

(Registrant)

Date: ~~February 6,~~July 31, 2019	\s\ Jodi L. Taylor
	Jodi L. Taylor
Chief Financial Officer and Chief Administrative Officer (duly authorized officer and Principal Financial Officer)

Date: ~~February 6,~~July 31, 2019	\s\ Jeffrey A. Miller
	Jeffrey A. Miller
Chief Accounting Officer (Principal Accounting Officer)

4134


	Contract liability		Revenue recognized		Contract liabilities		Contract liability
	balance at		from beginning		added during		balance at
	March 31, 2018 (1)		liability		period (2)		December 29, 2018

Unearned revenue	$	11,080	$	(10,735)	$	10,596	$	10,941
Gift cards and store credits outstanding	$	8,470	$	(2,623)	$	3,715	$	9,562


Thirteen weeks ended December 29, 2018	TCS		Elfa		Eliminations		Total
Net sales to third parties	$	204,899	$	16,738	$	—	$	221,637
Intersegment sales		—		22,369		(22,369)		—
Adjusted EBITDA		19,014		4,994		(2,192)		21,816
Interest expense, net		5,957		51		—		6,008
Assets (1)		671,865		105,491		(5,334)		772,022


	Net sales
Net sales for the thirty-nine weeks ended December 30, 2017	$	624,464
Incremental net sales increase (decrease) due to:
Comparable stores (including a $8,421, or 17.5%, increase in online sales)		8,683
New stores		11,733
Elfa third party net sales (excluding impact of foreign currency translation)		(526)
Impact of foreign currency translation on Elfa third party net sales		(2,660)
Shipping and delivery		219
Net sales for the thirty-nine weeks ended December 29, 2018	$	641,913


	Payments due by period
			Within
	Total		1 Year		1 ‑ 3 Years		3 ‑ 5 Years		After 5 Years
Recorded contractual obligations
Term loans	$	270,797	$	6,813	$	13,626	$	250,358	$	—
Revolving loans		42,000		—		42,000		—		—
Other long-term obligations (1)		1,819		199		398		573		649
Unrecorded contractual obligations
Estimated interest (2)		93,215		21,282		40,184		31,749		—
Total	$	407,831	$	28,294	$	96,208	$	282,680	$	649