~~EXPLANATORY NOTE~~

The Container Store Group, Inc. (the “Company”) is filing this Amendment No. 1 (this “Amendment”) to its Quarterly Report on Form 10‑Q for the period ended December 29, 2018, which was originally filed with the Securities and Exchange Commission on February 6, 2019 (the “Form 10‑Q”) to correct inadvertent omissions pertaining to certain references to internal control over financial reporting that were required to be provided in the Section 302 Certifications of our principal executive officer and principal financial officer (the “Section 302 Certifications”) as filed with the Form 10‑Q. The Exhibits 31.1 and 31.2 filed with the Form 10‑Q omitted from the Section 302 Certifications: (i) the introductory language in paragraph 4 that refers to the certifying officer’s responsibility for establishing and maintaining internal control over financial reporting for the Company; and (ii) paragraph 4(b) regarding the design of internal control over financial reporting. The Company hereby amends the Form 10‑Q by resubmitting corrected versions of Exhibits 31.1 and 31.2 with this Amendment.

This Amendment does not reflect events occurring after the filing of the Form 10‑Q or modify or update those disclosures affected by subsequent events. Except for the items described above or contained in this Amendment, this Amendment continues to speak as of the date of the Form 10‑Q, and does not modify, amend or update any other item or disclosures in the Form 10‑Q.

~~PART II.OTHER INFORMATION~~TABLE OF CONTENTS

~~ITEM 6.EXHIBITS~~

~~The following exhibits are filed with this Amendment:~~


~~Exhibit~~ ~~Number~~		~~Exhibit Description~~
PART I.	FINANCIAL INFORMATION

~~31.1~~Item 1.	Financial Statements		~~Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a‑14(a) and Rule 15d‑14(a)~~

~~31.2~~	Unaudited Consolidated Balance Sheets as of September 28, 2019, March 30, 2019, and September 29, 2018	3

	~~Certification~~Unaudited Consolidated Statements of ~~Chief~~Operations for the Thirteen and Twenty-Six Weeks ended September 28, 2019 and September 29, 2018	5

	Unaudited Consolidated Statements of Comprehensive (Loss) Income for the Thirteen and Twenty-Six Weeks ended September 28, 2019 and September 29, 2018	6

	Unaudited Consolidated Statements of Cash Flows for the Twenty-Six Weeks ended September 28, 2019 and September 29, 2018	7

	Unaudited Consolidated Statements of Shareholders’ Equity for the Thirteen and Twenty-Six Weeks ended September 28, 2019 and September 29, 2018	8

	Notes to the Unaudited Consolidated Financial ~~Officer pursuant to Exchange Act Rule 13a‑14(a)~~Statements	9

Item 2.	Management’s Discussion and ~~Rule 15d‑14(a)~~Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	34

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3.	Default Upon Senior Securities	35

Item 4.	Mine Safety Disclosures	35

Item 5.	Other Information	35

Item 6.	Exhibits	36

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PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

The Container Store Group, Inc.

Consolidated balance sheets


	September 28,		March 30,		September 29,
(In thousands)	2019		2019		2018
Assets	(unaudited)				(unaudited)
Current assets:
Cash	$	9,029	$	7,364	$	7,212
Accounts receivable, net		26,030		25,568		25,400
Inventory		133,200		108,650		110,801
Prepaid expenses		11,736		10,078		11,021
Income taxes receivable		2,603		1,003		3,394
Other current assets		10,518		11,705		10,562
Total current assets		193,116		164,368		168,390
Noncurrent assets:
Property and equipment, net		155,107		152,588		149,259
Noncurrent operating lease assets		362,609		—		—
Goodwill		202,815		202,815		202,815
Trade names		223,184		225,150		226,939
Deferred financing costs, net		206		241		276
Noncurrent deferred tax assets, net		1,803		1,912		1,979
Other assets		1,732		1,670		1,796
Total noncurrent assets		947,456		584,376		583,064
Total assets	$	1,140,572	$	748,744	$	751,454

See accompanying notes.

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The Container Store Group, Inc.

Consolidated balance sheets (continued)


	September 28,		March 30,		September 29,
(In thousands, except share and per share amounts)	2019		2019		2018
Liabilities and shareholders’ equity	(unaudited)				(unaudited)
Current liabilities:
Accounts payable	$	74,376	$	58,734	$	62,313
Accrued liabilities		65,522		67,163		64,199
Revolving lines of credit		10,813		5,511		1,128
Current portion of long-term debt		6,936		7,016		7,052
Current operating lease liabilities		61,663		—		—
Income taxes payable		254		2,851		1,851
Total current liabilities		219,564		141,275		136,543
Noncurrent liabilities:
Long-term debt		268,007		254,960		282,289
Noncurrent operating lease liabilities		333,603		—		—
Noncurrent deferred tax liabilities, net		49,516		51,702		50,630
Other long-term liabilities		10,534		36,114		41,020
Total noncurrent liabilities		661,660		342,776		373,939
Total liabilities		881,224		484,051		510,482
Commitments and contingencies (Note 6)
Shareholders’ equity:
Common stock, $0.01 par value, 250,000,000 shares authorized; 48,306,412 shares issued at September 28, 2019; 48,142,319 shares issued at March 30, 2019; 48,138,907 shares issued at September 29, 2018		483		481		481
Additional paid-in capital		865,347		863,978		862,495
Accumulated other comprehensive loss		(32,395)		(26,132)		(23,167)
Retained deficit		(574,087)		(573,634)		(598,837)
Total shareholders’ equity		259,348		264,693		240,972
Total liabilities and shareholders’ equity	$	1,140,572	$	748,744	$	751,454

See accompanying notes.

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The Container Store Group, Inc.

Consolidated statements of operations



	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	September 28,		September 29,		September 28,		September 29,
(In thousands, except share and per share amounts) (unaudited)	2019		2018		2019		2018
Net sales	$	236,432	$	224,453	$	445,952	$	420,276
Cost of sales (excluding depreciation and amortization)		99,628		93,878		189,341		174,930
Gross profit		136,804		130,575		256,611		245,346
Selling, general, and administrative expenses (excluding depreciation and amortization)		113,978		105,656		222,309		212,261
Stock-based compensation		965		769		1,776		1,355
Pre-opening costs		2,331		881		3,506		1,227
Depreciation and amortization		8,742		9,128		18,448		18,465
Other expenses		403		24		376		217
(Gain) loss on disposal of assets		—		—		(4)		40
Income from operations		10,385		14,117		10,200		11,781
Interest expense, net		5,402		7,377		11,111		15,285
Loss on extinguishment of debt		—		2,082		—		2,082
Income (loss) before taxes		4,983		4,658		(911)		(5,586)
Provision (benefit) for income taxes		1,337		1,417		(458)		(2,063)
Net income (loss)	$	3,646	$	3,241	$	(453)	$	(3,523)

Net income (loss) per common share — basic and diluted	$	0.08	$	0.07	$	(0.01)	$	(0.07)

Weighted-average common shares — basic		48,291,643		48,138,907		48,261,395		48,138,907
Weighted-average common shares — diluted		48,417,474		48,519,166		48,261,395		48,138,907

See accompanying notes.

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The Container Store Group, Inc.

Consolidated statements of comprehensive (loss) income



	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	September 28,		September 29,		September 28,		September 29,
(In thousands) (unaudited)	2019		2018		2019		2018
Net income (loss)	$	3,646	$	3,241	$	(453)	$	(3,523)
Unrealized (loss) gain on financial instruments, net of tax (benefit) provision of $(981), $154, $(1,000) and $(412)		(2,801)		438		(2,929)		(1,347)
Pension liability adjustment, net of tax provision (benefit)		125		(18)		123		135
Foreign currency translation adjustment		(3,790)		652		(3,457)		(4,639)
Comprehensive (loss) income	$	(2,820)	$	4,313	$	(6,716)	$	(9,374)

See accompanying notes.

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The Container Store Group, Inc.

Consolidated statements of cash flows



	Twenty-Six Weeks Ended
	September 28,		September 29,
(In thousands) (unaudited)	2019		2018
Operating activities
Net loss	$	(453)	$	(3,523)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		18,448		18,465
Stock-based compensation		1,776		1,355
(Gain) loss on disposal of assets		(4)		40
Loss on extinguishment of debt		—		2,082
Deferred tax benefit		(1,810)		(2,927)
Non-cash interest		931		1,418
Other		199		—
Changes in operating assets and liabilities:
Accounts receivable		(1,858)		(373)
Inventory		(25,988)		(17,066)
Prepaid expenses and other assets		310		1,875
Accounts payable and accrued liabilities		17,424		13,304
Net change in lease assets and liabilities		122		—
Income taxes		(4,254)		(6,083)
Other noncurrent liabilities		912		(431)
Net cash provided by operating activities		5,755		8,136

Investing activities
Additions to property and equipment		(21,534)		(10,669)
Proceeds from sale of property and equipment		4		7
Net cash used in investing activities		(21,530)		(10,662)

Financing activities
Borrowings on revolving lines of credit		35,428		45,404
Payments on revolving lines of credit		(29,676)		(19,267)
Borrowings on long-term debt		29,000		272,500
Payments on long-term debt		(16,775)		(294,497)
Payment of debt issuance costs		—		(2,244)
Payment of taxes with shares withheld upon restricted stock vesting		(356)		(122)
Net cash provided by financing activities		17,621		1,774

Effect of exchange rate changes on cash		(181)		(435)

Net increase (decrease) in cash		1,665		(1,187)
Cash at beginning of fiscal period		7,364		8,399
Cash at end of fiscal period	$	9,029	$	7,212

Supplemental information for non-cash investing and financing activities:
Purchases of property and equipment (included in accounts payable)	$	1,177	$	1,192

See accompanying notes.

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The Container Store Group Inc.

Consolidated statements of shareholders’ equity


								Accumulated
						Additional		other				Total
(In thousands, except share amounts)	Par		Common stock			paid-in		comprehensive		Retained		shareholders’
(unaudited)	value		Shares	Amount		capital		(loss) income		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
Net income			—		—		—		—		3,646		3,646
Stock-based compensation			—		—		965		—		—		965
Vesting of restricted stock awards			23,215		—		4		—		—		4
Taxes related to net share settlement of restricted stock awards			—		—		(8)		—		—		(8)
Foreign currency translation adjustment			—		—		—		(3,790)		—		(3,790)
Unrealized gain on financial instruments, net of $(981) tax benefit			—		—		—		(2,801)		—		(2,801)
Pension liability adjustment, net of $30 tax benefit			—		—		—		125		—		125
Balance at September 28, 2019	$	0.01	48,306,412		483		865,347		(32,395)		(574,087)		259,348

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
Net income			—		—		—		—		3,241		3,241
Stock-based compensation			—		—		769		—		—		769
Foreign currency translation adjustment			—		—		—		652		—		652
Unrealized gain on financial instruments, net of $154 tax provision			—		—		—		438		—		438
Pension liability adjustment, net of $4 tax provision			—		—		—		(18)		—		(18)
Balance at September 29, 2018	$	0.01	48,138,907	$	481	$	862,495	$	(23,167)	$	(598,837)	$	240,972

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)

September 28, 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 30, 2019, filed with the Securities and Exchange Commission on May 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, 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”). 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 September 28, 2019, The Container Store, Inc. (“TCS”) operates 93 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 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 twenty-six weeks ended September 28, 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.

Recent accounting pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 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. The Company adopted this standard in the first quarter of fiscal 2019 and elected certain practical expedients permitted under the transition guidance, including the package of practical expedients; however, the Company did not elect the hindsight practical expedient. Additionally, the Company elected the optional transition method that allowed for a cumulative-effect adjustment in the period of adoption and did not restate prior periods. The adoption of ASU 2016-02 resulted in an increase in total assets and total liabilities of $352,059 at transition. However,

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the adoption of this standard did not have a material impact on the consolidated statement of operations or the consolidated statement of cash flows. See Note 3 for further discussion on leases.

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 Company adopted this standard in the first quarter of fiscal 2019. The adoption of this standard did not 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. The Company adopted this standard in the first quarter of fiscal 2019. The adoption of this standard did not result in a material impact to the Company’s financial statements.

In July 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. 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 new standard will require recognition of full lifetime expected losses upon initial recognition of the financial instrument. The Company is required to adopt ASU 2016-13 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019 on a modified retrospective basis. Early adoption is permitted for fiscal years beginning after December 15, 2018. An entity should apply the standard by recording a cumulative effect adjustment to retained earnings upon adoption. The adoption of this standard is not expected to 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


	September 28,		March 30,		September 29,
	2019		2019		2018
Accounts receivable, net:
Trade receivables, net	$	16,203	$	16,730	$	15,789
Credit card receivables		7,930		7,244		7,472
Other receivables		1,897		1,594		2,139
	$	26,030	$	25,568	$	25,400
Inventory:
Finished goods	$	128,095	$	103,774	$	105,355
Raw materials		4,532		4,282		4,904
Work in progress		573		594		542
	$	133,200	$	108,650	$	110,801
Accrued liabilities:
Accrued payroll, benefits and bonuses	$	17,615	$	19,771	$	19,810
Unearned revenue		13,874		10,744		10,064
Accrued transaction and property tax		12,800		12,249		10,805
Gift cards and store credits outstanding		8,945		8,777		8,406
Accrued lease liabilities		—		4,882		4,573
Accrued interest		1,602		209		966
Other accrued liabilities		10,686		10,531		9,575
	$	65,522	$	67,163	$	64,199

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 provided above. Unearned revenue was $10,744 as of March 30, 2019, and $10,144 was subsequently recognized into revenue for the twenty-six weeks ended September 28, 2019. Gift cards and store credits outstanding was $8,777 as of March 30, 2019, and $1,924 was subsequently recognized into revenue for the twenty-six weeks ended September 28, 2019. See Note 10 for disaggregated revenue disclosures.

3. Leases

We conduct all of our U.S. operations from leased facilities that include corporate headquarters, warehouse facilities, and 93 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.

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 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.

Discount Rate

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.

The components of lease costs for the thirteen and twenty-six weeks ended September 28, 2019 were as follows:


		Thirteen Weeks Ended		Twenty-Six Weeks Ended
Operating lease costs	$	22,639	$	45,000
Variable lease costs		160		632
Total lease costs	$	22,799	$	45,632

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 twenty-six weeks ended September 28, 2019.

Supplemental cash flow information related to our leases for the thirteen and twenty-six weeks ended September 28, 2019 were as follows:


		Thirteen Weeks Ended		Twenty-Six Weeks Ended
Cash paid for amounts included in the measurement of operating lease liabilities	$	22,349	$	44,493
Additions to right-of-use assets	$	23,569	$	39,134

Weighted average remaining operating lease term and incremental borrowing rate as of September 28, 2019 were as follows:


Weighted average remaining lease term (years)	7.2
Weighted average incremental borrowing rate	8.7	%

As of September 28, 2019, future minimum lease payments under our operating lease liabilities were as follows:


	Operating leases
Within 1 year (remaining)	$	46,133
2 years		92,484
3 years		78,689
4 years		68,494
5 years		60,567
Thereafter		198,216
Total lease payments	$	544,583
Less amount representing interest		(149,317)
Total lease liability	$	395,266
Less current lease liability		(61,663)
Total noncurrent lease liability	$	333,603

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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. Net income (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 extent their inclusion would be dilutive. Potentially dilutive securities are excluded from the computation of 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				Twenty-Six Weeks Ended
	September 28,		September 29,		September 28,		September 29,
	2019		2018		2019		2018
Numerator:
Net income (loss)	$	3,646	$	3,241	$	(453)	$	(3,523)
Denominator:
Weighted-average common shares — basic		48,291,643		48,138,907		48,261,395		48,138,907
Options and other dilutive securities		125,831		380,259		—		—
Weighted-average common shares — diluted		48,417,474		48,519,166		48,261,395		48,138,907

Net income (loss) per common share — basic and diluted	$	0.08	$	0.07	$	(0.01)	$	(0.07)
Antidilutive securities not included:
Stock options outstanding		2,388,222		2,350,339		2,420,176		2,637,068
Nonvested restricted stock awards		202,376		14,492		275,489		120,709

5. Income taxes

The provision for income taxes in the thirteen weeks ended September 28, 2019 was $1,337 as compared to $1,417 in the thirteen weeks ended September 29, 2018. The effective tax rate for the thirteen weeks ended September 28, 2019 was 26.8%, as compared to 30.4% in the thirteen weeks ended September 29, 2018. During the thirteen weeks ended September 28, 2019, the effective tax rate rose above the U.S. statutory rate of 21% primarily due to U.S. state income taxes, as well as the impact of the global intangible low-taxed income (“GILTI”) provision from the Tax Cuts and Jobs Act (the “Tax Act”) enacted in fiscal 2017 and the officer compensation limitation provision from the Tax Act. During the thirteen weeks ended September 29, 2018, the effective tax rate rose above the U.S. statutory rate primarily due to the impact of the GILTI provision and the officer compensation limitation provision from the Tax Act, and U.S. state income taxes.

The benefit for income taxes in the twenty-six weeks ended September 28, 2019 was $458 as compared to $2,063 in the twenty-six weeks ended September 29, 2018. The effective tax rate for the twenty-six weeks ended September 28, 2019 was 50.3%, as compared to 36.9% in the twenty-six weeks ended September 29, 2018. During the twenty-six weeks ended September 28, 2019, the effective tax rate rose above the U.S. statutory rate of 21% primarily due to the impact of U.S. state income taxes, as well as the GILTI provision from the Tax Act and the officer compensation limitation provision from the Tax Act enacted in fiscal 2017. During the twenty-six weeks ended September 29, 2018, the effective tax rate rose above the U.S. statutory rate 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, as well as the impact of the GILTI provision and the officer compensation limitation provision from the Tax Act, and U.S. state income taxes.

6. Commitments and contingencies

In connection with insurance policies and other contracts, the Company has outstanding standby letters of credit totaling $4,235 as of September 28, 2019.

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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.

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 twenty-six weeks ended September 28, 2019:


	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) income before reclassifications, net of tax		(3,262)		123		(3,457)		(6,596)
Amounts reclassified to earnings, net of tax		333		—		—		333
Net current period other comprehensive (loss) income		(2,929)		123		(3,457)		(6,263)

Balance at September 28, 2019	$	(3,896)	$	(1,710)	$	(26,789)	$	(32,395)

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 twenty-six weeks ended September 28, 2019 and September 29, 2018, the TCS segment used forward contracts for 100% of inventory purchases in Swedish 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 (loss) income 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

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effectiveness of the foreign currency hedge instruments and determined the foreign currency hedge instruments were highly effective during the twenty-six weeks ended September 28, 2019 and September 29, 2018. Forward contracts not designated as hedges in the Elfa segment are adjusted to fair value as SG&A on the consolidated statements of operations; however, during the twenty-six weeks ended September 28, 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.

The Company had a $3,896 loss in accumulated other comprehensive loss related to foreign currency hedge instruments at September 28, 2019, of which $776 represents an unrealized loss for settled foreign currency hedge instruments related to inventory on hand as of September 28, 2019. The Company expects the unrealized loss of $776, 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 September 28, 2019, March 30, 2019 and September 29, 2018, the Company held certain items that are required to be measured at fair value on a recurring basis. These included the nonqualified retirement plan, which consists of investments purchased by employee contributions to retirement savings accounts. 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. 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:


			September 28,		March 30,		September 29,
Description		Balance Sheet Location	2019		2019		2018
Assets
Nonqualified retirement plan	N/A	Other current assets	$	5,747	$	5,810	$	6,011
Total assets			$	5,747	$	5,810	$	6,011

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 September 28, 2019, March 30, 2019 and September 29, 2018, the estimated fair value of the Company’s long-term debt, including current maturities, was $291,811, $274,753, and $299,137, respectively.

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 September 28, 2019	TCS		Elfa		Eliminations		Total
Net sales to third parties	$	221,235	$	15,197	$	—	$	236,432
Intersegment sales		—		20,865		(20,865)		—
Adjusted EBITDA		18,661		5,950		(2,185)		22,426
Interest expense, net		5,289		113		—		5,402
Assets (1)		1,049,096		125,940		(34,464)		1,140,572


Thirteen Weeks Ended September 29, 2018	TCS		Elfa		Eliminations		Total
Net sales to third parties	$	208,915	$	15,538	$	—	$	224,453
Intersegment sales		—		14,650		(14,650)		—
Adjusted EBITDA		21,228		3,839		(720)		24,347
Interest expense, net		7,295		82		—		7,377
Assets (1)		650,644		104,585		(3,775)		751,454

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Twenty-Six Weeks Ended September 28, 2019	TCS		Elfa		Eliminations		Total
Net sales to third parties	$	416,311	$	29,641	$	—	$	445,952
Intersegment sales		—		32,415		(32,415)		—
Adjusted EBITDA		28,896		8,037		(3,864)		33,069
Interest expense, net		10,904		207		—		11,111
Assets (1)		1,049,096		125,940		(34,464)		1,140,572


Twenty-Six Weeks Ended September 29, 2018	TCS		Elfa		Eliminations		Total
Net sales to third parties	$	388,997	$	31,279	$	—	$	420,276
Intersegment sales		—		25,045		(25,045)		—
Adjusted EBITDA		31,332		5,438		(32)		36,738
Interest expense, net		15,140		145		—		15,285
Assets (1)		650,644		104,585		(3,775)		751,454

(1)

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

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


	Thirteen Weeks Ended					Twenty-Six Weeks Ended
	September 28,		September 29,		September 28,		September 29,
		2019		2018	2019		2018
Income (loss) before taxes	$	4,983	$	4,658	$	(911)	$	(5,586)
Add:
Depreciation and amortization		8,742		9,128		18,448		18,465
Interest expense, net		5,402		7,377		11,111		15,285
Pre-opening costs (a)		2,331		881		3,506		1,227
Non-cash lease expense (b)		(415)		(581)		(1,177)		(1,218)
Stock-based compensation (c)		965		769		1,776		1,355
Loss on extinguishment of debt (d)		—		2,082		—		2,082
Foreign exchange losses (gains) (e)		14		9		(61)		47
Optimization Plan implementation charges (f)		—		—		—		4,864
Elfa France closure (g)		403		—		403		—
Other adjustments (h)		1		24		(26)		217
Adjusted EBITDA	$	22,426	$	24,347	$	33,069	$	36,738

(a)

Non-capital expenditures associated with opening new stores, relocating stores, and costs associated with opening the second distribution center, including 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 operating lease expense has been above or below our cash operating lease payments. The amount varies depending on the average age of our lease portfolio (weighted for size), as our GAAP operating lease expense on younger leases typically exceeds our cash operating lease payments, while our GAAP operating lease expense on older leases is typically less than our cash operating lease payments. In the second quarter of fiscal 2019, lease expenses associated with the opening of the second distribution center were excluded from Non-cash lease expense and included in Pre-opening costs.

(c)

Non-cash charges related to stock-based compensation programs, which vary from period to period depending on volume and vesting timing of awards. We adjust for these charges to facilitate comparisons from period to period.

(d)

Loss recorded as a result of the amendments made to the Senior Secured Term Loan Facility in September 2018, 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.

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(f)

Charges incurred to implement our 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 in the first quarter of fiscal 2018, which we do not consider in our evaluation of ongoing performance.

(g)

Charges related to the closure of Elfa France operations in the second quarter of fiscal 2019, which we do not consider in our evaluation of ongoing performance.

(h)

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

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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 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 a security breach or cyber-attack of our website or information technology systems, and other damage to such systems; effects of competition on our 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; 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 effectively manage our growth; 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; risks related to violations of anti-bribery and anti-kickback laws; risks related to our fixed lease obligations; 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; 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 30, 2019, filed with the Securities and Exchange Commission (the “SEC”) on May 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 subject to risks and uncertainties, you should not rely on these forward-looking statements as predictions of future

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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 2019 ends on March 28, 2020 and fiscal 2018 ended on March 30, 2019. The second quarter of fiscal 2019 ended on September 28, 2019 and the second quarter of fiscal 2018 ended on September 29, 2018, 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 September 28, 2019, we operated 93 stores with an average size of approximately 25,000 square feet (19,000 selling square feet) in 33 states and the District of Columbia. We offer our customers their choice of how to shop—in-store, online or through 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 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”), 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.

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				Twenty-Six Weeks Ended
	September 28,		September 29,		September 28,		September 29,
	2019		2018		2019		2018
Net sales	$	236,432	$	224,453	$	445,952	$	420,276
Cost of sales (excluding depreciation and amortization)		99,628		93,878		189,341		174,930
Gross profit		136,804		130,575		256,611		245,346
Selling, general, and administrative expenses (excluding depreciation and amortization)		113,978		105,656		222,309		212,261
Stock-based compensation		965		769		1,776		1,355
Pre-opening costs		2,331		881		3,506		1,227
Depreciation and amortization		8,742		9,128		18,448		18,465
Other expenses		403		24		376		217
(Gain) loss on disposal of assets		—		—		(4)		40
Income from operations		10,385		14,117		10,200		11,781
Interest expense, net		5,402		7,377		11,111		15,285
Loss on extinguishment of debt		—		2,082		—		2,082
Income (loss) before taxes		4,983		4,658		(911)		(5,586)
Provision (benefit) for income taxes		1,337		1,417		(458)		(2,063)
Net income (loss)	$	3,646	$	3,241	$	(453)	$	(3,523)


	Thirteen Weeks Ended					��	Twenty-Six Weeks Ended
	September 28,			September 29,			September 28,			September 29,
	2019			2018			2019			2018
Percentage of net sales:
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales (excluding depreciation and amortization)		42.1	%		41.8	%		42.5	%		41.6	%
Gross profit		57.9	%		58.2	%		57.5	%		58.4	%
Selling, general, and administrative expenses (excluding depreciation and amortization)		48.2	%		47.1	%		49.9	%		50.5	%
Stock‑based compensation		0.4	%		0.3	%		0.4	%		0.3	%
Pre‑opening costs		1.0	%		0.4	%		0.8	%		0.3	%
Depreciation and amortization		3.7	%		4.1	%		4.1	%		4.4	%
Other expenses		0.2	%		0.0	%		0.1	%		0.1	%
(Gain) loss on disposal of assets		0.0	%		0.0	%		(0.0)	%		0.0	%
Income from operations		4.4	%		6.3	%		2.3	%		2.8	%
Interest expense, net		2.3	%		3.3	%		2.5	%		3.6	%
Loss on extinguishment of debt		—	%		0.9	%		—	%		0.5	%
Income (loss) before taxes		2.1	%		2.1	%		(0.2)	%		(1.3)	%
Provision (benefit) for income taxes		0.6	%		0.6	%		(0.1)	%		(0.5)	%
Net income (loss)		1.5	%		1.4	%		(0.1)	%		(0.8)	%
Operating data:
Comparable store sales growth for the period (1)		5.4	%		1.3	%		6.5	%		2.9	%
Number of stores open at end of period		93			92			93			92
Non‑GAAP measures (2):
Adjusted EBITDA (3)	$	22,426		$	24,347		$	33,069		$	36,738
Adjusted net income (loss) (4)	$	3,937		$	4,748		$	(162)		$	736
Adjusted net income (loss) per common share — diluted (4)	$	0.08		$	0.10		$	(0.00)		$	0.02

(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

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store is relocated, we continue to consider net sales from that store to be comparable store sales. 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 (which includes business sales) are also included in calculations of comparable store sales.

(2)

We have presented EBITDA, Adjusted EBITDA, adjusted net income (loss), and adjusted net income (loss) per common share – diluted as supplemental measures of financial performance that are not required by, or presented in accordance with, 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 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.

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 (loss) before interest, taxes, depreciation, and amortization. Adjusted EBITDA is calculated in accordance with our Secured Term Loan Facility (as defined below) and the Revolving Credit Facility (as defined below) 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 (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.

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Additionally, EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as they do not reflect certain cash requirements such as tax payments, debt service requirements, capital expenditures, store openings and certain other cash costs that may recur in the future. EBITDA and Adjusted EBITDA contain certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation, such as pre-opening costs and stock compensation expense. Our presentation of Adjusted EBITDA should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using EBITDA and Adjusted EBITDA supplementally. Our measures of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.

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


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	September 28,		September 29,		September 28,		September 29,
	2019		2018		2019		2018

Net income (loss)	$	3,646	$	3,241	$	(453)	$	(3,523)
Depreciation and amortization		8,742		9,128		18,448		18,465
Interest expense, net		5,402		7,377		11,111		15,285
Income tax provision (benefit)		1,337		1,417		(458)		(2,063)
EBITDA		19,127		21,163		28,648		28,164
Pre-opening costs (a)		2,331		881		3,506		1,227
Non-cash lease expense (b)		(415)		(581)		(1,177)		(1,218)
Stock-based compensation (c)		965		769		1,776		1,355
Loss on extinguishment of debt (d)		—		2,082		—		2,082
Foreign exchange losses (gains) (e)		14		9		(61)		47
Optimization Plan implementation charges (f)		—		—		—		4,864
Elfa France closure (g)		403		—		403		—
Other adjustments (h)		1		24		(26)		217
Adjusted EBITDA	$	22,426	$	24,347	$	33,069	$	36,738

(a)

Non-capital expenditures associated with opening new stores, relocating stores and costs associated with opening the second distribution center, including 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)

(c)

(d)

Loss recorded as a result of the amendments made to the Senior Secured Term Loan Facility in September 2018, 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)

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administrative expenses (“SG&A”) in the first quarter of fiscal 2018, which we do not consider in our evaluation of ongoing performance.

(g)

Charges related to the closure of Elfa France operations in the second quarter of fiscal 2019, which we do not consider in our evaluation of ongoing performance.

(h)

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

(4)

Adjusted net income (loss) and adjusted net income (loss) per common share – diluted 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, 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, charges related to the closure of Elfa France operations, and the tax impact of these adjustments and other unusual or infrequent tax items. We define adjusted net income (loss) per common share – diluted 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 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 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 to the non-GAAP financial measures of adjusted net income (loss) and adjusted net income (loss) per common share – diluted is set forth below:


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
	September 28,		September 29,		September 28,		September 29,
	2019		2018		2019		2018

Numerator:
Net income (loss)	$	3,646	$	3,241	$	(453)	$	(3,523)
Loss on extinguishment of debt (a)		—		2,082		—		2,082
Elfa France closure (b)		403		—		403		—
Optimization Plan implementation charges (c)		—		—		—		4,864
Taxes (d)		(112)		(575)		(112)		(2,687)
Adjusted net income (loss)	$	3,937	$	4,748	$	(162)	$	736
Denominator:
Weighted-average common shares outstanding — diluted		48,417,474		48,519,166		48,261,395		48,138,907

Net income (loss) per common share — diluted	$	0.08	$	0.07	$	(0.01)	$	(0.07)
Adjusted net income (loss) per common share — diluted	$	0.08	$	0.10	$	(0.00)	$	0.02

(a)

Loss recorded as a result of the amendments made to the Senior Secured Term Loan Facility in September 2018, which we do not consider in our evaluation of our ongoing operations.

(b)

Charges related to the closure of Elfa France operations in the second quarter of fiscal 2019, which we do not consider in our evaluation of ongoing performance.

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(c)

Charges incurred to implement our Optimization Plan, which include certain consulting costs recorded in SG&A in the first quarter of fiscal 2018, which we do not consider in our evaluation of ongoing performance.

(d)

Tax impact of adjustments to net income (loss), the tax impact related to the closure of Elfa France operations and the tax benefit recorded in the first quarter of fiscal 2018 as a result of a reduction in the Swedish tax rate, which are considered to be unusual or infrequent tax items, all of which we do not consider in our evaluation of ongoing performance.

Thirteen Weeks Ended September 28, 2019 Compared to Thirteen Weeks Ended September 29, 2018

Net sales

The following table summarizes our net sales for each of the thirteen weeks ended September 28, 2019 and September 29, 2018:



	September 28, 2019		% total		September 29, 2018		% total
TCS net sales	$	221,235	93.6	%	$	208,915	93.1	%
Elfa third party net sales		15,197	6.4	%		15,538	6.9	%
Net sales	$	236,432	100.0	%	$	224,453	100.0	%

Net sales in the thirteen weeks ended September 28, 2019 increased by $11,979, or 5.3%, compared to the thirteen weeks ended September 29, 2018. This increase was comprised of the following components:


	Net sales
Net sales for the thirteen weeks ended September 29, 2018	$	224,453
Incremental net sales increase (decrease) due to:
Comparable stores (including a $3,677, or 18.5%, increase in online sales)		11,124
New stores		902
Elfa third party net sales (excluding impact of foreign currency translation)		763
Impact of foreign currency translation on Elfa third party net sales		(1,103)
Shipping and delivery		293
Net sales for the thirteen weeks ended September 28, 2019	$	236,432

In the thirteen weeks ended September 28, 2019, comparable stores generated an $11,124, or 5.4% increase in net sales, primarily driven by a 9.3% increase in Custom Closets sales. Additionally, two new stores generated $902 of incremental net sales, of which one store opened in the second quarter of fiscal 2019 and one store opened during fiscal 2018. Elfa third party net sales decreased $340 in the thirteen weeks ended September 28, 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 September 28, 2019 and the thirteen weeks ended September 29, 2018, Elfa third party net sales increased $763.

Gross profit and gross margin

Gross profit in the thirteen weeks ended September 28, 2019 increased by $6,229, or 4.8%, compared to the thirteen weeks ended September 29, 2018. The increase in gross profit was primarily the result of increased consolidated net sales, partially offset by a decrease in consolidated gross margin. The following table summarizes the gross margin for the thirteen weeks ended September 28, 2019 and September 29, 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:


	September 28, 2019		September 29, 2018
TCS gross margin	57.0	%	57.8	%
Elfa gross margin	36.0	%	34.9	%
Total gross margin	57.9	%	58.2	%

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TCS gross margin decreased 80 basis points primarily due to successful marketing and merchandising campaigns that drove a higher mix of lower margin product and service sales, partially offset by an improvement in foreign currency translation. Elfa gross margin increased 110 basis points primarily due to production efficiencies, partially offset by higher direct materials costs attributable to higher raw materials prices associated with a weaker Swedish krona. In total, gross margin decreased 30 basis points primarily due to a higher mix of lower margin products and services sold in the second quarter of fiscal 2019.

Selling, general and administrative expenses

Selling, general and administrative expenses in the thirteen weeks ended September 28, 2019 increased by $8,322, or 7.9%, compared to the thirteen weeks ended September 29, 2018. As a percentage of consolidated net sales, SG&A increased by 110 basis points. The following table summarizes SG&A as a percentage of consolidated net sales for the thirteen weeks ended September 28, 2019 and September 29, 2018:


	September 28, 2019		September 29, 2018
	% of Net sales		% of Net sales
TCS selling, general and administrative	45.2	%	44.1	%
Elfa selling, general and administrative	3.0	%	3.0	%
Total selling, general and administrative	48.2	%	47.1	%

TCS selling, general and administrative expenses increased by 110 basis points as a percentage of consolidated net sales primarily due to incremental Custom Closets marketing expenses, as well as increased healthcare and real estate property tax expenses, partially offset by ongoing savings and efficiency efforts.

Pre-opening costs

Pre-opening costs increased to $2,331 in the second quarter of fiscal 2019 as compared to $881 in the second quarter of fiscal 2018. The increase is primarily due to $1,728 of costs associated with the opening of the second distribution center. The company opened one new store in each of the second quarters of fiscal 2019 and fiscal 2018.

Interest expense

Interest expense decreased by $1,975, or 26.8%, in the thirteen weeks ended September 28, 2019 to $5,402, as compared to $7,377 in the thirteen weeks ended September 29, 2018. This decrease is primarily due to an amendment (the “Fifth Amendment”) to the Senior Secured Term Loan Facility that was entered into during the second quarter of fiscal 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

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Twenty-Six Weeks Ended September 28, 2019 Compared to Twenty-Six Weeks Ended September 29, 2018

Net sales

The following table summarizes our net sales for each of the twenty-six weeks ended September 28, 2019 and September 29, 2018:



	September 28, 2019		% total		September 29, 2018		% total
TCS net sales	$	416,311	93.4	%	$	388,997	92.6	%
Elfa third party net sales		29,641	6.6	%		31,279	7.4	%
Net sales	$	445,952	100.0	%	$	420,276	100.0	%

Net sales in the twenty-six weeks ended September 28, 2019 increased by $25,676, or 6.1%, compared to the twenty-six weeks ended September 29, 2018. This increase was comprised of the following components:


	Net sales
Net sales for the twenty-six weeks ended September 29, 2018	$	420,276
Incremental net sales increase (decrease) due to:
Comparable stores (including a $8,785, or 23.5%, increase in online sales)		24,950
New stores		1,656
Elfa third party net sales (excluding impact of foreign currency translation)		749
Impact of foreign currency translation on Elfa third party net sales		(2,386)
Shipping and delivery		707
Net sales for the twenty-six weeks ended September 28, 2019	$	445,952

In the twenty-six weeks ended September 28, 2019, comparable stores generated a $24,950, or 6.5% increase in net sales. Additionally, two new stores generated $1,656 of incremental net sales, of which one store was opened during the second quarter of fiscal 2019 and one store was opened during fiscal 2018. Elfa third party net sales decreased $1,637 in the twenty-six weeks ended September 28, 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 twenty-six weeks ended September 28, 2019 and twenty-six weeks ended September 29, 2018, Elfa third party net sales increased $749.

Gross profit and gross margin

Gross profit in the twenty-six weeks ended September 28, 2019 increased by $11,265, or 4.6%, compared to the twenty-six weeks ended September 29, 2018. The increase in gross profit was primarily the result of increased consolidated net sales, partially offset by a decrease in consolidated gross margin. The following table summarizes the gross margin for the twenty-six weeks ended September 28, 2019 and September 29, 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:


	September 28, 2019		September 29, 2018
TCS gross margin	57.2	%	57.9	%
Elfa gross margin	36.1	%	36.0	%
Total gross margin	57.5	%	58.4	%

TCS gross margin decreased 70 basis points primarily due to marketing and merchandising campaigns that drove a higher mix of lower margin products and service sales, partially offset by an improvement in foreign currency translation. Elfa gross margin increased 10 basis points primarily due to production efficiencies, partially offset by higher direct materials costs attributable to higher raw materials prices associated with a weaker Swedish krona. In total, gross margin decreased 90 basis points primarily due to a higher mix of lower margin products and services sold in the twenty-six weeks ended of fiscal 2019.

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Selling, general and administrative expenses

Selling, general and administrative expenses in the twenty-six weeks ended September 28, 2019 increased by $10,048, or 4.7%, compared to the twenty-six weeks ended September 29, 2018. As a percentage of consolidated net sales, SG&A decreased by 60 basis points. The following table summarizes SG&A as a percentage of consolidated net sales for the twenty-six weeks ended September 28, 2019 and September 29, 2018:



	September 28, 2019		September 29, 2018
	% of Net sales		% of Net sales
TCS selling, general and administrative	46.7	%	47.0	%
Elfa selling, general and administrative	3.2	%	3.5	%
Total selling, general and administrative	49.9	%	50.5	%

TCS selling, general and administrative expenses decreased by 30 basis points as a percentage of consolidated net sales. This was primarily due to Optimization Plan expenses incurred in the first quarter of fiscal 2018 that were not incurred in the first quarter of fiscal 2019, partially offset by increased Custom Closets marketing expenses, as well as increased real estate property taxes and healthcare expenses.Elfa selling, general and administrative expenses decreased by 30 basis points as a percentage of consolidated net sales, primarily due to ongoing savings and efficiency efforts.

Pre-opening costs

Pre-opening costs increased to $3,506 in the first half of fiscal 2019 as compared to $1,227 in the first half of fiscal 2018. The increase is primarily due to $2,848 of costs associated with the opening of the second distribution center. The Company opened one new store in the twenty-six weeks ended September 28, 2019 as compared to opening two stores in the twenty-six weeks ended September 29, 2018.

Interest expense

Interest expense decreased by $4,174, or 27.3%, in the twenty-six weeks ended September 28, 2019 to $11,111, as compared to $15,285 in the twenty-six weeks ended September 29, 2018. This decrease is primarily due to the Fifth Amendment to the Senior Secured Term Loan Facility that was entered into during the second quarter of fiscal 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

Liquidity and Capital Resources

We have relied on cash flows from operations, a $100,000 asset-based revolving credit agreement (the “Revolving Credit Facility” as further discussed under “Revolving Credit Facility” below), and the 2019 Elfa Senior Secured Credit Facilities (as defined below) as our primary sources of liquidity. Our primary cash needs are for merchandise inventories, direct materials, payroll, store leases, capital expenditures associated with opening new stores and updating existing stores, as well as information technology and infrastructure, including building our second distribution 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 noncurrent 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

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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 2019 Elfa Senior Secured Credit 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 or at all.

At September 28, 2019, we had $9,029 of cash, of which $4,325 was held by our foreign subsidiaries. In addition, we had $70,352 of additional availability under the Revolving Credit Facility and approximately $12,145 of additional availability under the 2019 Elfa Revolving Credit Facility (as defined below) as of September 28, 2019. There were $4,235 in letters of credit outstanding under the Revolving Credit Facility and other contracts at that date.

Cash flow analysis

A summary of our key components and measures of liquidity are shown in the following table:




	Twenty-Six Weeks Ended
	September 28,		September 29,
	2019		2018
Net cash provided by operating activities	$	5,755	$	8,136
Net cash used in investing activities		(21,530)		(10,662)
Net cash provided by financing activities		17,621		1,774
Effect of exchange rate changes on cash		(181)		(435)
Net increase (decrease) in cash	$	1,665	$	(1,187)
Free cash flow (Non-GAAP) (1)	$	(15,779)	$	(2,533)

(1)

See below for a discussion of this non-GAAP financial measure and reconciliation to its most directly comparable GAAP financial measure.

Net cash provided by operating activities

Cash from operating activities consists primarily of net income (loss) adjusted for non-cash items, including depreciation and amortization, stock-based compensation, and deferred taxes as well as the effect of changes in operating assets and liabilities.

Net cash provided by operating activities was $5,755 for the twenty-six weeks ended September 28, 2019. Non-cash items of $19,540 were partially offset by a net change in operating assets and liabilities of $13,332 and net loss of $453. 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 second distribution center, partially offset by an increase in accounts payable and accrued liabilities primarily driven by timing of inventory receipts during the twenty-six weeks ended September 28, 2019.

Net cash provided by operating activities was $8,136 for the twenty-six weeks ended September 29, 2018. Non-cash items of $20,433 were partially offset by a net loss of $3,523 and a net change in operating assets and liabilities of $8,774. The net change in operating assets and liabilities is primarily due to an increase in merchandise inventory and a decrease in income taxes payable, partially offset by a decrease in accounts payable and accrued liabilities during the twenty-six weeks ended September 29, 2018.

Net cash 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.

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Our total capital expenditures for the twenty-six weeks ended September 28, 2019 were $21,534. Capital expenditures of $13,355 related to the opening of the second distribution center, expected to be fully operational in late fiscal 2019, accounted for the majority of capital expenditures. We incurred $5,792 of capital expenditures for new store openings, relocations and existing store remodels. We opened one new store during the twenty-six weeks ended September 28, 2019. The remaining capital expenditures of $2,387 were primarily for investments in information technology and new product rollouts.

Our total capital expenditures for the twenty-six weeks ended September 29, 2018 were $10,669 with new store openings, relocations and existing store remodels accounting for slightly less than half of spending at $5,099. We opened two stores during the twenty-six weeks ended September 29, 2018. The remaining capital expenditures of $5,570 were primarily for investments in our distribution centers and information technology.

Net cash provided by financing activities

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

Net cash provided by financing activities was $17,621 for the twenty-six weeks ended September 28, 2019. This included net proceeds of $14,000 from borrowings under the Revolving Credit Facility, and net proceeds of $5,752 from borrowings under the 2019 Elfa Senior Secured Credit Facilities, partially offset by payments of $1,775 for repayment of long-term indebtedness, and $356 for taxes paid with the withholding of shares upon vesting of restricted stock awards.

Net cash provided by financing activities was $1,774 for the twenty-six weeks ended September 29, 2018. This included proceeds of $25,000 from borrowings under the Revolving Credit Facility combined with net proceeds of $1,137 from borrowings under the 2014 Elfa Revolving Credit Facility to support higher working capital needs. The net proceeds of the revolver borrowings were partially offset by net payments of $21,997 for repayment of long-term indebtedness, debt issuance costs of $2,244, and $122 for taxes paid with the withholding of shares upon vesting of restricted stock awards.

As of September 28, 2019, TCS had a total of $70,352 of unused borrowing availability under the Revolving Credit Facility, and $29,000 of borrowings outstanding under the Revolving Credit Facility.

As of September 28, 2019, Elfa had a total of $12,145 of unused borrowing availability under the 2019 Elfa Revolving Credit Facility and $10,813 borrowings outstanding under the 2019 Elfa Senior Secured Credit 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 centers, among other things. Historically, our free cash flow has been lower in the first half of the fiscal year, due to

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lower net sales, operating income, and cash flows from operations, and as such, is not necessarily indicative of the free cash flow for the full year.

The following table sets forth a reconciliation of free cash flow, a non-GAAP financial measure, to net cash provided by operating activities, which we believe to be the GAAP financial measure most directly comparable to free cash flow:



	Twenty-Six Weeks Ended
	September 28,		September 29,
	2019		2018
Net cash provided by operating activities	$	5,755	$	8,136
Less: Additions to property and equipment		(21,534)		(10,669)
Free cash flow	$	(15,779)	$	(2,533)

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 lenders party thereto (the “Senior Secured Term Loan Facility”). On September 14, 2018 (the “Effective Date”), the Company entered into a Fifth Amendment to the Senior Secured Term Loan Facility. The Fifth Amendment amended the Senior Secured Term Loan Facility to, among other things, (i) extend the maturity date of the loans under the Senior Secured Term Loan Facility to September 14, 2023, (ii) decrease the applicable interest rate margin to 5.00% for LIBOR loans and 4.00% for base rate loans and, beginning from the date that a compliance certificate is delivered to the administrative agent for the fiscal year 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 the Revolving Credit Facility in connection with the closing of the Fifth Amendment. As of September 28, 2019, the aggregate principal amount in outstanding borrowings under the Senior Secured Term Loan Facility was $255,688 and the interest rate on such borrowings is LIBOR +5.00%, 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 (as such term is defined in the Senior Secured Term Loan Facility) requirement. As of September 28, 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.

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Revolving Credit Facility

On April 6, 2012, The Container Store Group, Inc., The Container Store, Inc. and certain of our domestic subsidiaries entered into an asset-based revolving credit agreement with the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and Wells Fargo Bank, National Association, as Syndication Agent (as amended, the “Revolving Credit Facility”). The maturity date of the loans under the Revolving Credit Facility is the earlier of August 18, 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 availability under the Revolving Credit Facility could be less than the stated amount of the Revolving Credit Facility (as reduced by the actual borrowings and outstanding letters of credit under the Revolving Credit Facility).

The Revolving Credit Facility is secured by (a) a first-priority security interest in substantially all of our personal property, consisting of inventory, accounts receivable, cash, deposit accounts, and other general intangibles, and (b) a second-priority security interest in the collateral that secures the Senior Secured Term Loan Facility on a first-priority basis, as described above (excluding stock in foreign subsidiaries in excess of 65%, and assets of non-guarantor subsidiaries and subject to certain other exceptions). Obligations under the Revolving Credit Facility are guaranteed by The Container Store Group, Inc. and each of The Container Store, Inc.’s U.S. subsidiaries.

The Revolving Credit Facility contains a number of covenants that, among other things, restrict our ability, subject to specified exceptions, to incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves, engage in businesses that are not in a related line of business; make loans, advances or guarantees; engage in transactions with affiliates; and make investments. In addition, the financing agreements contain certain cross-default provisions. We are required to maintain a consolidated fixed-charge coverage ratio of 1.0 to 1.0 if excess availability is less than $10,000 at any time. As of September 28, 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.

2019 Elfa Senior Secured Credit Facilities

On March 18, 2019, Elfa 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 Bank”), which consists of (i) an SEK 110.0 million (approximately $11,224 as of September 28, 2019) revolving credit facility (the “2019 Original Revolving Facility”), (ii) upon Elfa’s request, an additional SEK 115.0 million (approximately $11,734 as of September 28, 2019) revolving credit facility (the “2019 Additional Revolving Facility” and together with the 2019 Original Revolving Facility, the “2019 Elfa Revolving Facilities”), and (iii) an uncommitted term loan facility in the amount of SEK 25.0 million (approximately $2,551 as of September 28, 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 term for the 2019 Elfa Senior Secured Credit Facilities began on April 1, 2019 and matures on April 1, 2024. Loans borrowed under the 2019 Elfa Revolving Facilities bear interest at Nordea Bank’s base rate +1.40%. Any loan borrowed under the Incremental Term Facility would bear interest at Stibor +1.70%.

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The 2019 Elfa Senior Secured Credit Facilities 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 Group Equity Ratio (as defined in the 2019 Elfa Senior Secured Credit Facilities) of not less than 32.5% and (ii) a consolidated ratio of net debt to EBITDA (as defined in the 2019 Elfa Senior Secured Credit Facilities) of less than 3.20. As of September 28, 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 2019 Elfa Senior Secured Credit Facilities) had occurred.

Critical accounting policies and estimates

The preparation of financial statements in accordance with 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 30, 2019, filed with the SEC on May 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 “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 30, 2019, filed with the SEC on May 30, 2019. As of September 28, 2019, there were no significant changes to any of our critical accounting policies and estimates, with the exception of the adoption of ASU 2016-02, 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 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 and Note 3 in the Notes to consolidated financial statements.

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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 30, 2019, filed with the SEC on May 30, 2019, other than those which occur in the normal course of business.

Off-Balance Sheet Arrangements

There have been no material changes to our off-balance sheet 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.

Recent Accounting Pronouncements

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risk profile as of September 28, 2019 has not materially changed since March 30, 2019. Our market risk profile as of March 30, 2019 is disclosed in our Annual Report on Form 10-K filed with the SEC on May 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 resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 28, 2019.

Changes in Internal Control

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended September 28, 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 30, 2019, filed with the SEC on May 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 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.

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SIGNATURES

Pursuant to the requirements 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)

	~~The Container Store Group, Inc.~~
	~~(Registrant)~~


Date: ~~March 14,~~October 30, 2019		~~/s/~~\s\ Jodi L. Taylor
	Jodi L. Taylor
		Chief Financial Officer and Chief Administrative Officer ~~and Secretary~~ (duly authorized officer and Principal Financial Officer)

Date: October 30, 2019	\s\ Jeffrey A. Miller
	~~principal financial officer)~~Jeffrey A. Miller
Chief Accounting Officer (Principal Accounting Officer)


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


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


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


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


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


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