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TCS Container Store

Filed: 3 Nov 21, 8:01am

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended October 2, 2021

or

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

For the transition period from                     to                     

Commission File Number: 001-36161

THE CONTAINER STORE GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware

26-0565401

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

500 Freeport Parkway, Coppell, TX

75019

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (972) 538-6000

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

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

TCS

New York Stock Exchange

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

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

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

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

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

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

The registrant had 50,646,109 shares of its common stock outstanding as of October 29, 2021.

PART I.

FINANCIAL INFORMATION

Item 1.

Financial statements

The Container Store Group, Inc.

Consolidated balance sheets

October 2,

April 3,

September 26,

(In thousands)

    

2021

    

2021

    

2020

Assets

(unaudited)

(unaudited)

Current assets:

Cash

$

23,137

$

17,687

$

61,847

Accounts receivable, net

 

31,035

 

28,949

 

29,053

Inventory

 

173,141

 

130,619

 

117,715

Prepaid expenses

 

12,690

 

11,429

 

10,391

Income taxes receivable

840

93

93

Other current assets

 

13,354

 

14,547

 

12,926

Total current assets

 

254,197

 

203,324

 

232,025

Noncurrent assets:

Property and equipment, net

 

130,733

 

131,884

 

136,573

Noncurrent operating lease right-of-use assets

304,194

307,147

304,390

Goodwill

 

202,815

 

202,815

 

202,815

Trade names

 

227,476

 

227,669

 

226,562

Deferred financing costs, net

 

229

 

255

 

135

Noncurrent deferred tax assets, net

 

905

 

2,305

 

2,444

Other assets

 

2,660

 

3,070

 

3,110

Total noncurrent assets

 

869,012

 

875,145

 

876,029

Total assets

$

1,123,209

$

1,078,469

$

1,108,054

See accompanying notes.

3

The Container Store Group, Inc.

Consolidated balance sheets (continued)

    

October 2,

    

April 3,

    

September 26,

(In thousands, except share and per share amounts)

    

2021

    

2021

    

2020

Liabilities and shareholders’ equity

(unaudited)

(unaudited)

Current liabilities:

Accounts payable

$

86,232

$

68,546

$

85,680

Accrued liabilities

 

85,848

 

86,551

 

76,734

Current borrowings on revolving lines of credit

 

59

 

 

1,107

Current portion of long-term debt

 

2,136

 

2,166

 

6,970

Current operating lease liabilities

50,177

50,847

54,724

Income taxes payable

 

2,852

 

6,803

 

2,797

Total current liabilities

 

227,304

 

214,913

 

228,012

Noncurrent liabilities:

Long-term debt

 

164,194

 

163,818

 

236,955

Noncurrent operating lease liabilities

278,235

285,022

292,142

Noncurrent deferred tax liabilities, net

 

46,650

 

48,923

 

48,556

Other long-term liabilities

 

12,108

 

12,124

 

13,094

Total noncurrent liabilities

 

501,187

 

509,887

 

590,747

Total liabilities

 

728,491

 

724,800

 

818,759

Commitments and contingencies (Note 6)

Shareholders’ equity:

Common stock, $0.01 par value, 250,000,000 shares authorized; 49,545,153 shares issued at October 2, 2021; 48,838,261 shares issued at April 3, 2021; 48,570,280 shares issued at September 26, 2020

 

495

 

488

 

486

Additional paid-in capital

 

871,545

 

873,048

 

869,167

Accumulated other comprehensive loss

 

(21,325)

 

(19,003)

 

(24,741)

Retained deficit

 

(455,997)

 

(500,864)

 

(555,617)

Total shareholders’ equity

 

394,718

 

353,669

 

289,295

Total liabilities and shareholders’ equity

$

1,123,209

$

1,078,469

$

1,108,054

See accompanying notes.

4

The Container Store Group, Inc.

Consolidated statements of operations

Thirteen Weeks Ended

Twenty-Six Weeks Ended

October 2,

September 26,

October 2,

September 26,

(In thousands, except share and per share amounts)(unaudited)

    

2021

    

2020

    

2021

    

2020

Net sales

$

275,954

$

248,241

$

521,269

$

399,927

Cost of sales (excluding depreciation and amortization)

 

112,416

 

102,183

 

211,407

 

175,630

Gross profit

 

163,538

 

146,058

 

309,862

 

224,297

Selling, general, and administrative expenses (excluding depreciation and amortization)

 

114,062

 

101,193

 

224,210

 

187,458

Stock-based compensation

 

1,086

 

1,977

 

1,955

 

2,809

Pre-opening costs

 

72

 

7

 

666

 

16

Depreciation and amortization

 

8,544

 

8,823

 

16,745

 

17,772

Other expenses

 

 

294

 

 

1,102

Gain on disposal of assets

 

 

 

(5)

 

(6)

Income from operations

 

39,774

 

33,764

 

66,291

 

15,146

Interest expense, net

 

3,186

 

4,491

 

6,371

 

9,441

Income before taxes

36,588

 

29,273

59,920

 

5,705

Provision for income taxes

 

9,393

 

9,073

 

15,053

 

2,175

Net income

$

27,195

$

20,200

$

44,867

$

3,530

Net income per common share — basic

$

0.55

$

0.42

$

0.91

$

0.07

Net income per common share — diluted

$

0.54

$

0.41

$

0.88

$

0.07

Weighted-average common shares — basic

49,468,324

48,513,826

49,274,611

48,451,508

Weighted-average common shares — diluted

 

50,217,614

 

48,782,505

 

51,112,668

 

48,630,246

See accompanying notes.

5

The Container Store Group, Inc.

Consolidated statements of comprehensive income

Thirteen Weeks Ended

Twenty-Six Weeks Ended

October 2,

September 26,

October 2,

September 26,

(In thousands)(unaudited)

    

2021

    

2020

    

2021

    

2020

Net income

$

27,195

$

20,200

$

44,867

$

3,530

Unrealized (loss) gain on financial instruments, net of tax (benefit) provision of ($398), $747, ($347), and $2,140

 

(1,161)

 

1,920

 

(1,018)

 

5,881

Pension liability adjustment

 

72

 

(137)

 

15

 

(356)

Foreign currency translation adjustment

 

(2,022)

 

2,446

 

(1,319)

 

6,029

Comprehensive income

$

24,084

$

24,429

$

42,545

$

15,084

See accompanying notes.

6

The Container Store Group, Inc.

Consolidated statements of cash flows

Twenty-Six Weeks Ended

October 2,

September 26,

(In thousands) (unaudited)

    

2021

    

2020

Operating activities

Net income

$

44,867

$

3,530

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

16,745

 

17,772

Stock-based compensation

1,955

 

2,809

Gain on disposal of assets

(5)

 

(6)

Deferred tax expense (benefit)

454

 

(4,726)

Non-cash interest

940

 

931

Other

(247)

 

80

Changes in operating assets and liabilities:

Accounts receivable

(2,105)

 

(2,529)

Inventory

(42,836)

 

8,748

Prepaid expenses and other assets

(2,125)

 

(2,266)

Accounts payable and accrued liabilities

17,359

 

46,227

Net change in lease assets and liabilities

(4,493)

9,672

Income taxes

(5,562)

 

7,493

Other noncurrent liabilities

30

 

3,448

Net cash provided by operating activities

24,977

91,183

Investing activities

Additions to property and equipment

(14,585)

 

(6,864)

Proceeds from sale of property and equipment

5

 

6

Net cash used in investing activities

(14,580)

 

(6,858)

Financing activities

Borrowings on revolving lines of credit

24,923

 

22,242

Payments on revolving lines of credit

(24,863)

 

(30,849)

Borrowings on long-term debt

5,000

 

Payments on long-term debt

(5,597)

(81,482)

Payment of taxes with shares withheld upon restricted stock vesting

(4,677)

(406)

Proceeds from the exercise of stock options

226

 

Net cash used in financing activities

(4,988)

 

(90,495)

Effect of exchange rate changes on cash

41

 

262

Net increase (decrease) in cash

5,450

 

(5,908)

Cash at beginning of fiscal period

17,687

 

67,755

Cash at end of fiscal period

$

23,137

$

61,847

Supplemental information for non-cash investing:

Purchases of property and equipment (included in accounts payable)

$

3,083

$

548

See accompanying notes.

7

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

    

deficit

    

equity

Balance at April 3, 2021

$

0.01

 

48,838,261

$

488

 

$

873,048

$

(19,003)

$

(500,864)

 

$

353,669

Net income

 

 

 

 

 

 

17,672

 

 

17,672

Stock-based compensation

 

 

 

 

869

 

 

 

 

869

Stock options exercised

52,183

1

225

226

Vesting of restricted stock awards

526,771

5

(5)

0

Taxes related to net share settlement of restricted stock awards

(3,677)

(3,677)

Foreign currency translation adjustment

 

 

 

 

 

703

 

 

 

703

Unrealized gain on financial instruments, net of $51 tax provision

 

 

 

 

 

143

 

 

 

143

Pension liability adjustment

 

 

 

 

 

(57)

 

 

 

(57)

Balance at July 3, 2021

$

0.01

 

49,417,215

494

 

 

870,460

 

(18,214)

 

(483,192)

 

 

369,548

Net income

27,195

27,195

Stock-based compensation

1,086

1,086

Vesting of restricted stock awards

127,938

1

(1)

0

Taxes related to net share settlement of restricted stock awards

Foreign currency translation adjustment

(2,022)

(2,022)

Unrealized gain on financial instruments, net of $398 tax benefit

(1,161)

(1,161)

Pension liability adjustment

72

72

Balance at October 2, 2021

$

0.01

49,545,153

495

871,545

(21,325)

(455,997)

394,718

See accompanying notes.

8

The Container Store Group, Inc.

Consolidated statements of shareholders’ equity (continued)

Accumulated

Additional

other

Total

(In thousands, except share amounts)

Par

Common stock

paid-in

comprehensive

Retained

shareholders’

(unaudited)

    

value

    

Shares

    

Amount

    

capital

    

loss

    

deficit

    

equity

Balance at March 28, 2020

$

0.01

 

48,316,559

$

483

 

$

866,667

$

(36,295)

$

(559,147)

 

$

271,708

Net loss

 

 

 

 

 

 

(16,670)

 

 

(16,670)

Stock-based compensation

 

 

 

 

832

 

 

 

 

832

Vesting of restricted stock awards

174,758

2

(2)

Taxes related to net share settlement of restricted stock awards

(165)

(165)

Foreign currency translation adjustment

 

 

 

 

 

3,583

 

 

 

3,583

Unrealized gain on financial instruments, net of $1,393 tax provision

 

 

 

 

 

3,961

 

 

 

3,961

Pension liability adjustment

 

 

 

 

 

(219)

 

 

(219)

Balance at June 27, 2020

$

0.01

 

48,491,317

485

 

867,332

(28,970)

(575,817)

 

263,030

Net income

 

 

20,200

 

20,200

Stock-based compensation

 

 

1,836

 

1,836

Vesting of restricted stock awards

78,963

1

(1)

Taxes related to net share settlement of restricted stock awards

Foreign currency translation adjustment

2,446

2,446

Unrealized gain on financial instruments, net of $747 tax benefit

1,920

1,920

Pension liability adjustment

(137)

(137)

Balance at September 26, 2020

$

0.01

48,570,280

486

869,167

(24,741)

(555,617)

289,295

See accompanying notes.

9

The Container Store Group, Inc.

Notes to consolidated financial statements (unaudited)

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

October 2, 2021

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 April 3, 2021, filed with the Securities and Exchange Commission (“SEC”) on June 3, 2021 (the “2020 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. 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 2021” refer to the 52-week fiscal year ending April 2, 2022, “fiscal 2020” refer to the 53-week fiscal year ended April 3, 2021, and “fiscal 2019” refer to the 52-week fiscal year ended March 28, 2020.

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”), at which time LGP held a controlling interest in the Company as the majority shareholder. During fiscal 2020, LGP sold common stock of the Company, reducing their ownership to less than 50% of the Company’s outstanding common stock. Although LGP is no longer the majority shareholder, LGP continues to have significant influence over the Company. As of October 2, 2021, The Container Store, Inc. (“TCS”) operates 94 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, mobile site, call center, and in-home design consultants. 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.

Business Update Related to Coronavirus

The novel coronavirus (“COVID-19”) pandemic had a negative impact on the Company’s fiscal 2020 operations and financial results. We experienced significant disruptions in store operations, including the temporary closure of all stores to in-store customer traffic, which adversely affected our business, results of operations and financial condition, and saw a significant increase in our curbside pick-up and online selling. During the second quarter of fiscal 2021, all stores were open. We continued to see a shift back to brick and mortar stores and a decrease in online channel sales year-over year. We will continue to review local, state, and federal mandates as we may need to temporarily adjust our operations to comply as COVID-19 and other uncertainties continue to unfold. We continue to prioritize the health and safety of our customers and employees by implementing strict health and safety protocols in our stores. We will continue to monitor guidance from the Centers for Disease Control and Prevention, local, state and federal guidance, and the impact of COVID-19 on the Company's business, results of operations, financial position and cash flows.

Seasonality

The Company’s business has historically been moderately seasonal in nature and, therefore, the results of operations for the twenty-six weeks ended October 2, 2021 have not necessarily been 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

10

operations in the fourth fiscal quarter, attributable primarily to the timing and impact of promotional campaigns. However, we do not expect fiscal 2021 sales and profitability to follow historical patterns due to various factors, including changes in promotional strategy and cadence, anticipated supply chain cost headwinds, and adding back costs to the business that were temporarily suspended during the pandemic.

Recent accounting pronouncements

In July 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“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. Originally, ASU 2016-13 was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. An entity should apply the standard by recording a cumulative effect adjustment to retained earnings upon adoption. In November 2019, FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is planning to adopt this standard in the first quarter of fiscal 2022. The adoption of this standard is not expected to result in a material impact to the Company’s financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, with early adoption permitted. The adoption of this standard in the first quarter of fiscal 2021 did not result in a material impact to the Company’s financial statements.

11

2.  Detail of certain balance sheet accounts

October 2,

April 3,

September 26,

    

2021

    

2021

    

2020

Accounts receivable, net:

Trade receivables, net

$

19,010

$

18,784

$

16,080

Credit card receivables

 

9,650

 

8,445

 

11,483

Other receivables

 

2,375

 

1,720

 

1,490

$

31,035

$

28,949

$

29,053

Inventory:

Finished goods

$

166,818

$

126,311

$

112,864

Raw materials

 

5,634

 

3,614

 

4,271

Work in progress

 

689

 

694

 

580

$

173,141

$

130,619

$

117,715

Accrued liabilities:

Accrued payroll, benefits and bonuses

$

26,192

$

30,028

$

20,538

Unearned revenue

22,406

19,503

16,360

Accrued transaction and property tax

15,202

15,660

15,441

Gift cards and store credits outstanding

10,304

9,862

9,067

Accrued lease liabilities

31

34

1,045

Accrued interest

2,692

95

3,750

Accrued sales returns

3,195

3,381

3,321

Other accrued liabilities

5,826

7,988

7,212

$

85,848

$

86,551

$

76,734

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 $19,503 as of April 3, 2021, and $18,450 was subsequently recognized into revenue for the twenty-six weeks ended October 2, 2021. Gift cards and store credits outstanding was $9,862 as of April 3, 2021, and $2,120 was subsequently recognized into revenue for the twenty-six weeks ended October 2, 2021. See Note 10 for disaggregated revenue disclosures.

3. Leases

We conduct all of our U.S. operations from leased facilities that include our corporate headquarters, warehouse facilities, and 94 store locations. The corporate headquarters, warehouse facilities, and stores are under operating leases that generally expire over the next 1 to 20 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 that 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.

12

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 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.

During the first and second quarters of fiscal 2020, the Company renegotiated terms with landlords as a result of the COVID-19 pandemic, which resulted in the deferral of approximately $11,900 of certain cash lease payments. Of the $11,900 of deferred cash lease payments, approximately $3,600 was repaid during the first half of fiscal 2021, and the remaining balance of $1,100 is expected to be repaid in the second half of fiscal 2021.

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 October 2, 2021 and September 26, 2020 were as follows:

Thirteen Weeks Ended

Twenty-Six Weeks Ended

October 2, 2021

September 26, 2020

October 2, 2021

September 26, 2020

Operating lease costs

$

21,859

$

22,683

$

43,695

$

45,194

Variable lease costs

 

518

 

280

 

818

 

311

Total lease costs

$

22,377

$

22,963

$

44,513

$

45,505

We do not have sublease income and do not recognize lease assets or liabilities for short-term leases, defined as operating leases with initial terms of less than 12 months. Our short-term lease costs were not material for the thirteen and twenty-six weeks ended October 2, 2021 and September 26, 2020.

Supplemental cash flow information related to our leases for the twenty-six weeks ended October 2, 2021 and September 26, 2020 were as follows:

Twenty-Six Weeks Ended

October 2, 2021

September 26, 2020

Cash paid for amounts included in the measurement of operating lease liabilities

$

48,755

$

35,207

Additions to right-of-use assets

$

18,698

$

32,817

Weighted average remaining operating lease term and incremental borrowing rate as of October 2, 2021 and September 26, 2020 were as follows:

Twenty-Six Weeks Ended

October 2, 2021

September 26, 2020

Weighted average remaining lease term (years)

6.5

7.0

Weighted average incremental borrowing rate

13.1

%

14.0

%

13

As of October 2, 2021, future minimum lease payments under our operating lease liabilities were as follows:

    

Operating leases (1)

Within 1 year (remaining)

$

45,616

2 years

 

87,559

3 years

 

80,400

4 years

 

71,406

5 years

 

61,660

Thereafter

 

154,983

Total lease payments

$

501,624

Less amount representing interest

(173,212)

Total lease liability

$

328,412

Less current lease liability

(50,177)

Total noncurrent lease liability

$

278,235

(1)Operating lease payments exclude approximately $4,194 of legally binding minimum lease payments for one lease signed but not yet commenced.

4. Net income per common share

Basic net income per common share is computed as net income divided by the weighted-average number of common shares for the period. Net income per common share – diluted is computed as net income 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 per common share – diluted if their effect is anti-dilutive.

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

Thirteen Weeks Ended

Twenty-Six Weeks Ended

October 2,

September 26,

October 2,

September 26,

    

2021

    

2020

    

2021

    

2020

Numerator:

Net income

$

27,195

$

20,200

$

44,867

$

3,530

Denominator:

Weighted-average common shares — basic

 

49,468,324

 

48,513,826

 

49,274,611

 

48,451,508

Nonvested restricted stock awards and other dilutive securities

749,290

268,679

1,838,057

178,738

Weighted-average common shares — diluted

50,217,614

48,782,505

51,112,668

48,630,246

Net income per common share — basic

$

0.55

$

0.42

$

0.91

$

0.07

Net income per common share — diluted

0.54

0.41

0.88

0.07

Antidilutive securities not included:

Stock options outstanding

 

1,729,250

 

2,285,867

 

1,861,136

 

2,515,767

Nonvested restricted stock awards

130,457

232,724

115,855

312,851

5.  Income taxes

The provision for income taxes in the thirteen weeks ended October 2, 2021 was $9,393 as compared to a provision of $9,073 in the thirteen weeks ended September 26, 2020. The effective tax rate for the thirteen weeks ended October 2, 2021 was 25.7%, as compared to 31.0% in the thirteen weeks ended September 26, 2020. During the thirteen weeks ended October 2, 2021, the effective tax rate rose above the U.S. statutory rate of 21%, primarily due to U.S. state

14

income taxes and the impact of the global intangible low-taxed income (“GILTI”). During the thirteen weeks ended September 26, 2020, the effective tax rate rose above the U.S. statutory rate, primarily due to stock-based compensation, U.S. state income taxes, and the impact of the GILTI provision from the Tax Cuts and Jobs Act of 2017.

The provision for income taxes in the twenty-six weeks ended October 2, 2021 was $15,053 as compared to $2,175 in the twenty-six weeks ended September 26, 2020. The effective tax rate for the twenty-six weeks ended October 2, 2021 was 25.1%, as compared to 38.1% in the twenty-six weeks ended September 26, 2020. During the twenty-six weeks ended October 2, 2021, the effective tax rate rose above the U.S. statutory rate of 21%, primarily due to U.S. state income taxes and the impact of the GILTI provision. During the twenty-six weeks ended September 26, 2020, the effective tax rate rose above the U.S. statutory rate, primarily due to stock-based compensation, U.S. state income taxes, and the impact of the GILTI provision.

6.  Commitments and contingencies

In connection with insurance policies and other contracts, the Company has outstanding standby letters of credit totaling $4,255 as of October 2, 2021.

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 October 2, 2021:

Foreign

currency

Pension

Foreign

hedge

liability

currency

    

instruments

    

adjustment

    

translation

    

Total

Balance at April 3, 2021

$

3,174

$

(2,415)

$

(19,762)

$

(19,003)

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

103

15

(1,319)

(1,201)

Amounts reclassified to earnings, net of tax

(1,121)

(1,121)

Net current period other comprehensive (loss) income

 

(1,018)

 

15

 

(1,319)

 

(2,322)

Balance at October 2, 2021

$

2,156

$

(2,400)

$

(21,081)

$

(21,325)

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, Derivatives and Hedging. 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.

15

During the twenty-six weeks ended October 2, 2021 and September 26, 2020, the TCS segment used forward contracts for 91% and 83% of inventory purchases in Swedish krona, respectively. 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 until the hedged item (inventory) is sold to the customer, at which time the deferred gain or loss is recognized through cost of sales. Any portion of a change in the foreign currency hedge instrument’s fair value that is considered to be ineffective, as defined, or that the Company has elected to exclude from its measurement of effectiveness, is immediately recorded in earnings as cost of sales. The Company assessed the effectiveness of the foreign currency hedge instruments and determined the foreign currency hedge instruments were highly effective during the twenty-six weeks ended October 2, 2021 and September 26, 2020. 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 October 2, 2021, 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 recognized a $2,156 gain in accumulated other comprehensive loss related to foreign currency hedge instruments at October 2, 2021, of which $924 represents an unrealized gain for settled foreign currency hedge instruments related to inventory on hand as of October 2, 2021. The Company expects the unrealized gain of $924, 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, is 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 and 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.

16

As of October 2, 2021, April 3, 2021 and September 26, 2020, the Company held certain items that are required to be measured at fair value on a recurring basis. These included foreign currency forward contracts which the Company uses to stabilize its retail gross margins and to protect its operations from downward currency exposure and 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.

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

October 2,

April 3,

September 26,

Description

    

    

Balance Sheet Location

    

2021

    

2021

    

2020

Assets

Nonqualified retirement plan

 

N/A

 

Other current assets

$

3,659

$

5,707

$

5,377

Foreign currency forward contracts

 

Level 2

 

Other current assets

 

1,667

 

2,906

 

241

Total assets

$

5,326

$

8,613

$

5,618

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 October 2, 2021, April 3, 2021 and September 26, 2020, the estimated fair value of the Company’s long-term debt, including current maturities, was as follows:

October 2,

April 3,

September 26,

    

2021

    

2021

    

2020

Senior secured term loan facility

$

174,870

$

174,064

$

236,431

2019 Elfa revolving facilities

59

1,107

Obligations under finance leases

265

335

273

Revolving credit facility

 

 

 

Total fair value of debt

 

175,194

 

174,399

 

237,811

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 2 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

17

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 October 2, 2021

    

TCS

    

Elfa

    

Eliminations

    

Total

Net sales to third parties

$

259,378

$

16,576

$

$

275,954

Intersegment sales

 

 

17,412

 

(17,412)

 

Adjusted EBITDA

 

41,676

 

4,112

 

1,960

 

47,748

Interest expense, net

3,097

89

3,186

Assets (1)

1,021,211

106,888

(4,890)

1,123,209

Thirteen Weeks Ended September 26, 2020

    

TCS

    

Elfa

    

Eliminations

    

Total

Net sales to third parties

$

233,004

$

15,237

$

$

248,241

Intersegment sales

14,892

(14,892)

Adjusted EBITDA

38,278

5,736

69

44,083

Interest expense, net

4,395

96

4,491

Assets (1)

1,012,629

102,180

(6,755)

1,108,054

Twenty-Six Weeks Ended October 2, 2021

    

TCS

    

Elfa

    

Eliminations

    

Total

Net sales to third parties

$

488,108

$

33,161

$

$

521,269

Intersegment sales

 

 

33,105

 

(33,105)

 

Adjusted EBITDA

 

69,644

 

8,209

 

3,397

 

81,250

Interest expense, net

6,220

151

6,371

Assets (1)

1,021,211

106,888

(4,890)

1,123,209

Twenty-Six Weeks Ended September 26, 2020

    

TCS

    

Elfa

    

Eliminations

    

Total

Net sales to third parties

$

372,390

$

27,537

$

$

399,927

Intersegment sales

23,584

(23,584)

Adjusted EBITDA

40,003

8,673

(130)

48,546

Interest expense, net

9,242

199

9,441

Assets (1)

1,012,629

102,180

(6,755)

1,108,054

(1)

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

18

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

Thirteen Weeks Ended

Twenty-Six Weeks Ended

    

October 2,

    

September 26,

    

October 2,

    

September 26,

2021

2020

2021

2020

Income before taxes

$

36,588

$

29,273

$

59,920

$

5,705

Add:

 

 

Depreciation and amortization

 

8,544

 

8,823

 

16,745

 

17,772

Interest expense, net

 

3,186

 

4,491

 

6,371

 

9,441

Pre-opening costs (a)

 

72

 

7

 

666

 

16

Non-cash lease expense (b)

 

(1,722)

 

(1,065)

 

(5,077)

 

10,073

Stock-based compensation (c)

 

1,086

 

1,977

 

1,955

 

2,809

Management transition costs (d)

473

Foreign exchange losses (e)

 

(6)

 

8

 

5

 

129

COVID-19 costs (f)

273

192

1,496

COVID-19 severance (g)

296

1,105

Adjusted EBITDA

$

47,748

$

44,083

$

81,250

$

48,546

(a)Non-capital expenditures associated with opening new stores and relocating stores, 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. Non-cash lease expense increased during the first half of fiscal 2020 due to renegotiated terms with landlords due to COVID-19 that resulted in deferral of $11,900 of certain cash lease payments. Of the $11,900 of deferred cash lease payments, approximately $3,600 was repaid during the first half of fiscal 2021, and the remaining balance of $1,100 is expected to be repaid in the second half of fiscal 2021.

(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)Costs related to the transition of key executives including severance and signing bonus recorded as selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance.  

(e)Realized foreign exchange transactional gains/losses our management does not consider in our evaluation of our ongoing operations.

(f)Includes incremental costs attributable to the COVID-19 pandemic, which consist of sanitization costs in the first quarter of fiscal 2021 and the first half of fiscal 2020, and hazard pay for distribution center employees in the first quarter of fiscal 2020, all of which are recorded as selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance.

(g)Includes costs incurred in the first half of fiscal 2020 associated with the reduction in workforce as a result of the COVID-19 pandemic and the related temporary store closures in fiscal 2020, which we do not consider in our evaluation of ongoing performance.

19

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, including, without limitation impacts of, and our plans in response to, the COVID-19 pandemic, and anticipated capital expenditures and other expenses, 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: the COVID-19 pandemic and the associated impact on our business, results of operations and financial condition; our ability to continue to lease space on favorable terms; costs and risks relating to new store openings; quarterly and seasonal fluctuations in our operating results; cost increases that are beyond our control; our inability to protect our brand; our failure or inability to protect our intellectual property rights; overall decline in the health of the economy, consumer spending, and the housing market; our inability to source and market new products to meet consumer preferences; failure to successfully anticipate consumer preferences and demand; competition from other stores and internet-based competition; vendors may sell similar or identical products to our competitors; our and our vendors’ vulnerability to natural disasters and other unexpected events; disruptions at our Elfa manufacturing facilities; deterioration or change in vendor relationships or events that adversely affect our vendors or their ability to obtain financing for their operations, including COVID-19; our payment terms for goods and services, and our negotiation of alternative terms for lease payments and other business contracts, each as a result of COVID-19; product recalls and/or product liability, as well as changes in product safety and other consumer protection laws; risks relating to operating two distribution centers; our dependence on foreign imports for our merchandise; our reliance upon independent third-party transportation providers; our inability to effectively manage our online sales; effects of a security breach or cyber-attack of our website or information technology systems, including relating to our use of third-party web service providers; damage to, or interruptions in, our information systems as a result of external factors, working from home arrangements, staffing shortages and difficulties in updating our existing software or developing or implementing new software; our indebtedness may restrict our current and future operations, and we may not be able to refinance our debt on favorable terms, or at all; fluctuations in currency exchange rates; our inability to maintain sufficient levels of cash flow to meet growth expectations; our fixed lease obligations; 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; changes to global markets and inability to predict future interest expenses; our reliance on key executive management; our inability to find, train and retain key personnel; labor relations difficulties; increases in health care costs and labor costs; violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery and anti-kickback laws; impairment charges and effects of changes in estimates or projections used to assess the fair value of our assets; effects of tax reform and other tax fluctuations; 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; our performance meeting guidance provided to the public; 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 April 3, 2021 (the “2020 Annual Report on Form 10-K”), filed with the Securities and Exchange Commission (the “SEC”) on June 3, 2021.

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

20

subject to risks and uncertainties, you should not rely on these forward-looking statements as predictions of future events. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein after the date of this report, whether as a result of any new information, future events or otherwise.

Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to the “Company,” “we,” “us,” and “our” refer to The Container Store Group, Inc. and, where appropriate, its subsidiaries.

We follow a 4-4-5 fiscal calendar, whereby each fiscal quarter consists of thirteen weeks grouped into two four-week “months” and one five-week “month”, and our fiscal year is the 52- or 53-week period ending on the Saturday closest to March 31. Fiscal 2021 ends on April 2, 2022 and will include 52 weeks and fiscal 2020 ended on April 3, 2021 and included 53 weeks. The second quarter of fiscal 2021 ended on October 2, 2021 and the second quarter of fiscal 2020 ended on September 26, 2020, 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 customers are highly educated, very busy and primarily homeowners with a higher than average household income. Our customers crave discovery, inspiration, and solutions that simplify their lives and maximize their spaces within their homes. Our vision is to deepen our relationship with our customers, expand our reach and strengthen our capabilities, all while transforming lives through the power of organization.

Our operations consist of two operating segments:

   The Container Store (“TCS”) consists of our retail stores, website and call center (which includes business sales), as well as our installation services business. As of October 2, 2021, we operated 94 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 also offer all of our products directly to customers through our website, mobile site, call center, and in-home design consultants. Our stores receive substantially all of our products directly from one of our two distribution centers. Our first distribution center in Coppell, Texas, is co-located with our support center and call center, and our second distribution center is located in Aberdeen, Maryland.

   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.

Business Update Related to Coronavirus

The novel coronavirus (“COVID-19”) pandemic had a negative impact on the Company’s fiscal 2020 operations and financial results. We experienced significant disruptions in store operations, including the temporary closure of all stores to in-store customer traffic, which adversely affected our business, results of operations and financial condition, and saw a significant increase in our curbside pick-up and online selling. During the second quarter of fiscal 2021, all stores were open. We continued to see a shift back to brick and mortar stores and a decrease in online channel sales year-over year. We will continue to review local, state, and federal mandates as we may need to temporarily adjust our operations to comply as COVID-19 and other uncertainties continue to unfold. We continue to prioritize the health and safety of our customers and employees by implementing strict health and safety protocols in our stores. We will continue to monitor

21

guidance from the Centers for Disease Control and Prevention, local, state and federal guidance, and the impact of COVID-19 on the Company's business, results of operations, financial position and cash flows.

Note on Dollar Amounts

All dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are in thousands, except per share amounts and unless otherwise stated.

Results of Operations

The following data represents the amounts shown in our unaudited consolidated statements of operations expressed in dollars and as a percentage of net sales and operating data for the periods presented. For segment data, see Note 10 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Thirteen Weeks Ended

Twenty-Six Weeks Ended

   

October 2,

   

September 26,

   

October 2,

   

September 26,

2021

2020

2021

2020

Net sales

$

275,954

$

248,241

$

521,269

$

399,927

Cost of sales (excluding depreciation and amortization)

 

112,416

 

102,183

 

211,407

 

175,630

Gross profit

 

163,538

 

146,058

 

309,862

 

224,297

Selling, general, and administrative expenses (excluding depreciation and amortization)

 

114,062

 

101,193

 

224,210

 

187,458

Stock-based compensation

 

1,086

 

1,977

 

1,955

 

2,809

Pre-opening costs

 

72

 

7

 

666

 

16

Depreciation and amortization

 

8,544

 

8,823

 

16,745

 

17,772

Other expenses

 

 

294

 

 

1,102

Gain on disposal of assets

 

 

 

(5)

 

(6)

Income from operations

 

39,774

 

33,764

 

66,291

 

15,146

Interest expense, net

3,186

4,491

6,371

9,441

Income before taxes

 

36,588

 

29,273

 

59,920

 

5,705

Provision for income taxes

 

9,393

 

9,073

 

15,053

 

2,175

Net income

$

27,195

$

20,200

$

44,867

$

3,530

Net income per common share — basic

$

0.55

$

0.42

$

0.91

$

0.07

Net income per common share — diluted

$

0.54

$

0.41

$

0.88

$

0.07

Weighted-average common shares — basic

49,468,324

48,513,826

49,274,611

48,451,508

Weighted-average common shares — diluted

 

50,217,614

 

48,782,505

 

51,112,668

 

48,630,246

22

Thirteen Weeks Ended

Twenty-Six Weeks Ended

October 2,

September 26,

October 2,

September 26,

2021

2020

2021

2020

Percentage of net sales:

 

  

 

  

 

  

 

  

 

Net sales

 

100.0

%  

100.0

%  

100.0

%  

100.0

%  

Cost of sales (excluding depreciation and amortization)

 

40.7

%  

41.2

%  

40.6

%  

43.9

%  

Gross profit

 

59.3

%  

58.8

%  

59.4

%  

56.1

%  

Selling, general, and administrative expenses (excluding depreciation and amortization)

 

41.3

%  

40.8

%  

43.0

%  

46.9

%  

Stock‑based compensation

 

0.4

%  

0.8

%  

0.4

%  

0.7

%  

Pre‑opening costs

 

0.0

%  

0.0

%  

0.1

%  

0.0

%  

Depreciation and amortization

 

3.1

%  

3.6

%  

3.2

%  

4.4

%  

Other expenses

 

%  

0.1

%  

%  

0.3

%  

Gain on disposal of assets

 

%  

%  

(0.0)

%  

(0.0)

%  

Income from operations

 

14.4

%  

13.6

%  

12.7

%  

3.8

%  

Interest expense, net

 

1.2

%  

1.8

%  

1.2

%  

2.4

%  

Income before taxes

 

13.3

%  

11.8

%  

11.5

%  

1.4

%  

Provision for income taxes

 

3.4

%  

3.7

%  

2.9

%  

0.5

%  

Net income

 

9.9

%  

8.1

%  

8.6

%  

0.9

%  

Operating data:

 

 

  

 

 

 

Number of stores at end of period (1)

 

94

 

93

 

94

 

93

 

NonGAAP measures (2):

 

  

 

  

 

  

 

  

 

Adjusted EBITDA (3)

 

$

47,748

 

$

44,083

 

$

81,250

 

$

48,546

 

Adjusted net income (4)

 

$

27,197

 

$

20,930

 

$

45,348

 

$

5,407

 

Adjusted net income per common share — diluted (4)

 

$

0.54

 

$

0.43

 

$

0.89

 

$

0.11

 

(1)In the first half of fiscal 2021, all 94 stores were open with strict health and safety protocols and adherence to local regulations. In the first quarter of fiscal 2020, the Company operated a total of 93 store locations, the majority of which were temporarily closed for at least seven days, as a result of COVID-19, and therefore were not considered comparable. During the second quarter of fiscal 2020, all 93 stores were open and operating at close to normalized schedules, with limited capacity.

(2)We have presented in the table above Adjusted EBITDA, adjusted net income, and adjusted net income 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 or net 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 the change in 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, which is a financial measure not calculated in accordance with GAAP. The Company believes the disclosure of the change in

23

Elfa third-party net sales without the effects of currency exchange rate fluctuations helps investors understand the Company’s underlying performance.

(3)EBITDA and Adjusted EBITDA have been presented in this Quarterly Report on Form 10-Q as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as net income before interest, taxes, depreciation, and amortization. Adjusted EBITDA is calculated in accordance with our Secured Term Loan Facility (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 as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Additionally, EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as they do not reflect certain cash requirements such as tax payments, debt service requirements, capital expenditures, store openings and certain other cash costs that may recur in the future. EBITDA and Adjusted EBITDA contain certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized. In evaluating Adjusted EBITDA, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation, such as pre-opening costs and stock compensation expense. Our presentation of Adjusted EBITDA should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using EBITDA and Adjusted EBITDA supplementally. Our measures of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.

24

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

Thirteen Weeks Ended

Twenty-Six Weeks Ended

October 2,

September 26,

October 2,

September 26,

2021

2020

2021

2020

    

    

    

    

Net income

$

27,195

$

20,200

$

44,867

$

3,530

Depreciation and amortization

 

8,544

 

8,823

 

16,745

 

17,772

Interest expense, net

 

3,186

 

4,491

 

6,371

 

9,441

Income tax provision

 

9,393

 

9,073

 

15,053

 

2,175

EBITDA

 

48,318

 

42,587

 

83,036

 

32,918

Pre-opening costs (a)

 

72

 

7

 

666

 

16

Non-cash lease expense (b)

 

(1,722)

 

(1,065)

 

(5,077)

 

10,073

Stock-based compensation (c)

 

1,086

 

1,977

 

1,955

 

2,809

Management transition costs (d)

473

Foreign exchange losses (e)

 

(6)

 

8

 

5

 

129

COVID-19 costs (f)

273

192

1,496

COVID-19 severance (g)

296

1,105

Adjusted EBITDA

$

47,748

$

44,083

$

81,250

$

48,546

(a)Non-capital expenditures associated with opening new stores and relocating stores, 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. Non-cash lease expense increased in the first half of fiscal 2020 due to renegotiated terms with landlords due to COVID-19 that resulted in deferral of $11,900 of certain cash lease payments. Of the $11,900 of deferred cash lease payments, approximately $3,600 was repaid during the first half of fiscal 2021, and the remaining $1,100 is expected to be repaid in the second half of fiscal 2021.

(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)Costs related to the transition of key executives including severance and signing bonus recorded as selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance.

(e)Realized foreign exchange transactional gains/losses our management does not consider in our evaluation of our ongoing operations.

(f)Includes incremental costs attributable to the COVID-19 pandemic, which consist of sanitization costs in the first quarter of fiscal 2021 and the first half fiscal 2020, and hazard pay for distribution center employees in the first quarter of fiscal 2020, all of which are recorded as selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance.

(g)Include costs incurred in the first half of fiscal 2020 associated with the reduction in workforce as a result of the COVID-19 pandemic and the related temporary store closures in fiscal 2020, which we do not consider in our evaluation of ongoing performance.

(4)Adjusted net income and adjusted net income 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 as net income before restructuring charges, charges related

25

to the impact of COVID-19 on business operations, credits pursuant to the CARES Act, severance charges associated with COVID-19, loss 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 per common share – diluted as adjusted net income divided by the diluted weighted average common shares outstanding. We use adjusted net income and adjusted net income 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 and adjusted net income 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 and net income per common share – diluted to the non-GAAP financial measures of adjusted net income and adjusted net income per common share – diluted is set forth below:

Thirteen Weeks Ended

Twenty-Six Weeks Ended

October 2,

September 26,

October 2,

September 26,

2021

2020

2021

2020

    

    

    

    

Numerator:

 

  

 

  

 

  

 

  

Net income

$

27,195

$

20,200

$

44,867

$

3,530

Management transition costs (a)

 

 

 

473

 

COVID-19 costs (b)

273

192

1,496

COVID-19 severance (c)

294

1,103

Taxes (d)

 

2

 

163

 

(184)

 

(722)

Adjusted net income

$

27,197

$

20,930

$

45,348

$

5,407

Denominator:

 

  

 

  

 

  

 

  

Weighted-average common shares outstanding — diluted

 

50,217,614

 

48,782,505

 

51,112,668

 

48,630,246

Net income per common share — diluted

$

0.54

$

0.41

$

0.88

$

0.07

Adjusted net income per common share — diluted

$

0.54

$

0.43

$

0.89

$

0.11

(a)Costs related to the transition of key executives including severance and signing bonus recorded as selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance.

(b)Includes incremental costs attributable to the COVID-19 pandemic, which consist of sanitization costs in the first quarter of fiscal 2021 and the first half of fiscal 2020, and hazard pay for distribution center employees in the first quarter of fiscal 2020, all of which are recorded as selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance.

(c)Includes costs incurred in the first half of fiscal 2020 associated with the reduction in workforce as a result of the COVID-19 pandemic and the related temporary store closures in fiscal 2020, which we do not consider in our evaluation of ongoing performance.

(d)Tax impact of adjustments to net income which are considered to be unusual or infrequent tax items, all of which we do not consider in our evaluation of ongoing performance.

26

Thirteen Weeks Ended October 2, 2021 Compared to Thirteen Weeks Ended September 26, 2020

Net sales

The following table summarizes our net sales for each of the thirteen weeks ended October 2, 2021 and September 26, 2020:

    

October 2, 2021

    

% total

    

September 26, 2020

    

% total

TCS net sales

$

259,378

 

94.0

%  

$

233,004

 

93.9

%

Elfa third-party net sales

 

16,576

 

6.0

%  

 

15,237

 

6.1

%

Net sales

$

275,954

 

100.0

%  

$

248,241

 

100.0

%

Net sales in the thirteen weeks ended October 2, 2021 increased $27,713, or 11.2%, compared to the thirteen weeks ended September 26, 2020. This increase was comprised of the following components:

    

Net sales

Net sales for the thirteen weeks ended September 26, 2020

$

248,241

Incremental net sales increase due to:

 

  

TCS net sales (including a $10,505, or 23.9%, decrease in online sales)

 

26,374

Elfa third-party net sales (excluding impact of foreign currency translation)

 

867

Impact of foreign currency translation on Elfa third-party net sales

 

472

Net sales for the thirteen weeks ended October 2, 2021

$

275,954

TCS net sales increased $26,374 or 11.3%, with Custom Closets up 22.1%, contributing 960 basis points of the increase and other product categories up 3.1%, contributing 170 basis points of the increase. Elfa third-party net sales increased $1,339 or 8.8% in the thirteen weeks ended October 2, 2021. 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 October 2, 2021 and the thirteen weeks ended September 26, 2020, Elfa third-party net sales increased 5.7%.

As a result of the impact of the COVID-19 pandemic on our Company stores and the Company’s policy of excluding extended store closures from its comparable sales calculation, we chose not to provide comparable store sales metrics in the second quarter of fiscal 2021. We do not believe that comparable store sales will be a meaningful metric in fiscal 2021.

Gross profit and gross margin

Gross profit in the thirteen weeks ended October 2, 2021 increased $17,480, or 12.0%, compared to the thirteen weeks ended September 26, 2020. The increase in gross profit was primarily the result of increased consolidated net sales combined with an increase in consolidated gross margin. The following table summarizes the gross margin for the thirteen weeks ended October 2, 2021 and September 26, 2020 by segment and total. The segment gross margins include the impact of intersegment net sales from the Elfa segment to the TCS segment:

    

October 2, 2021

    

September 26, 2020

TCS gross margin

 

58.1

%  

57.5

%

Elfa gross margin

 

31.8

%  

39.8

%

Total gross margin

 

59.3

%  

58.8

%

TCS gross margin increased 60 basis points primarily due to decreased shipping costs as a result of a lower mix of online sales, combined with less promotional activity and a favorable mix of products and services, partially offset by increased freight costs in the second quarter of fiscal 2021. Elfa gross margin decreased 800 basis points primarily due to higher direct material costs and unfavorable customer mix. In total, gross margin increased 50 basis points, primarily due to the increase in TCS gross margin during the thirteen weeks ended October 2, 2021, partially offset by the decrease in Elfa gross margin for the same period.

27

Selling, general and administrative expenses

Selling, general and administrative expenses in the thirteen weeks ended October 2, 2021 increased $12,869, or 12.7%, compared to the thirteen weeks ended September 26, 2020 as we restored certain expenses that were temporarily suspended in fiscal 2020 as part of our COVID-19 pandemic management strategy. The following table summarizes SG&A as a percentage of consolidated net sales for the thirteen weeks ended October 2, 2021 and September 26, 2020:

October 2, 2021

September 26, 2020

 

    

% of Net sales

    

% of Net sales

 

TCS selling, general and administrative

 

38.9

%  

38.3

%

Elfa selling, general and administrative

 

2.4

%  

2.5

%

Total selling, general and administrative

 

41.3

%  

40.8

%

Total selling, general and administrative expenses as a percentage of consolidated net sales increased 50 basis points primarily due to increased compensation and benefits costs, partially offset by leverage of occupancy and other costs on higher sales during the thirteen weeks ended October 2, 2021.

Interest expense

Interest expense decreased by $1,305, or 29.1%, in the thirteen weeks ended October 2, 2021 to $3,186, as compared to $4,491 in the thirteen weeks ended September 26, 2020. The decrease is primarily due to a lower principal balance on the Senior Secured Term Loan Facility (as defined below) combined with lower interest rates.

Taxes

The provision for income taxes in the thirteen weeks ended October 2, 2021 was $9,393 as compared to $9,073 in the thirteen weeks ended September 26, 2020. The effective tax rate for the thirteen weeks ended October 2, 2021 was 25.7%, as compared to 31.0% in the thirteen weeks ended September 26, 2020. The decrease in the effective tax rate is primarily due to the impact of permanent and discrete items on higher pre-tax income in the thirteen weeks ended October 2, 2021.

Twenty-Six Weeks Ended October 2, 2021 Compared to Twenty-Six Weeks Ended September 26, 2020

Net sales

The following table summarizes our net sales for each of the twenty-six weeks ended October 2, 2021 and September 26, 2020:

    

October 2, 2021

    

% total

    

September 26, 2020

    

% total

TCS net sales

$

488,108

 

93.6

%  

$

372,390

 

93.1

%

Elfa third-party net sales

 

33,161

 

6.4

%  

 

27,537

 

6.9

%

Net sales

$

521,269

 

100.0

%  

$

399,927

 

100.0

%

28

Net sales in the twenty-six weeks ended October 2, 2021 increased $121,342, or 30.3%, compared to the twenty-six weeks ended September 26, 2020. This increase was comprised of the following components:

    

Net sales

Net sales for the twenty-six weeks ended September 26, 2020

$

399,927

Incremental net sales increase due to:

 

  

TCS net sales (including a $43,961, or 40%, decrease in online sales)

 

115,718

Elfa third-party net sales (excluding impact of foreign currency translation)

 

2,978

Impact of foreign currency translation on Elfa third-party net sales

 

2,646

Net sales for the twenty-six weeks ended October 2, 2021

$

521,269

TCS net sales increased $115,718 or 31.1%, with Custom Closets up 36.9%, contributing 1690 basis points of the increase, and other product categories up 26.1%, contributing 1420 basis points of the increase. Elfa third-party net sales increased $5,624 or 20.4% in the twenty-six weeks ended October 2, 2021. 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 October 2, 2021 and the twenty-six weeks ended September 26, 2020, Elfa third-party net sales increased $2,978 or 10.8%.

As a result of the impact of the COVID-19 pandemic on our Company stores and the Company’s policy of excluding extended store closures from its comparable sales calculation, we chose not to provide comparable store sales metrics in the twenty-six weeks ended October 2, 2021. We do not believe that comparable store sales will be a meaningful metric in fiscal 2021.

Gross profit and gross margin

Gross profit in the twenty-six weeks ended October 2, 2021 increased $85,565, or 38.1%, compared to the twenty-six weeks ended September 26, 2020. The increase in gross profit was primarily the result of increased consolidated net sales combined with an increase in consolidated gross margin. The following table summarizes the gross margin for the twenty-six weeks ended October 2, 2021 and September 26, 2020 by segment and total. The segment gross margins include the impact of intersegment net sales from the Elfa segment to the TCS segment:

    

October 2, 2021

    

September 26, 2020

TCS gross margin

 

58.2

%  

54.6

%

Elfa gross margin

 

34.1

%  

41.0

%

Total gross margin

 

59.4

%  

56.1

%

TCS gross margin increased 360 basis points primarily due to less promotional activity combined with decreased shipping costs as a result of a lower mix of online sales, and partially offset by increased freight costs in the first half of fiscal 2021. Elfa gross margin decreased 690 basis points primarily due to higher direct material costs and unfavorable customer mix. In total, gross margin increased 330 basis points primarily due to the increase in TCS gross margin during the twenty-six weeks ended October 2, 2021, partially offset by the decrease in Elfa gross margin for the same period. In the second half of fiscal 2021, we expect year-over-year consolidated gross margin declines as the mix between brick-and-mortar sales and online sales stabilizes as compared to the prior year, combined with continued headwinds from freight costs.

29

Selling, general and administrative expenses

Selling, general and administrative expenses in the twenty-six weeks ended October 2, 2021 increased $36,752, or 19.6%, compared to the twenty-six weeks ended September 26, 2020 as we restored certain expenses that were temporarily suspended in fiscal 2020 as part of our COVID-19 pandemic management strategy. As a percentage of consolidated net sales, SG&A decreased by 390 basis points. The following table summarizes SG&A as a percentage of consolidated net sales for the twenty-six weeks ended October 2, 2021 and September 26, 2020:

 

October 2, 2021

September 26, 2020

 

    

% of Net sales

    

% of Net sales

 

TCS selling, general and administrative

 

40.2

%  

43.8

%

Elfa selling, general and administrative

 

2.8

%  

3.1

%

Total selling, general and administrative

 

43.0

%  

46.9

%

Total selling, general and administrative expenses as a percentage of consolidated net sales decreased 390 basis points primarily due to leverage of occupancy, marketing and other costs on higher sales, partially offset by an increase in compensation and benefit costs in the twenty-six weeks ended October 2, 2021. In the second half of fiscal 2021, we expect increases in SG&A as a percentage of consolidated net sales as compared to the prior year due to expected deleverage of fixed costs on lower sales, combined with the restoration of certain compensation and benefits costs that were temporarily suspended during the pandemic.

Interest expense

Interest expense decreased by $3,070, or 32.5%, in the twenty-six weeks ended October 2, 2021 to $6,371, as compared to $9,441 in the twenty-six weeks ended September 26, 2020. The decrease is primarily due to a lower principal balance on the Senior Secured Term Loan Facility (as defined below) combined with lower interest rates and decreased borrowings on the Revolving Credit Facility (as defined below).

Taxes

The provision for income taxes in the twenty-six weeks ended October 2, 2021 was $15,053 as compared to $2,175 in the twenty-six weeks ended September 26, 2020. The effective tax rate for the twenty-six weeks ended October 2, 2021 was 25.1%, as compared to 38.1% in the twenty-six weeks ended September 26, 2020. The decrease in the effective tax rate is primarily due to the impact of permanent and discrete items on higher pre-tax income in the twenty-six weeks ended October 2, 2021.

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 and direct materials, payroll, store leases, capital expenditures associated with opening new stores and updating existing stores, as well as information technology and infrastructure, including our distribution centers, and Elfa manufacturing facility enhancements. The most significant components of our operating assets and liabilities are merchandise inventories, accounts receivable, prepaid expenses, operating lease assets and other assets, accounts payable, operating lease 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 these periods when compared to the rest of our fiscal year. In fiscal 2021, we expect total capital expenditures to be approximately $47,000 for technology infrastructure and software projects, existing store merchandising and refresh activities, our Elfa business, and new store development inclusive of our new store in Annapolis, Maryland, which opened in the first quarter of fiscal 2021, and another new store anticipated in fiscal 2022. We believe that cash expected to be generated from operations and the remaining availability of borrowings under the Revolving Credit Facility and the 2019 Elfa Revolving Facilities will be sufficient to meet

30

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 October 2, 2021, we had $23,137 of cash, of which $4,934 was held by our foreign subsidiaries. In addition, we had $96,830 of additional availability under the Revolving Credit Facility and approximately $12,498 of additional availability under the 2019 Elfa Revolving Facilities (as defined below) as of October 2, 2021. There were $4,255 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

October 2,

September 26,

    

2021

    

2020

Net cash provided by operating activities

$

24,977

$

91,183

Net cash used in investing activities

 

(14,580)

 

(6,858)

Net cash used in financing activities

 

(4,988)

 

(90,495)

Effect of exchange rate changes on cash

 

41

 

262

Net increase (decrease) in cash

$

5,450

$

(5,908)

Free cash flow (Non-GAAP) (1)

$

10,392

$

84,319

(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 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 $24,977 for the twenty-six weeks ended October 2, 2021 and was comprised of net income of $44,867 and non-cash items of $19,842, partially offset by a net change in operating assets and liabilities of $39,732. The net change in operating assets and liabilities is primarily due to an increase in merchandise inventory due to increased freight and commodity costs, combined with increased unit levels to support increased sales trends and to account for longer lead times resulting from supply chain disruptions.

Net cash provided by operating activities was $91,183 for the twenty-six weeks ended September 26, 2020 and was comprised of a net change in operating assets and liabilities of $70,793, non-cash items of $16,860 and net income of $3,530. The net change in operating assets and liabilities was primarily due to an increase in accounts payable and accrued liabilities, combined with a decrease in merchandise inventory and cash operating lease payments. The increase in accounts payable and accrued liabilities was primarily due to a shift in timing of merchandise inventory purchases combined with a temporary increase in vendor payment terms.

Net cash used in investing activities

Investing activities consist primarily of capital expenditures for new store openings, existing store remodels, infrastructure, information systems, and our distribution centers.

Our total capital expenditures for the twenty-six weeks ended October 2, 2021 were $14,585. We incurred capital expenditures of $6,761 for technology investments and maintenance capital. We incurred capital expenditures of $5,462

31

for investments in our existing stores and new stores. We opened one new store during the twenty-six weeks ended October 2, 2021. The remaining capital expenditures of $2,362 related to investments in our distribution centers.

Our total capital expenditures for the twenty-six weeks ended September 26, 2020 were $6,864. We incurred capital expenditures of $4,211 for maintenance capital and information technology investments. We incurred capital expenditures of $1,351 related to the distribution centers. The remaining capital expenditures of $1,302 were primarily related to investments in our existing stores. We did not open any new stores during the twenty-six weeks ended September 26, 2020.

Net cash used in financing activities

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

Net cash used in financing activities was $4,988 for the twenty-six weeks ended October 2, 2021. This included tax payments of $4,677 in connection with the withholding of shares upon vesting of restricted stock awards, and repayments of $597 on indebtedness outstanding under the Senior Secured Term Loan Facility and the 2019 Elfa Senior Secured Term Loan Facility, partially offset by proceeds of $226 from the exercise of stock options and net borrowings of $60 on the 2019 Elfa Revolving Facilities.

Net cash used in financing activities was $90,495 for the twenty-six weeks ended September 26, 2020. This included net repayments of $78,000 on the Revolving Credit Facility and net repayments of $8,607 for the 2019 Elfa Senior Secured Credit Facilities. In addition, the Company made combined repayments of $3,482 on indebtedness outstanding under the Senior Secured Term Loan Facility and the 2019 Elfa Senior Secured Term Loan Facility, and $406 for taxes paid with the withholding of shares upon vesting of restricted stock awards.

As of October 2, 2021, TCS had a total of $96,830 of unused borrowing availability and zero borrowings outstanding under the Revolving Credit Facility.

As of October 2, 2021, Elfa had a total of $12,498 of unused borrowing availability and $59 of borrowings outstanding under the 2019 Elfa Revolving Facilities.

Free cash flow (Non-GAAP)

We present free cash flow, which we define as net cash provided by 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 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. We generated free cash flow of $10,392 for the twenty-six weeks ended October 2, 2021, which decreased as compared to free cash flow of $84,319 for the twenty-six weeks ended September 26, 2020. The decrease in free cash flow in the first half of fiscal 2021 compared to the first half of fiscal 2020 reflects the many

32

actions undertaken by the Company to preserve liquidity in the first half of fiscal 2020 as a result of COVID-19, including temporary reductions in inventory purchases, temporary extension of payment terms, and reduced capital expenditures. Additionally, during the first and second quarters of fiscal 2020, the Company renegotiated terms with landlords as a result of the COVID-19 pandemic, which resulted in the deferral of approximately $11,900 of certain cash lease payments. Of the $11,900 of deferred cash lease payments, approximately $3,600 was repaid during the first half of fiscal 2021, and the remaining balance of $1,100 is expected to be repaid in the second half of fiscal 2021.

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

October 2,

September 26,

    

2021

    

2020

Net cash provided by operating activities

$

24,977

$

91,183

Less: Additions to property and equipment

 

(14,585)

 

(6,864)

Free cash flow

$

10,392

$

84,319

Senior Secured Term Loan Facility

On April 6, 2012, the Company, 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 November 25, 2020, the Company entered into Amendment No. 7 (the “Seventh Amendment”) to the Senior Secured Term Loan Facility. In connection with the Seventh Amendment, the Company (a) paid down approximately $47,200 of the outstanding loans under the Senior Secured Term Loan Facility, which reduced the aggregate principal amount of the loans under the facility to $200,000 and (b) amended the Senior Secured Term Loan Facility to, among other things, extend the maturity date to January 31, 2026 and impose a 1.00% premium if a voluntary prepayment is made from the proceeds of a repricing transaction within the one year anniversary of the Seventh Amendment. The Company is required to make quarterly amortization payments of $500 on the term loan facility, with the balloon payment for the remaining balance due on January 31, 2026. Prior to the date of delivery of a compliance certificate for the fiscal quarter ended October 2, 2021, the applicable interest rate margin for LIBOR loans was 4.75%, subject to a LIBOR floor of 1.00%, and 3.75% for base rate loans and, thereafter, may step up to 5.00% for LIBOR Loans and 4.00% for base rate loans unless the consolidated leverage ratio achieved is less than or equal to 2.75 to 1.00. As of October 2, 2021, the aggregate principal amount in outstanding borrowings under the Senior Secured Term Loan Facility was $166,065, net of deferred financing costs, and the consolidated leverage ratio was less than 1.00.

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 Company 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 October 2, 2021, 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.

33

Revolving Credit Facility

On April 6, 2012, the Company, 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”). On November 25, 2020, the Company entered into Amendment No. 5 (the “Fifth Amendment”). The Fifth Amendment amends the Revolving Credit Facility to extend the maturity date to the earlier of (a) November 25, 2025 and (b) October 31, 2025 if any portion of the Senior Secured Term Loan Facility remains outstanding on such date and the maturity date of the Senior Secured Term Loan Facility is not extended.

The aggregate principal amount of the facility is $100,000. Borrowings under the Revolving Credit Facility accrue interest at LIBOR+1.25%. In addition, the Revolving Credit Facility includes an uncommitted incremental revolving facility in the amount of $50,000, which is subject to receipt of lender commitments and satisfaction of specified conditions.

The Revolving Credit Facility provides that proceeds are to be used for working capital and other general corporate purposes, and allows for swing line advances of up to $15,000 and the issuance of letters of credit of up to $40,000.

The availability of credit at any given time under the Revolving Credit Facility is limited by reference to a borrowing base formula based upon numerous factors, including the value of eligible inventory, eligible accounts receivable, and reserves established by the administrative agent. As a result of the borrowing base formula, the actual borrowing availability under the Revolving Credit Facility could be less than the stated amount of the Revolving Credit Facility (as reduced by the actual borrowings and outstanding letters of credit under the Revolving Credit Facility).

The Revolving Credit Facility is secured by (a) a first-priority security interest in substantially all of our personal property, consisting of inventory, accounts receivable, cash, deposit accounts, and other general intangibles, and (b) a second-priority security interest in the collateral that secures the Senior Secured Term Loan Facility on a first-priority basis, as described above (excluding stock in foreign subsidiaries in excess of 65%, and assets of non-guarantor subsidiaries and subject to certain other exceptions). Obligations under the Revolving Credit Facility are guaranteed by the Company 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 October 2, 2021, 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 $12,557 as of October 2, 2021) revolving credit facility (the “2019 Original Revolving Facility”), (ii) upon Elfa’s request, an additional SEK 115.0 million (approximately $13,128 as of October 2, 2021) 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 $2,854 as of October 2, 2021), 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%.

34

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 October 2, 2021, 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 2020 Annual Report on Form 10-K.

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 2020 Annual Report on Form 10-K. As of October 2, 2021, there were no significant changes to any of our critical accounting policies and estimates.

Contractual obligations

There were no material changes to our contractual obligations from those disclosed in our 2020 Annual Report on Form 10-K.

Off-Balance Sheet Arrangements

There have been no material changes to our off-balance sheet arrangements as disclosed in our 2020 Annual Report on Form 10-K.

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

Not applicable.

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.

35

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 October 2, 2021.

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 October 2, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 2020 Annual Report on Form 10-K.

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.

36

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

01/10/14

3.2

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

8-K

001-36161

3.1

09/08/21

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

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

*

101.SCH

Inline XBRL Taxonomy Extension Schema Document

*

101.CAL

Inline XBRL Taxonomy Calculation Linkbase Document

*

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

*

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

*

101.PRE

Inline XBRL Taxonomy Extension Presentation

*

104

Cover Page Interactive Data File – formatted as Inline XBRL and contained in Exhibit 101

*

*     Filed herewith.

**   Furnished herewith.

37

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)

Date: November 3, 2021

\s\ Jeffrey A. Miller

Jeffrey A. Miller

Chief Financial Officer (duly authorized officer and Principal Financial Officer)

Date: November 3, 2021

\s\ Kristin Schwertner

Kristin Schwertner

Chief Accounting Officer (Principal Accounting Officer)

38