Upgrade to SI Premium - Free Trial

Form 10-Q Container Store Group, For: Jul 02

August 3, 2022 7:55 AM
00001411688--04-012022Q1falseContainer Store Group, Inc.0001411688tcs:StockRepurchaseProgramMemberus-gaap:SubsequentEventMember2022-08-010001411688us-gaap:CommonStockMember2022-04-032022-07-020001411688us-gaap:CommonStockMember2021-04-042021-07-030001411688us-gaap:RetainedEarningsMember2022-07-020001411688us-gaap:AdditionalPaidInCapitalMember2022-07-020001411688us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-07-020001411688us-gaap:RetainedEarningsMember2022-04-020001411688us-gaap:AdditionalPaidInCapitalMember2022-04-020001411688us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-04-020001411688us-gaap:RetainedEarningsMember2021-07-030001411688us-gaap:AdditionalPaidInCapitalMember2021-07-030001411688us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-07-030001411688us-gaap:RetainedEarningsMember2021-04-030001411688us-gaap:AdditionalPaidInCapitalMember2021-04-030001411688us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-04-030001411688us-gaap:CommonStockMember2022-07-020001411688us-gaap:CommonStockMember2022-04-020001411688us-gaap:CommonStockMember2021-07-030001411688us-gaap:CommonStockMember2021-04-030001411688tcs:AmendedAndRestatedIncentiveAwardPlan2013Member2022-06-012022-06-010001411688tcs:TimeBasedRestrictedSharesMembertcs:AmendedAndRestatedIncentiveAwardPlan2013Member2022-06-012022-06-010001411688us-gaap:PerformanceSharesMember2022-06-012022-06-010001411688us-gaap:IntersegmentEliminationMembertcs:ElfaMember2022-04-032022-07-020001411688us-gaap:IntersegmentEliminationMembertcs:ElfaMember2021-04-042021-07-030001411688us-gaap:AccumulatedOtherComprehensiveIncomeMember2022-04-032022-07-020001411688us-gaap:AccumulatedOtherComprehensiveIncomeMember2021-04-042021-07-030001411688us-gaap:ForeignExchangeContractMember2022-04-032022-07-020001411688us-gaap:AccumulatedTranslationAdjustmentMember2022-04-032022-07-020001411688us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2022-04-032022-07-020001411688us-gaap:RetainedEarningsMember2022-04-032022-07-020001411688us-gaap:RetainedEarningsMember2021-04-042021-07-030001411688tcs:LgpMembersrt:MaximumMember2021-04-030001411688us-gaap:RevolvingCreditFacilityMemberus-gaap:FairValueInputsLevel2Member2022-07-020001411688us-gaap:FairValueInputsLevel2Memberus-gaap:SecuredDebtMember2022-07-020001411688us-gaap:FairValueInputsLevel2Membertcs:FinanceLeaseObligationsMember2022-07-020001411688tcs:The2019ElfaRevolvingCreditFacilityMemberus-gaap:FairValueInputsLevel2Member2022-07-020001411688us-gaap:FairValueInputsLevel2Member2022-07-020001411688us-gaap:FairValueInputsLevel2Memberus-gaap:SecuredDebtMember2022-04-020001411688us-gaap:FairValueInputsLevel2Membertcs:FinanceLeaseObligationsMember2022-04-020001411688tcs:The2019ElfaRevolvingCreditFacilityMemberus-gaap:FairValueInputsLevel2Member2022-04-020001411688us-gaap:FairValueInputsLevel2Member2022-04-020001411688us-gaap:FairValueInputsLevel2Memberus-gaap:SecuredDebtMember2021-07-030001411688us-gaap:FairValueInputsLevel2Membertcs:FinanceLeaseObligationsMember2021-07-030001411688tcs:The2019ElfaRevolvingCreditFacilityMemberus-gaap:FairValueInputsLevel2Member2021-07-030001411688us-gaap:FairValueInputsLevel2Member2021-07-030001411688us-gaap:StandbyLettersOfCreditMember2022-07-020001411688srt:MinimumMember2022-07-020001411688srt:MaximumMember2022-07-020001411688srt:ScenarioPreviouslyReportedMember2021-04-042021-07-030001411688srt:ScenarioForecastMemberus-gaap:SellingGeneralAndAdministrativeExpensesMemberus-gaap:SubsequentEventMember2022-07-032022-10-010001411688srt:ScenarioForecastMemberus-gaap:SubsequentEventMember2022-07-032022-10-010001411688us-gaap:OtherCurrentAssetsMemberus-gaap:FairValueInputsLevel2Memberus-gaap:FairValueMeasurementsRecurringMember2021-07-030001411688srt:MinimumMemberus-gaap:ForeignExchangeForwardMember2022-04-032022-07-020001411688srt:MaximumMemberus-gaap:ForeignExchangeForwardMember2022-04-032022-07-020001411688srt:MinimumMemberus-gaap:ForeignExchangeForwardMember2021-04-042021-07-030001411688srt:MaximumMemberus-gaap:ForeignExchangeForwardMember2021-04-042021-07-030001411688us-gaap:ForeignExchangeForwardMemberus-gaap:NotDesignatedAsHedgingInstrumentEconomicHedgeMember2022-04-032022-07-020001411688us-gaap:ForeignExchangeContractMemberus-gaap:CashFlowHedgingMemberus-gaap:DesignatedAsHedgingInstrumentMember2022-04-032022-07-0200014116882021-04-030001411688srt:RestatementAdjustmentMembertcs:ClosetWorksMember2021-12-300001411688srt:ScenarioPreviouslyReportedMembertcs:ClosetWorksMember2021-12-3000014116882021-12-300001411688srt:ScenarioPreviouslyReportedMembertcs:ClosetWorksMember2021-12-302021-12-300001411688srt:RestatementAdjustmentMembertcs:ClosetWorksMember2021-12-302021-12-3000014116882021-12-302021-12-300001411688tcs:ClosetWorksMember2021-12-302021-12-300001411688tcs:ClosetWorksMember2021-12-300001411688us-gaap:FairValueMeasurementsRecurringMember2022-07-020001411688us-gaap:FairValueMeasurementsRecurringMember2022-04-020001411688us-gaap:FairValueMeasurementsRecurringMember2021-07-030001411688us-gaap:OperatingSegmentsMembertcs:TCSMember2022-07-020001411688us-gaap:OperatingSegmentsMembertcs:ElfaMember2022-07-020001411688us-gaap:IntersegmentEliminationMember2022-07-020001411688us-gaap:OperatingSegmentsMembertcs:TCSMember2021-07-030001411688us-gaap:OperatingSegmentsMembertcs:ElfaMember2021-07-030001411688us-gaap:IntersegmentEliminationMember2021-07-030001411688us-gaap:ForeignExchangeContractMemberus-gaap:CashFlowHedgingMemberus-gaap:DesignatedAsHedgingInstrumentMember2022-07-020001411688us-gaap:EmployeeStockOptionMember2022-04-032022-07-020001411688tcs:NonVestedRestrictedStockAwardsMember2022-04-032022-07-020001411688us-gaap:EmployeeStockOptionMember2021-04-042021-07-030001411688tcs:NonVestedRestrictedStockAwardsMember2021-04-042021-07-030001411688us-gaap:AdditionalPaidInCapitalMember2022-04-032022-07-020001411688us-gaap:AdditionalPaidInCapitalMember2021-04-042021-07-030001411688us-gaap:ForeignExchangeContractMember2022-07-020001411688us-gaap:AccumulatedTranslationAdjustmentMember2022-07-020001411688us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2022-07-020001411688us-gaap:ForeignExchangeContractMember2022-04-020001411688us-gaap:AccumulatedTranslationAdjustmentMember2022-04-020001411688us-gaap:AccumulatedDefinedBenefitPlansAdjustmentMember2022-04-020001411688tcs:ElfaMember2022-07-020001411688srt:RestatementAdjustmentMember2021-04-042021-07-030001411688us-gaap:OtherCurrentAssetsMemberus-gaap:FairValueMeasurementsRecurringMember2022-07-020001411688us-gaap:OtherCurrentAssetsMemberus-gaap:FairValueMeasurementsRecurringMember2022-04-020001411688us-gaap:OtherCurrentAssetsMemberus-gaap:FairValueMeasurementsRecurringMember2021-07-030001411688us-gaap:OperatingSegmentsMembertcs:TCSMember2022-04-032022-07-020001411688us-gaap:OperatingSegmentsMembertcs:ElfaMember2022-04-032022-07-020001411688us-gaap:IntersegmentEliminationMember2022-04-032022-07-020001411688us-gaap:OperatingSegmentsMembertcs:TCSMember2021-04-042021-07-030001411688us-gaap:OperatingSegmentsMembertcs:ElfaMember2021-04-042021-07-030001411688us-gaap:IntersegmentEliminationMember2021-04-042021-07-0300014116882021-04-042021-07-0300014116882022-07-0200014116882022-04-0200014116882021-07-0300014116882022-07-2900014116882022-04-032022-07-02xbrli:sharesiso4217:USDutr:sqfttcs:countryxbrli:pureiso4217:USDxbrli:sharestcs:segmenttcs:statetcs:store

Table of Contents

y

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 July 2, 2022

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 51,533,476 shares of its common stock outstanding as of July 29, 2022.

Table of Contents

TABLE OF CONTENTS

PART I.

FINANCIAL INFORMATION

Item 1.

Financial statements

Unaudited consolidated balance sheets as of July 2, 2022, April 2, 2022, and July 3, 2021

3

Unaudited consolidated statements of operations for the thirteen weeks ended July 2, 2022 and July 3, 2021

5

Unaudited consolidated statements of comprehensive income for the thirteen weeks ended July 2, 2022 and July 3, 2021

6

Unaudited consolidated statements of cash flows for the thirteen weeks ended July 2, 2022 and July 3, 2021

7

Unaudited consolidated statements of shareholders’ equity for the thirteen weeks ended July 2, 2022 and July 3, 2021

8

Notes to the unaudited consolidated financial statements

9

Item 2.

Management’s discussion and analysis of financial condition and results of operations

21

Item 3.

Quantitative and qualitative disclosures about market risk

35

Item 4.

Controls and procedures

35

PART II.

OTHER INFORMATION

Item 1.

Legal proceedings

36

Item 1A.

Risk factors

36

Item 2.

Unregistered sales of equity securities and use of proceeds

36

Item 3.

Default upon senior securities

36

Item 4.

Mine safety disclosures

36

Item 5.

Other information

36

Item 6.

Exhibits

37

2

Table of Contents

PART I.

FINANCIAL INFORMATION

Item 1.

Financial statements

The Container Store Group, Inc.

Consolidated balance sheets

July 2,

April 2,

July 3,

(In thousands)

2022

    

2022

    

2021

    

Assets

(unaudited)

(unaudited)

Current assets:

Cash

$

23,206

$

14,252

$

10,512

Accounts receivable, net

 

30,466

 

30,225

 

29,292

Inventory

 

190,752

 

192,783

 

145,041

Prepaid expenses

 

14,612

 

11,628

 

12,767

Income taxes receivable

808

1,687

93

Other current assets

 

9,826

 

9,836

 

17,538

Total current assets

 

269,670

 

260,411

 

215,243

Noncurrent assets:

Property and equipment, net

 

144,175

 

140,198

 

130,600

Noncurrent operating lease right-of-use assets

365,053

347,519

303,232

Goodwill

 

221,159

 

221,159

 

202,815

Trade names

 

221,633

 

224,938

 

228,416

Deferred financing costs, net

 

190

 

203

 

243

Noncurrent deferred tax assets, net

 

636

 

865

 

1,026

Other assets

 

1,923

 

2,284

 

2,951

Total noncurrent assets

 

954,769

 

937,166

 

869,283

Total assets

$

1,224,439

$

1,197,577

$

1,084,526

See accompanying notes.

3

Table of Contents

The Container Store Group, Inc.

Consolidated balance sheets (continued)

July 2,

    

April 2,

    

July 3,

    

(In thousands, except share and per share amounts)

2022

    

2022

    

2021

    

Liabilities and shareholders’ equity

(unaudited)

(unaudited)

Current liabilities:

Accounts payable

$

68,920

$

84,059

$

68,209

Accrued liabilities

 

81,743

 

89,004

 

80,205

Current borrowings on revolving lines of credit

 

11,541

 

1,790

 

423

Current portion of long-term debt

 

2,072

 

2,096

 

2,155

Current operating lease liabilities

54,605

52,540

48,976

Income taxes payable

 

10,464

 

6,026

 

9,938

Total current liabilities

 

229,345

 

235,515

 

209,906

Noncurrent liabilities:

Long-term debt

 

173,502

 

158,564

 

163,745

Noncurrent operating lease liabilities

332,800

317,345

280,053

Noncurrent deferred tax liabilities, net

 

48,309

 

50,493

 

48,972

Other long-term liabilities

 

6,876

 

7,564

 

12,302

Total noncurrent liabilities

 

561,487

 

533,966

 

505,072

Total liabilities

 

790,832

 

769,481

 

714,978

Commitments and contingencies (Note 7)

Shareholders’ equity:

Common stock, $0.01 par value, 250,000,000 shares authorized; 49,941,336 shares issued at July 2, 2022; 49,635,447 shares issued at April 2, 2022; 49,417,215 shares issued at July 3, 2021

 

499

 

496

 

494

Additional paid-in capital

 

875,016

 

874,190

 

870,460

Accumulated other comprehensive loss

 

(33,241)

 

(27,444)

 

(18,214)

Retained deficit

 

(408,667)

 

(419,146)

 

(483,192)

Total shareholders’ equity

 

433,607

 

428,096

 

369,548

Total liabilities and shareholders’ equity

$

1,224,439

$

1,197,577

$

1,084,526

See accompanying notes.

4

Table of Contents

The Container Store Group, Inc.

Consolidated statements of operations

Thirteen Weeks Ended

 

July 2,

July 3,

 

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

    

2022

    

2021

    

    

Net sales

$

262,634

$

245,315

Cost of sales (excluding depreciation and amortization)

 

112,546

 

98,991

Gross profit

 

150,088

 

146,324

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

 

121,909

 

110,148

Stock-based compensation

 

1,201

 

869

Pre-opening costs

 

36

 

594

Depreciation and amortization

 

9,006

 

8,201

Loss (gain) on disposal of assets

 

1

 

(5)

Income from operations

 

17,935

 

26,517

Interest expense, net

 

3,223

 

3,185

Income before taxes

14,712

 

23,332

Provision for income taxes

 

4,233

 

5,660

Net income

$

10,479

$

17,672

Net income per common share — basic

$

0.21

$

0.36

Net income per common share — diluted

$

0.21

$

0.35

Weighted-average common shares — basic

49,719,559

49,080,897

Weighted-average common shares — diluted

 

50,312,855

 

50,448,216

See accompanying notes.

5

Table of Contents

The Container Store Group, Inc.

Consolidated statements of comprehensive income

Thirteen Weeks Ended

July 2,

July 3,

(In thousands) (unaudited)

    

2022

    

2021

    

    

Net income

$

10,479

$

17,672

Unrealized (loss) gain on financial instruments, net of tax (benefit) provision of ($39) and $51

 

(113)

 

143

Pension liability adjustment

 

214

 

(57)

Foreign currency translation adjustment

 

(5,898)

 

703

Comprehensive income

$

4,682

$

18,461

See accompanying notes.

6

Table of Contents

The Container Store Group, Inc.

Consolidated statements of cash flows

Thirteen Weeks Ended

July 2,

July 3,

(In thousands) (unaudited)

    

2022

    

2021

    

    

Operating activities

Net income

$

10,479

$

17,672

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

Depreciation and amortization

9,006

 

8,201

Stock-based compensation

1,201

 

869

Loss (gain) on disposal of assets

1

 

(5)

Deferred tax (benefit) expense

(1,325)

 

5,097

Non-cash interest

471

 

470

Other

81

 

(109)

Changes in operating assets and liabilities:

Accounts receivable

(2,101)

 

110

Inventory

(59)

 

(14,494)

Prepaid expenses and other assets

(2,415)

 

(4,183)

Accounts payable and accrued liabilities

(17,280)

 

(5,738)

Net change in lease assets and liabilities

7

(2,926)

Income taxes

5,271

 

(1,265)

Other noncurrent liabilities

(165)

 

38

Net cash provided by operating activities

3,172

3,737

Investing activities

Additions to property and equipment

(17,620)

 

(7,566)

Investments in non-qualified plan trust

(767)

(39)

Proceeds from non-qualified plan trust redemptions

60

39

Proceeds from sale of property and equipment

 

5

Net cash used in investing activities

(18,327)

 

(7,561)

Financing activities

Borrowings on revolving lines of credit

23,834

 

430

Payments on revolving lines of credit

(13,528)

 

Borrowings on long-term debt

15,000

 

5,000

Payments on long-term debt

(530)

(5,550)

Payment of taxes with shares withheld upon restricted stock vesting

(712)

(3,677)

Proceeds from the exercise of stock options

340

 

226

Net cash provided by (used in) financing activities

24,404

 

(3,571)

Effect of exchange rate changes on cash

(295)

 

220

Net increase (decrease) in cash

8,954

 

(7,175)

Cash at beginning of fiscal period

14,252

 

17,687

Cash at end of fiscal period

$

23,206

$

10,512

Supplemental information:

Purchases of property and equipment (included in accounts payable)

$

6,486

$

947

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

$

22,254

$

25,179

Additions to right-of-use assets

$

30,321

$

6,678

See accompanying notes.

7

Table of Contents

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 2, 2022

$

0.01

 

49,635,447

$

496

$

874,190

$

(27,444)

$

(419,146)

$

428,096

Net income

 

 

 

 

 

 

10,479

 

 

10,479

Stock-based compensation

 

 

 

 

1,201

 

 

 

 

1,201

Stock options exercised

73,594

1

339

340

Vesting of restricted stock awards

232,295

2

(2)

Taxes related to net share settlement of restricted stock awards

(712)

(712)

Foreign currency translation adjustment

 

 

 

 

 

(5,898)

 

 

 

(5,898)

Unrealized gain on financial instruments, net of $39 tax benefit

 

 

 

 

 

(113)

 

 

 

(113)

Pension liability adjustment

 

 

 

 

 

214

 

 

 

214

Balance at July 2, 2022

$

0.01

 

49,941,336

$

499

 

$

875,016

$

(33,241)

$

(408,667)

 

$

433,607

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)

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

See accompanying notes.

8

Table of Contents

The Container Store Group, Inc.

Notes to consolidated financial statements (unaudited)

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

July 2, 2022

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 2, 2022, filed with the Securities and Exchange Commission (“SEC”) on June 2, 2022 (the “2021 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. Consistent with our disclosures in the 2021 Annual Report on Form 10-K, the Company has revised the fiscal 2021 interim period presentation of the purchases and sales of the underlying investments held in the rabbi trust related to the nonqualified retirement plan in the Consolidated statement of cash flows from operating activities to investing activities. See “Note 1. Nature of business and summary of significant accounting policies” of the Notes to consolidated financial statements in our 2021 Annual Report on Form 10-K for additional information.

The following table presents the effects of the changes in presentation of these cash flows, compared to the previously reported Consolidated statements of cash flows:

Thirteen Weeks Ended July 3, 2021

(In thousands)(unaudited)

    

As Reported

Adjustment

As Corrected

Prepaid expenses and other assets

$

(4,183)

$

$

(4,183)

Net cash provided by operating activities

3,737

3,737

Investments in non-qualified plan trust

(39)

(39)

Proceeds from non-qualified plan trust redemptions

39

39

Net cash used in investing activities

$

(7,561)

$

$

(7,561)

All references herein to “fiscal 2022” refer to the 52-week fiscal year ending April 1, 2023, “fiscal 2021” refer to the 52-week fiscal year ended April 2, 2022, and “fiscal 2020” refer to the 53-week fiscal year ended April 3, 2021.

Description of business

Our operations consist of two reportable segments:

The Container Store, Inc. (“TCS”): 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 to accomplish their projects through an assortment of innovative products and unparalleled customer service. In 2007, The Container Store, Inc. was sold to The Container Store Group, Inc. (the “Company”), a holding company, of which a majority stake was purchased by Leonard Green and Partners, L.P. (“LGP”), with the remainder held by certain employees of The Container Store, Inc. On November 6, 2013, the Company completed the initial public offering (the “IPO”), of its common stock at which time LGP held a controlling interest in the Company as the majority shareholder. During fiscal 2020, LGP sold some of the 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.

The Container Store, Inc. consists of our retail stores, website and call center (which includes business sales), as well as our in-home services business. As of July 2, 2022, 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, through its website, responsive mobile site and application, call center and in-home design consultants. On December 30, 2021, the Company completed the acquisition of Closet Parent Company, Inc. (“Closet Works”), a designer, manufacturer and supplier of wood-based custom home storage and organization solutions, which is included in the TCS reportable segment. Closet Works, based in Chicago, Illinois, services the United

9

Table of Contents

States by offering customized solutions for closets, garages, home offices, pantries, laundry rooms, murphy beds and built-in wall units.

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 that are customizable for any area of the home. elfa® branded products are sold exclusively in the United States in The Container Store retail stores, website and call center, and Elfa sells to various retailers on a wholesale basis in approximately 30 countries around the world, with a concentration in the Nordic region of Europe.

Seasonality

The Company’s business is moderately seasonal in nature and, therefore, the results of operations for the thirteen weeks ended July 2, 2022 are not necessarily indicative of the operating results for the full year. Our storage and organization product and services offering makes us less susceptible to holiday season shopping patterns than many retailers. In fiscal 2021, sales and profitability did not follow historical patterns due to various factors, including changes in promotional strategy and cadence. Fiscal 2022 sales and profitability patterns are expected to be largely consistent with fiscal 2021.

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 adopted this standard in the first quarter of fiscal 2022. The adoption of this standard did not result in a material impact to the Company’s financial statements.

10

Table of Contents

2.  Detail of certain balance sheet accounts

July 2,

April 2,

July 3,

    

2022

    

2022

    

2021

Accounts receivable, net:

Trade receivables, net

$

18,272

$

19,170

$

16,801

Credit card receivables

 

10,261

 

9,308

 

10,362

Other receivables

 

1,933

 

1,747

 

2,129

$

30,466

$

30,225

$

29,292

Inventory:

Finished goods

$

182,523

$

186,025

$

140,171

Raw materials

 

6,902

 

5,769

 

4,235

Work in progress

 

1,327

 

989

 

635

$

190,752

$

192,783

$

145,041

Accrued liabilities:

Accrued payroll, benefits and bonuses

$

21,795

$

32,316

$

24,831

Unearned revenue

24,747

22,603

21,579

Accrued transaction and property tax

14,306

15,056

13,536

Gift cards and store credits outstanding

12,441

11,921

10,340

Accrued sales returns

4,170

3,197

3,428

Accrued interest

188

121

91

Other accrued liabilities

4,096

3,790

6,400

$

81,743

$

89,004

$

80,205

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. Unearned revenue was $22,603 as of April 2, 2022, and $17,309 was subsequently recognized into revenue for the thirteen weeks ended July 2, 2022. Gift cards and store credits outstanding was $11,921 as of April 2, 2022, and $1,440 was subsequently recognized into revenue for the thirteen weeks ended July 2, 2022. See Note 11 for disaggregated revenue disclosures.

3. Leases

We conduct all of our U.S. operations from leased facilities that include our corporate headquarters, distribution centers, manufacturing facilities, and 94 store locations. The corporate headquarters, distribution centers, manufacturing facilities, and stores are leased under operating leases that generally expire over the next 1 to 15 years. We also lease computer hardware under operating leases that generally expire over the next few years. In most cases, management expects that in the normal course of business, leases will be renewed or replaced by other leases. The Company also has finance leases at our Elfa segment which are immaterial.

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

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

 

Upon lease commencement, we recognize the lease liability measured at the present value of the fixed future minimum lease payments. We have elected the practical expedient to not separate lease and non-lease components. Therefore, lease payments included in the measurement of the lease liability include all fixed payments in the lease arrangement. We record a right-of-use asset for an amount equal to the lease liability, increased for any prepaid lease costs and initial

11

Table of Contents

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.

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 weeks ended July 2, 2022 and July 3, 2021 were as follows:

Thirteen Weeks Ended

July 2, 2022

July 3, 2021

Operating lease costs

$

22,304

$

21,840

Variable lease costs

 

369

 

300

Total lease costs

$

22,673

$

22,140

We do not have sublease income and do not recognize lease assets or liabilities for short-term leases, defined as operating leases with initial terms of less than 12 months. Our short-term lease costs were not material for the thirteen weeks ended July 2, 2022 and July 3, 2021.

Weighted average remaining operating lease term and incremental borrowing rate as of July 2, 2022 and July 3, 2021 were as follows:

Thirteen Weeks Ended

July 2, 2022

July 3, 2021

Weighted average remaining lease term (years)

6.9

6.7

Weighted average incremental borrowing rate

10.7

%

13.4

%

12

Table of Contents

As of July 2, 2022, future minimum lease payments under our operating lease liabilities were as follows:

    

Operating leases

Within 1 year (remaining)

$

68,386

2 years

 

90,696

3 years

 

81,315

4 years

 

73,245

5 years

 

63,261

Thereafter

 

171,666

Total lease payments

$

548,569

Less amount representing interest

161,164

Total lease liability

$

387,405

Less current lease liability

54,605

Total noncurrent lease liability

$

332,800

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

 

July 2,

July 3,

 

    

2022

    

2021

    

    

Numerator:

Net income

$

10,479

$

17,672

Denominator:

Weighted-average common shares — basic

 

49,719,559

 

49,080,897

Nonvested restricted stock awards and other dilutive securities

593,296

1,367,319

Weighted-average common shares — diluted

50,312,855

50,448,216

Net income per common share — basic

$

0.21

$

0.36

Net income per common share — diluted

0.21

0.35

Antidilutive securities not included:

Stock options outstanding

1,541,235

 

1,658,924

Nonvested restricted stock awards

252,582

33,400

13

Table of Contents

5. Closet Works Acquisition

On December 30, 2021, the Company acquired 100% of the voting equity interest in Closet Works, a leading designer, manufacturer, and supplier of custom home storage and closet organization solutions.

The acquisition date fair value of the consideration transferred totaled $21,438 of cash (subject to working capital and certain other adjustments as set forth in the purchase agreement for the acquisition). The Closet Works acquisition has been accounted for as a business combination in accordance with the requirements of ASC 805. The acquisition price has been allocated on a preliminary basis among assets acquired and liabilities assumed at fair value based on information currently available, with the excess recorded as goodwill. Prior to the finalization of the purchase price allocation, if information becomes available that would indicate it is probable that unknown events had occurred and the amounts can be reasonably estimated, such items will be included in the final purchase price allocation and may change goodwill.

The preliminary allocation of consideration to the net tangible assets acquired and liabilities assumed reflects preliminary fair value estimates and analyses using the cost and market approaches, which are subject to change within the measurement period as valuations are finalized. Thus, the following table summarizes the provisional measurements of tangible assets, liabilities, goodwill and deferred income tax assets at the acquisition date and are subject to change. During the first quarter of fiscal 2022, we had immaterial true-ups as noted below.

December 30,

December 30,

2021

2021

(as reported at April 2, 2022)

Adjustments

(as reported at July 2, 2022)

Cash

$

1,993

$

(3)

$

1,990

Accounts receivable

389

3

392

Inventory

1,300

-

1,300

Prepaid expenses

177

-

177

Property and equipment, net

2,988

-

2,988

Operating lease right-of-use assets

1,638

-

1,638

Goodwill

18,344

-

18,344

Other assets

40

-

40

Total identifiable assets acquired

26,869

-

26,869

Accounts payable

(989)

20

(969)

Accrued liabilities

(2,269)

(20)

(2,289)

Current operating lease liabilities

(446)

-

(446)

Noncurrent operating lease liabilities

(1,092)

-

(1,092)

Noncurrent deferred tax liabilities, net

(635)

-

(635)

Total liabilities

(5,431)

-

(5,431)

Total purchase price

$

21,438

$

-

$

21,438

The goodwill recorded in connection with the acquisition, which is not expected to be deductible for tax purposes, was included in our TCS segment. The goodwill recognized is attributable primarily to expected synergies and the assembled workforce of Closet Works. The Company began consolidating Closet Works upon completion of the acquisition effective December 30, 2021.

14

Table of Contents

6.  Income taxes

The provision for income taxes in the thirteen weeks ended July 2, 2022 was $4,233 as compared to a provision of $5,660 in the thirteen weeks ended July 3, 2021. The effective tax rate for the thirteen weeks ended July 2, 2022 was 28.8%, as compared to 24.3% in the thirteen weeks ended July 3, 2021. During the thirteen weeks ended July 2, 2022 and July 3, 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 global intangible low-taxed income provision.

7.  Commitments and contingencies

In connection with insurance policies and other contracts, the Company has outstanding standby letters of credit totaling $3,700 as of July 2, 2022.

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 consolidated financial statements on an individual basis or in the aggregate.

8.  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 thirteen weeks ended July 2, 2022:

Foreign

currency

Pension

Foreign

hedge

liability

currency

    

instruments

    

adjustment

    

translation

    

Total

Balance at April 2, 2022

$

51

$

(1,909)

$

(25,586)

$

(27,444)

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

37

214

(5,898)

(5,647)

Amounts reclassified to earnings, net of tax

(150)

(150)

Net current period other comprehensive (loss) income

 

(113)

 

214

 

(5,898)

 

(5,797)

Balance at July 2, 2022

$

(62)

$

(1,695)

$

(31,484)

$

(33,241)

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 9.

15

Table of Contents

9.  Foreign currency forward contracts

The Company’s international operations and purchases of its significant product lines 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.

During the thirteen weeks ended July 2, 2022 and July 3, 2021, the TCS segment used forward contracts for 100% and 82% 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 as other comprehensive income (loss) until the hedged item (inventory) is sold to the customer, at which time the deferred gain or loss is recognized through cost of sales. Any portion of a change in the foreign currency hedge instrument’s fair value that is considered to be ineffective, as defined, or that the Company has elected to exclude from its measurement of effectiveness, is immediately recorded in earnings as cost of sales. The Company assessed the effectiveness of the foreign currency hedge instruments and determined the foreign currency hedge instruments were highly effective during the thirteen weeks ended July 2, 2022 and July 3, 2021. 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 thirteen weeks ended July 2, 2022, the Company did not recognize any amount associated with the change in fair value of forward contracts not designated as hedging instruments, as the Company had none of these instruments outstanding.

The Company had a $62 loss in AOCL related to foreign currency hedge instruments at July 2, 2022, of which $57 represents an unrealized loss for settled foreign currency hedge instruments related to inventory on hand as of July 2, 2022. The Company expects the unrealized loss of $57, 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 is included in AOCL, net of taxes, presented in Note 8 of these financial statements.

10.  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 liabiliti