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The Container Store Group, Inc. Consolidated financial statements

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As filed with the Securities and Exchange Commission on September 30, 2013

Registration No. 333-            

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1



REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



THE CONTAINER STORE GROUP, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)
  5719
(Primary Standard Industrial
Classification Code Number)
  26-0565401
(I.R.S. Employer
Identification No.)

500 Freeport Parkway
Coppell, TX 75019
(972) 538-6000
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)



William A. "Kip" Tindell, III
Chairman and Chief Executive Officer
500 Freeport Parkway
Coppell, TX 75019
(972) 538-6000
(Name, address, including zip code, and telephone number, including area code, of agent for service)



Copies to:

Howard A. Sobel, Esq.
Gregory P. Rodgers, Esq.
Latham & Watkins LLP
885 Third Avenue
New York, New York 10022
Telephone: (212) 906-1200
Fax: (212) 751-4864

 

Roxane F. Reardon, Esq.
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, New York 10017-3954
(212) 455-2000



Approximate date of commencement of proposed sale to the public:    As soon as practicable after this Registration Statement is declared effective.



If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.    o

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o                          

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o                          

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o                          

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

Large accelerated filer o   Accelerated filer o
Non-accelerated filer ý
(Do not check if a smaller reporting company)
  Smaller reporting company o



CALCULATION OF REGISTRATION FEE

       
 
Title of each class of securities to be registered
  Proposed maximum aggregate
offering price(1)(2)

  Amount of registration fee(3)
 

Common Stock, $0.01 par value per share

  $200,000,000   $27,280

 

(1)   Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2)   Includes the offering price of shares of common stock that may be sold if the over-allotment option granted by the Registrant to the underwriters is exercised.

(3)   Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

   


Subject to completion, dated September 30, 2013

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

Preliminary Prospectus

                              shares

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Common stock

This is The Container Store Group, Inc.'s initial public offering. We anticipate that the initial public offering price will be between $             and $             per share. Prior to this offering, there has been no public market for our shares. After pricing this offering, we expect that the shares will trade on the New York Stock Exchange under the symbol "TCS."

We are an emerging growth company, as defined in Section 2(a) of the Securities Act, and will be subject to reduced public reporting requirements. This prospectus complies with the requirements that apply to an issuer that is an emerging growth company.

Investing in our common stock involves risks that are described in the "Risk Factors" beginning on page 15 of this prospectus.

PRICE $               A SHARE

   

    Per share     Total  
   

Public offering price

  $     $    

Underwriting discount(1)

  $     $    

Proceeds, before expenses, to us

  $     $    
   

(1)   We have agreed to reimburse the underwriters for certain expenses in connection with this offering. See "Underwriting."

We have granted the underwriters the right to purchase up to an additional         shares at the initial public offering price less the underwriting discount, within 30 days from the date of this prospectus.

Delivery of the shares will be made on or about                          , 2013.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

J.P. Morgan   Barclays   Credit Suisse

Morgan Stanley
                              BofA Merrill Lynch
                                                             Wells Fargo Securities
                                                                                            Jefferies

 

Guggenheim Securities

The date of this prospectus is                          , 2013.

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Table of contents

 
  Page

Prospectus summary

  1

Risk factors

  15

Cautionary note regarding forward-looking statements

  38

The exchange

  40

Use of proceeds

  42

Capitalization

  43

Dividend policy

  46

Dilution

  47

Selected consolidated financial data

  50

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

  55

Letter from our Chairman and Chief Executive Officer

  83

Business

  88

Management

  101

Executive compensation

  109

Certain relationships and related party transactions

  124

Principal stockholders

  128

Description of capital stock

  130

Description of indebtedness

  134

Shares eligible for future sale

  137

Material U.S. federal income tax consequences to non-U.S. holders

  140

Certain ERISA considerations

  145

Underwriting

  146

Legal matters

  154

Experts

  154

Where you can find more information

  154

Index to consolidated financial statements

  F-1

GRAPHIC

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As used in this prospectus, unless the context otherwise requires, references to:

"we," "us," "our" and "The Container Store" refer to the consolidated operations of The Container Store Group, Inc., and its consolidated subsidiaries;

"The Container Store, Inc." refer to The Container Store, Inc., a Texas corporation and our wholly-owned subsidiary;

"TCS" refer to our TCS segment, which consists of our retail stores, website and call center;

"Elfa" refer to our Elfa segment, which consists of our Sweden-based corporate group that designs and manufactures component-based shelving and drawer systems that are customizable for any area of the home, including closets, kitchens, offices and garages; and

"LGP" refer to Leonard Green & Partners, L.P.

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. Neither we nor the underwriters have authorized anyone to provide you with different information. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus, or any free writing prospectus, as the case may be, or any sale of shares of our common stock.

For investors outside the United States: We are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. Neither we nor the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside the United States.


Basis of presentation

Our fiscal year is the 52- or 53-week period ending on the Saturday closest to February 28. Our last five completed fiscal years ended on March 2, 2013, February 25, 2012, February 26, 2011, February 27, 2010 and February 28, 2009, respectively. For ease of reference, we identify our fiscal years in this prospectus by reference to the calendar year prior to the one in which the fiscal year ends. For example, "fiscal 2012" refers to our fiscal year ended March 2, 2013. The fiscal year ended March 2, 2013 included 53 weeks, whereas the fiscal years ended February 25, 2012, February 26, 2011, February 27, 2010 and February 28, 2009 included 52 weeks. The first half of fiscal 2013 ended on August 31, 2013 and the first half of fiscal 2012 ended on August 25, 2012, and both included twenty six weeks.


Presentation of certain financial measures

Certain financial measures presented in this prospectus, such as EBITDA, Adjusted EBITDA, net working capital, Adjusted EBITDA margin, comparable store sales, average ticket, four-wall Adjusted EBITDA, four-wall Adjusted EBITDA margin, total initial cash investment, pre-tax payback period and annualized return on invested capital are not recognized under accounting principles generally

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accepted in the United States, which we refer to as "GAAP." We define these terms, other than EBITDA and Adjusted EBITDA, as follows:

"net working capital" means, as of any date, current assets (excluding cash and cash equivalents) less current liabilities (excluding the current portion of long-term debt and revolving lines of credit).

"Adjusted EBITDA margin" means, for any period, the Adjusted EBITDA for that period divided by the net sales for that period.

net sales from our stores are included in "comparable store sales" beginning on the first day of the sixteenth full fiscal month following each store's opening. When a store is relocated, we continue to consider sales from that store to be comparable store sales. Net sales from our website and our call center are also included in calculations of comparable store sales.

"average ticket" for any period is calculated by dividing (a) net sales of merchandise by our TCS segment (or, if average ticket is being calculated with respect to the elfa® Custom Design Center, the net sales of merchandise from the elfa® Custom Design Center) for that period (regardless of whether such net sales are included in comparable store sales for such period) by (b) the number of transactions for that period comprising such net sales.

"four-wall Adjusted EBITDA" means, for any period for a given store, the Adjusted EBITDA for that period for that store, before allocation of corporate selling, general and administrative expenses allocated to that store.

"four-wall Adjusted EBITDA margin" means, for any period for a given store, the four-wall Adjusted EBITDA for that period for that store, divided by the net sales for that period for that store.

"total initial cash investment" means, for a given store, our initial cash investment in that store, which consists of initial inventory, pre- and grand opening expenses and capital investment, net of tenant allowances.

"pre-tax payback period" means, for a given store, the number of years it takes for the cumulative four-wall Adjusted EBITDA from that store from its opening to equal our total initial cash investment in that store. For stores that have not paid back yet, we assume that the future four-wall future Adjusted EBITDA for that store will be comparable to its historical four-wall Adjusted EBITDA.

"annualized return on invested capital" means, for a given store, a percentage calculated by dividing (a) the total four-wall Adjusted EBITDA for that store from the store opening date through the end of the most recently completed fiscal year by (b) our total initial cash investment in that store, and dividing that quotient by the number of years that store has been open.

For definitions of EBITDA and Adjusted EBITDA and reconciliations of those measures to the most directly comparable GAAP measures, see "Summary Historical Consolidated Financial and Other Data." The use of certain of these measures is also discussed under "Management's Discussion and Analysis of Financial Condition and Results of Operations—How We Assess the Performance of Our Business."


Trademarks, trade names and service marks

This prospectus includes our trademarks, trade names and service marks, such as "The Container Store," "Contain Yourself" and "elfa," which are protected under applicable intellectual property

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laws and are our property. This prospectus also contains trademarks, trade names and service marks of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ®, TM or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, trade names and service marks. We do not intend our use or display of other parties' trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.


Market and industry data

Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate is based on information from independent industry and research organizations and other third-party sources (including industry publications, surveys and forecasts), and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data and our knowledge of such industry and markets, which we believe to be reasonable. Although we believe the data from these third-party sources is reliable, we have not independently verified any third-party information. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in "Risk Factors." These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

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Prospectus summary

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should read this entire prospectus carefully, especially the "Risk Factors" section beginning on page 15 and our consolidated financial statements and the related notes appearing at the end of this prospectus, before making an investment decision.

Company overview

We are the leading specialty retailer of storage and organization products in the United States, with over $700 million of net sales in fiscal 2012. We are the original storage and organization specialty retailer and the only national retailer solely devoted to the category. Our goal is to help provide order to an increasingly busy and chaotic world. We provide creative, multifunctional, customizable storage and organization solutions that help our customers save time, save space and improve the quality of their lives. We believe our commitment to the category, breadth of product assortment, passionate employees and focus on solutions-based selling create a long-lasting bond with our customers and foster devotion to The Container Store brand. As a result, we continue to expand our base of passionate, enthusiastic and loyal customers, which we believe will further drive our growth and profitability.

We foster an employee-first culture built around our Foundation Principles, which are described on the inside front cover of this prospectus and in the letter from William A. "Kip" Tindell, III, our Chairman and Chief Executive Officer, to prospective shareholders appearing on page 83. The Foundation Principles define how we approach our relationships with our employees, vendors, customers and communities and influence every aspect of our business.

Our business was established with one store in Dallas, Texas in 1978. Today our operations consist of two reporting segments:

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

Elfa, based in Malmö, Sweden, which designs and manufactures component-based shelving and drawer systems that are customizable for any area of the home, including closets, kitchens, offices and garages. In addition to supplying our TCS segment, which is the exclusive distributor of elfa® branded products in the United States, Elfa sells to various retailers and distributors in more than 30 other countries around the world on a wholesale basis. In fiscal 2012, the Elfa segment had $94 million of third party net sales, which represented approximately 13% of our total net sales.

As of September 1, 2013, we operated 61 stores with an average size of approximately 19,000 selling square feet in 22 states and the District of Columbia. In fiscal 2012, our TCS net sales were derived from approximately 10,500 unique stock keeping units ("SKUs") organized into 16 distinct lifestyle departments sourced from approximately 700 vendors around the world. The breadth, depth and quality of our product offerings are designed to appeal to a broad demographic, including our core customers, who are predominantly female, affluent, highly educated and busy.

 

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The passion and dedication of our employees, management team and vendor network allows us to successfully execute our business strategy. We believe our culture and conscious business approach ultimately drive our strong financial performance, as demonstrated by:

thirteen consecutive quarters (through August 2013) of positive comparable store sales growth;

consistently improving profitability, with Adjusted EBITDA margin increasing from 8.5% in fiscal 2008 to 12.4% in fiscal 2012; and

strong new store performance, with an average four-wall Adjusted EBITDA margin of 21.5% in the first twelve months of operation and an average pre-tax payback period of approximately 2.5 years for our 12 new stores that opened from fiscal 2008 through fiscal 2011.

As described in our "Management's Discussion and Analysis of Financial Condition and Results of Operations," we experienced GAAP net losses of $45.1 million, $30.7 million, $0.1 million and $0.7 million in fiscal 2010, fiscal 2011, fiscal 2012 and the first twenty six weeks of fiscal 2013, respectively. The net losses in fiscal 2010, fiscal 2011 and fiscal 2012 are inclusive of intangible asset impairments at our Elfa segment in the amounts of $52.4 million, $47.0 million, $15.5 million in fiscal 2010, fiscal 2011 and fiscal 2012, respectively.

Our competitive strengths

Deep-rooted, employee-first culture.    We believe our highly-trained, experienced and motivated employees are critical to delivering our solutions-based retail experience to our customers. Taking care of our employees is The Container Store's top priority, so we continually invest in their recruitment, training and overall job satisfaction. We believe that these investments result in high employee retention rates, inspired service and an enhanced customer experience that differentiates us from other retailers.

We are highly selective in our hiring process, typically hiring less than 4% of annual applicants, and often our new employees are existing customers. We train our employees extensively and continuously throughout their employment. Each new full-time store employee receives more than 260 hours of formal training in their first year alone, which we believe to be far beyond the industry average. Training focuses on our culture, leadership skills, product knowledge, space design skills and operational skills. In addition, we offer flexible work schedules, comprehensive benefits and above industry average compensation to both full and part-time employees. As a result, we have an average full-time employee turn-over rate of approximately 10% annually, compared to the retail industry average of over 100%, and we have been recognized in FORTUNE Magazine's list of "100 Best Companies To Work For®" in each of the last 14 years.

An unmatched collection of storage and organization products.    We offer our customers storage and organization solutions through an extensive and carefully curated assortment of creative and original products at competitive prices. We accomplish this in three principal ways:

Highly experienced buying team—Our buying team is responsible for sourcing all of our products and averages 15 years tenure at The Container Store. To ensure that our merchandise remains fresh and on-trend, our buying team frequently works directly with vendors to create high quality and differentiated new products exclusively for The Container Store, often based on direct feedback from our customers. The buying team also introduces approximately 2,000 new SKUs on average into our assortment each year.

 

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Deep vendor relationships—We strive to form meaningful, long-lasting relationships with all of our vendors. We have been developing and refining our distinctive relationship-focused approach to our vendors for over 35 years. We do not view vendor negotiations as a zero-sum game, but rather as an opportunity to develop mutually beneficial relationships, which we believe has created a unique sense of loyalty among our vendors. We estimate that over half of our net sales in fiscal 2012 were generated from merchandise exclusive to The Container Store, and we believe that only a small portion of our merchandise is carried by other national retailers. Our strong vendor relationships benefit us in a number of ways, including an increased number of exclusive products, competitive pricing and favorable payment terms.

The elfa® advantage—We are the exclusive distributor of elfa® products in the United States. elfa® is both our highest sales volume and, by virtue of our vertical integration, our highest gross margin department. Each of our stores includes an elfa® Custom Design Center where our highly trained experts can assist customers in designing and installing a customized storage solution. In fiscal 2012, the elfa® department represented approximately $141 million, or approximately 23%, of TCS net sales, which included approximately $106 million of elfa® Custom Design Center net sales with an average ticket of $583.01. This compares to an average ticket for the entire TCS segment of $57.34.

Highly-differentiated shopping experience.    We place great emphasis on creating an inviting and engaging store experience. Our customers often come to The Container Store knowing that they have a storage and organization challenge, but without a clear plan of how to address and solve their underlying issue. Our highly-trained salespeople seek to interact with our customers, asking questions, listening and learning from them so that they can understand the complete scope of their needs. This allows us to provide our customers with creative, tailored, comprehensive and multifunctional solutions, often utilizing multiple products from many of the 16 distinct lifestyle departments in our stores. This selling approach allows us to sell a broader range of products and to deliver a differentiated experience to our customers, which we believe results in a higher average ticket, repeat visits and frequent referrals to other potential customers.

Our interactive customer service experience is further enhanced by a variety of additional service offerings, including our elfa® Installation Service, GoShop! Click & Pickup (in which a customer orders online and picks up at a store with curbside delivery to the customer's car in most markets) and GoShop! Scan & Deliver in the Manhattan market (in which a customer simply scans her products with a hand-held device, checks out, after which the merchandise is delivered to her home). These services and, in the case of GoShop! Click & Pickup and GoShop! Scan & Deliver, advanced technologies, provide additional convenience and flexibility to our customers and reinforce our commitment to providing a differentiated shopping experience.

Proven real estate site selection process. We seek to locate our stores in highly desirable retail developments surrounded by dense concentrations of our core customers. We maintain a disciplined approach to new store development and perform comprehensive market research before selecting a new site based on customer demographics from eSite, an independent customer analytics research firm, and data from our customer database to identify existing customers. Additionally, we maintain a flexible cost structure that allows us to achieve consistent four-wall Adjusted EBITDA margins across a range of store sales volumes and successfully operate stores in a variety of markets. Our data-driven approach, premium locations and flexible new store model have resulted in strong performance across our store base. We have never closed or relocated a store due to underperformance.

 

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We have deep relationships with best-in-class commercial real estate firms and believe that we are a sought-after tenant given our brand and the high volume of affluent customers that visit our stores. As a result, we continue to have access to desirable retail sites on attractive terms.

Powerful brand with strong customer loyalty.    We believe that The Container Store brand has become synonymous with the storage and organization category and an organized, stress-reduced lifestyle. The strength of our brand is built on our history as the originator and leader of the storage and organization category, our best-in-class product offerings and our commitment to our employees, vendors, customers and communities. We believe that this makes us the preferred retail destination for storage and organization solutions.

We have achieved nationwide recognition attributable in part to numerous news and media impressions. We are consistently presented with opportunities to showcase our brand on a national stage. Notable publicity includes appearances on "Oprah's Favorite Things" in her farewell season in 2010 and on "Ellen's 12 Days of Christmas" in 2012. In addition, we received the National Retail Federation's Gold Medal Award for excellence in 2011. The prominence of our brand has also led to a significant number of unpaid media impressions, including print mentions in newspapers and magazines with more than 520 million readers and television broadcast mentions on shows with more than 270 million viewers in 2012. We also enjoy a strong following on various social media outlets including Facebook (over 235,000 "likes"), Twitter (over 21,000 followers) and Pinterest (over 28,000 followers), in each case as of September 1, 2013.

Highly experienced and passionate management team with proven track record.    Led by our Chairman and Chief Executive Officer, William A. "Kip" Tindell, III, our senior management team averages over 17 years with The Container Store, and is responsible for our proven track record of growth and consistent performance. Both Kip and Sharon Tindell, our Chief Merchandising Officer, have been inducted into the Retailing Hall of Fame. Melissa Reiff, our President and Chief Operating Officer, joined the team in 1995 and has been instrumental in elevating and leading the organization through its sizable expansion over the past two decades. Kip, Sharon, Melissa and the rest of the management team are dedicated to maintaining our employee-first culture and crafting mutually beneficial relationships with all of our stakeholders, which we believe will lead to continued growth and value creation in the future.

Our growth strategy

The key elements of our growth strategy include:

Expanding our store base.    We believe that our expansion opportunities in the United States are significant. Our current footprint of 62 stores extends to 22 states and the District of Columbia. We expect to open six new stores during fiscal 2013 (including one store relocation), five of which have already opened, and an additional seven new stores in fiscal 2014 (including one store relocation). Based on research conducted for us by eSite, we believe that we can grow our current U.S. store footprint to at least 300 stores in our current format by adding more stores in new and existing markets. The rate of future store additions in any particular period is inherently uncertain and is subject to numerous factors that are outside of our control. As a result, we do not currently have an anticipated timeframe for such expansion. We have adopted a disciplined expansion strategy designed to leverage the strength of our business model and nationally recognized brand name to successfully develop new stores in an array of markets that are primed for growth, including new,

 

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existing, small and large markets. While our current expansion focus is on domestic markets, we believe international expansion may provide additional growth opportunities for us in the future.

Historically, our new store openings have been highly successful due in part to our new store opening execution strategy, which involves months of hiring, training and preparation and culminates in a multi-day grand opening celebration in partnership with a local charity. This distinctive approach enables our new stores to deliver strong sales volumes quickly and results in shorter new store pre-tax payback periods. The average four-wall Adjusted EBITDA margin was 21.5% in the first twelve months of operation and the average pre-tax payback period was approximately 2.5 years for our 12 new stores that opened from fiscal 2008 through fiscal 2011.

Driving comparable store sales growth.    We have achieved positive comparable store sales growth in each of the past thirteen fiscal quarters (through August 2013) and have increased our average ticket by 12.8% during the same period. We believe that we can continue to grow our comparable store sales by driving store traffic, improving customer conversion and growing our average ticket by continuing to provide a differentiated shopping experience through our solutions-based selling approach, new product and service introductions and well-maintained stores. Our employees receive continuous training on our products to ensure that our customers are sold complete solutions rather than individual products. We also believe that our high levels of service will continue to drive increased sales of products in our higher margin elfa® department and complete space design solutions. We believe that these factors, combined with our continuous focus on further increasing brand awareness, will attract new customers and increase loyalty with existing customers.

Enhancing and growing multi-channel presence.    In addition to our retail stores, we also offer our products directly to our customers through our fully-integrated website and call center, which collectively accounted for 5.4% of TCS net sales in fiscal 2012. Through continual technology enhancements and innovative services, such as GoShop! Click & Pickup, we believe we are well positioned for continued growth in our direct sales channels. Our website and call center sales have increased 84% from fiscal 2008 to fiscal 2012, including 25% growth in fiscal 2012.

Increasing brand awareness.    We will continue to promote our brand by constantly communicating our message of organized and stress-reduced living to our current and potential customers. We do this through our comprehensive marketing strategy, which includes direct mail, advertising, online, public relations and social media. Our Customer Relationship Management ("CRM") strategy allows us to target our marketing efforts through direct mail and email. This strategy is supported by our customer database of over 14 million customer households, which includes customer transaction data and demographic overlays that help us better understand customer behaviors and identify opportunities. Additionally, our marketing and brand building efforts are enhanced by an on-going dialogue with our customers through growing social and mobile channels including Facebook, Twitter, Pinterest and Instagram.

As a part of our commitment to Conscious Capitalism®, we focus on serving the local communities in which we operate. We provide donations, gift cards and storage and organization makeovers to a variety of local non-profit organizations to show our support for the organizations that are important to our customers. Additionally, when opening each new store, we partner with a prominent local non-profit organization, working together to welcome the new store to the community. We host a grand opening party on the Thursday night before the Saturday on which the store opens, and donate 10% of our initial Saturday and Sunday sales from that new store to our non-profit partner.

 

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As we continue to grow our store base, we plan to continue our active partnerships with local non-profit organizations in order to build a sense of community with our customers and promote The Container Store brand.

Improving profitability.    We believe that the expected expansion of our store base and the expected growth in comparable store sales will result in improved Adjusted EBITDA margins as we take advantage of economies of scale in product sourcing and leverage our existing infrastructure, supply chain, corporate overhead and other fixed costs. We also expect to maintain our disciplined pricing approach, which involves strategic promotional campaigns with limited use of traditional markdowns or discounting.

Our market

We operate within the storage and organization category, which extends across many retail segments including housewares, office supplies and travel, among others. This category is highly fragmented and The Container Store is the only national retailer solely devoted to it. We have little direct competition from other national or regional retailers in the storage and organization market. Certain national mass merchants, specialty, and online retailers carry some storage and organization products. However, they typically devote only a limited portion of their merchandise to the category comprising a small subset of the products offered by The Container Store.

We believe the category is growing and will continue to grow due, in part, to several favorable demographic trends, including (1) the desire for efficiency and organization of Baby Boomers as they become "empty nesters," (2) the generation of Baby Boomers' children driving demand for organizational products as they move into their first homes and (3) the increase of dual-income families with a need for solutions to organize and simplify their busy lives. Given The Container Store's industry leadership, unmatched product assortment, excellent customer service and national footprint, we believe we are well positioned to increase our share of this growing category.

Summary risk factors

We are subject to a number of risks, including risks that may prevent us from achieving our business objectives or that may adversely affect our business, financial condition, results of operations, cash flows and prospects. You should carefully consider the following risks, including the risks discussed in the section entitled "Risk Factors," before investing in our common stock:

an overall decline in the health of the economy and consumer spending may affect consumer purchases of discretionary items, which could reduce demand for our products and materially harm our sales, profitability and financial condition;

costs and risks related to new store openings could severely limit our growth opportunities;

if we are unable to source and market new products to meet our high standards and customer preferences or are unable to offer our customers an aesthetically pleasing shopping environment, our results of operations may be adversely affected;

we depend on a single distribution center for all our stores;

we face competition from mass merchants, specialty retail stores and internet-based competition;

 

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we have debt service obligations and may incur additional indebtedness in the future, which may require us to use a substantial portion of our cash flow to service debt and limit our financial and operating flexibility; and

our fixed lease obligations could adversely affect our financial performance.

Dividend and exchange of preferred stock

Upon the closing of this offering, a dividend in the aggregate amount of $          million, which we refer to collectively as the "Dividend," will be paid from the proceeds of this offering as follows: (i) first, on a pro rata basis to the holders of our senior preferred stock, which will reduce the liquidation preference of each such share of our senior preferred stock until such liquidation preference has been reduced to $1,000.00 per share and (ii) second, the remainder of such $          million on a pro rata basis to the holders of our junior preferred stock, which will reduce the liquidation preference of each such share of our junior preferred stock. Immediately following the payment of the Dividend, we will exchange each outstanding share of our senior and junior preferred stock for a number of shares of common stock determined by dividing (a) the liquidation preference amount of such preferred stock by (b) the initial public offering price in this offering. As of September 1, 2013, on an as adjusted basis to give effect to the reduction resulting from the Dividend, the liquidation preference per share of our senior preferred stock would have been $1,000.00 and the liquidation preference per share of our junior preferred stock would have been $             . For more information, see "The Exchange."

Principal equity holders

Upon the closing of this offering and after giving effect to the Exchange, funds affiliated with LGP will collectively hold approximately                  shares, or         %, of our outstanding common stock. It is possible that the interests of LGP may in some circumstances conflict with our interests and the interests of our other stockholders, including you. Founded in 1989, LGP is one of the nation's leading private equity firms with approximately $15 billion in equity capital under management. Based in Los Angeles, LGP has invested in over 65 companies, targeting investments in established companies that are leaders in their markets with strong management teams. LGP has extensive experience investing in retail companies, including investments in Whole Foods Market, J. Crew, PETCO Animal Supplies, BJ's Wholesale Club, Topshop, David's Bridal, Leslie's Poolmart, Jo-Ann Stores, Sports Authority, Savers, Neiman Marcus Group, Tourneau, Jetro Cash & Carry and The Tire Rack. LGP acquired its shares of our stock in 2007, in connection with transactions in which The Container Store, Inc. was sold to The Container Store Group, Inc. (f/k/a TCS Holdings, Inc.), which was majority-owned by LGP. LGP will participate in the Dividend and the Exchange on the same basis as the other holders of our preferred stock, but will not otherwise receive any compensation or equity securities in connection with the offering.

Upon the closing of this offering and after giving effect to the Exchange, Kip Tindell, our Chairman and Chief Executive Officer, his wife, Sharon Tindell, our Chief Merchandising Officer, and Melissa Reiff, our President and Chief Operating Officer, will collectively hold approximately              shares, or         % of our outstanding common stock.

Corporate information

The Container Store Group, Inc. (f/k/a TCS Holdings, Inc.), the issuer of the common stock in this offering, was incorporated as a Delaware corporation on June 29, 2007 for the purpose of acquiring

 

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our wholly owned subsidiary, The Container Store, Inc. Our corporate headquarters are located at 500 Freeport Parkway, Coppell, TX 75019. Our telephone number is (972) 538-6000. Our principal website address is www.containerstore.com. The information on any of our websites is deemed not to be incorporated in this prospectus or to be part of this prospectus.

Implications of being an emerging growth company

We qualify as an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012, or JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements that are applicable to other companies that are not emerging growth companies. Accordingly, we have included detailed compensation information for only our three most highly compensated executive officers and have not included a compensation discussion and analysis (CD&A) of our executive compensation programs in this prospectus. In addition, for so long as we are an emerging growth company, we will not be required to:

engage an auditor to report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act");

comply with any requirement that may be adopted by the Public Company Accounting Oversight Board (the "PCAOB") regarding mandatory audit firm rotation or a supplement to the auditor's report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);

submit certain executive compensation matters to shareholder advisory votes, such as "say-on-pay," "say-on-frequency" and "say-on-golden parachutes;" or

disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer's compensation to median employee compensation.

While we are an emerging growth company, Section 107(b) of the JOBS Act would also permit us to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we have irrevocably elected not to take advantage of this accommodation.

We will remain an emerging growth company until the earliest to occur of:

our reporting $1 billion or more in annual gross revenues;

our issuance, in a three year period, of more than $1 billion in non-convertible debt;

the end of the fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million on the last business day of our second fiscal quarter; and

the end of fiscal 2018.

 

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The offering

Common stock offered by us                 shares.

Underwriters' option to purchase additional shares of common stock from us

 

              shares.

Common stock to be outstanding after this offering

 

              shares (or              shares if the underwriters exercise their option to purchase additional shares in full).

 

 

In this prospectus, we have calculated the number of shares of common stock to be issued pursuant to the Exchange using the liquidation preference of the shares of our preferred stock as of September 1, 2013. Accordingly, such number does not take into account shares of common stock to be issued in the Exchange in satisfaction of the accrued liquidation preference on our preferred stock on or after September 1, 2013 and to, but excluding, the closing date of this offering. Such liquidation preference will accrue at a rate of $242,311.28 per day (which rate will increase to $249,742.16 as of October 1, 2013) in the aggregate (which would be exchanged in the Exchange for approximately              shares of our common stock per day). Such accrual of the liquidation preference compounds on a quarterly basis, and as a result, the rate of accrual will increase on the first day of the next calendar quarter. For more information, please see "Use of Proceeds" and "The Exchange" elsewhere in this prospectus.

 

 

For additional information regarding the impact of a change in the assumed initial public offering price and/or the actual closing date of this offering on the number of shares outstanding after the closing of this offering related to the exchange of our preferred stock, see "The Exchange."

Use of proceeds

 

We estimate that the net proceeds to us from this offering, after deducting the underwriting discount and estimated offering expenses, will be approximately $              million (or approximately $              million if the underwriters exercise their option to purchase additional shares in full), assuming the shares are offered at $              per share (the midpoint of the estimated price range set forth on the cover of this prospectus).

 

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    We intend to use the net proceeds that we receive from this offering as follows:

 

(i)  first, to pay a dividend to holders of our senior preferred stock, which will reduce the liquidation preference of such shares until such liquidation preference is reduced to $1,000.00 per share and (ii) second, to pay the remainder as a dividend to holders of our junior preferred stock, which will reduce the liquidation preference of such shares (see "—Dividend and Exchange of Preferred Stock" above); and

 

if the underwriters exercise their option to purchase additional shares, we intend to use the net proceeds that we receive to repay a portion of the outstanding borrowings under the Senior Secured Term Loan Facility (as such term is defined under "Description of Indebtedness").


Directed share program

 

The underwriters have reserved for sale, at the initial public offering price, up to approximately              shares of our common stock being offered for sale to our directors, officers and certain employees and other parties related to the Company. We will offer these shares to the extent permitted under applicable regulations. The number of shares available for sale to the general public in this offering will be reduced to the extent these persons purchase reserved shares. Any reserved shares not purchased will be offered by the underwriters to the general public on the same terms as the other shares.

Controlled company

 

Upon the closing of this offering and after giving effect to the Exchange, certain affiliates of LGP and certain members of management will own approximately              shares, or        %, of our outstanding common stock. As a result, we will be a "controlled company" within the meaning of the listing rules, and therefore will be exempt from certain of the corporate governance listing requirements, of the New York Stock Exchange. See "Management—Corporate Governance."

 

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Dividend policy   We currently intend to retain all available funds and any future earnings for use in the operation of our business, and therefore we do not currently expect to pay any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, capital requirements and other factors that our board of directors deems relevant. We are a holding company, and substantially all of our operations are carried out by our subsidiary, The Container Store, Inc., and its subsidiaries. The Container Store, Inc.'s ability to pay dividends to us is limited by the Revolving Credit Facility (as such term is defined under "Description of Indebtedness") and the Senior Secured Term Loan Facility, which may in turn limit our ability to pay dividends on our common stock. Our ability to pay dividends may also be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries.

Risk factors

 

Investing in shares of our common stock involves a high degree of risk. See "Risk Factors" beginning on page 15 of this prospectus for a discussion of factors you should carefully consider before investing in shares of our common stock.

Proposed New York Stock Exchange symbol

 

"TCS"

In this prospectus, the number of shares of our common stock to be outstanding after this offering is based on the number of shares of our common stock and our preferred stock outstanding as of September 1, 2013, and excludes:

40,887 shares of common stock issuable upon exercise of stock options outstanding as of September 1, 2013 at a weighted-average exercise price of $100.00 per share;

             shares of common stock reserved as of the closing date of this offering for future issuance under our 2013 Equity Plan (as defined in "Executive Compensation—Equity Incentive Plans"); and

the shares of common stock to be issued in the Exchange in satisfaction of the accrued liquidation preference on our preferred stock on and after September 1, 2013.

Unless otherwise indicated, this prospectus reflects and assumes the following:

the exchange of all outstanding shares of our preferred stock into              shares of our common stock pursuant to the Exchange (this exchange ratio has been calculated using the midpoint of the range set forth on the cover of this prospectus and the accrued liquidation preference on our preferred stock as of September 1, 2013), which will occur immediately prior to the closing of the offering;

the filing of our restated certificate of incorporation and the adoption of our amended and restated by-laws upon the closing of this offering; and

no exercise by the underwriters of their option to purchase additional shares.

See "The Exchange" for a discussion of the impact of the initial public offering price and the actual closing date of this offering on the number of shares of common stock outstanding following the offering.

 

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Summary historical consolidated financial and operating data

The following tables summarize our financial data as of the dates and for the periods indicated. We have derived the consolidated statement of operations data and consolidated balance sheet data for the fiscal years ended February 26, 2011, February 25, 2012, and March 2, 2013 from our audited consolidated financial statements for such years and for the twenty six weeks ended August 25, 2012 and August 31, 2013 from our unaudited consolidated financial statements for such periods. Our audited consolidated financial statements as of February 25, 2012 and March 2, 2013 and for the fiscal years ended February 26, 2011, February 25, 2012 and March 2, 2013 have been included in this prospectus. Our unaudited consolidated financial statements as of August 31, 2013 and for the twenty six weeks ended August 25, 2012 and August 31, 2013 have been included in this prospectus and, in the opinion of management, include all adjustments (inclusive only of normally recurring adjustments) necessary for a fair presentation. Historical results are not indicative of the results to be expected in the future and results of operations for an interim period are not necessarily indicative of results for a full year. The fiscal year ended March 2, 2013 included 53 weeks, whereas the fiscal years ended February 25, 2012 and February 26, 2011 included 52 weeks. Line items that are only applicable to our TCS segment are noted with (*) and to our Elfa segment with (+). For segment data, see Note 14 to our consolidated financial statements.

You should read the following information together with the more detailed information contained in "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the accompanying notes appearing elsewhere in this prospectus.

   
 
  Fiscal year ended   Twenty six weeks ended  
(in thousands)
  February 26,
2011

  February 25,
2012

  March 2,
2013

  August 25,
2012

  August 31,
2013

 
   

Consolidated statement of operations data:

                               

Net sales

  $ 568,820   $ 633,619   $ 706,757   $ 314,316   $ 343,419  

Cost of sales (excluding depreciation and amortization)

    235,295     266,355     291,146     131,162     142,818  
       

Gross profit

    333,525     367,264     415,611     183,154     200,601  
       

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

    269,474     293,665     331,380     155,307     169,287  

Pre-opening costs*

    1,747     5,203     7,562     4,436     3,934  

Goodwill and trade name impairment+

    52,388     47,037     15,533          

Depreciation and amortization

    24,354     27,451     29,550     14,489     15,050  

Restructuring charges+

    341     133     6,369     2,309     361  

Other expenses

        193     987     482     626  

Loss (gain) on disposal of assets

    139     210     88     (5 )   73  
       

Income (loss) from operations

    (14,918 )   (6,628 )   24,142     6,136     11,270  

Interest expense

    26,006     25,417     21,388     10,890     11,074  

Loss on extinguishment of debt*

            7,333     7,329     1,101  
       

Loss before taxes

    (40,924 )   (32,045 )   (4,579 )   (12,083 )   (905 )

Provision (benefit) for income taxes(1)

    4,129     (1,374 )   (4,449 )   (2,998 )   (217 )
       

Net loss

  $ (45,053 ) $ (30,671 ) $ (130 ) $ (9,085 ) $ (688 )
   

 

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  As of    
 
(in thousands)
  February 26,
2011

  February 25,
2012

  March 2,
2013

  August 31,
2013

   
 
   

Consolidated balance sheet data:

                               

Cash and cash equivalents

  $ 49,756   $ 51,163   $ 25,351   $ 12,744        

Net working capital(2)

    21,341     21,367     22,557     29,793        

Total assets

    773,303     746,678     752,820     754,351        

Long-term debt(3)

    300,893     300,166     285,371     370,977        

Total stockholders' equity

    268,227     232,989     233,375     139,566        
   

 

   
 
  Fiscal year   Twenty six weeks ended  
 
  February 26,
2011

  February 25,
2012

  March 2,
2013

  August 25,
2012

  August 31,
2013

 
   

Other financial data:

                               

Adjusted EBITDA (in thousands)(4)

  $ 67,707   $ 75,644   $ 87,585   $ 30,139   $ 32,719  

Adjusted EBITDA margin(5)

    11.9%     11.9%     12.4%     9.6%     9.5%  

Comparable store sales growth for the period*(6)

    8.1%     7.6%     4.4%     5.6%     2.9%  

Number of stores open at end of period*

    49     53     58     57     61  

Average ticket*(7)

  $ 53.68   $ 55.60   $ 57.34   $ 54.70   $ 57.54  
   

(1)   The difference between our effective tax rate and the statutory Federal tax rate is predominantly related to fluctuations in the valuation allowance recorded against net deferred assets not expected to be realized, the effects of foreign income taxed at a different rate and intraperiod tax allocations between continuing operations and other comprehensive income.

(2)   Net working capital is defined as current assets (excluding cash and cash equivalents) less current liabilities (excluding the current portion of long-term debt and revolving lines of credit).

(3)   Long-term debt consists of the current and long-term portions of the Senior Secured Term Loan Facility, the Elfa Term Loan Facility and other mortgages and loans.

(4)   EBITDA and Adjusted EBITDA have been presented in this prospectus 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 the Secured Term Loan Facility and the Revolving Credit Facility and is the basis 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 prospectus because they are key metrics used by management, our board of directors and LGP to assess our financial performance. EBITDA and Adjusted EBITDA are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In addition to covenant compliance and executive performance evaluations, 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.

EBITDA and Adjusted EBITDA are not GAAP measures of our financial performance or liquidity and should not be considered as alternatives to net income (loss) as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. 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, stock compensation expense, and losses on extinguishment of debt. 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.

 

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

   
 
  Fiscal year ended   Twenty six weeks
ended
 
(in thousands)
  February 26,
2011

  February 25,
2012

  March 2,
2013

  August 25,
2012

  August 31,
2013

 
   

Net loss

  $ (45,053 ) $ (30,671 ) $ (130 ) $ (9,085 ) $ (688 )

Depreciation and amortization

    24,354     27,451     29,550     14,489     15,050  

Interest expense

    26,006     25,417     21,388     10,890     11,074  

Income tax expense (benefit)

    4,129     (1,374 )   (4,449 )   (2,998 )   (217 )
       

EBITDA

    9,436     20,823     46,359     13,296     25,219  

Management fees(a)

        500     1,000     500     500  

Pre-opening costs*(b)

    1,747     5,000     7,562     4,436     3,934  

Goodwill and trade name impairment+(c)

    52,388     47,037     15,533          

Non-cash rent(d)

    2,442     1,935     2,014     1,306     702  

Restructuring charges+(e)

    341     133     6,369     2,309     361  

Stock compensation expense(f)

            283         213  

Loss on extinguishment of debt*(g)

            7,333     7,329     1,101  

Foreign exchange (gains) losses(h)

    1,269     (66 )   55     444     16  

Other adjustments(i)

    84     282     1,077     519     673  
       

Adjusted EBITDA

  $ 67,707   $ 75,644   $ 87,585   $ 30,139   $ 32,719  
   

    (a)    Fees paid to LGP in accordance with our management services agreement, which will terminate on the closing of this offering.

    (b)    Non-capital expenditures associated with opening new stores and relocating stores. Prior to fiscal 2012, the amount of pre-opening costs permitted pursuant to the terms of the Revolving Credit Facility and the Senior Secured Term Loan Facility to be included in the calculation of Adjusted EBITDA was limited to $5.0 million, and the limit was increased to $10.0 million in April 2012. Similar limits exist in our compensation plan. We adjust for these costs to facilitate comparisons of our performance from period to period.

    (c)    Non-cash charges related to impairment of intangible assets, related to Elfa, which we do not consider in our evaluation of ongoing performance.

    (d)    Reflects the extent to which our annual GAAP rent expense has been above or below our cash rent payments due to lease accounting adjustments. The adjustment varies depending on the average age of our lease portfolio (weighted for size), as our GAAP rent expense on younger leases typically exceeds our cash cost, while our GAAP rent expense on older leases is typically less than our cash cost. Although our GAAP rent expense has exceeded our cash rent payments through our last fiscal year, as our lease portfolio matures we expect our cash rent payments to exceed our GAAP rent expense, beginning in fiscal 2013.

    (e)    Includes charges incurred to restructure business operations at Elfa, including the sale of a subsidiary in Germany and a manufacturing facility in Norway in fiscal 2012, as well as the relocation of certain head office functions in sales and marketing from the Västervik, Sweden, manufacturing location to the group headquarters in Malmö, Sweden in fiscal 2012, which we do not consider in our evaluation of ongoing performance.

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

    (g)    Loss recorded as a result of the repayment of then outstanding term loan facility and senior subordinated notes in April 2012, which we do not consider in our evaluation of our ongoing operations, and the April 2013 amendment to the Senior Secured Term Loan Facility. In the event the underwriters exercise their option to purchase additional shares, we expect to incur a charge in connection with our repayment of a portion of the borrowings under the Senior Secured Term Loan Facility with a portion of the net proceeds of this offering.

    (h)    Realized foreign exchange transactional gains/losses.

    (i)    Other adjustments include amounts our management does not consider in our evaluation of ongoing operations, including costs incurred in preparations for this offering and other charges.

(5)   Adjusted EBITDA margin means, for any period, the Adjusted EBITDA for that period divided by the net sales for that period.

(6)   A store is included in the comparable store sales calculation on the first day of the sixteenth full month following the store's opening. When a store is relocated, we continue to consider sales from that store to be comparable store sales. Net sales from our website and call center are also included in calculations of comparable store sales.

(7)   Average ticket for any period is calculated by dividing (a) net sales of merchandise by our TCS segment (or, if average ticket is being calculated with respect to the elfa® Custom Design Center, the net sales of merchandise from the elfa® Custom Design Center) for that period (regardless of whether such net sales are included in comparable store sales for such period) by (b) the number of transactions for that period comprising such net sales.

 

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Risk factors

You should carefully consider the risks described below, together with all of the other information included in this prospectus, before making an investment decision. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks or uncertainties. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Risks related to our business

An overall decline in the health of the economy and consumer spending may affect consumer purchases of discretionary items, which could reduce demand for our products and materially harm our sales, profitability and financial condition.

Our business depends on consumer demand for our products and, consequently, is sensitive to a number of factors that influence consumer spending generally and for discretionary items in particular. Factors influencing consumer spending include general economic conditions, consumer disposable income, fuel prices, recession and fears of recession, unemployment, war and fears of war, inclement weather, availability of consumer credit, consumer debt levels, conditions in the housing market, interest rates, sales tax rates and rate increases, inflation, consumer confidence in future economic conditions and political conditions, and consumer perceptions of personal well-being and security. For example, the 2008-2009 economic downturn led to decreased discretionary spending, which adversely impacted our business and resulted in declining sales trends. In addition, a decrease in home purchases has led and may continue to lead to decreased consumer spending on home-related products. Prolonged or pervasive economic downturns could slow the pace of new store openings or cause current stores to close. Adverse changes in factors affecting discretionary consumer spending have reduced and may continue to further reduce consumer demand for our products, thus reducing our sales and harming our business and operating results. In particular, consumer purchases of discretionary items, such as our elfa® closet systems, tend to decline during recessionary periods when disposable income is lower.

Costs and risks relating to new store openings could severely limit our growth opportunities.

Our growth strategy depends on opening stores in new and existing markets. We must successfully choose store sites, execute favorable real estate transactions on terms that are acceptable to us, hire competent personnel and effectively open and operate these new stores. Our plans to increase our number of retail stores will depend in part on the availability of existing retail stores or store sites. A lack of available financing on terms acceptable to real estate developers or a tightening credit market may adversely affect the number or quality of retail sites available to us. We cannot assure you that stores or sites will be available to us, or that they will be available on terms acceptable to us. If additional retail store sites are unavailable on acceptable terms, we may not be able to carry out a significant part of our growth strategy.

If we are unable to source and market new products to meet our high standards and customer preferences or are unable to offer our customers an aesthetically pleasing shopping environment, our results of operations may be adversely affected.

Our success depends on our ability to source and market new products that both meet our standards for quality and appeal to customers' preferences. A small number of our employees, including our buying team, are primarily responsible for both sourcing products that meet our high specifications and identifying and responding to changing customer preferences. Failure to source

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and market such products, or to accurately forecast changing customer preferences, could lead to a decrease in the number of customer transactions at our stores and a decrease in the amount customers spend when they visit our stores. In addition, the sourcing of our products is dependent, in part, on our relationships with our vendors. If we are unable to maintain these relationships we may not be able to continue to source products at competitive prices that both meet our standards and appeal to our customers. We also attempt to create a pleasant and appealing shopping experience. If we are not successful in creating a pleasant and appealing shopping experience we may lose customers. If we do not succeed in introducing and sourcing new products that consumers want to buy or maintaining good relationships with our vendors, or are unable to provide a pleasant and appealing shopping environment or maintain our level of customer service, our sales, operating margins and market share may decrease, which would adversely impact our business, financial condition and results of operations.

We have experienced net losses in the past and we may experience net losses in the future.

We experienced net losses of $45.1 million, $30.7 million and $0.1 million in fiscal 2010, fiscal 2011 and fiscal 2012, respectively. These net losses are inclusive of intangible asset impairments at our Elfa segment in the amounts of $52.4 million, $47.0 million, $15.5 million in fiscal 2010, fiscal 2011 and fiscal 2012, respectively. We may experience net losses in the future, and we cannot assure you that we will achieve profitability in future periods.

We depend on a single distribution center for all of our stores.

We handle merchandise distribution for all of our stores from a single facility in Coppell, Texas, a suburb of Dallas, Texas. We use independent third party transportation companies as well as leased trucks to deliver our merchandise to our stores and our clients. Any significant interruption in the operation of our distribution center or the domestic transportation infrastructure due to natural disasters, accidents, inclement weather, system failures, work stoppages, slowdowns or strikes by employees of the transportation companies, or other causes could delay or impair our ability to distribute merchandise to our stores, which could result in lower sales, a loss of loyalty to our brands and excess inventory and would have a material adverse effect on our business, financial condition and results of operations. Our business depends upon the successful operation of our distribution center, as well as our ability to fulfill orders and to deliver our merchandise to our customers in a timely manner.

Our facilities and systems, as well as those of our vendors, are vulnerable to natural disasters and other unexpected events, and as a result we may lose merchandise and be unable to effectively deliver it to our stores and result in delay shipments to our online customers.

Our retail stores, corporate offices, distribution center, infrastructure projects and direct-to-customer operations, as well as the operations of our vendors from which we receive goods and services, are vulnerable to damage from earthquakes, tornadoes, hurricanes, fires, floods, power losses, telecommunications failures, hardware and software failures, computer viruses and similar events. If any of these events result in damage to our facilities or systems, or those of our vendors, we may experience interruptions in our business until the damage is repaired, resulting in the potential loss of customers and revenues. In addition, we may incur costs in repairing any damage beyond our applicable insurance coverage.

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We rely upon independent third-party transportation providers for substantially all of our product shipments and are subject to increased shipping costs as well as the potential inability of our third-party transportation providers to deliver on a timely basis.

We currently rely upon independent third-party transportation providers for substantially all of our product shipments, including shipments to and from all of our stores. Our utilization of these delivery services for shipments is subject to risks, including increases in fuel prices, which would increase our shipping costs, and employee strikes and inclement weather which may impact a shipping company's ability to provide delivery services that adequately meet our shipping needs. If we change the shipping companies we use, we could face logistical difficulties that could adversely affect deliveries and we would incur costs and expend resources in connection with such change. Moreover, we may not be able to obtain terms as favorable as those received from independent third-party transportation providers, which in turn would increase our costs.

Our business depends in part on a strong brand image. If we are not able to protect our brand, we may be unable to attract a sufficient number of customers or sell sufficient quantities of our products.

We believe that the brand image we have developed has contributed significantly to the success of our business to date. We also believe that protecting The Container Store brand is integral to our business and to the implementation of our strategies for expanding our business. Our brand image may be diminished if we do not continue to make investments in areas such as marketing and advertising, as well as the day-to-day investments required for store operations, catalog mailings, online sales and employee training. Our brand image may be further diminished if new products fail to maintain or enhance our distinctive brand image. Furthermore, our reputation could be jeopardized if we fail to maintain high standards for merchandise quality, if we fail to maintain high ethical, social and environmental standards for all of our operations and activities, if we fail to comply with local laws and regulations or if we experience negative publicity or other negative events that affect our image or reputation, some of which may be beyond our ability to control, such as the effects of negative publicity regarding our vendors. Any failure to maintain a strong brand image could have an adverse effect on our sales and results of operations.

If we fail to successfully anticipate consumer preferences and demand, or to manage inventory commensurate with demand, our results of operations may be adversely affected.

Our success depends in large part on our ability to identify, originate and define storage and organization product trends, as well as to anticipate, gauge and react to changing consumer demands in a timely manner. Our products must appeal to a range of consumers whose preferences cannot always be predicted with certainty. We cannot assure you that we will be able to continue to develop products that customers respond to positively or that we will successfully meet consumer demands in the future. Any failure on our part to anticipate, identify or respond effectively to consumer preferences and demand could adversely affect sales of our products. If this occurs, our sales may decline, and we may be required to mark down certain products to sell the resulting excess inventory, which could have a material adverse effect on our financial condition and results of operations.

In addition, we must manage our merchandise in stock and inventory levels to track consumer demand. Much of our merchandise requires that we provide vendors with significant ordering lead time, frequently before market factors are known. In addition, the nature of our products requires us to carry a significant amount of inventory prior to peak selling seasons. If we are not able to

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anticipate consumer demand for our different product offerings, or successfully manage inventory levels for products that are in demand, we may experience:

back orders, order cancellations and lost sales for products that are in high demand for which we did not stock adequate inventory; and

overstock inventory levels for products that have lower consumer demand, requiring us to take markdowns or other steps to sell slower moving merchandise.

As a result of these and other factors, we are vulnerable to demand and pricing shifts and to misjudgments in the selection and timing of merchandise purchases.

New stores in new markets, where we are less familiar with the target customer and less well-known, may face different or additional risks and increased costs compared to stores operated in existing markets or new stores in existing markets. We also may not be able to advertise cost-effectively in new or smaller markets in which we have less store density, which could slow sales growth at such stores.

Successful expansion increases the complexity of our business and we may not be able to effectively manage our growth, which may cause our brand image and financial performance to suffer.

Our expansion in new and existing markets may present competitive, distribution, merchandising and regulatory challenges that differ from our current challenges, including competition among our stores, diminished novelty of our store design and concept, added strain on our distribution center, additional information to be processed by our management information systems and diversion of management attention from operations, such as the control of inventory levels in our stores. We also cannot guarantee that we will be able to obtain and distribute adequate product supplies to our stores or maintain adequate warehousing and distribution capability at acceptable costs. New stores also may have lower than anticipated sales volumes relative to previously opened stores during their comparable years of operation, and sales volumes at new stores may not be sufficient to achieve store-level profitability or profitability comparable to that of existing stores. To the extent that we are not able to meet these various challenges, our sales could decrease, our operating costs could increase and our operating profitability could be impacted.

Our business requires that we lease substantial amounts of space and there can be no assurance that we will be able to continue to lease space on terms as favorable as the leases negotiated in the past.

We do not own any real estate at our TCS segment. Instead, we lease all of our store locations, as well as our corporate headquarters and distribution center in Coppell, Texas. Our stores are leased from third parties and generally have an initial term of ten to fifteen years. Many of our lease agreements also have additional five-year renewal options. We believe that we have been able to negotiate favorable rental rates and tenant allowances over the last few years due in large part to the state of the economy and higher than usual vacancy rates in a number of regional malls and shopping centers. These trends may not continue, and there is no guarantee that we will be able to continue to negotiate such favorable terms. Many of our leases have early cancellation clauses, which permit the lease to be terminated by us or the landlord if certain sales levels are not met in specific periods or if the shopping venue does not meet specified occupancy standards. In addition to fixed minimum lease payments, most of our store leases provide for additional rental payments based on a percentage of sales, or "percentage rent," if sales at the respective stores exceed

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specified levels, as well as the payment of common area maintenance charges, real property insurance and real estate taxes. Many of our lease agreements have defined escalating rent provisions over the initial term and any extensions. Increases in our already substantial occupancy costs and difficulty in identifying economically suitable new store locations could have significant negative consequences, which include:

requiring that a greater portion of our available cash be applied to pay our rental obligations, thus reducing cash available for other purposes and reducing our operating profitability;

increasing our vulnerability to general adverse economic and industry conditions; and

limiting our flexibility in planning for, or reacting to changes in, our business or in the industry in which we compete.

Additional sites that we lease may be subject to long-term non-cancelable leases if we are unable to negotiate our current standard lease terms. If an existing or future store is not profitable, and we decide to close it, we may nonetheless be committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under that lease. In addition, if we are not able to enter into new leases or renew existing leases on terms acceptable to us, this could have an adverse effect on our results of operations.

We will require significant capital to fund our expanding business, which may not be available to us on satisfactory terms or at all. We plan to use cash from operations to fund our operations and execute our growth strategy. If we are unable to maintain sufficient levels of cash flow, we may not meet our growth expectations or we may require additional financing which could adversely affect our financial health and impose covenants that limit our business activities.

We plan to continue our growth and expansion, including opening a number of new stores, remodeling existing stores and upgrading our information technology systems and other infrastructure, as opportunities arise. Our plans to expand our store base may not be successful and the implementation of these other plans may not result in expected increases in our net sales even though they increase our costs. We will require significant capital to support our expanding business and execute on our growth strategy.

We currently primarily depend on cash flow from operations and the Revolving Credit Facility to fund our business and growth plans. Upon the closing of this offering we expect that we will continue to primarily depend on cash flow from operations and our Revolving Credit Facility to fund our business and growth plans. If our business does not generate sufficient cash flow from operations to fund these activities, we may need additional equity or debt financing. If such financing is not available to us, or is not available on satisfactory terms, our ability to operate and expand our business or respond to competitive pressures would be curtailed and we may need to delay, limit or eliminate planned store openings or operations or other elements of our growth strategy. If we raise additional capital by issuing equity securities or securities convertible into equity securities, your ownership would be diluted.

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Disruptions in the global financial markets may make it difficult for us to borrow a sufficient amount of capital to finance the carrying costs of inventory and to pay for capital expenditures and operating costs, which could negatively affect our business.

Disruptions in the global financial markets and banking systems have made credit and capital markets more difficult for companies to access, even for some companies with established revolving or other credit facilities. Under the Revolving Credit Facility, each member of the syndicate for the Revolving Credit Facility is responsible for providing a portion of the loans to be made under the facility. Factors that have previously affected our borrowing ability under the Revolving Credit Facility have included the borrowing base formula limitations, adjustments in the appraised value of our inventory used to calculate the borrowing base and the availability of each of the lenders to advance its portion of requested borrowing drawdowns under the facility. If, in connection with a disruption in the global financial markets or otherwise, any participant, or group of participants, with a significant portion of the commitments in the Revolving Credit Facility fails to satisfy its obligations to extend credit under the facility and we are unable to find a replacement for such participant or group of participants on a timely basis (if at all), our liquidity and our business may be materially adversely affected.

Our costs may change as a result of currency exchange rate fluctuations.

In fiscal 2012, approximately 79% of our merchandise was manufactured abroad based on cost of merchandise purchased. The prices charged by foreign manufacturers may be affected by the fluctuation of their local currency against the U.S. dollar. We source goods from various countries, including China, and thus changes in the value of the U.S. dollar compared to other currencies may affect the costs of goods that we purchase.

Our largest exposure to currency exchange rate fluctuations is between the U.S. dollar and Swedish krona. The TCS segment purchases all products from the Elfa segment in Swedish krona. Approximately 19% of our U.S. dollar merchandise purchases in the TCS segment in fiscal 2012 were originally made in Swedish krona from our Elfa segment.

If we are unable to effectively manage our online sales, our reputation and operating results may be harmed.

E-commerce has been our fastest growing business over the last several years and continues to be a growing part of our business. The success of our e-commerce business depends, in part, on factors over which we may not control. We must successfully respond to changing consumer preferences and buying trends relating to e-commerce usage. We are also vulnerable to certain additional risks and uncertainties associated with our e-commerce websites, including: changes in required technology interfaces; website downtime and other technical failures; costs and technical issues as we upgrade our website software; computer viruses; changes in applicable federal and state regulations; security breaches; and consumer privacy concerns. In addition, we must keep up to date with competitive technology trends, including the use of new or improved technology, creative user interfaces and other e-commerce marketing tools such as paid search and mobile applications, among others, which may increase our costs and which may not succeed in increasing sales or attracting customers. Our competitors, some of whom have greater resources than us, may also be able to benefit from changes in e-commerce technologies, which could harm our competitive position. Our failure to successfully respond to these risks and uncertainties might adversely affect the sales in our e-commerce business, as well as damage our reputation and brands.

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Competition, including internet-based competition, could negatively impact our business, adversely affecting our ability to generate higher net sales and our ability to obtain favorable store locations.

While our differentiated product offerings have limited direct competition, similar items can be found in a variety of retailers. We compete primarily based on level of service and by product quality and selection. Competitive products can be found in mass merchants (e.g., Walmart and Target), as well as specialty retail chains (e.g., Bed Bath & Beyond and Crate & Barrel). Some of our competitors, particularly the mass merchants, are larger and have greater financial resources than we do. We also face competition from internet-based retailers (e.g., Amazon), in addition to traditional store-based retailers. This could result in increased price competition since our customers can more readily search and compare similar products.

Our ability to obtain merchandise on a timely basis at competitive prices could suffer as a result of any deterioration or change in our vendor relationships or events that adversely affect our vendors or their ability to obtain financing for their operations.

We believe our vendor relationships are critical to our success. We do not have long-term contracts with any of our vendors and we generally transact business on an order-by-order basis, operating without any contractual assurances of continued supply, pricing or access to new products. Any of our vendors could discontinue supplying us with desired products in sufficient quantities for a variety of reasons.

The benefits we currently experience from our vendor relationships could be adversely affected if our vendors:

discontinue selling merchandise to us;

enter into exclusivity arrangements with our competitors;

sell similar merchandise to our competitors with similar or better pricing, many of whom already purchase merchandise in significantly greater volume and, in some cases, at lower prices than we do;

raise the prices they charge us;

change pricing terms to require us to pay on delivery or upfront, including as a result of changes in the credit relationships some of our vendors have with their various lending institutions;

lengthen their lead times; or

initiate or expand sales of storage and organization products to retail customers directly through their own stores, catalogs or on the internet and compete with us directly.

We historically have established excellent working relationships with many small- to mid-size vendors that generally have more limited resources, production capacities and operating histories. Market and economic events that adversely impact our vendors could impair our ability to obtain merchandise in sufficient quantities. Such events include difficulties or problems associated with our vendors' business, finances, labor, ability to export or import, as the case may be, merchandise, costs, production, insurance and reputation. There can be no assurance that we will be able to acquire desired merchandise in sufficient quantities on acceptable terms or at all in the future, especially if we need significantly greater amounts of inventory in connection with the growth of our business. We may need to develop new relationships with larger vendors, as our current vendors

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may be unable to supply us with needed quantities and we may not be able to find similar merchandise on the same terms from larger vendors. If we are unable to acquire suitable merchandise in sufficient quantities, at acceptable prices with adequate delivery times due to the loss of or a deterioration or change in our relationship with one or more of our key vendors or events harmful to our vendors occur, it may adversely affect our business and results of operations.

There is a risk that our vendors may sell similar or identical products to our competitors, which could harm our business.

Although many of our products are sold by our vendors only to The Container Store, products related to the majority of our non-elfa® sales are not sold to us on an exclusive basis. Of the non-elfa® products that we purchase on an exclusive basis, none of these products are sold pursuant to agreements with exclusivity provisions. As a result, most of our vendors have no obligation to refrain from selling similar or identical products to our competitors, some of whom purchase products in significantly greater volume, or entering into exclusive arrangements with other retailers that could limit our access to their products. Our vendors could also initiate or expand sales of their products through their own stores or through the Internet to the retail market and therefore compete with us directly or sell their products through outlet centers or discount stores, increasing the competitive pricing pressure we face.

We depend on key executive management.

We depend on the leadership and experience of our key executive management. The loss of the services of any of our executive management members could have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace such personnel on a timely basis or without incurring increased costs, or at all. We do not maintain key-man life insurance policies on any of our executive officers. We believe that our future success will depend on our continued ability to attract and retain highly skilled and qualified personnel. There is a high level of competition for experienced, successful personnel in the retail industry. Our inability to meet our staffing requirements in the future could impair our growth and harm our business.

If we are unable to find, train and retain key personnel, including new employees that reflect our brand image and embody our culture, we may not be able to grow or sustain our operations.

Our success depends in part upon our ability to attract, motivate and retain a sufficient number of store employees, including general managers and store managers, who understand and appreciate our customers, products, brand and corporate culture, and are able to adequately and effectively represent our culture and establish credibility with our customers. Our planned growth will require us to hire and train even more personnel to manage such growth. If we are unable to hire and retain personnel capable of consistently providing a high level of customer service, as demonstrated by their enthusiasm for our culture, understanding of our customers and knowledge of the merchandise we offer, our ability to open new stores may be impaired, the performance of our existing and new stores could be materially adversely affected and our brand image may be negatively impacted. There is a high level of competition for experienced, qualified personnel in the retail industry and we compete for personnel with a variety of companies looking to hire for retail positions. Our growth plans could strain our ability to staff our new stores, particularly at the store manager level, which could have an adverse effect on our ability to maintain a cohesive and consistently strong team, which in turn could have an adverse impact on our business. If we are unable to attract, train and retain employees in the future, we may not be able to serve our

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customers effectively, thus reducing our ability to continue our growth and to operate our existing stores as profitably as we have in the past.

Labor activities could cause labor relations difficulties for us.

None of our U.S.-based employees is currently subject to a collective bargaining agreement. As we continue to grow and enter different regions, unions may attempt to organize all or part of our employee base at certain stores or within certain regions. Responding to such organization attempts may distract management and employees and may have a negative financial impact on individual stores, or on our business as a whole.

As of September 1, 2013, approximately 53% of Elfa's employees (6% of our total employees) were covered by collective bargaining agreements. A dispute with a union or employees represented by a union, including a failure to extend or renew our collective bargaining agreements, could result in production interruptions caused by work stoppages. If a strike or work stoppage were to occur, our results of operations could be adversely affected.

Higher health care costs and labor costs could adversely affect our business.

With the passage in 2010 of the U.S. Patient Protection and Affordable Care Act, we are required to provide affordable coverage, as defined in the Act, to all employees, or otherwise be subject to a payment per employee based on the affordability criteria in the Act. Many of these requirements will be phased in over a period of time, with the majority of the most impactful provisions affecting us presently anticipated to begin in the second quarter of fiscal 2015. Additionally, some states and localities have passed state and local laws mandating the provision of certain levels of health benefits by some employers. Increased health care and insurance costs could have a material adverse effect on our business, financial condition and results of operations. In addition changes in federal or state workplace regulations could adversely affect our ability to meet our financial targets.

We are subject to risks associated with our dependence on foreign imports for our merchandise.

In fiscal 2012, excluding purchases for Elfa, we purchased approximately 26% of our merchandise from vendors located in the United States and approximately 74% from vendors located outside the United States (including approximately 44% from vendors located in China). In addition, some of the merchandise we purchase from vendors in the United States also depends, in whole or in part, on vendors located outside the United States. As a result, our business depends on global trade, as well as trade and cost factors that impact the specific countries where our vendors are located, including Asia. Our future success will depend in part upon our ability to maintain our existing foreign vendor relationships and to develop new ones. While we rely on our long-term relationships with our foreign vendors, we have no long-term contracts with them and transact business on an order by order basis. Additionally, many of our imported products are subject to existing duties, tariffs and quotas that may limit the quantity of some types of goods which we may import into the United States. Our dependence on foreign imports also makes us vulnerable to risks associated with products manufactured abroad, including, among other things, risks of damage, destruction or confiscation of products while in transit to our distribution centers located in the United States, charges on or assessment of additional import duties, tariffs and quotas, loss of "most favored nation" trading status by the United States in relation to a particular foreign country, work stoppages, including without limitation as a result of events such as longshoremen strikes, transportation and other delays in shipments, including without limitation as a result of heightened security screening and inspection processes or other port-of-entry limitations or restrictions in the

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United States, freight cost increases, economic uncertainties, including inflation, foreign government regulations, trade restrictions, including the United States retaliating against protectionist foreign trade practices and political unrest, increased labor costs and other similar factors that might affect the operations of our vendors in specific countries such as China.

An interruption or delay in supply from our foreign sources, or the imposition of additional duties, taxes or other charges on these imports, could have a material adverse effect on our business, financial condition and results of operations unless and until alternative supply arrangements are secured.

In addition, there is a risk that compliance lapses by our vendors could occur which could lead to investigations by U.S. government agencies responsible for international trade compliance. Resulting penalties or enforcement actions could delay future imports/exports or otherwise negatively impact our business. In addition, there remains a risk that one or more of our foreign vendors will not adhere to applicable legal requirements or our global compliance standards such as fair labor standards, the prohibition on child labor and other product safety or manufacturing safety standards. The violation of applicable legal requirements, including labor, manufacturing and safety laws, by any of our vendors, the failure of any of our vendors to adhere to our global compliance standards or the divergence of the labor practices followed by any of our vendors from those generally accepted in the United States, could disrupt our supply of products from our vendors or the shipment of products to us, result in potential liability to us and harm our reputation and brand, any of which could negatively affect our business and operating results.

Because of our international operations, we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery and anti-kickback laws.

We source a significant portion of our products from outside the United States. The U.S. Foreign Corrupt Practices Act, and other similar anti-bribery and anti-kickback laws and regulations generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. While our vendor compliance agreements mandate compliance with applicable law, we cannot assure you that we will be successful in preventing our employees or other agents from taking actions in violation of these laws or regulations. Such violations, or allegations of such violations, could disrupt our business and result in a material adverse effect on our financial condition, results of operations and cash flows.

We face risks related to our indebtedness.

Our leverage could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk associated with our variable rate debt and prevent us from meeting our obligations under our notes and credit facilities. As of August 31, 2013, we had total outstanding debt of $392.2 million and an additional $68.6 million of availability under the Revolving Credit Facility and the Elfa Revolving Credit Facility. Our high degree of leverage could have important consequences to us, including:

making it more difficult for us to make payments on our debt;

increasing our vulnerability to general economic and industry conditions;

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requiring a substantial portion of cash flow from operations to be dedicated to the payment of principal and interest on our debt, thereby reducing our ability to use our cash flow to fund our operations, capital expenditures, and future business opportunities;

exposing us to the risk of increased interest rates as our borrowings under the Senior Secured Term Loan Facility, the Revolving Credit Facility and the Elfa Senior Secured Credit Facilities are at variable rates;

restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

requiring us to comply with financial and operational covenants, restricting us, among other things from placing liens on our assets, making investments, incurring debt, making payments to our equity or debt holders and engaging in transactions with affiliates;

limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, and general corporate or other purposes; and

limiting our ability to adjust to changing market conditions and placing us at a competitive disadvantage compared to our competitors who may be less highly leveraged.

In addition, a failure by us or our subsidiaries to comply with the agreements governing our indebtedness could result in an event of default under such indebtedness, which could adversely affect our ability to respond to changes in our business and manage our operations. Upon the occurrence of an event of default under any of the agreements governing our indebtedness, the lenders could elect to declare all amounts outstanding to be due and payable and exercise other remedies as set forth in the agreements. If any of our indebtedness were to be accelerated, there can be no assurance that our assets would be sufficient to repay this indebtedness in full, which could have a material adverse effect on our ability to continue to operate as a going concern. See "Description of Indebtedness."

We have debt service obligations and may incur additional indebtedness in the future, which may require us to use a substantial portion of our cash flow to service debt and limit our financial and operating flexibility in important ways.

As of August 31, 2013, we had total outstanding debt of $392.2 million and an additional $68.6 million of availability under the Revolving Credit Facility and the Elfa Revolving Credit Facility. We will continue to have debt service obligations following the completion of this offering. We may incur additional indebtedness in the future. Our indebtedness, or any borrowings under any future debt financing (including the Revolving Credit Facility) will require interest payments and need to be repaid or refinanced, could require us to divert funds identified for other purposes to debt service and would create additional cash demands and could impair our liquidity position and add financial risk for us. Diverting funds identified for other purposes for debt service may adversely affect our business and growth prospects. If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of assets or issue equity to obtain necessary funds. We do not know whether we would be able to take any of these actions on a timely basis, on terms satisfactory to us, or at all.

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Our level of indebtedness has important consequences to you and your investment in our common stock. For example, our level of indebtedness may:

require us to use a substantial portion of our cash flow from operations to pay interest and principal on our debt, which would reduce the funds available to us for working capital, capital expenditures, expansion plans and other investments and other general corporate purposes;

limit our ability to pay future dividends;

limit our ability to obtain additional financing for working capital, capital expenditures, expansion plans and other investments, which may limit our ability to implement our business strategy;

heighten our vulnerability to downturns in our business, the storage and organization retail industry or in the general economy and limit our flexibility in planning for, or reacting to, changes in our business; or

prevent us from taking advantage of business opportunities as they arise or successfully carrying out our plans to expand our store base and product offerings.

We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in amounts sufficient to enable us to make payments on our indebtedness or to fund our operations.

Our fixed lease obligations could adversely affect our financial performance.

Our fixed lease obligations will require us to use a significant portion of cash generated by our operations to satisfy these obligations, and could adversely impact our ability to obtain future financing to support our growth or other operational investments. We will require substantial cash flows from operations to make our payments under our operating leases, all of which provide for periodic increases in rent. As of March 2, 2013, our minimum annual rental obligations under long-term operating leases for fiscal 2013 and fiscal 2014 through fiscal 2015 are $62.5 million and $123.5 million, respectively. If we are not able to make the required payments under the leases, the lenders or owners of the stores may, among other things, repossess those assets, which could adversely affect our ability to conduct our operations. In addition, our failure to make payments under our operating leases could trigger defaults under other leases or under agreements governing our indebtedness, which could cause the counterparties under those agreements to accelerate the obligations due thereunder.

Material damage to, or interruptions in, our information systems as a result of external factors, staffing shortages and difficulties in updating our existing software or developing or implementing new software could have a material adverse effect on our business or results of operations.

We depend largely upon our information technology systems in the conduct of all aspects of our operations. Such systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, fire and natural disasters. Damage or interruption to our information systems may require a significant investment to fix or replace them, and we may suffer interruptions in our operations in the interim. In addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology or with maintenance or adequate support of existing systems could also disrupt or reduce the efficiency of our operations. Any material interruptions or failures in our information systems may have a material adverse effect on our business or results of operations.

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We also rely heavily on our information technology staff. If we cannot meet our staffing needs in this area, we may not be able to fulfill our technology initiatives while continuing to provide maintenance on existing systems.

We rely on certain software vendors to maintain and periodically upgrade many of these systems so that they can continue to support our business. The software programs supporting many of our systems were licensed to us by independent software developers. The inability of these developers or us to continue to maintain and upgrade these information systems and software programs would disrupt or reduce the efficiency of our operations if we were unable to convert to alternate systems in an efficient and timely manner.

We are vulnerable to various risks and uncertainties associated with our websites, including changes in required technology interfaces, website downtime and other technical failures, costs and technical issues as we upgrade our website software, computer viruses, changes in applicable federal and state regulation, security breaches, legal claims related to our website operations and e-commerce fulfillment and other consumer privacy concerns. Our failure to successfully respond to these risks and uncertainties could reduce website sales and have a material adverse effect on our business or results of operations.

There are claims made against us from time to time that can result in litigation that could distract management from our business activities and result in significant liability or damage to our brand.

From time to time we are involved in litigation, claims and other proceedings relating to the conduct of our business, including but not limited to consumer protection class action litigation, claims related to our business, or employment practices and claims of intellectual property infringement. In addition, from time to time, we are subject to product liability and personal injury claims for the products that we sell and the stores we operate. Our purchase orders generally require the vendor to indemnify us against any product liability claims; however, if the vendor does not have insurance or becomes insolvent, we may not be indemnified. In addition, we could face a wide variety of employee claims against us, including general discrimination, privacy, labor and employment, Employee Retirement Income Security Act of 1974, as amended, and disability claims. Any claims could also result in litigation against us and could also result in regulatory proceedings being brought against us by various federal and state agencies that regulate our business, including the U.S. Equal Employment Opportunity Commission. Often these cases raise complex factual and legal issues, which are subject to risks and uncertainties and which could require significant management time. Litigation and other claims and regulatory proceedings against us could result in unexpected expenses and liability and could also materially adversely affect our operations and our reputation.

Product recalls and/or product liability, as well as changes in product safety and other consumer protection laws, may adversely impact our operations, merchandise offerings, reputation, results of operations, cash flow and financial condition.

We are subject to regulations by a variety of federal, state and international regulatory authorities, including the Consumer Product Safety Commission. In fiscal 2012, we purchased merchandise from approximately 700 vendors. If our vendors fail to manufacture or import merchandise that adheres to product safety requirements or our quality control standards, our reputation and brands could be damaged, potentially leading to increases in customer litigation against us. It is possible that one or more of our vendors might not adhere to product safety requirements or our quality

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control standards, and we might not identify the deficiency before merchandise is sold. Any issues of product safety, could cause us to recall some of those products. If our vendors are unable or unwilling to recall products failing to meet product safety requirements or our quality standards, we may be required to recall those products at a substantial cost to us. Furthermore, to the extent we are unable to replace any recalled products, we may have to reduce our merchandise offerings, resulting in a decrease in sales, especially if a recall occurs near a seasonal period.

Moreover, changes in product safety or other consumer protection laws could lead to increased costs to us for certain merchandise, or additional labor costs associated with readying merchandise for sale. Long lead times on merchandise ordering cycles increase the difficulty for us to plan and prepare for potential changes to applicable laws. In particular, The Consumer Product Safety Improvement Act of 2008 imposes significant requirements on manufacturing, importing, testing and labeling requirements for some of our products. In the event that we are unable to timely comply with regulatory changes, significant fines or penalties could result, and could adversely affect our reputation, results of operations, cash flow and financial condition.

Failure to protect the integrity and security of individually identifiable data of our customers and employees could expose us to litigation and damage our reputation.

We receive and maintain certain personal information about our customers and employees, including credit card information. The use of this information by us is regulated at the international, federal and state levels, and is subject to certain contractual restrictions in third party contracts. Although we have implemented processes to protect the integrity and security of personal information, there can be no assurance that this information will not be obtained by unauthorized persons or used inappropriately. If the security and information systems of ours or of our business associates are compromised or our business associates fail to comply with these laws and regulations and this information is obtained by unauthorized persons or used inappropriately, it could negatively affect our reputation as our customers and employees have a high expectation that we will adequately safeguard and protect their personal information, including their credit card information, as well as our results of operations and financial conditions. Any compromise or failure could result in litigation against us or the imposition of penalties. As privacy and information security laws and regulations change, we may incur additional costs to ensure we remain in compliance.

Changes in statutory, regulatory, accounting, and other legal requirements could potentially impact our operating and financial results.

We are subject to numerous statutory, regulatory and legal requirements, domestically and abroad. Our operating results could be negatively impacted by developments in these areas due to the costs of compliance in addition to possible government penalties and litigation in the event of deemed noncompliance. Changes in the regulatory environment in the area of product safety, environmental protection, privacy and information security, wage and hour laws, among others, could potentially impact our operations and financial results.

We lease all of our properties at the TCS segment and the group headquarters and sales offices at the Elfa segment, and each is classified as an operating lease. The Financial Accounting Standards Board ("FASB") has issued an exposure draft that will revise lease accounting and require many leases currently considered to be operating leases to instead be classified as capital leases. The primary impact to this exposure draft would be that such leases would be recorded on the balance sheet as debt, and they currently have an off-balance sheet classification as operating leases. The

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timeline for effectiveness of this pronouncement, as well as the final guidelines and potential financial impact, are unclear at this point.

If our operating and financial performance in any given period does not meet the guidance that we provide to the public, our stock price may decline.

We may provide public guidance on our expected operating and financial results for future periods. Although we believe that this guidance provides investors and analysts with a better understanding of management's expectations for the future and is useful to our stockholders and potential stockholders, such guidance is comprised of forward-looking statements subject to the risks and uncertainties described in this report and in our other public filings and public statements. Our actual results may not always be in line with or exceed the guidance we have provided, especially in times of economic uncertainty. If, in the future, our operating or financial results for a particular period do not meet our guidance or the expectations of investment analysts or if we reduce our guidance for future periods, the market price of our common stock may decline as well.

Our total assets include intangible assets with an indefinite life, goodwill and trademarks, and substantial amounts of property and equipment. Changes in estimates or projections used to assess the fair value of these assets, or operating results that are lower than our current estimates at certain store locations, may cause us to incur impairment charges that could adversely affect our results of operation.

Our total assets include intangible assets with an indefinite life, goodwill and trademarks, and substantial amounts of property and equipment. We make certain estimates and projections in connection with impairment analyses for these long lived assets, in accordance with FASB ASC 360, "Property, Plant and Equipment" ("ASC 360"), and ASC 350, "Intangibles—Goodwill and Other" ("ASC 350"). We also review the carrying value of these assets for impairment on an annual basis and whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable in accordance with ASC 360 or ASC 350. We will record an impairment loss when the carrying value of the underlying asset, asset group or reporting unit exceeds its fair value. These calculations require us to make a number of estimates and projections of future results. If these estimates or projections change, we may be required to record additional impairment charges on certain of these assets. If these impairment charges are significant, our results of operations would be adversely affected. We recorded impairment charges of $0.4 million, $15.6 million and $15.5 million related to the elfa® trade name in fiscal 2010, fiscal 2011 and fiscal 2012, respectively. We also recorded goodwill impairment charges of $52.0 million, $31.5 million and $0 related to the Elfa segment in fiscal 2010, fiscal 2011 and fiscal 2012, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 2 to our audited consolidated financial statements included elsewhere in this prospectus.

Significant increases in raw material prices or energy costs may adversely affect our costs, including cost of merchandise.

Any future increases in commodity prices for raw materials that are directly or indirectly related to the production of our products, such as the prices of steel, oil, resin and pulp, may adversely affect our costs. Furthermore, the transportation industry may experience a shortage or reduction of capacity, which could be exacerbated by higher fuel prices. Our results of operations may be adversely affected if we or our vendors are unable to secure, or are able to secure only at significantly higher costs, such commodities or fuel.

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Fluctuations in our tax obligations and effective tax rate and realization of our deferred tax assets, including net operating loss carryforwards, may result in volatility of our operating results.

We are subject to income taxes in various U.S. and certain foreign jurisdictions. We record tax expense based on our estimates of future payments, which may include reserves for uncertain tax positions in multiple tax jurisdictions, and valuation allowances related to certain net deferred tax assets, including net operating loss carryforwards. At any one time, many tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. We expect that throughout the year there could be ongoing variability in our quarterly tax rates as events occur and exposures are evaluated.

In addition, our effective tax rate in a given financial statement period may be materially impacted by a variety of factors including but not limited to changes in the mix and level of earnings, varying tax rates in the different jurisdictions in which we operate, fluctuations in the valuation allowance, timing of the utilization of net operating loss carryforwards, or by changes to existing accounting rules or regulations. Further, tax legislation may be enacted in the future which could negatively impact our current or future tax structure and effective tax rates.

Our operating results are subject to quarterly and seasonal fluctuations, and results for any quarter may not necessarily be indicative of the results that may be achieved for the full fiscal year. As a result, the market price of our common stock may fluctuate substantially.

Our quarterly results have fluctuated in the past and may fluctuate significantly in the future, depending upon a variety of factors, including, among other things, our product offerings, promotional events, store openings, the weather, remodeling or relocations, shifts in the timing of holidays, timing of catalog releases or sales, timing of delivery of orders, competitive factors and general economic conditions. As a result of these quarterly and seasonal fluctuations, the market price of our common stock may fluctuate substantially.

In addition, we historically have realized, and expect to continue to realize, higher Adjusted EBITDA in the fourth quarter of our fiscal year due to the Annual elfa® Sale. In fiscal 2012, we recorded Adjusted EBITDA of $35.0 million in the fourth fiscal quarter or approximately 39.9% of our fiscal 2012 Adjusted EBITDA.

Our comparable store sales and quarterly results have fluctuated significantly in the past based on a number of economic, seasonal and competitive factors, and we expect them to continue to fluctuate in the future. Since the beginning of fiscal 2008, our quarterly comparable store sales growth has ranged from a decrease of 13.7% to an increase of 12.9%. This variability could cause our comparable store sales and quarterly results to fall below the expectations of securities analysts or investors, which could result in a decline in the market price of our common stock.

Accordingly, our results of operations may fluctuate on a seasonal basis and relative to corresponding periods in prior years. Moreover, we may take certain pricing or marketing actions that could have a disproportionate effect on our business, financial condition and results of operations in a particular quarter or selling season. These initiatives may disproportionately impact results in a particular quarter and we believe that comparisons of our operating results from period to period are not necessarily meaningful and cannot be relied upon as indicators of future performance.

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Material disruptions at one of our Elfa manufacturing facilities could negatively affect our business.

Elfa operates four manufacturing facilities: two in Sweden, one in Poland and one in Finland. A material operational disruption in one of our Elfa manufacturing facilities could occur as a result of any number of events including, but not limited to, major equipment failures, labor stoppages, transportation failures affecting the supply and shipment of materials and finished goods, severe weather conditions and disruptions in utility services. Such a disruption could negatively impact production, customer deliveries and financial results.

Our failure or inability to protect our intellectual property rights could diminish the value of our brand and weaken our competitive position.

We attempt to protect our intellectual property rights, both in the United States and in foreign countries, through a combination of copyright, patent, trademark, trade secret, trade dress and unfair competition laws, as well as confidentiality procedures, and assignment and licensing arrangements. Our failure to obtain or maintain adequate protection of our intellectual property rights for any reason could have a material adverse effect on our business, results of operations and financial condition. Further, we cannot assure you that competitors or other third parties will not infringe our intellectual property rights, or that we will have adequate resources to enforce our intellectual property rights.

In addition, intellectual property protection may be unavailable or limited in some foreign countries where laws or law enforcement practices may not protect our intellectual property rights as fully as in the United States, and it may be more difficult for us to successfully challenge the use of our intellectual property rights by other parties in such countries and our competitive position may suffer.

If third parties claim that we infringe upon their intellectual property rights, our operating results could be adversely affected.

We face the risk of claims that we have infringed third parties' intellectual property rights. Any claims of intellectual property infringement, even those without merit, could (i) be expensive and time consuming to defend; (ii) cause us to cease making, licensing or using products or methods that allegedly infringe; (iii) require us to redesign, reengineer, or rebrand our products or packaging, if feasible; (iv) divert management's attention and resources; or (v) require us to enter into royalty or licensing agreements in order to obtain the right to use a third party's intellectual property. Any royalty or licensing agreements, if required, may not be available to us on acceptable terms or at all. A successful claim of infringement against us could result in our being required to pay significant damages, enter into costly license or royalty agreements, or stop the sale of certain products, any of which could have a negative impact on our operating results and harm our future prospects.

Risks related to this offering and ownership of our common stock

We are controlled by investment funds managed by LGP, whose interests in our business may be different from yours.

Upon the closing of this offering and after giving effect to the Exchange, LGP will own approximately                  shares, or         %, of our outstanding common stock. LGP will, for the foreseeable future, have significant influence over our reporting and corporate management and affairs, and will be able to control virtually all matters requiring stockholder approval. LGP is able to,

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subject to applicable law, and the voting arrangements with management described in "Certain relationships and related party transactions," designate a majority of the members of our board of directors and control actions to be taken by us and our board of directors, including amendments to our certificate of incorporation and bylaws and approval of significant corporate transactions, including mergers and sales of substantially all of our assets. The directors so elected will have the authority, subject to the terms of our indebtedness and our rules and regulations, to issue additional stock, implement stock repurchase programs, declare dividends and make other decisions. It is possible that the interests of LGP may in some circumstances conflict with our interests and the interests of our other stockholders, including you.

We are a "controlled company" within the meaning of the New York Stock Exchange listing requirements and as a result, will qualify for and intend to rely on exemptions from certain corporate governance requirements. You will not have the same protection afforded to stockholders of companies that are subject to such corporate governance requirements.

Because of the aggregate voting power over our Company held by certain affiliates of LGP and certain members of management, we are considered a "controlled company" for the purposes of the New York Stock Exchange listing requirements. As such, we are exempt from the corporate governance requirements that our board of directors, our compensation committee and our nominating and corporate governance committee meet the standard of independence established by those corporate governance requirements. The independence standards are intended to ensure that directors who meet the independence standard are free of any conflicting interest that could influence their actions as directors.

Following this offering, we intend to utilize these exemptions afforded to a "controlled company." Accordingly, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange.

Our anti-takeover provisions could prevent or delay a change in control of our Company, even if such change in control would be beneficial to our stockholders.

Provisions of our amended and restated certificate of incorporation and amended and restated bylaws as well as provisions of Delaware law could discourage, delay or prevent a merger, acquisition or other change in control of our Company, even if such change in control would be beneficial to our stockholders. These include:

authorizing the issuance of "blank check" preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt;

a provision for a classified board of directors so that not all members of our board of directors are elected at one time;

the removal of directors only for cause;

no provision for the use of cumulative voting for the election of directors;

limiting the ability of stockholders to call special meetings;

requiring all stockholder actions to be taken at a meeting of our stockholders (i.e. no provision for stockholder action by written consent); and

establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

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In addition, the Delaware General Corporation Law, to which we are subject, prohibits us, except under specified circumstances, from engaging in any mergers, significant sales of stock or assets or business combinations with any stockholder or group of stockholders who owns at least 15% of our common stock.

Finally, we understand that, substantially concurrently with the closing of this offering, the affiliates of LGP which own our common stock, and Kip Tindell, Sharon Tindell and Melissa Reiff (the "management directors") intend to enter into a voting agreement. Pursuant to the terms of this agreement, for so long as such LGP affiliates and the management directors collectively hold at least          % of our outstanding common stock, or the agreement is otherwise terminated in accordance with its terms, such affiliates of LGP will agree to vote their shares of our common stock in favor of the election of the management directors to our board of directors upon their nomination by the nominating and corporate governance committee of our board of directors and the management directors will agree to vote their shares of our common stock in favor of the election of the directors affiliated with LGP upon their nomination by the nominating and corporate governance committee of our board of directors. Upon the closing of this offering, the parties to this agreement will collectively hold approximately                  shares, or         %, of our outstanding common stock. See "Certain relationships and related party transactions—Voting agreement."

The provision of our certificate of incorporation requiring exclusive venue in the Court of Chancery in the State of Delaware for certain types of lawsuits may have the effect of discouraging lawsuits against our directors and officers.

Our certificate of incorporation, as it will be in effect upon the closing of this offering, will require, to the fullest extent permitted by law, that (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the DGCL or our certificate of incorporation or the bylaws or (iv) any action asserting a claim against us governed by the internal affairs doctrine will have to be brought only in the Court of Chancery in the State of Delaware. Although we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.

Taking advantage of the reduced disclosure requirements applicable to "emerging growth companies" may make our common stock less attractive to investors.

The JOBS Act provides that, so long as a company qualifies as an "emerging growth company," it will, among other things:

be exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that its independent registered public accounting firm provide an attestation report on the effectiveness of its internal control over financial reporting;

be exempt from the "say on pay" and "say on golden parachute" advisory vote requirements of the Dodd-Frank Wall Street Reform and Customer Protection Act (the "Dodd-Frank Act");

certain disclosure requirements of the Dodd-Frank Act relating to compensation of its executive officers and be permitted to omit the detailed compensation discussion and analysis from proxy statements and reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); and

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instead provide a reduced level of disclosure concerning executive compensation and be exempt from any rules that may be adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotations or a supplement to the auditor's report on the financial statements.

We currently intend to take advantage of the reduced disclosure requirements regarding executive compensation. We have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 107(b) of the JOBS Act. If we remain an "emerging growth company" after fiscal 2013, we may take advantage of other exemptions, including the exemptions from the advisory vote requirements and executive compensation disclosures under the Dodd-Frank Act and the exemption from the provisions of Section 404(b) of the Sarbanes-Oxley Act. We cannot predict if investors will find our common stock less attractive if we elect to rely on these exemptions, or if taking advantage of these exemptions would result in less active trading or more volatility in the price of our common stock. Also, as a result of our intention to take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us as long as we qualify as an "emerging growth company," our financial statements may not be comparable to companies that fully comply with regulatory and reporting requirements upon the public company effective dates.

We will incur increased costs as a result of becoming a public company.

As a public company, we will incur significant legal, accounting, insurance and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act and related rules implemented by the Securities and Exchange Commission ("SEC"). The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. In estimating these costs, we took into account expenses related to insurance, legal, accounting, and compliance activities, as well as other expenses not currently incurred. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

Failure to establish and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.

We are not currently required to comply with the rules of the SEC implementing Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC's rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of controls over financial reporting. Though we will be required to disclose changes made in our internal controls and procedures on a quarterly basis, we will not be required to make

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our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC. However, as an emerging growth company, our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC or the date we are no longer an emerging growth company. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.

To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring additional accounting or internal audit staff. Testing and maintaining internal control can divert our management's attention from other matters that are important to the operation of our business. In addition, when evaluating our internal control over financial reporting, we may identify material weaknesses that we may not be able to remediate in time to meet the applicable deadline imposed upon us for compliance with the requirements of Section 404. For example, a material weakness was identified during fiscal 2012 relating to the accounting for the elfa® trade name. We are taking steps to remediate this material weakness and expect to do so by the end of fiscal 2013. If we identify additional material weaknesses in our internal control over financial reporting or are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our common stock could be negatively affected, and we could become subject to investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

We do not currently expect to pay any cash dividends.

The continued operation and expansion of our business will require substantial funding. Accordingly, we do not currently expect to pay any cash dividends on shares of our common stock. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. Additionally, the obligors under the Senior Secured Term Loan Facility, the Revolving Credit Facility and the Elfa Senior Secured Credit Facilities are currently restricted from paying cash dividends, and we expect these restrictions to continue in the future. Accordingly, if you purchase shares in this offering, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our common stock.

Substantial future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.

Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. Upon the closing of this offering, we will have                   shares of common stock outstanding. The shares of common stock offered in this offering will be freely tradable without restriction under the Securities Act, except for any shares of our common stock that may be held or acquired by our directors,

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executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available. Current holders of our common stock have rights, subject to certain conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. See "Certain Relationships and Related Party Transactions—Stockholders Agreement."

We and each of our executive officers and directors and certain shareholders, including LGP, which collectively will hold         % of our outstanding capital stock upon the closing of this offering and after giving effect to the Exchange, have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of the shares of common stock or securities convertible into or exchangeable for, or that represent the right to receive, shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of J.P. Morgan Securities LLC, Barclays Capital Inc. and Credit Suisse Securities (USA) LLC. See "Underwriting."

All of our shares of common stock outstanding as of the date of this prospectus may be sold in the public market by existing stockholders 180 days after the date of this prospectus, subject to applicable limitations imposed under federal securities laws. See "Shares Eligible for Future Sale" for a more detailed description of the restrictions on selling shares of our common stock after this offering.

In the future, we may also issue our securities if we need to raise capital in connection with a capital raise or acquisitions. The amount of shares of our common stock issued in connection with a capital raise or acquisition could constitute a material portion of our then-outstanding shares of our common stock.

Our common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.

After this offering, the market price for our common stock is likely to be volatile, in part because our shares have not been traded publicly. In addition, the market price of our common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:

quarterly variations in our operating results compared to market expectations;

changes in preferences of our customers;

announcements of new products or significant price reductions by us or our competitors;

size of the public float;

stock price performance of our competitors;

fluctuations in stock market prices and volumes;

default on our indebtedness;

actions by competitors or other shopping center tenants;

changes in senior management or key personnel;

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changes in financial estimates by securities analysts;

the market's reaction to our reduced disclosure as a result of being an emerging growth company under the JOBS Act;

negative earnings or other announcements by us or other retail home goods companies;

downgrades in our credit ratings or the credit ratings of our competitors;

issuances of capital stock; and

global economic, legal and regulatory factors unrelated to our performance.

Numerous factors affect our business and cause variations in our operating results and affect our net sales and comparable store sales, including consumer preferences, buying trends and overall economic trends; our ability to identify and respond effectively to trends and customer preferences; actions by competitors and other shopping center tenants; changes in our merchandise mix; pricing; the timing of our releases of new merchandise and promotional events; the level of customer service that we provide in our stores; changes in sales mix among sales channels; our ability to source and distribute products effectively; inventory shrinkage; weather conditions, particularly during the holiday season; and the number of stores we open in any period.

The initial public offering price of our common stock will be determined by negotiations between us and the underwriters based upon a number of factors and may not be indicative of prices that will prevail following the closing of this offering. Volatility in the market price of our common stock may prevent investors from being able to sell their common stock at or above the initial public offering price. As a result, you may suffer a loss on your investment.

In addition, stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many retail companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs and our resources and the attention of management could be diverted from our business.

If you purchase shares of common stock sold in this offering, you will incur immediate and substantial dilution.

If you purchase shares of common stock in this offering, you will incur immediate and substantial dilution in the amount of $             per share based upon an assumed initial public offering price of $             per share (the midpoint of the estimated price range set forth on the cover of this prospectus), which is substantially higher than the pro forma net tangible book value per share of our outstanding common stock. In addition, you may also experience additional dilution, or potential dilution, upon future equity issuances to investors or to our employees, consultants and directors under our stock option and equity incentive plans. See "Dilution."

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Cautionary note regarding forward-looking statements

This prospectus contains forward-looking statements. These statements 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.

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 in this prospectus are only predictions. 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. We believe that these factors include, but are not limited to, the following:

overall decline in the health of the economy, consumer spending, and the housing market;

our inability to manage costs and risks relating to new store openings;

our inability to source and market new products to meet consumer preferences;

our failure to achieve or maintain profitability;

our dependence on a single distribution center for all of our stores;

our vulnerability to natural disasters and other unexpected events;

our reliance upon independent third-party transportation providers;

our inability to protect our brand;

our failure to successfully anticipate consumer preferences and demand;

our inability to manage our growth;

inability to locate available retail store sites on terms acceptable to us;

our inability to maintain sufficient levels of cash flow to meet growth expectations;

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;

fluctuations in currency exchange rates;

our inability to effectively manage our online sales;

competition from other stores and internet-based competition;

our inability to obtain merchandise on a timely basis at competitive prices as a result of changes in vendor relationships;

vendors may sell similar or identical products to our competitors;

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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;

our dependence on foreign imports for our merchandise;

violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery and anti-kickback laws; and

our indebtedness may restrict our current and future operations.

These forward-looking statements speak only as of the date of this prospectus and are subject to a number of risks, uncertainties and assumptions described in the "Risk Factors" section and elsewhere in this prospectus. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein after we distribute this prospectus, whether as a result of any new information, future events or otherwise.

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The exchange

Holders of our preferred stock are entitled to a preferential payment upon certain distributions by us to holders of our capital stock (referred to as the liquidation preference), equal to the purchase price for such share ($1,000.00) plus accrued and unpaid dividends from August 16, 2007, the date of the LGP acquisition, on the outstanding liquidation preference at a rate of 12% per annum, compounded quarterly. Upon the closing of this offering, a dividend in the aggregate amount of $              million, which we refer to as the "Dividend," will be paid from the net proceeds from this offering as follows: (i) first, on a pro rata basis to the holders of our senior preferred stock, which shall reduce the liquidation preference of each such share of our senior preferred stock until such liquidation preference has been reduced to $1,000.00 per share and (ii) second, on a pro rata basis to the holders of our junior preferred stock, which will reduce the liquidation preference of each such share of our junior preferred stock.

As required by our existing stockholders agreement, each holder of our preferred stock will exchange each outstanding share of such holder's preferred stock for a number of shares of common stock determined by dividing (a) the liquidation preference amount of such preferred stock on the date of the Dividend (and after giving effect to the payment of the Dividend) by (b) the initial public offering price in this offering. References to the "Exchange" throughout this prospectus refer to the exchange of our preferred stock for our common stock.

As of September 1, 2013, as adjusted to give effect to the reduction resulting from the Dividend the liquidation preference per share of our senior preferred stock would have been $1,000.00 and the liquidation preference per share of our junior preferred stock would have been $             . These liquidation preference amounts are calculated as follows:

   
 
  Liquidation preference
per share of our
senior preferred stock

  Liquidation preference
per share of our
junior preferred stock

 
   

Liquidation preference as of September 1, 2013

  $ 1,599.13   $ 2,065.21  

Payment of the Dividend

  $ (599.13)   $                

Liquidation preference as of September 1, 2013, after giving effect to the payment of the Dividend

  $ 1,000.00   $                
   

The number of shares of common stock actually issued in the Exchange will be calculated using the liquidation preference as of the closing date of this offering. The liquidation preference will accrue at a rate of $242,311.28 per day (which rate will increase to $249,742.16 as of October 1, 2013) in the aggregate, which represents $105,745.53 per day (which rate will increase to $108,988.39 as of October 1, 2013) with respect to the shares of senior preferred stock and $136,565.75 per day (which rate will increase to $140,753.77 as of October 1, 2013) with respect to the shares of our junior preferred stock, for each day on or after September 1, 2013 and to, but excluding, the closing date of this offering. Such accrual of the liquidation preference compounds on a quarterly basis, and as a result, the rate of accrual will increase on the first day of the next calendar quarter.

Assuming an initial public offering price of $             per share (the midpoint of the range set forth on the front cover of this prospectus) and the liquidation preference as of September 1, 2013 after giving effect to the payment of the Dividend,                    shares of common stock will be

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outstanding immediately after the Exchange. The actual number of shares of common stock that will be issued as a result of the Exchange is subject to change based on the initial public offering price and the closing date of this offering.

The following table sets forth the computation of the exchange ratio as of September 1, 2013 for each share of our senior preferred stock and our junior preferred stock, based on the above assumptions:

   
 
  Senior
preferred
stock

  Junior
preferred
stock

 
   

Liquidation preference per share as of September 1, 2013, after giving effect to the payment of the Dividend

  $ 1,000.00   $                

Assumed initial offering price per share

             

Exchange ratio

             
   

Because the number of shares of common stock issued in the Exchange will be determined by reference to the initial public offering price in this offering, a change in the assumed initial public offering price would have a corresponding impact on the number of outstanding shares of common stock presented in this prospectus after giving effect to this offering. The following number of shares of our common stock would be outstanding immediately after the Exchange and giving effect to this offering, assuming (i) the initial public offering prices for our common stock shown below and (ii) the liquidation preference per share as of September 1, 2013 after giving effect to the payment of the Dividend, as described above:

   
 
  $
  $
  $
  $
  $
 
   

Exchange ratio for our senior preferred stock

                               

Exchange ratio for our junior preferred stock

                               

Shares of our common stock issued in the Exchange

                               

Outstanding shares of our common stock as of September 1, 2013

    498,049     498,049     498,049     498,049     498,049  

Shares of our common stock issued in this offering

                               

Outstanding shares of our common stock, after giving effect to the Exchange and this offering

                               
   

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Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting the underwriting discount and estimated offering expenses, will be approximately $              million (or $              million if the underwriters exercise their option to purchase additional shares in full), assuming the shares are offered at $             per share (the midpoint of the estimated price range set forth on the cover of this prospectus).

Each $1.00 increase or decrease in the assumed initial public offering price of $             per share (the midpoint of the estimated price range set forth on the cover of this prospectus) would increase or decrease, as applicable, the net proceeds we receive from this offering by approximately $              million (or $              million if the underwriters exercise their option to purchase additional shares in full), assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discount and estimated offering expenses. We may also increase or decrease the number of shares we are offering. An increase of 1,000,000 shares in the number of shares offered by us, together with a concomitant $1.00 increase in the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover of this prospectus, would increase the net proceeds to us from this offering by approximately $             after deducting underwriting discounts and estimated offering expenses payable by us. Conversely, a decrease of 1,000,000 shares in the number of shares offered by us together with a concomitant $1.00 decrease in the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover of this prospectus, would decrease the net proceeds to us from this offering by approximately $              million after deducting underwriting discounts and estimated offering expenses payable by us.

We intend to use the net proceeds that we receive from this offering as follows:

(i) first, to pay a dividend to holders of our senior preferred stock, which will reduce the liquidation preference of such shares until such liquidation preference is reduced to $1,000.00 per share and (ii) second, to pay the remainder as a dividend to holders of our junior preferred stock, which will reduce the liquidation preference of such shares (see "—Dividend and Exchange of Preferred Stock" above); and

if the underwriters exercise their option to purchase additional shares, we intend to use the net proceeds that we receive to repay a portion of the outstanding borrowings under the Senior Secured Term Loan Facility (as such term is defined under "Description of Indebtedness").

As of August 31, 2013, $361.3 million was outstanding under the Senior Secured Term Loan Facility. Borrowings under the Senior Secured Term Loan Facility had a weighted average interest rate of 6.42% for fiscal 2012. The Senior Secured Term Loan Facility accrues interest at the rate of the London Interbank Offered Rate (LIBOR) + 4.25%, subject to a LIBOR floor of 1.25%, and matures on April 6, 2019. On April 8, 2013, The Container Store, Inc. entered into the Increase and Repricing Transactions, which were effected pursuant to an amendment to the Senior Secured Term Loan Facility. The additional $90.0 million of borrowings was used to finance a dividend distribution to holders of our senior preferred stock in the amount of $90.0 million, which was paid on April 9, 2013. See "Description of Indebtedness."

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Capitalization

The following table sets forth our cash and cash equivalents and capitalization as of August 31, 2013, as follows:

on an actual basis;

on an as adjusted basis to reflect only (1) the exchange of all outstanding shares of our preferred stock into               shares of common stock upon the closing of this offering pursuant to the Exchange (following the payment of the Dividend to Holders of our preferred stock) and (2) the filing of our restated certificate of incorporation as of the closing date of this offering; and

on an as further adjusted basis to give further effect to our issuance and sale of              shares of common stock in this offering at an assumed initial public offering price of $             per share (the midpoint of the price range listed on the cover page of this prospectus) after deducting the underwriting discounts and estimated offering expenses payable by us.

For more information, please see "Use of Proceeds" and "The Exchange" elsewhere in this prospectus. You should read this information in conjunction with our consolidated financial statements and the related notes appearing at the end of this prospectus and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section and other financial information contained in this prospectus.

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  As of August 31, 2013  
(in thousands, except share and per share data)
  Actual
  As adjusted(1)
  As further
adjusted(2)

 
   

Cash and cash equivalents

  $ 12,744   $     $    
       

Debt:

                   

Revolving Credit Facility(3)

  $              

Senior Secured Term Loan Facility

    361,344              

Elfa Term Loan Facility

    3,769              

Elfa Revolving Credit Facility(4)

    21,215              

Mortgage and other loans

    5,864              
       

Total Debt

  $ 392,192              

Stockholders' equity:

                   

Senior preferred stock, par value $0.01 per share; 250,000 shares authorized, 202,480 shares issued and 202,182 outstanding, actual; and no shares authorized, issued or outstanding, as adjusted and as further adjusted(5)

  $ 2              

Junior preferred stock, par value $0.01 per share; 250,000 shares authorized, 202,480 shares issued and 202,182 outstanding, actual; and no shares authorized, issued or outstanding, as adjusted and as further adjusted(5)

    2              

Common stock, par value $0.01 per share; 600,000 shares authorized, 500,356 shares issued and 498,049 outstanding, actual;              shares authorized, as adjusted and as further adjusted;              shares issued, as adjusted and as further adjusted; and              shares outstanding, as adjusted and as further adjusted

    5              

Additional paid-in capital(5)

    455,484              

Accumulated other comprehensive loss

    (569 )            

Retained deficit

    (314,518 )            

Treasury stock, 2,903 shares

    (840 )            
       

Total stockholders' equity

  $ 139,566              
       

Total capitalization

  $ 531,758   $     $    
   

(1)   We have calculated the number of shares of common stock to be issued pursuant to the Exchange using the liquidation preference of the shares of our preferred stock as of September 1, 2013, after giving effect to the payment of the Dividend. Accordingly, such amounts do not take into account shares of our common stock to be issued in the Exchange in satisfaction of the liquidation preference of our preferred stock accrued on or after September 1, 2013 and to, but excluding, the closing date of this offering. Such liquidation preference will accrue at a rate of $242,311.28 per day (which rate will increase to $249,742.16 as of October 1, 2013) in the aggregate (which would be exchanged in the Exchange for approximately               shares of our common stock per day). Such accrual of the liquidation preference compounds on a quarterly basis, and as a result, the rate of accrual will increase on the first day of the next calendar quarter.

Because the number of shares of common stock for which a share of our preferred stock will be exchanged will be determined by reference to the initial public offering price in this offering, a change in the assumed initial public offering price would also have a corresponding impact on the number of shares of common stock exchanged for shares of our preferred stock pursuant to the Exchange upon the closing of this offering.

If the initial public offering price is equal to $              per share, the midpoint of the price range set forth on the cover of this prospectus, our preferred stock would be exchanged for an aggregate of              shares of our common stock upon the closing of

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this offering, assuming that the closing occurs on September 1, 2013. A $1.00 increase in the assumed initial public offering price of $             per share would decrease by               shares the number of shares of our common stock that will be exchanged for our preferred stock upon the closing of this offering. A $1.00 decrease in the assumed initial public offering price of $             per share would increase by              shares the number of shares of our common stock that will be exchanged for our preferred stock upon the closing of this offering.

(2)   A $1.00 increase (decrease) in the assumed initial public offering price of $              per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) the as further adjusted amount of each of additional paid-in capital, total stockholders' equity and total capitalization by approximately $             , $             and $             , respectively, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We may also increase or decrease the number of shares we are offering. An increase of 1,000,000 shares in the number of shares offered by us, together with a concomitant $1.00 increase in the assumed initial public offering price of $             per share (which is the midpoint of the price range set forth on the cover of this prospectus) would increase (decrease) the as further adjusted amount of each of additional paid in capital, total stockholders' equity and total capitalization by approximately $             , $             and $             , respectively, after deducting underwriting discounts and estimated offering expenses payable by us. Conversely, a decrease of 1,000,000 shares in the number of shares offered by us together with a concomitant $1.00 decrease in the assumed initial public offering price of $             per share, which is the midpoint of the price range set forth on the cover of this prospectus, would decrease (increase) the as adjusted amount of each of additional paid in capital, total stockholders' equity and total capitalization by approximately $             , $             and $             , respectively after deducting underwriting discounts and estimated offering expenses payable by us.

The table above does not include:

40,887 shares of common stock issuable upon exercise of stock options outstanding as of September 1, 2013 at a weighted-average exercise price of $100.00 per share;

             shares of common stock reserved as of the closing date of this offering for future issuance under our 2013 Equity Plan; and

the shares of common stock to be issued in the Exchange in satisfaction of the accrued liquidation preference on our preferred stock after September 1, 2013 (see note 1 above).

(3)   The Revolving Credit Facility provides for borrowings of up to $75.0 million.

(4)   The Elfa Revolving Credit Facility provides for borrowings of up to SEK 175,000,000 (approximately $26.4 million as of August 31, 2013).

(5)   The accrued liquidation preference of the senior preferred stock and junior preferred stock as of August 31, 2013 was approximately $323.8 million and approximately $418.2 million, respectively.

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Dividend policy

We currently intend to retain all available funds and any future earnings for use in the operation of our business, and therefore we do not currently expect to pay any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of our board of directors and will depend upon our results of operations, financial condition, capital requirements and other factors that our board of directors deems relevant. We are a holding company, and substantially all of our operations are carried out by our subsidiary, The Container Store, Inc., and its subsidiaries. The Container Store, Inc.'s ability to pay dividends to us is limited by the Revolving Credit Facility and the Senior Secured Term Loan Facility, which may in turn limit our ability to pay dividends on our common stock. Our ability to pay dividends may also be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries.

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Dilution

If you invest in our common stock in this offering, your ownership interest will be immediately diluted to the extent of the difference between the initial public offering price per share and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Our pro forma net tangible book value as of August 31, 2013 was $              million, or $             per share of our common stock. Pro forma net tangible book value per share represents our total tangible assets reduced by the amount of our total liabilities, divided by the total number of shares of our common stock outstanding after giving effect to the exchange of all outstanding shares of our preferred stock upon the closing of this offering (but without giving effect to the increase per share attributable to this offering).

After giving effect to the sale of             shares of common stock that we are offering at an assumed initial public offering price of $             per share, which is the midpoint of the range listed on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of August 31, 2013 would have been approximately $              million, or approximately $             per share. This amount represents an immediate increase in net tangible book value of $             per share to our existing stockholders and an immediate dilution in net tangible book value of approximately $             per share to new investors purchasing shares of common stock in this offering. We determine dilution by subtracting the pro forma as adjusted net tangible book value per share after this offering from the amount of cash that a new investor paid for a share of common stock. The following table illustrates this dilution:

   

Assumed initial public offering price per share

  $     $    

Pro forma net tangible book value per share as of August 31, 2013

             

Increase per share attributable to this offering

             

Pro forma as adjusted net tangible book value per share after this offering

  $     $    
       

Dilution per share to new investors

  $     $    
   

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, which is the midpoint of the range listed on the cover page of this prospectus, would increase (decrease) the pro forma as adjusted net tangible book value per share after this offering by approximately $             , and dilution in net tangible book value per share to new investors by approximately $             , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Because the number of shares of common stock into which a share of our preferred stock is convertible will be determined by reference to the initial public offering price in this offering, a change in the assumed initial public offering price would also have a corresponding impact on our pro forma net tangible book value per share of common stock. Our pro forma net tangible book value per share of common stock

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would have been the following at August 31, 2013 assuming the initial public offering prices for our common stock shown below:

   
Assumed initial public offering price per share   $     $     $     $     $    
Pro forma net tangible book value per share as of August 31, 2013   $     $     $     $     $    
   

If the underwriters exercise their option to purchase additional shares of our common stock in full in this offering, the pro forma as adjusted net tangible book value after the offering would be $             per share, the increase in net tangible book value per share to existing stockholders would be $             and the dilution in net tangible book value per share to new investors would be $             per share, in each case assuming an initial public offering price of $             per share, which is the midpoint of the range listed on the cover page of this prospectus.

The following table summarizes, as of August 31, 2013, the differences between the number of shares purchased from us, the total consideration paid to us in cash and the average price per share that existing stockholders and new investors paid. The calculation below is based on an assumed initial public offering price of $             per share, which is the midpoint of the range listed on the cover page of this prospectus, before deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

   
 
  Shares purchased   Total consideration    
 
 
  Average price
per share

 
 
  Number
  Percent
  Amount
  Percent
 
   

Existing stockholders

          %   $       %   $    

New investors

                               
       

Total

          100%   $       100%   $    
   

The foregoing tables and calculations are based on the number of shares of our common stock and our preferred stock outstanding as of September 1, 2013 after giving effect to the exchange of all outstanding shares of our preferred stock upon the closing of this offering determined by reference to the midpoint of the range set forth on the cover of this prospectus and the payment of the Dividend to holders of our preferred stock, and exclude:

40,887 shares of common stock issuable upon exercise of stock options outstanding as of September 1, 2013 at a weighted-average exercise price of $100.00 per share;

             shares of common stock reserved as of the closing date of this offering for future issuance under our 2013 Equity Plan; and

the shares of common stock to be issued in the Exchange in satisfaction of the accrued liquidation preference on our preferred stock on and after September 1, 2013.

In this prospectus, we have calculated the number of shares of common stock to be issued pursuant to the Exchange using an assumed offering date of September 1, 2013 for purposes of calculating the liquidation preference of the shares of our preferred stock, and the application of the net proceeds to us. Accordingly, such amounts do not take into account shares of common stock to be issued in the Exchange in satisfaction of the accrued liquidation preference on our preferred stock on and after September 1, 2013 and to, but excluding, the closing date of this offering. Such

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dividends accrue at a rate of $242,311.28 per day (which rate will increase to $249,742.16 as of October 1, 2013) in the aggregate (which would be exchanged in the Exchange for approximately              shares of our common stock per day). Such accrual of the liquidation preference compounds on a quarterly basis, and as a result, the rate of accrual will increase on the first day of the next calendar quarter. For more information, please see "Use of Proceeds" and "The Exchange" elsewhere in this prospectus.

To the extent any of our outstanding options are exercised, there will be further dilution to new investors. To the extent all of such outstanding options had been exercised as of September 1, 2013, the pro forma as adjusted net tangible book value per share after this offering would be $             , and the dilution in net tangible book value per share to new investors would be $             .

If the underwriters exercise their option to purchase additional shares in full:

the percentage of shares of common stock held by existing stockholders will decrease to approximately         % of the total number of shares of our common stock outstanding after this offering; and

the number of shares held by new investors will increase to             , or approximately         % of the total number of shares of our common stock outstanding after this offering.

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Selected consolidated financial data

You should read the following selected consolidated financial data in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

We have derived the consolidated statement of operations data and consolidated balance sheet data for the fiscal years ended February 26, 2011, February 25, 2012, and March 2, 2013 from our audited consolidated financial statements for such years and for the twenty six weeks ended August 25, 2012 and August 31, 2013 from our unaudited consolidated financial statements for such periods. Our audited consolidated financial statements as of February 25, 2012 and March 2, 2013 and for the fiscal years ended February 26, 2011, February 25, 2012 and March 2, 2013 have been included in this prospectus. The consolidated statements of operations data for the fiscal year ended February 27, 2010 is derived from our audited consolidated financial statements that are not included in this prospectus. We have derived the consolidated statement of operations data for the fiscal year ended February 28, 2009 and the consolidated balance sheet data as of February 28, 2009 and February 27, 2010 from our unaudited consolidated financial statements that are not included in this prospectus. Our unaudited consolidated financial statements as of August 31, 2013 and for the twenty six weeks ended August 25, 2012 and August 31, 2013 have been included in this prospectus and, in the opinion of management, include all adjustments (inclusive only of normally recurring adjustments) necessary for a fair presentation. Historical results are not indicative of the results to be expected in the future and results of operations for an interim period are not necessarily indicative of results for a full year. The fiscal year ended March 2, 2013 included 53 weeks, whereas the fiscal years ended February 25, 2012, and February 26, 2011, February 27, 2010 and February 28, 2009 included 52 weeks. Categories that are only applicable to our TCS segment are noted with (*) and to our Elfa segment with (+). For segment data, see Note 14 to our consolidated financial statements.

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  Fiscal year ended   Twenty six weeks ended  
(in thousands, except shares and per share amounts)
  February 28,
2009

  February 27,
2010

  February 26,
2011

  February 25,
2012

  March 2,
2013

  August 25,
2012

  August 31,
2013

 
   

Consolidated statement of operations

                                           

Net sales

  $ 551,276   $ 523,004   $ 568,820   $ 633,619   $ 706,757   $ 314,316   $ 343,419  

Cost of sales (excluding depreciation and amortization)

    238,559     223,759     235,295     266,355     291,146     131,162     142,818  
       

Gross profit

    312,717     299,245     333,525     367,264     415,611     183,154     200,601  
       

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

    270,803     252,272     269,474     293,665     331,380     155,307     169,287  

Pre-opening costs*

    4,076     1,167     1,747     5,203     7,562     4,436     3,934  

Goodwill and trade name impairment+

    124,228         52,388     47,037     15,533          

Depreciation and amortization

    22,650     23,845     24,354     27,451     29,550     14,489     15,050  

Restructuring charges+

            341     133     6,369     2,309     361  

Long-lived asset impairment

    2,091                          

Other expenses

    1,532     329         193     987     482     626  

Loss (gain) on disposal of assets

    53     121     139     210     88     (5 )   73  
       

Income (loss) from operations

    (112,716 )   21,511     (14,918 )   (6,628 )   24,142     6,136     11,270  

Interest expense

    28,716     27,331     26,006     25,417     21,388     10,890     11,074  

Loss on extinguishment of debt*

                    7,333     7,329     1,101  
       

Loss before taxes

    (141,432 )   (5,820 )   (40,924 )   (32,045 )   (4,579 )   (12,083 )   (905 )

Provision (benefit) for income taxes(1)

    1,195     (1,623 )   4,129     (1,374 )   (4,449 )   (2,998 )   (217 )
       

Net loss

  $ (142,627 ) $ (4,197 ) $ (45,053 ) $ (30,671 ) $ (130 ) $ (9,085 ) $ (688 )

Less preferred dividends accrued

    (54,897 )   (61,868 )   (69,723 )   (78,575 )   (90,349 )   (42,954 )   (44,150 )
       

Net loss attributable to common stockholders (basic and diluted)(2)

  $ (197,524 ) $ (66,065 ) $ (114,776 ) $ (109,246 ) $ (90,479 ) $ (52,039 ) $ (44,838 )
       

Net Loss per share attributable to common stockholders (basic and diluted)(2)

  $ (395.21 ) $ (132.30 ) $ (230.05 ) $ (219.10 ) $ (181.60 ) $ (104.43 ) $ (90.01 )
       

Shares used in computing net loss per share attributable to common stockholders (basic and diluted)(2)

    499,791     499,338     498,905     498,600     498,225     498,330     498,144  

Pro forma net loss per common share (basic and diluted)(2)

                                           
       

Shares used in computing pro forma net loss per common share (basic and diluted)(2)

                                           
   

   
 
  Fiscal year   Twenty six weeks ended  
 
  February 28,
2009

  February 27,
2010

  February 26,
2011

  February 25,
2012

  March 2,
2013

  August 25,
2012

  August 31,
2013

 
   

Other financial data:

                                           

Adjusted EBITDA (in thousands)(3)

  $ 46,995   $ 51,862   $ 67,707   $ 75,644   $ 87,585   $ 30,139   $ 32,719  

Adjusted EBITDA margin(4)

    8.5%     9.9%     11.9%     11.9%     12.4%     9.6%     9.5%  

Comparable store sales growth for the period*(5)

    (9.3)%     (5.7)%     8.1%     7.6%     4.4%     5.6%     2.9%  

Number of stores open at end of period*

    46     47     49     53     58     57     61  

Average ticket*(6)

  $ 54.62   $ 52.48   $ 53.68   $ 55.60   $ 57.34   $ 54.70   $ 57.54  
   

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  As of  
(in thousands)
  February 28,
2009

  February 27,
2010

  February 26,
2011

  February 25,
2012

  March 2,
2013

  August 31,
2013

 
   

Consolidated balance sheet data:

                                     

Cash and cash equivalents

  $ 7,248   $ 26,162   $ 49,756   $ 51,163   $ 25,351   $ 12,744  

Net working capital(7)

    37,642     33,365     21,341     21,367     22,557     29,793  

Total assets

    761,309     797,133     773,303     746,678     752,820     754,351  

Long-term debt(8)

    303,875     305,673     300,893     300,166     285,371     370,977  

Total stockholders' equity

    285,305     303,301     268,227     232,989     233,375     139,566  
   

(1)   The difference between our effective tax rate and the statutory Federal tax rate is predominantly related to fluctuations in the valuation allowance recorded against net deferred assets not expected to be realized, the effects of foreign income taxed at a different rate and intraperiod tax allocations between continuing operations and other comprehensive income.

(2)   Common stockholders do not share in net income unless earnings exceed the unpaid dividends on our preferred stock. Accordingly, prior to this offering, there were no earnings available for common stockholders because in fiscal 2008, fiscal 2009, fiscal 2010, fiscal 2011, fiscal 2012 and the twenty six weeks ended August 25, 2012 and August 31, 2013 we reported a net loss. During any period in which we had a net loss, the loss was attributed only to the common stockholders. For all periods presented, basic and diluted net loss per common share are the same, as any additional common stock equivalents would be anti-dilutive.

Pro forma figures give effect to the offering and the Exchange as if such transactions were completed at the beginning of such period. We will not have any preferred stock outstanding after the completion of this offering. See "The Exchange" for additional information.

As each of the exchange ratio for our senior preferred stock and the exchange ratio for our junior preferred stock will be determined based on the final initial offering price, the pro forma weighted average number of common shares, and therefore the pro forma basic and diluted earnings per common share, would change if the offering price is not $             per share (the midpoint of the range set forth in the cover of this prospectus). The following table sets forth the impact of a change in the final initial offering price on each of (i) the exchange ratio for our senior preferred stock, (ii) the exchange ratio for our junior preferred stock, (iii) our pro forma weighted average number of common shares and (iv) our pro forma earnings per common share:

 
 
  $
  $
  $
  $
  $
 

Exchange ratio for our senior preferred stock

                   

Exchange ratio for our junior preferred stock

                   

Shares used in computing pro forma net loss per common share (basic and diluted)

                   

Pro forma net loss per common share (basic and diluted)

  $   $   $   $   $
 

In addition, we have calculated the number of shares of common stock to be issued pursuant to the Exchange using an assumed offering date of September 1, 2013 for purposes of calculating the liquidation preference of the shares of our preferred stock. Accordingly, such amounts do not take into account shares of common stock to be issued in the Exchange in satisfaction of the accrued liquidation preference on our preferred stock after September 1, 2013 and through the closing date of this offering. Such liquidation preference will accrue at a rate of approximately $242,311.28 per day (which rate will increase to $249,742.16 as of October 1, 2013) in the aggregate (which would be exchanged in the Exchange for approximately             shares of our common stock per day).

(3)   EBITDA and Adjusted EBITDA have been presented in this prospectus 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 the Secured Term Loan Facility and the Revolving Credit Facility and is the basis 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 prospectus because they are key metrics used by management, our board of directors and LGP to assess our financial performance. EBITDA and Adjusted EBITDA are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In addition to covenant compliance and executive performance evaluations, 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.

EBITDA and Adjusted EBITDA are not GAAP measures of our financial performance or liquidity and should not be considered as alternatives to net income (loss) as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. 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

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this presentation, such as pre-opening costs, stock compensation expense, and losses on extinguishment of debt. Our presentation of Adjusted EBITDA should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using EBITDA and Adjusted EBITDA supplementally. Our measures of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.

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

   
 
  Fiscal year ended   Twenty six weeks ended  
(in thousands)
  February 28,
2009

  February 27,
2010

  February 26,
2011

  February 25,
2012

  March 2,
2013

  August 25,
2012

  August 31,
2013

 
   

Net loss

  $ (142,627 ) $ (4,197 ) $ (45,053 ) $ (30,671 ) $ (130 ) $ (9,085 ) $ (688 )

Depreciation and amortization

    22,650     23,845     24,354     27,451     29,550     14,489     15,050  

Interest expense

    28,716     27,331     26,006     25,417     21,388     10,890     11,074  

Income tax expense (benefit)

    1,195     (1,623 )   4,129     (1,374 )   (4,449 )   (2,998 )   (217 )
       

EBITDA

    (90,066 )   45,356     9,436     20,823     46,359     13,296     25,219  

Management fees(a)

                500     1,000     500     500  

Pre-opening costs*(b)

    4,076     1,167     1,747     5,000     7,562     4,436     3,934  

Goodwill and trade name impairment+(c)

    124,228         52,388     47,037     15,533          

Non-cash rent(d)

    5,450     4,033     2,442     1,935     2,014     1,306     702  

Restructuring charges+(e)

    1,814         341     133     6,369     2,309     361  

Long-lived asset impairment+(f)

    2,091                          

Stock compensation expense(g)

    350                 283         213  

Loss on extinguishment of debt*(h)

                    7,333     7,329     1,101  

Foreign exchange (gains) losses(i)

    (871 )   959     1,269     (66 )   55     444     16  

Other adjustments(j)

    (77 )   347     84     282     1,077     519     673  
       

Adjusted EBITDA

  $ 46,995   $ 51,862   $ 67,707   $ 75,644   $ 87,585   $ 30,139   $ 32,719  
   

(a)   Fees paid to LGP in accordance with our management services agreement, which will terminate on the closing of this offering.

(b)   Non-capital expenditures associated with opening new stores and relocating stores. Prior to fiscal 2012, the amount of pre-opening costs permitted pursuant to the terms of the Revolving Credit Facility and the Senior Secured Term Loan Facility to be included in the calculation of Adjusted EBITDA was limited to $5.0 million, and the limit was increased to $10.0 million in April 2012. Similar limits exist in our compensation plan. We adjust for these costs to facilitate comparisons of our performance from period to period.

(c)   Non-cash charges related to impairment of intangible assets, primarily related to Elfa, which we do not consider in our evaluation of our ongoing performance.

(d)   Reflects the extent to which our annual GAAP rent expense has been above or below our cash rent payment due to lease accounting adjustments. The adjustment varies depending on the average age of our lease portfolio (weighted for size), as our GAAP rent expense on younger leases typically exceeds our cash cost, while our GAAP rent expense on older leases is typically less than our cash cost. Although our GAAP rent expense has exceeded our cash rent payments through our last fiscal year, as our lease portfolio matures we expect our cash rent payments to exceed our GAAP rent expense, beginning in fiscal 2013.

(e)   Includes charges incurred to restructure business operations at Elfa, including the closure of a sales subsidiary in the Netherlands in 2008, the sale of a subsidiary in Germany and a manufacturing facility in Norway in fiscal 2012, as well as the relocation of certain head office functions in sales and marketing from the Västervik, Sweden, manufacturing location to the group headquarters in Malmö, Sweden in fiscal 2012, which we do not consider in our evaluation of our ongoing performance.

(f)    Non-cash charges related to impairment of long-lived tangible assets in our Elfa segment.

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

(h)   Loss recorded as a result of the repayment of the then outstanding term loan facility and senior subordinated notes in April 2012, which we do not consider in our evaluation of our ongoing operations, and the April 2013 amendment to the Senior Secured Term Loan Facility. In the event the underwriters exercise their option to purchase additional shares, we expect to incur a charge in connection with our repayment of a portion of the borrowings under the Senior Secured Term Loan Facility with the net proceeds of this offering.

(i)    Realized foreign exchange transactional gains/losses.

(j)    Other adjustments include amounts our management does not consider in our evaluation of our ongoing operations, including costs incurred in preparations for this offering and other charges.

(4)   Adjusted EBITDA margin means, for any period, the Adjusted EBITDA for that period divided by the net sales for that period.

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(5)   A store is included in the comparable store sales calculation on the first day of the sixteenth full fiscal month following the store's opening. When a store is relocated, we continue to consider sales from that store to be comparable store sales. Net sales from our website and call center are also included in calculations of comparable store sales.

(6)   Average ticket for any period is calculated by dividing (a) net sales of merchandise by our TCS segment (or, if average ticket is being calculated with respect to the elfa® Custom Design Center, the net sales of merchandise from the elfa® Custom Design Center) for that period (regardless of whether such net sales are included in comparable store sales for such period) by (b) the number of transactions for that period comprising such net sales.

(7)   Net working capital is defined as current assets (excluding cash and cash equivalents) less current liabilities (excluding the current portion of long-term debt and revolving lines of credit).

(8)   Long-term debt consists of the current and long-term portions of the Senior Secured Term Loan Facility, the Elfa Term Loan Facility, and other mortgages and loans.

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

You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" sections of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Our fiscal year is the 52- or 53-week period ending on the Saturday closest to February 28. The following discussion contains references to fiscal 2010, fiscal 2011, and fiscal 2012, which represent our fiscal years ended February 26, 2011, February 25, 2012, and March 2, 2013, respectively. Fiscal 2010 and fiscal 2011 were 52-week periods, whereas fiscal 2012 was a 53-week period. The first half of fiscal 2013 ended on August 31, 2013 and the first half of fiscal 2012 ended on August 25, 2012, and both included twenty six weeks.

Overview

As of September 1, 2013, we operated 61 stores with an average size of approximately 19,000 selling square feet in 22 states and the District of Columbia. In fiscal 2012, TCS net sales were derived from approximately 10,500 unique SKUs organized into 16 distinct lifestyle departments sourced from approximately 700 vendors around the world. The breadth, depth and quality of our product offerings are designed to appeal to a broad demographic, including our core customers, who are predominantly female, affluent, highly educated and busy.

Our operations consist of two reporting segments:

TCS, which consists of our retail stores, website and call center. As of September 1, 2013, we operated 61 stores with an average size of approximately 19,000 selling square feet in 22 states and the District of Columbia. We also offer all of our products directly to customers through our website and call center which accounted for approximately 5.4% of TCS net sales in fiscal 2012. Our stores receive all products directly from our distribution center co-located with our corporate headquarters in Coppell, Texas. In fiscal 2012, TCS net sales were derived from approximately 10,500 unique stock keeping units ("SKUs") organized into 16 distinct lifestyle departments sourced from approximately 700 vendors around the world. The breadth, depth and quality of our product offerings are selected to appeal to a broad demographic, including our core customers, who are predominantly female, affluent, highly educated and busy. In fiscal 2012, TCS had net sales of $613 million, which represented approximately 87% of our total net sales.

Elfa, which designs and manufactures component-based shelving and drawer systems and made-to-measure sliding doors. Elfa was founded in 1948 and is headquartered in Malmö, Sweden. Elfa's shelving and drawer systems are customizable for any area of the home, including closets, kitchens, offices and garages. Elfa operates four manufacturing facilities with two located in Sweden, one in Finland 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. and represented approximately 34% of Elfa's total sales in fiscal 2012. Elfa also sells its products on a wholesale basis to various retailers in more than 30

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    countries around the world, with a concentration in the Nordic region of Europe. In fiscal 2012, the Elfa segment had $94 million of third party net sales, which represented approximately 13% of our total net sales.

How we assess the performance of our business

We consider a variety of financial and operating measures in assessing the performance of our business. The key measures we use to determine how our business is performing are net sales, gross profit, gross margin, and selling, general and administrative expenses. In addition, we also review other important metrics such as comparable store sales, average ticket and Adjusted EBITDA.

Net sales

Net sales reflect our sales of merchandise plus other services provided, such as shipping, delivery, and installation, less returns and discounts. Net sales also include wholesale sales by Elfa. Revenue from our TCS segment is recognized upon receipt of the product by our customers or upon completion of the service to our customers. Elfa segment revenue is recorded upon shipment.

The retail and wholesale businesses in which we operate are cyclical, and consequently our sales are affected by general economic conditions. Purchases of our products are sensitive to trends in the levels of consumer spending, which are affected by a number of factors such as consumer disposable income, housing market conditions, stock market performance, consumer debt, interest rates, tax rates and overall consumer confidence.

Our business is moderately seasonal. As a result, our revenues fluctuate from quarter to quarter, which often affects the comparability of our interim results. Net sales are historically higher in the fourth quarter due primarily to the impact of our Annual elfa® Sale, which begins on December 24th and runs into early February each year.

Gross profit and gross margin

Gross profit is equal to our net sales less cost of sales. Gross profit as a percentage of net sales is referred to as gross margin. Cost of sales in our TCS segment includes the purchase cost of inventory less vendor rebates, in-bound freight, as well as inventory shrinkage. Costs incurred to ship or deliver merchandise to customers, as well as direct installation costs, are also included in cost of sales in our TCS segment. Elfa segment cost of sales from manufacturing operations includes direct costs associated with production, primarily material and wages. The components of our cost of sales may not be comparable to the components of cost of sales or similar measures by other retailers. As a result, data in this prospectus regarding our gross profit and gross margin may not be comparable to similar data made available by other retailers.

Our gross profit is variable in nature and generally follows changes in net sales. Our gross margin can be impacted by changes in the mix of products sold. For example, sales from our TCS segment typically provide a higher gross margin than sales to third parties from our Elfa segment. Gross margin for our TCS segment is also susceptible to foreign currency risk as purchases of elfa® products from our Elfa segment are in Swedish krona, while sales of these products are in U.S. dollars. We mitigate this risk through the use of forward contracts, whereby we hedge purchases of inventory by locking in foreign currency exchange rates in advance.

Selling, general and administrative expenses

Selling, general and administrative expenses includes all operating costs not included in cost of sales or pre-opening costs. For our TCS segment, these include all payroll and payroll-related

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expenses, marketing expenses, all occupancy expenses (which include rent, real estate taxes, common area maintenance, utilities, telephone, property insurance, and repair and maintenance), costs to ship product from the distribution center to our stores, and supplies expenses. We also incur costs for our distribution and corporate office operations. For our Elfa segment, these include sales and marketing expenses, product development costs, and all expenses related to operations at headquarters. Depreciation and amortization is excluded from both gross profit and selling, general and administrative expenses. Selling, general and administrative expenses also include non-cash stock-based compensation.

Selling, general and administrative expenses includes both fixed and variable components and, therefore, is not directly correlated with net sales. The components of our selling, general and administrative expenses may not be comparable to the components of similar measures of other retailers. We expect that our selling, general and administrative expenses will increase in future periods with future growth and in part due to additional legal, accounting, insurance, and other expenses that we expect to incur as a result of being a public company, including compliance with the Sarbanes-Oxley Act.

New store Pre-opening costs

Non-capital expenditures associated with opening new stores, including rent, marketing expenses, travel and relocation costs, and training costs, are expensed as incurred and are included in pre-opening costs in the consolidated statement of operations.

Comparable store sales

A store is included in the comparable store sales calculation on the first day of the sixteenth full fiscal month following the store's opening, which is when we believe comparability is achieved. When a store is relocated, we continue to include sales from that store in comparable store sales. Sales from our website and call center, which are included in our net sales for all periods discussed below, are also included in calculations of comparable store sales.

Comparable store sales allow us to evaluate how our retail store base is performing by measuring the change in period-over-period net sales in stores that have been open for fifteen months or more. Various factors affect comparable store sales, including:

national and regional economic trends in the United States;

changes in our merchandise mix;

changes in pricing;

changes in timing of promotional events or holidays; and

weather.

Opening new stores is an important part of our growth strategy. As we continue to pursue our growth strategy, we anticipate that a significant percentage of our net sales will come from stores not included in our comparable store sales calculation. Accordingly, comparable store sales are only one measure we use to assess the success of our growth strategy.

Average ticket

Average ticket for any period is calculated by dividing (a) net sales of merchandise from our TCS segment (or, if average ticket is being calculated with respect to the elfa® Custom Design Center, the net sales of merchandise from the elfa® Custom Design Center) for that period (regardless of whether such net sales are included in comparable sales for such period) by (b) the number of transactions for that period comprising such net sales. Historically, the average ticket for our elfa® department has been significantly higher than our overall average ticket.

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Adjusted EBITDA

EBITDA and Adjusted EBITDA are key metrics used by management, our board of directors and LGP to assess our financial performance. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In addition to covenant compliance and executive performance evaluations, 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 define EBITDA as net income before interest, taxes, depreciation, and amortization. Adjusted EBITDA is calculated in accordance with the Secured Term Loan Facility and the Revolving Credit Facility and is the basis 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 representative of our ongoing operating performance. For reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, see "Summary Historical Consolidated Financial and Other Data."

Results of operation

The following tables summarize key components of our results of operations for the periods indicated, in dollars and as a percentage of net sales (categories that are only applicable to our TCS segment are noted with (*) and to our Elfa segment with (+)). For segment data, see Note 14 to our consolidated financial statements.

   
 
  Fiscal year   Twenty six weeks ended  
(in thousands)
  2010
  2011
  2012
  August 25, 2012
  August 31, 2013
 
   

Net sales

  $ 568,820   $ 633,619   $ 706,757   $ 314,316   $ 343,419  

Cost of sales (excluding depreciation and amortization)

    235,295     266,355     291,146     131,162     142,818  
       

Gross profit

    333,525     367,264     415,611     183,154     200,601  
       

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

    269,474     293,665     331,380     155,307     169,287  

Pre-opening costs*

    1,747     5,203     7,562     4,436     3,934  

Goodwill and trade name impairment+

    52,388     47,037     15,533          

Depreciation and amortization

    24,354     27,451     29,550     14,489     15,050  

Restructuring charges+

    341     133     6,369     2,309     361  

Other expenses

        193     987     482     626  

Loss (gain) on disposal of assets

    139     210     88     (5 )   73  
       

Income (loss) from operations

    (14,918 )   (6,628 )   24,142     6,136     11,270  

Interest expense

    26,006     25,417     21,388     10,890     11,074  

Loss on extinguishment of debt*

            7,333     7,329     1,101  
       

Loss before taxes

    (40,924 )   (32,045 )   (4,579 )   (12,083 )   (905 )

Provision (benefit) for income taxes

    4,129     (1,374 )   (4,449 )   (2,998 )   (217 )
       

Net loss

  $ (45,053 ) $ (30,671 ) $ (130 ) $ (9,085 ) $ (688 )
   

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  Fiscal year   Twenty six weeks ended  
 
  2010
  2011
  2012
  August 25, 2012
  August 31, 2013
 
   

Percentage of net sales:

                         

Net sales

  100.0%   100.0%   100.0%     100.0%     100.0%  

Cost of sales (excluding depreciation and amortization)

  41.4%   42.0%   41.2%     41.7%     41.6%  
       

Gross profit

  58.6%   58.0%   58.8%     58.3%     58.4%  
       

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

  47.4%   46.3%   46.9%     49.4%     49.3%  

Pre-opening costs*

  0.3%   0.8%   1.1%     1.4%     1.1%  

Goodwill and trade name impairment+

  9.2%   7.5%   2.2%          

Depreciation and amortization

  4.3%   4.3%   4.2%     4.6%     4.4%  

Restructuring charges+

  0.0%   0.0%   0.9%     0.7%     0.1%  

Other expenses

  0.0%   0.0%   0.1%     0.2%     0.2%  

Loss (gain) on disposal of assets

  0.0%   0.0%   0.0%     0.0%     0.0%  
       

Income (loss) from operations

  (2.6% ) (1.0% ) 3.4%     2.0%     3.3%  

Interest expense

  4.6%   4.0%   3.0%     3.5%     3.2%  

Loss on extinguishment of debt*

      1.0%     2.3%     0.3%  
       

Loss before taxes

  (7.2% ) (5.0% ) (0.6% )   (3.8% )   (0.2% )

Provision (benefit) for income taxes

  0.7%   (0.2% ) (0.6% )   (0.9% )   (0.0% )
       

Net loss

  (7.9% ) (4.8% ) (0.0% )   (2.9% )   (0.2% )
       

Operating data:

                         

Comparable store sales growth for the period*

  8.1%   7.6%   4.4%     5.6%     2.9%  

Number of stores open at end of period*

  49   53   58     57     61  

Average ticket*

  $53.68   $55.60   $57.34     $54.70     $57.54  
   

First twenty six weeks of fiscal 2013 compared to first twenty six weeks of fiscal 2012

Net sales

The following table summarizes our net sales for the first twenty six weeks of fiscal 2013 and fiscal 2012:

   
(dollars in thousands)
  Twenty six Weeks Ended
August 25, 2012

  % total
  Twenty six Weeks Ended
August 31, 2013

  % total
 
   

TCS net sales

  $ 270,349     86.0%   $ 302,799     88.2%  

Elfa third party net sales

    43,967     14.0%     40,620     11.8%  
       

Net Sales

  $ 314,316     100.0%   $ 343,419     100.0%  
   

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Net sales in the first twenty six weeks of fiscal 2013 increased by $29,103, or 9.3%, compared to the first twenty six weeks of fiscal 2012. This increase is comprised of the following components:

   
(in thousands)
  Net sales
 
   

Net sales for the first twenty six weeks of fiscal 2012

  $ 314,316  

Incremental net sales increase (decrease) due to:

       

Comparable stores (including a $2,072 increase in online sales)

    11,161  

New stores

    20,103  

Elfa third party net sales

    (3,347 )

Other

    1,186  
       

Net sales for the first twenty six weeks of fiscal 2013

  $ 343,419  
   

This increase in net sales was driven by comparable store sales growth of 2.9%, which includes online sales growth of 17.5%. The comparable store sales growth is primarily attributable to an increase in the average ticket of 5.0%, which more than offset a 1.9% decrease in transactions. New store net sales increases are due to eight incremental stores, five of which were opened in fiscal 2012 (including four in the first twenty six weeks of fiscal 2012) and four of which were opened in the first twenty six weeks of fiscal 2013. These increases were partially offset by the $3,347 decline in Elfa segment third party sales, which were impacted negatively by the sale of an unprofitable German subsidiary in the fourth quarter of fiscal 2012, as well as continuing weakness in the Nordic market. The decline in Elfa segment sales was partially offset by the appreciation of the Swedish krona against the U.S. dollar.

Gross profit and gross margin

Gross profit in the first twenty six weeks of fiscal 2013 increased by $17,447, or 9.5%, compared to the same time period in fiscal 2012. The increase in gross profit was primarily the result of increased sales, as well as improved margins on a consolidated basis. The following table summarizes the gross margin for the first twenty six weeks of fiscal 2013 and fiscal 2012, respectively, by segment and total. The segment margins include the impact of inter-segment sales from the Elfa segment to the TCS segment:

   
 
  Twenty six Weeks Ended  
 
  August 25, 2012
  August 31, 2013
 
   

TCS gross margin

    59.4%     58.8%  

Elfa gross margin

    38.3%     38.3%  

Total gross margin

    58.3%     58.4%  
   

TCS gross margin declined 60 basis points in the first twenty six weeks of fiscal 2013 as compared to the first twenty six weeks of fiscal 2012. The decline in TCS gross margin is primarily due to higher inter-segment cost of sales in our elfa department, as the U.S. dollar weakened as compared to the Swedish krona. Additionally, the TCS segment recorded a one-time reduction of cost of sales related to the favorable settlement of a customs audit in the first twenty six weeks of fiscal 2012, which contributed 22 basis points of improved gross margin during that period. Elfa gross margin remained consistent at 38.3%. On a consolidated basis, gross margin increased 10 basis points in the first twenty six weeks of fiscal 2013 as compared to the first twenty six weeks of fiscal 2012. This was primarily due to a larger percentage of third party sales coming from the more profitable TCS segment, partially offset by declines in gross margin at our TCS segment.

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Selling, general and administrative expenses

Selling, general and administrative expenses in the first twenty six weeks of fiscal 2013 increased by $13,980 or 9.0%, compared to the same period in fiscal 2012. The increase in selling, general and administrative expenses was primarily due to the increase in sales. The following table summarizes the selling, general and administrative expenses as a percentage of consolidated net sales for the first twenty six weeks of fiscal 2013 and the first twenty six weeks of fiscal 2012:

   
 
  Twenty six Weeks Ended  
 
  August 25, 2012
% of net sales

  August 31, 2013
% of net sales

 
   

TCS selling, general and administrative

    42.7%     43.4%  

Elfa selling, general and administrative

    6.7%     5.9%  
       

Total selling, general and administrative

    49.4%     49.3%  
   

TCS selling, general, and administrative expenses increased by 70 basis points as a percentage of total net sales. Compensation, benefits, and recruiting expenses and professional fees were the most significant factors as we invest in our employee base and incur additional costs in preparation for this offering and operating as a public company. Elfa selling, general, and administrative expenses decreased by 80 basis points as a percentage of total net sales due to strong cost management during the year.

Pre-opening costs

Pre-opening costs decreased $502 or 11.3% in the first twenty six weeks of fiscal 2013 to $3,934, as compared to $4,436 in the first twenty six weeks of fiscal 2012. We incurred significant pre-opening costs for six stores in the first twenty six weeks of fiscal 2013, four of which opened during that time (three new stores and one relocation), one of which opened after August 31, 2013 and one of which will open later in the third quarter of fiscal 2013. These costs were less than those incurred in advance of opening six stores in the first twenty six weeks of fiscal 2012, as savings were realized in costs associated with the store openings in the first twenty six weeks of fiscal 2013.

Restructuring charges

Restructuring charges decreased $1,948, or 84.4% in the first twenty six weeks of fiscal 2013 to $361, as compared to $2,309 in the first twenty six weeks of fiscal 2012. During fiscal 2012, Elfa implemented a plan to restructure its business operations to improve efficiency. In conjunction with these efforts, a subsidiary in Germany was sold and a manufacturing facility in Norway was shut down and consolidated into a like facility in Sweden. Additionally, certain head office functions in sales and marketing were relocated from the Vastervik, Sweden, manufacturing location to the group headquarters in Malmo, Sweden. Most of the costs associated with these restructuring efforts were incurred in fiscal 2012 and we expect these costs to be minimal for the remainder of fiscal 2013.

Interest expense

Interest expense increased $184, or 1.7%, to $11,074 in the first twenty six weeks of fiscal 2013 as compared to $10,890 in the first twenty six weeks of fiscal 2012. The increase resulted primarily from the April 2013 amendment and increase in borrowings under the Senior Secured Term Loan Facility of $90.0 million, which we refer to as the "Increase and Repricing Transactions". The resulting increase in principal amount of the Senior Secured Term Loan Facility resulted in higher interest expense, which was offset in part by the lower interest rate under the Senior Secured Term Loan Facility resulting from the Increase and Repricing Transactions. The Senior Secured Term

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Loan Facility now accrues interest at a rate of LIBOR plus 4.25%, subject to a LIBOR floor of 1.25%. Prior to the Increase and Repricing Transactions, the Senior Secured Term Loan Facility accrued interest at a rate of LIBOR plus 5.0%, subject to a LIBOR floor of 1.25%.

Loss on extinguishment of debt

We recorded expenses of $1,101 in the first twenty six weeks of fiscal 2013 associated with the Increase and Repricing Transactions, including the acceleration of deferred financing costs, legal fees, and other associated costs (all of which was incurred in the first quarter of fiscal 2013). In the first twenty six weeks of fiscal 2012, we recorded expenses of $7,329 associated with the "Refinancing Transactions" pursuant to which we repaid our $125 million prior senior secured term loan facility, entered into on August 16, 2007, which we refer to as the "Prior Senior Secured Term Loan Facility," as well as our higher interest bearing senior subordinated notes with borrowings under our new $275 million Senior Secured Term Loan Facility at a lower overall interest rate.

Taxes

The benefit for income taxes decreased $2,781 in the first twenty six weeks of fiscal 2013 to $217 as compared to $2,998 in the first twenty six weeks of fiscal 2012. The decrease was largely attributable to a decrease in loss before taxes, as well as an increase in the expected annual effective tax rate.

Fiscal 2012 compared to fiscal 2011

Net sales

The following table summarizes our net sales for fiscal 2012 and fiscal 2011:

   
(dollars in thousands)
  Fiscal 2011
  % total
  Fiscal 2012
  % total
 
   

TCS net sales

  $ 530,909     83.8%   $ 613,252     86.8%  

Elfa third party net sales

    102,710     16.2%     93,505     13.2%  
       

Net Sales

  $ 633,619     100.0%   $ 706,757     100.0%  
   

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Net sales in fiscal 2012 increased by $73,138, or 11.5%, compared to fiscal 2011. This increase is comprised of the following components:

   
(in thousands)
  Net sales
 
   

Net sales for fiscal 2011

  $ 633,619  

Incremental net sales increase (decrease) due to:

       

Comparable stores (including a $5,616 increase in online sales)

    19,915  

New stores

    40,785  

53rd week sales

    11,088  

Installation services

    9,739  

Elfa third party net sales

    (9,205 )

Other

    816  
       

Net sales fiscal 2012

  $ 706,757  
   

The increase in net sales was driven by comparable store sales growth of 4.4%, which benefited from online sales growth of 24.6%. The comparable store sales growth was primarily attributable to an increase in the average ticket of 4.2%. New store net sales increases are due to nine incremental stores, five of which were opened in fiscal 2012. The additional (53rd) week of fiscal 2012 generated incremental sales of $11,008; fiscal 2011 consisted of 52 weeks. The increase in installation services was due to the acquisition of The Container Store Services, LLC in the fourth quarter of fiscal 2011. The Container Store Services, LLC is a subsidiary that performs installation of elfa products. These increases were partially offset by the $9,205 decline in Elfa third party net sales, which were impacted negatively by continuing weakness in the European economy and the Nordic market, the sale of a German subsidiary, and the depreciation of the Swedish krona against the U.S. dollar.

Gross profit and gross margin

Gross profit in fiscal 2012 increased by $48,347, or 13.2%, compared to fiscal 2011. The increase in gross profit was primarily the result of increased sales, as well as improved margins at Elfa. The following table summarizes the gross margin for fiscal 2012 and fiscal 2011 by segment and total. The segment margins include the impact of inter-segment sales from the Elfa segment to the TCS segment:

   
 
  Fiscal 2011
  Fiscal 2012
 
   

TCS gross margin

    59.0%     59.0%  

Elfa gross margin

    37.5%     38.7%  

Total gross margin

    58.0%     58.8%  
   

TCS gross margin remained consistent at 59.0%. Elfa gross margin improved primarily due to lower direct material costs compared to the same time period last year. On a consolidated basis, gross margin improved due to a larger percentage of net sales coming from the more profitable TCS segment compared to the same time period last year.

Selling, general and administrative expenses

Selling, general and administrative expenses in fiscal 2012 increased by $37,715 or 12.8%, compared to the fiscal 2011. The increase in selling, general and administrative expenses was

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primarily due to the increase in sales. The following table summarizes the selling, general and administrative expenses as a percentage of consolidated net sales for fiscal 2012 and fiscal 2011:

   
 
  Fiscal 2011
% of net sales

  Fiscal 2012
% of net sales

 
   

TCS selling, general and administrative

    39.5%     41.0%  

Elfa selling, general and administrative

    6.8%     5.9%  
       

Total selling, general and administrative

    46.3%     46.9%  
   

TCS selling, general and administrative expenses increased by 150 basis points as a percentage of total net sales. Compensation, benefits, and recruiting expenses was the most significant factor as we invested in training in our stores and additional personnel to support our growth, primarily in certain corporate office functions and our distribution center. Health insurance claims also increased in fiscal 2012 as compared to fiscal 2011. Other expenses contributing to the increase were transportation and information technology maintenance costs. Reductions as a percentage of sales included occupancy expenses, which are largely fixed in nature and decline as a percentage of sales when comparable store sales increase. Elfa selling, general and administrative expenses decreased by 90 basis points as a percentage of total net sales due to strong cost management during the year, including the sale of a German subsidiary.

Pre-opening costs

Pre-opening costs increased $2,359 or 45.3% in fiscal 2012 to $7,562, as compared to $5,203 in fiscal 2011. We incurred significant pre-opening costs for eight stores in fiscal 2012, six of which opened in fiscal 2012 (five new stores and one relocation) and two which opened in the first quarter of fiscal 2013. This is compared to pre-opening costs incurred for five stores in fiscal 2011.

Goodwill and trade name impairment

Goodwill and trade name impairment expense was $15,533 in fiscal 2012 as compared to $47,037 in fiscal 2011. When we were acquired in 2007, a substantial portion of the purchase price was recorded as goodwill and other intangible assets at Elfa. All impairment charges incurred in fiscal 2012 and fiscal 2011 are related to the Elfa segment. Elfa has experienced a challenging economic climate in Europe, which resulted in Elfa not achieving its third party sales and profit forecasts in fiscal 2012 and fiscal 2011. The impairment charge in fiscal 2012 was related to the Elfa trade name and was calculated using a relief from royalty discounted cash flow analysis. Of the $47,037 impairment charge recorded in fiscal 2011, $31,453 was related to goodwill associated with the Elfa segment, calculated using an income approach, and represented a complete impairment of goodwill for the Elfa segment. The remaining $15,584 of the impairment charge in fiscal 2011 was related to the Elfa trade name.

As discussed above, reported impairment charges relate solely to the write-off of goodwill and the write-down of the trade name at Elfa due to the ongoing European recession which affected the segment's wholesale business and other factors discussed herein. The goodwill for the Elfa segment was fully impaired in fiscal 2011 and there is no balance remaining on our balance sheet. These impairment charges exceeded our consolidated net loss in every period presented herein.

Restructuring charges

During fiscal 2012, Elfa implemented a plan to restructure its business operations to improve efficiency. In conjunction with these efforts, a subsidiary in Germany was sold and a manufacturing facility in Norway was shut down and consolidated into a like facility in Sweden. Additionally, certain

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head office functions in sales and marketing were relocated from the Västervik, Sweden, manufacturing location to the group headquarters in Malmö, Sweden. In conjunction with these moves, $6,369 of charges were incurred and recorded as restructuring charges during fiscal 2012, the majority of which was severance.

Interest expense

Interest expense decreased $4,029, or 15.9%, to $21,388 in fiscal 2012 as compared to $25,417 in fiscal 2011. This decrease resulted primarily from the Refinancing Transactions, whereby a new $275 million Senior Secured Term Loan Facility was entered into, replacing the Prior Senior Secured Term Loan Facility and senior subordinated notes. The Senior Secured Term Loan Facility accrued interest at LIBOR plus 5.0%, subject to a LIBOR floor of 1.25%. The Prior Senior Secured Term Loan Facility accrued interest at LIBOR plus 3.0%. The senior subordinated notes accrued interest at 11.0% (11.5% to the extent paid in kind).

Loss on extinguishment of debt

We recorded expenses of $7,333 in fiscal 2012 associated with the Refinancing Transactions described above. This amount consisted of an early extinguishment fee, acceleration of deferred financing costs, legal fees and other associated costs.

Taxes

The benefit for income taxes increased by $3,075 in fiscal 2012 to $4,449 as compared to $1,374 in fiscal 2011. The increase was largely attributable to a reduction in impairments of intangibles not deductible for tax purposes and changes in the valuation allowance on deferred tax assets not expected to be realized in the future. Also contributing to the increase in the income tax benefit was a statutory reduction in Swedish tax rates and other effects of foreign income taxes.

Fiscal 2011 compared to fiscal 2010

Net sales

The following table summarizes our net sales for fiscal 2011 and fiscal 2010:

   
(dollars in thousands)
  Fiscal 2010
  % total
  Fiscal 2011
  % total
 
   

TCS net sales

  $ 472,333     83.0%   $ 530,909     83.8%  

Elfa third party net sales

    96,487     17.0%     102,710     16.2%  
       

Net Sales

  $ 568,820     100.0%   $ 633,619     100.0%  
   

Net sales in fiscal 2011 increased by $64,799, or 11.4%, compared to fiscal 2010. This increase is comprised of the following components:

   
(in thousands)
  Net sales
 
   

Net sales for fiscal 2010

  $ 568,820  

Incremental net sales increase due to:

       

Comparable stores (including a $5,233 increase in online sales)

    36,344  

New stores

    18,297  

Installation services

    2,725  

Elfa third party net sales

    6,223  

Other

    1,210  
       

Net sales fiscal 2011:

  $ 633,619  
   

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This increase in net sales was driven by comparable store sales growth of 7.6%, which benefited from online sales growth of 29.7%. The comparable store sales growth was attributable to an increase in the average ticket of 3.9% combined with a 3.6% increase in transactions. New store net sales increases were due to six incremental stores, four of which were opened in fiscal 2011. The increase in installation services was due to the acquisition of The Container Store Services, LLC in the fourth quarter of fiscal 2011. Elfa third party net sales were impacted positively by the appreciation of the Swedish krona against the U.S. dollar, which more than offset the impact of recessionary trends in Europe which caused a decline in orders from retailers in the region.

Gross profit and gross margin

Gross profit in fiscal 2011 increased by $33,739, or 10.1%, compared to fiscal 2010. The increase in gross profit was primarily the result of increased sales, partially offset by lower margins. The following table summarizes the gross margin for fiscal 2011 and fiscal 2010 by segment and total. The segment margins include the impact of inter-segment sales from the Elfa segment to the TCS segment:

   
 
  Fiscal 2010
  Fiscal 2011
 
   

TCS gross margin

    59.9%     59.0%  

Elfa gross margin

    38.7%     37.5%  

Total gross margin

    58.6%     58.0%  
   

TCS gross margin declined 90 basis points in fiscal 2011 as compared to fiscal 2010. The decline in gross margin was primarily due to higher inter-segment cost of sales in our elfa department, as the U.S. dollar weakened as compared to the Swedish krona. Elfa gross margin declined primarily due to more promotional activity utilized to generate sales during a recessionary environment.

Selling, general and administrative expenses

Selling, general and administrative expenses in fiscal 2011 increased by $24,191 or 9.0%, compared to the fiscal 2010. The increase in selling, general and administrative expenses was primarily due to the increase in sales. The following table summarizes the selling, general and administrative expenses as a percentage of consolidated net sales for fiscal 2011 and fiscal 2010:

   
 
  Fiscal 2010
% of net sales

  Fiscal 2011
% of net sales

 
   

TCS selling, general and administrative

    40.6%     39.5%  

Elfa selling, general and administrative

    6.8%     6.8%  
       

Total selling, general and administrative

    47.4%     46.3%  
   

TCS selling, general and administrative expenses decreased by 110 basis points as a percentage of total net sales. The improvement was primarily attributable to occupancy costs, which are largely fixed in nature, and declined as a percentage of net sales. Marketing costs also declined as a percentage of net sales, as a larger percentage of our marketing efforts shifted to new stores in fiscal 2011. Elfa selling, general and administrative expenses remained flat at 6.8% as a percentage of total net sales.

Pre-opening costs

Pre-opening costs increased $3,456, or 197.8%, in fiscal 2011 to $5,203, as compared to $1,747 in fiscal 2010. We incurred significant pre-opening costs for five stores in fiscal 2011, four of which

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opened in fiscal 2011 and one which opened in the first quarter of fiscal 2012. This is compared to two new stores and one relocated store in fiscal 2010.

Goodwill and trade name impairment

Goodwill and trade name impairment expense was $47,037 in fiscal 2011 as compared to $52,388 in fiscal 2010. All impairment charges incurred in fiscal 2011 and fiscal 2010 are related to the Elfa segment. Elfa has experienced a challenging economic climate in Europe, which resulted in Elfa not achieving its sales and profit forecast in fiscal 2011 and fiscal 2010. Of the $47,037 impairment charge recorded in fiscal 2011, $31,453 was related to goodwill associated with the Elfa segment, calculated using an income approach, and represented a complete impairment of goodwill for the Elfa segment. The remaining $15,584 of the impairment charge in fiscal 2011 was related to the Elfa trade name, calculated using a relief from royalty method. Of the $52,388 impairment charge recorded in fiscal 2010, $51,971 was related to goodwill associated with the Elfa segment and the remaining $417 was related to the Elfa trade name.

Interest expense

Interest expense decreased $589, or 2.3%, to $25,417 in fiscal 2011 as compared to $26,006 in fiscal 2010. The decrease in interest expense is primarily attributable to the expiration of interest rate swaps in the second quarter of fiscal 2011 and the elimination of the associated interest expense and was partially offset by interest income recorded from receipt of an IRS refund received by TCS in the first quarter of fiscal 2010.

Taxes

We recorded an income tax benefit in fiscal 2011 of $1,374, which is a $5,503 reduction in income tax expense as compared to the income tax provision recorded in fiscal 2010 of $4,129. The reduction in income tax expense is largely attributable to a decrease in impairments of intangibles not deductible for tax purposes, changes in the valuation allowance on deferred tax assets not expected to be realized in the future and the effects of foreign income taxes.

Interim results and seasonality

The following table sets forth our historical quarterly results of operation as well as certain operating data for each of our most recent ten fiscal quarters. This unaudited quarterly information has been prepared on the same basis as our annual audited financial statements appearing elsewhere in this document, and includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary to present fairly the financial information for the fiscal quarters presented.

The quarterly data should be read in conjunction with our audited consolidated financial statements and the related notes appearing elsewhere in this document. The quarterly data for the first and second quarter of fiscal 2011 has not been audited or reviewed by our Independent Registered Public Accounting Firm and accordingly they express no opinion or any form of assurance on it.

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Quarterly results of operations

   
 
  Fiscal 2011   Fiscal 2012   Fiscal 2013  
(in thousands, except average ticket and operating data)
 
  First quarter
  Second quarter
  Third quarter
  Fourth quarter
  First quarter
  Second quarter
  Third quarter
  Fourth quarter(1)
  First quarter
  Second quarter
 
   

Net sales

  $ 132,966   $ 149,701   $ 157,830   $ 193,122   $ 145,755   $ 168,560   $ 175,416   $ 217,025   $ 159,645   $ 183,773  

Gross Profit

    76,612     85,879     93,405     111,368     84,177     98,977     104,114     128,342     93,204     107,396  

Income (loss) from operations

    1,465     8,195     10,046     (26,333 )   (2,651 )   8,788     10,285     7,719     (159 )   11,429  

Net income (loss)

    (4,403 )   1,680     2,749     (30,697 )   (12,445 )   3,360     6,862     2,093     (4,795 )   4,107  

Year-Over-Year Increase

                                                             

Net Sales

    10.2%     11.1%     9.0%     14.6%     9.6%     12.6%     11.1%     12.4%     9.5%     9.0%  

Gross Profit

    10.4%     9.2%     5.7%     14.7%     9.9%     15.3%     11.5%     15.2%     10.7%     8.5%  

Operating data

                                                             

Comparable store sales change*

    7.5%     8.8%     6.3%     7.9%     6.0%     5.4%     4.3%     2.7%     2.7%     3.1%  

Number of stores open at end of period*

    49     50     53     53     55     57     58     58     60     61  

Average ticket*

  $ 51.51   $ 54.70   $ 56.31   $ 58.58   $ 53.03   $ 56.10   $ 58.62   $ 60.32   $ 56.04   $ 58.81  

Adjusted EBITDA(2)

  $ 8,485   $ 16,427   $ 20,380   $ 30,352   $ 8,257   $ 21,882   $ 22,456   $ 34,990   $ 10,591   $ 22,128  

Percent of Annual Results

                                                             

Net sales

    21.0%     23.6%     24.9%     30.5%     20.6%     23.8%     24.8%     30.7%     n/a     n/a  

Gross Profit

    20.9%     23.4%     25.4%     30.3%     20.3%     23.8%     25.1%     30.9%     n/a     n/a  

Adjusted EBITDA

    11.2%     21.7%     26.9%     40.1%     9.4%     25.0%     25.6%     39.9%     n/a     n/a  

Adjusted EBITDA Margin

    6.4%     11.0%     12.9%     15.7%     5.7%     13.0%     12.8%     16.1%     6.6%     12.0%  
   

(1)   The fourth quarter of fiscal 2012 contained 14 weeks, as compared to the fourth quarter of fiscal 2011, which contained 13 weeks.

(2)   EBITDA and Adjusted EBITDA have been presented in this document 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 the Secured Term Loan Facility and the Revolving Credit Facility and is the basis 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 document because they are key metrics used by management, our board of directors, and LGP to assess our financial performance. EBITDA and Adjusted EBITDA are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In addition to executive performance evaluations, we use Adjusted EBITDA to supplement GAAP measures of performance for our income statement, to make budgeting decisions, and to compare our performance against that of other peer companies using similar measures. We believe that Adjusted EBITDA provides useful supplemental information facilitating operating performance comparisons from period to period and company to company. In addition, we use Adjusted EBITDA: (i) to evaluate the effectiveness of our business strategies and (ii) because the Secured Term Loan Facility and the Revolving Credit Facility use a measure substantially the same as Adjusted EBITDA to measure our compliance with certain covenants.

EBITDA and Adjusted EBITDA are not GAAP measures of our financial performance or liquidity and should not be considered as alternatives to net income (loss) as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. 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, stock compensation expense, and losses on extinguishment of debt. 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.

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

 
  Fiscal 2011   Fiscal 2012   Fiscal 2013  
(in thousands)
  First
Quarter

  Second
Quarter

  Third
Quarter

  Fourth
Quarter

  First
Quarter

  Second
Quarter

  Third
Quarter

  Fourth
Quarter

  First
Quarter

  Second
Quarter

 
   

Net income (loss)

  $ (4,403 ) $ 1,680   $ 2,749   $ (30,697 ) $ (12,445 ) $ 3,360   $ 6,862   $ 2,093   $ (4,795 ) $ 4,107  

Depreciation and amortization

    6,560     6,715     6,883     7,293     7,254     7,235     7,336     7,725     7,470     7,580  

Interest expense

    6,646     6,136     6,222     6,413     5,798     5,092     5,131     5,367     5,555     5,519  

Income tax expense (benefit)

    (779 )   378     1,075     (2,049 )   (3,240 )   243     (1,711 )   259     (2,020 )   1,803  
       

EBITDA

  $ 8,024   $ 14,909   $ 16,929   $ (19,040 ) $ (2,633 ) $ 15,930   $ 17,618   $ 15,444   $ 6,210     19,009  

Management fees(a)

    0     0     250     250     250     250     250     250     250     250  

Pre-opening costs*(b)

    157     985     2,682     1,175     1,661     2,775     2,137     989     1,962     1,972  

Goodwill and trade name impairment+(c)

    0     0     0     47,037     0     0     0     15,533     0     0  

Non-cash rent(d)

    480     534     428     493     442     864     433     276     391     311  

Restructuring charges+(e)

    0     0     54     79     1,055     1,254     2,056     2,004     241     120  

Long-lived asset impairment(f)

    0     0     0     0     0     0     0     0     0     0  

Stock compensation expense(g)

    0     0     0     0     0     0     157     126     99     114  

Loss on extinguishment of debt*(h)

    0     0     0     0     7,236     93     4     0     1,101     0  

Foreign exchange (gains) losses(i)

    (199 )   (24 )   14     143     (15 )   459     (563 )   174     94     (79 )

Other adjustments(j)

    24     22     23     215     261     257     366     194     243     431  
       

Adjusted EBITDA

  $ 8,486   $ 16,426   $ 20,380   $ 30,352   $ 8,257   $ 21,882   $ 22,456   $ 34,990   $ 10,591   $ 22,128  
   

(a)   Fees paid to LGP in accordance with our management services agreement, which will terminate on the closing of this offering.

(b)   Non-capital expenditures associated with opening new stores and relocating stores. Prior to fiscal 2012, the amount of pre-opening costs permitted pursuant to the terms of the Revolving Credit Facility and the Senior Secured Term Loan Facility to be included in the calculation of Adjusted EBITDA was limited to $5.0 million, and the limit was increased to $10.0 million in April 2012. Similar limits exist in our compensation plan. We adjust for these costs to facilitate comparisons of store operating performance from period to period.

(c)   Non-cash charges related to impairment of intangible assets, primarily related to Elfa, which we do not consider reflective of our ongoing performance.

(d)   Reflects the extent to which our annual GAAP rent expense has been above or below our cash rent payment due to lease accounting adjustments. The adjustment varies depending on the average age of our lease portfolio (weighted for size), as our GAAP expense on younger leases typically exceeds our cash cost, while our GAAP expense on older leases is typically less than cash cost. Although our GAAP rent expense has exceeded our cash rent payments through our last fiscal year, as our lease portfolio matures we expect our cash rent payments to exceed our GAAP rent expense, beginning in fiscal 2013.

(e)   Includes charges incurred to restructure business operations at Elfa, including the closure of a sales subsidiary in the Netherlands in 2008, the closure of a sales subsidiary in Germany and a manufacturing facility in Norway in 2012, as well as the relocation of certain head office functions in sales and marketing from the Västervik, Sweden, manufacturing location to the group headquarters in Malmö, Sweden in 2012, which we do not consider reflective of our ongoing performance.

(f)    Non-cash charges related to impairment of long-lived tangible assets in our Elfa segment.

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

(h)   Loss recorded as a result of the repayment of the Prior Senior Secured Term Loan Facility and senior subordinated notes in April 2012, which we do not consider reflective of our ongoing operations, and the April 2013 amendment to the Senior Secured Term Loan Facility. In the event the underwriters exercise their option to purchase additional shares, we expect to incur a similar charge in connection with our repayment of a portion of the borrowings under the Senior Secured Term Loan Facility with the proceeds of this offering.

(i)    Realized foreign exchange transactional gains/losses in all periods.

(j)    Other adjustments include amounts our management believes are not representative of our ongoing operations, including costs incurred in preparations for this offering and other charges.

Seasonality

Our business is moderately seasonal in nature. Our storage and organization product offering makes us less susceptible to holiday shopping seasonal patterns than many retailers. In addition, our marketing plan is designed to minimize volatility and seasonal fluctuations of sales across periods. Historically, our business has realized a higher portion of net sales, operating income and cash flows from operations in the fourth fiscal quarter, attributable primarily to the impact of our Annual elfa® Sale (which starts on December 24th and runs through early February). In addition, our Annual Shelving Sale occurs in the third fiscal quarter and results in historically higher sales, operating income and cash flows from operations for the period. As a result of these factors, working capital requirements and demands on our product distribution and delivery network

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fluctuate during the year, and are greatest in the second and third fiscal quarters as we prepare for our Annual Shelving Sale, the holiday selling season, and our Annual elfa® Sale.

Liquidity and capital resources

We rely on cash flows from operations and the Revolving Credit Facility as our primary sources of liquidity. Our primary cash needs are for merchandise inventories, direct materials, payroll, store rent, capital expenditures associated with opening new stores and updating existing stores, as well as information technology and infrastructure, including distribution center and Elfa manufacturing facility enhancements. The most significant components of our operating assets and liabilities are merchandise inventories, accounts receivable, prepaid expenses and other assets, accounts payable, other current and non-current liabilities, taxes receivable and taxes payable. Our liquidity is seasonal as a result of our building inventory for key selling periods, and as a result, our borrowings are generally higher during these periods when compared to the rest of our fiscal year. Our borrowings generally increase in our second and third fiscal quarters as we prepare for the Annual elfa® Sale which is in our fourth fiscal quarter. We believe that cash expected to be generated from operations, and the availability of borrowings under the Revolving Credit Facility or other financing arrangements, will be sufficient to meet liquidity requirements, anticipated capital expenditures and payments due under our existing credit facilities for at least the next 24 months.

At August 31, 2013, we had $12.7 million of cash and cash equivalents and $68.6 million in borrowing availability under our Revolving Credit Facility and the Elfa Revolving Credit Facility. There were $3.1 million in letters of credit outstanding under the Revolving Credit Facility at that date.

Cash flow analysis

A summary of our operating, investing and financing activities are shown in the following table:

   
 
   
   
   
  Twenty six weeks ended  
 
  Fiscal year  
 
  August 25,
2012

  August 31,
2013

 
(in thousands)
  2010
  2011
  2012
 
   

Net cash provided by (used in) operating activities

  $ 48,764   $ 42,470   $ 45,186   $ (4,295 ) $ 8,014  

Net cash used in investing activities

    (18,157 )   (41,470 )   (48,245 )   (25,822 )   (21,339 )

Net cash provided by (used in) financing activities

    (7,243 )   167     (22,642 )   (7,664 )   843  

Effect of exchange rate changes on cash

    230     240     (111 )   12     (125 )
       

Increase (decrease) in cash and cash equivalents

  $ 23,594   $ 1,407   $ (25,812 ) $ (37,769 ) $ (12,607 )
   

Net cash provided by (used in) operating activities

Cash from operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, deferred taxes and the effect of changes in operating assets and liabilities.

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Net cash used in operating activities was $4,295 for the first twenty six weeks of fiscal 2012 and net cash provided by operating activities was $8,014 for the first twenty six weeks of fiscal 2013. The $12,309 increase in fiscal 2013 compared to fiscal 2012 was due primarily to the substantial reduction of net loss as well as increased cash flows provided by operating assets and liabilities. Cash provided by operating assets and liabilities increased $4,068 in the first twenty six weeks of 2013 as decreases in merchandise inventories, accounts receivable, and prepaid expenses were offset by decreases in accounts payable, income taxes payable, and noncurrent liabilities.

Net cash provided by operating activities was $45,186 and $42,470 for fiscal 2012 and fiscal 2011, respectively, as non-cash items (primarily impairment charges relating to Elfa, as discussed above) more than offset net losses. The $2,716 increase in fiscal 2012 compared to fiscal 2011 was due to improved cash flows provided by operating assets and liabilities as well as an increased benefit of non-cash items. Cash provided by operating assets and liabilities increased $1,446 in fiscal 2012 compared to fiscal 2011. Merchandise inventory, accounts receivable, and prepaid expenses all increased year-over-year, which was offset by increases in accounts payable and income taxes payable.

Net cash provided by operating activities was $42,470 and $48,764 for fiscal 2011 and fiscal 2010, respectively, as non-cash items (primarily impairment charges relating to Elfa, as discussed above) more than offset net losses. The $6,294 decrease in fiscal 2011 compared to fiscal 2010 was due to decreased cash flows provided by operating assets and liabilities and a decreased benefit of non-cash items offset by a smaller net loss year-over-year. Cash provided by operating assets and liabilities decreased $13,411 in fiscal 2011 compared to fiscal 2010. Merchandise inventory, accounts receivable, and prepaid expenses all increased year-over-year, which were offset by decreases in accounts payable and income taxes payable.

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 center.

Capital expenditures for the first twenty six weeks of fiscal 2013 were $21,728 with new store openings and existing store remodels accounting for the majority of spending at $14,381. The remaining capital expenditures of $7,347 in the first twenty six weeks of fiscal 2013 were primarily for investments in information technology, our corporate offices and our distribution center. Capital expenditures were partially offset by proceeds from sale of property and equipment of $389. We expect to open six new stores during 2013 (including one store relocation), four of which opened during the first twenty six weeks of fiscal 2013, one of which opened after August 31, 2013, and one of which will open later in the third quarter of fiscal 2013. We expect to have capital expenditures of approximately $45 million in fiscal 2013, including capital expenditures already incurred in the year-to-date period, primarily related to our efforts to open new stores, remodel existing stores and support existing and future infrastructure, including our information systems and our distribution center.

Our total capital expenditures for fiscal 2012 were $48,559 with new store openings and existing store remodels accounting for the majority of spending at $28,225. The remaining capital expenditures of $20,334 in fiscal 2012 were primarily for investments in information technology, our corporate offices and distribution center and Elfa manufacturing facility enhancements.

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Our total capital expenditures for fiscal 2011 were $41,220 with new store openings and existing store remodels accounting for approximately half the spend at $20,298. The remaining capital expenditures of $20,922 in fiscal 2011 were primarily for acquisition of plant, property, and equipment at Elfa as well as investments in information technology, our corporate offices, and distribution center.

Our total capital expenditures for fiscal 2010 were $18,175 with new store openings and existing store remodels accounting for $7,793. The remaining capital expenditures of $10,382 in fiscal 2010 were primarily for investments in information technology, our corporate offices and distribution center, and Elfa manufacturing facility enhancements.

Net cash provided by financing activities

Financing activities consist primarily of borrowings and payments under our Senior Secured Credit Facility and our Revolving Credit Facility.

Net cash provided by financing activities was $843 in the first twenty six weeks of fiscal 2013. This included the net proceeds of $8,213 from borrowings under the Elfa Revolving Credit Facility to support higher liquidity needs. In addition, The Container Store, Inc. increased its borrowings under the Senior Secured Term Facility by $90.0 million pursuant to the Increase and Repricing Transactions, which were used to finance a dividend distribution to holders of our senior preferred stock.

Net cash used for financing activities was $22,642 in fiscal 2012. This included net proceeds of $2,108 from borrowings under the Elfa Revolving Credit Facility to support higher working capital needs. The net proceeds of the revolver borrowings at Elfa were offset by payments of $24,569 cash for repayment of indebtedness outstanding under the Elfa Term Loan Facility, the Senior Secured Term Loan Facility and the Revolving Credit Facility, as well as additional debt repayment and transaction costs associated with the Refinancing Transactions.

Net cash provided by financing activities was $167 in fiscal 2011. This included net proceeds of $6,914 from borrowings under the Elfa Revolving Credit Facility to support higher working capital needs. The net proceeds of the revolver borrowings at Elfa were offset by payments of $6,731 cash for repayment of indebtedness outstanding under the Elfa Term Loan Facility and the Senior Secured Term Loan Facility.

Net cash used for financing activities was $7,243 in fiscal 2010. This included payments of $812 cash for repayment of indebtedness outstanding under the Elfa Revolving Credit Facility as well as payments of $6,254 cash for repayment of indebtedness outstanding under the Elfa Term Loan Facility and the Senior Secured Term Loan Facility.

As of August 31, 2013, we had a total of $63,392 of unused borrowing availability under the Revolving Credit Facility, and $3,093 in letters of credit issued under the Revolving Credit Facility. There were no borrowings outstanding under the Revolving Credit Facility as of August 31, 2013.

As of August 31, 2013, Elfa had a total of $5,165 of unused borrowing availability under its revolving credit facility and $21,215 outstanding under its revolving credit facility.

Senior Secured Term Loan Facility

On April 6, 2012, The Container Store, Inc. entered into the $275.0 million Senior Secured Term Loan Facility with JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent,

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Barclays Bank PLC, Morgan Stanley Senior Funding, Inc. and Wells Fargo Bank, N.A., as Co-Documentation Agents. Prior to the Increase and Repricing Transactions, as discussed below, borrowings under the Senior Secured Term Loan Facility accrued interest at LIBOR+5.0%, subject to a LIBOR floor of 1.25%.

We used proceeds from the Senior Secured Term Loan Facility, along with $20.0 million in cash, to extinguish the outstanding amounts under the Prior Senior Secured Term Loan Facility of $115.4 million and The Container Store, Inc.'s senior subordinated notes of $165.5 million.

On April 8, 2013, The Container Store, Inc. entered into the Increase and Repricing Transactions, which were effected pursuant to an amendment to the Senior Secured Term Loan Facility. Under this amendment, the borrowings under the Senior Secured Term Loan Facility were increased to $362.3 million. Following the Increase and Repricing Transactions, borrowings under the Senior Secured Term Loan Facility bear interest at a rate of LIBOR + 4.25%, subject to a LIBOR floor of 1.25%, and the maturity date remains as April 6, 2019. Additionally, the amendment eliminated the senior secured leverage ratio covenant referenced below. Pursuant to the amendment, we are required to make quarterly principal repayments of $0.9 million through December 31, 2018, with a balloon payment for the remaining balance of $341.4 million due on April 6, 2019. The additional $90.0 million of borrowings was used to finance a dividend distribution to holders of our senior preferred stock in the amount of $90.0 million, which was paid on April 9, 2013.

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% and 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 security interest, junior in priority, 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 each of The Container Store Group, Inc. and The Container Store Group, Inc.'s U.S. subsidiaries. Originally, we were required to maintain a senior secured leverage ratio covenant, however as discussed above, this covenant was removed on April 8, 2013. The ratio was tested as of the last day of each fiscal quarter. The initial permitted maximum for this ratio was 5.25 to 1.00 and the requirement stepped down over time to 3.75 to 1.00. We were compliant with this financial covenant at March 2, 2013. Under the Senior Secured Term Loan Facility, we were required to make quarterly principal repayments of $0.7 million through December 31, 2018, with a balloon payment for the remaining balance of $256.4 million due on April 6, 2019. As noted above, this was modified in April 2013 in connection with the Increase and Repricing Transactions.

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 itself, 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. As of August 31, 2013, we were in compliance with all covenants and no Event of Default (as such term is defined in the Senior Secured Term Loan Facility) had occurred.

Revolving Credit Facility

On April 6, 2012, The Container Store, Inc. entered into the $75.0 million Revolving Credit Facility with JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and Wells Fargo

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Bank, N.A., as Syndication Agent. Borrowings under the Revolving Credit Facility accrue interest at LIBOR+1.25% to 1.75%, subject to adjustment based on average daily excess availability over the preceding quarter, and the maturity date is April 6, 2017. The Revolving Credit Facility replaced The Container Store, Inc.'s prior $75.0 million asset-based revolving credit facility.

The Revolving Credit Facility is to be used for working capital and other general corporate purposes. The Revolving Credit Facility allows for swing line advances to The Container Store, Inc. of up to $7.5 million and the issuance of letters of credit to us of up to $20.0 million. 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 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 each of The Container Store Group, Inc. and The Container Store Group, 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 itself, 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 million at any time. As of August 31, 2013, we were in compliance with all covenants and no Event of Default (as such term is defined in the Revolving Credit Facility) has occurred.

Elfa Senior Secured Credit Facilities

On April 27, 2009, Elfa entered into the Elfa Senior Secured Credit Facilities with Tjustbygdens Sparbank AB, which we refer to as Sparbank, which consist of a SEK 137,500,000 (approximately $20.7 million as of August 31, 2013) term loan facility, which we refer to as the Elfa Term Loan Facility, and a SEK 175,000,000 (approximately $26.4 million as of August 31, 2013) revolving credit facility, which we refer to as the Elfa Revolving Credit Facility and, together with the Elfa Term Loan Facility, the Elfa Senior Secured Credit Facilities. On January 27, 2012, Sparbank transferred all of its commitments, rights and obligations under the Elfa Senior Secured Credit Facilities to Swedbank AB. Borrowings under the Elfa Senior Secured Credit Facilities accrue interest at a rate of STIBOR+1.775%. The Elfa Term Loan Facility matures on August 30, 2014 and the Elfa Revolving Credit Facility matures on August 30, 2014, subject to automatic annual renewal as long as certain conditions are satisfied. Elfa is required to make quarterly principal repayments under the Elfa Term Loan Facility of SEK 6,250,000 (approximately $0.9 million as of August 31, 2013) through maturity.

The Elfa Senior Secured Credit Facilities are secured by first priority security interests in substantially all of Elfa's assets.

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The Elfa Senior Secured Credit Facilities contain 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, pay dividends, merge with other companies, engage in businesses that are not in a related line of business and make guarantees. In addition, Elfa is required to maintain (i) a consolidated equity ratio (calculated as Elfa's consolidated total shareholders' equity divided by its consolidated total assets) of not less than 35% and (ii) a consolidated ratio of net debt to EBITDA (as defined in the Elfa Senior Secured Credit Facilities) not greater than 4.0, each tested as of the end of each quarter. As of August 31, 2013 Elfa was in compliance with all covenants and no Event of Default (as defined in the Elfa Senior Secured Credit Facilities) had occurred.

Events of default under the Elfa Senior Secured Credit Facilities include, but are not limited to: (i) nonpayment of any amount due under the credit agreement; (ii) failure to perform or observe covenants; (iii) nonpayment of any other amount owed to the lender; (iv) certain cross-defaults to other indebtedness; (v) bankruptcy or insolvency of Elfa or any of its subsidiaries; (vi) attachment of any assets of Elfa or any of its subsidiaries; and (vii) the occurrence of any other circumstances which give the lender reasonable grounds to assume that Elfa's conditions or ability to perform its obligations under the Elfa Senior Secured Credit Facilities have deteriorated significantly.

Contractual obligations

We enter into long-term obligations and commitments in the normal course of business, primarily debt obligations and non-cancelable operating leases. As of March 2, 2013, without giving effect to this offering, our contractual cash obligations over the next several periods were as follows:

   
 
  Payments due by period  
(in thousands)
  Total
  Fiscal 2013
  Fiscal 2014-2015
  Fiscal 2016-2017
  Thereafter
 
   

Term loans(1)

  $ 278,750   $ 6,625   $ 7,437   $ 5,500   $ 259,188  

Revolving loans

    13,482     13,482              

Other long-term obligations(2)

    6,621     2,398     2,109     501     1,613  

Estimated interest(1)(3)

    106,297     17,482     34,345     33,641     20,829  

Operating leases(4)

    470,436     62,521     123,530     109,782     174,603  

Letters of credit

    2,793     2,793              

Purchase obligations(5)

    29,421     29,421              

Forward contracts(6)

    31,845     31,845              
       

Total

  $ 939,645   $ 166,567   $ 167,421   $ 149,424   $ 456,233  
   

(1)   On April 8, 2013, we executed an amendment to the Senior Secured Term Loan Facility (which we refer to as the Increase and Repricing Transactions), whereby additional term loans in the amount of $90.0 million were borrowed. As a result, our contractual cash obligations for term loans and estimated interest increased as follows:

   
(in thousands)
  Term loans
  Estimated interest
 
   

Remainder of 2013

  $ 6,592   $ 20,424  

2014-2015

    9,182     40,444  

2016-2017

    7,245     39,614  

Thereafter

    345,043     21,589  
       

Total

  $ 368,062   $ 122,071  
   

(2)   Other long-term obligations include a mortgage on a manufacturing facility in Poland, as well as a note payable related to the acquisition of The Container Store Services, LLC in 2012.

(3)   For purposes of this table, interest has been estimated based on interest rates in effect for our indebtedness as of March 2, 2013, and estimated borrowing levels in the future. Actual borrowing levels and interest costs may differ.

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(4)   We enter into operating leases during the normal course of business. Most lease arrangements provide us with the option to renew the leases at defined terms. The future operating lease obligations would change if we were to exercise these options, or if we were to enter into additional operating leases.

(5)   Purchase obligations related to merchandise inventory.

(6)   We enter into 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 Elfa segment.

Off-balance sheet arrangements

None.

Critical accounting policies and estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States 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. Management evaluates its accounting policies, estimates, and judgments on an on-going basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.

Management evaluated the development and selection of its critical accounting policies and estimates and believes that the following involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position, and are therefore discussed as critical. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our consolidated financial statements. With respect to critical accounting policies, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. More information on all of our significant accounting policies can be found in Note 1—Nature of Business and Summary of Significant Accounting Policies to our audited consolidated financial statements included elsewhere in this prospectus.

Revenue recognition

We recognize revenues and the related cost of goods sold for our TCS segment when merchandise is received by our customers, which reflects an estimate of shipments that have not yet been received by the customer. This estimate is based on shipping terms and historical delivery times. We recognize revenues and the related cost of goods sold for our Elfa Segment upon shipment.

We recognize shipping and handling fees as revenue when the merchandise is shipped to the customer. Costs of shipping and handling are included in cost of goods sold. We recognize installation fees as revenue upon completion of the installation service to the customer. Costs of installation are included in cost of goods sold.

Sales tax collected is not recognized as revenue as it is ultimately remitted to governmental authorities.

We reserve for projected merchandise returns based on historical experience and various other assumptions that we believe to be reasonable. The reserve reduces sales and cost of sales, accordingly. Merchandise exchanges of similar product and price are not considered merchandise returns and, therefore, are excluded when calculating the sales returns reserve.

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Gift cards and merchandise credits

We sell gift cards to our customers in our stores, online and through our call center. We issue merchandise credits in our stores and through our call center. Revenue associated with sales of gift cards and issuances of merchandise credits is recognized when the gift card or merchandise credit is redeemed by the customer, or when the likelihood of redemption by the customer is remote (i.e., breakage). An estimate of the rate of gift card breakage is applied over the period of estimated performance (48 months as of the end of 2012) and the breakage amounts are included in net sales in the consolidated statement of operations.

Inventories

Inventories at retail stores are comprised of finished goods and are valued at the lower of cost or market, with cost determined on a weighted-average cost method including associated freight costs, and market determined based on the estimated net realizable value. Manufacturing inventories are comprised of raw materials, work in process, and finished goods and are valued on a first-in, first out basis using full absorption accounting which includes material, labor, other variable costs, and other applicable manufacturing overhead. To determine if the value of inventory is recoverable at cost, we consider current and anticipated demand, customer preference and the merchandise age. The significant estimates used in inventory valuation are obsolescence (including excess and slow-moving inventory) and estimates of inventory shrinkage. We adjust our inventory for obsolescence based on historical trends, aging reports, specific identification and our estimates of future retail sales prices.

Reserves for shrinkage are estimated and recorded throughout the period as a percentage of cost of sales based on historical shrinkage results and current inventory levels. Actual shrinkage is recorded throughout the year based upon periodic cycle counts. Actual inventory shrinkage can vary from estimates due to factors including the mix of our inventory and execution against loss prevention initiatives in our stores and distribution center.

Due to these factors, our obsolescence and shrinkage reserves contain uncertainties. Both estimates have calculations that require management to make assumptions and to apply judgments regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. If actual obsolescence or shrinkage estimates change from our original estimates, we will adjust our inventory reserves accordingly throughout the period. Management does not believe that changes in the assumptions used in these estimates would have a significant effect on our inventory balances. We have not made any material changes to our assumptions included in the calculations of the obsolescence and shrinkage reserves during the periods presented.

Income taxes

We account for deferred income taxes utilizing Financial Accounting Standards Board Accounting Standards Codification ("ASC") 740, Income Taxes. ASC 740 requires an asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. When a net deferred asset position exists, such as with our TCS segment, a three-year cumulative financial loss before income taxes is indicative that realization of a deferred tax asset is in doubt. As a result, valuation allowances are established against deferred tax assets when it is more-likely-than-not that the realization of those deferred tax assets will not occur.

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Valuation allowances are released as positive evidence of future taxable income sufficient to realize the underlying deferred tax assets becomes available (e.g., three-year cumulative financial income).

Deferred tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse. The effect on deferred taxes from a change in the tax rate is recognized through continuing operations in the period that includes the enactment of the change. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future.

We operate in certain jurisdictions outside the United States. ASC 740-30 provides that the undistributed earnings of a foreign subsidiary be accounted for as a temporary difference under the presumption that all undistributed earnings will be distributed to the parent company as a dividend. Sufficient evidence of the intent to permanently reinvest the earnings in the jurisdiction where earned precludes a company from recording the temporary difference. For purposes of ASC 740-30, we are partially reinvested in Elfa and thus do not record a temporary difference. We are partially reinvested since we have permanently reinvested our past earnings at Elfa; however, we do not assert that all future earnings will be reinvested into Elfa.

Leases

Rent expense on operating leases, including rent holidays and scheduled rent increases, is recorded on a straight-line basis over the term of the lease, commencing on the date we take possession of the leased property. Rent expense is recorded in selling, general and administrative expenses. Pre-opening rent expense is recorded in pre-opening costs in the consolidated statement of operations. The net excess of rent expense over the actual cash paid has been recorded as deferred rent in the accompanying consolidated balance sheets. Tenant improvement allowances are also included in the accompanying consolidated balance sheets as deferred rent liabilities and are amortized as a reduction of rent expense over the term of the lease from the possession date. Contingent rental payments, typically based on a percentage of sales, are recognized in rent expense when payment of the contingent rent is probable.

Intangibles and long-lived assets

Goodwill

We evaluate goodwill annually to determine whether it is impaired. Goodwill is also tested between annual impairment tests if an event occurs or circumstances change that would indicate that the fair value of a reporting unit is less than its carrying amount. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset. If an impairment indicator exists, we test the intangible asset for recoverability. We have identified two reporting units and we have selected the fourth fiscal quarter to perform our annual goodwill impairment testing.

Prior to testing goodwill for impairment, we perform a qualitative assessment to determine whether it is more likely than not that goodwill is impaired for each reporting unit. If the results of the qualitative assessment indicate that the likelihood of impairment is greater than 50%, then we perform a two-step impairment test on goodwill. In the first step, we compare the fair value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired and we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the

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impairment test in order to determine the implied fair value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then we would record an impairment loss equal to the difference.

The fair value of each reporting unit is determined by using a discounted cash flow analysis using the income approach. We also use a market approach to compare the estimated fair value to comparable companies. The determination of fair value requires assumptions and estimates of many critical factors, including among others, our nature and our history, financial and economic conditions affecting us, our industry and the general economy, past results, our current operations and future prospects, sales of similar businesses or capital stock of publicly held similar businesses, as well as prices, terms and conditions affecting past sales of similar businesses. Forecasts of future operations are based, in part, on operating results and management's expectations as to future market conditions. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgments to estimate industry economic factors and the profitability of future business strategies. If actual results are not consistent with our estimates and assumptions, we may be exposed to future impairment losses that could be material.

Our tests for impairment of goodwill resulted in a determination that the fair value of the Elfa reporting unit was less than the carrying value in fiscal 2011 and fiscal 2010.

Trade names

We annually evaluate whether the trade names continue to have an indefinite life. Trade names are reviewed for impairment annually in the fourth quarter and may be reviewed more frequently if indicators of impairment are present. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset, a product recall or an adverse action or assessment by a regulator.

The impairment review is performed by comparing the carrying value to the estimated fair value, determined using a discounted cash flow methodology. If the recorded carrying value of the trade name exceeds its estimated fair value, an impairment charge is recorded to write the trade name down to its estimated fair value. Factors used in the valuation of intangible assets with indefinite lives include, but are not limited to, future revenue growth assumptions, estimated market royalty rates that could be derived from the licensing of our trade names to third parties, and a rate used to discount the estimated royalty cash flow projections to their present value (or estimated fair value).

The valuation of trade names requires assumptions and estimates of many critical factors, which are consistent with the factors discussed under "Goodwill" above. Forecasts of future operations are based, in part, on operating results and management's expectations as to future market conditions. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgments to estimate industry economic factors and the profitability of future business strategies. If actual results are not consistent with our estimates and assumptions, we may be exposed to future impairment losses that could be material.

Long-lived assets

Long-lived assets, such as property and equipment and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that may indicate impairment

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include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset, a product recall or an adverse action or assessment by a regulator. If the sum of the estimated undiscounted future cash flows related to the asset are less than the carrying value, we recognize a loss equal to the difference between the carrying value and the fair value, usually determined by the estimated undiscounted cash flow analysis of the asset.

For our TCS segment, we evaluate long-lived tangible assets at an individual store level, which is the lowest level at which independent cash flows can be identified. We evaluate corporate assets or other long-lived assets that are not store-specific at the consolidated level. For our Elfa segment, we evaluate long-lived tangible assets at an individual subsidiary level.

Since there is typically no active market for our long-lived tangible assets, we estimate fair values based on the expected future cash flows. We estimate future cash flows based on store-level historical results, current trends, and operating and cash flow projections. Our estimates are subject to uncertainty and may be affected by a number of factors outside our control, including general economic conditions and the competitive environment. While we believe our estimates and judgments about future cash flows are reasonable, future impairment charges may be required if the expected cash flow estimates, as projected, do not occur or if events change requiring us to revise our estimates.

Foreign currency forward contracts

We account for foreign currency forward contracts in accordance with ASC No. 815, Derivatives and Hedging. 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 Elfa. All currency-related hedge instruments have terms from 1 to 12 months and require us to exchange currencies at agreed-upon rates at settlement. We do not hold or enter into financial instruments for trading or speculative purposes. We record all financial instruments on a gross basis. We account for all foreign currency forward contracts as cash flow hedges, as defined. All financial instruments are recorded on the consolidated balance sheet at fair value. Changes in fair value that are considered to be effective are recorded in other comprehensive income (loss) until the hedged item (inventory) is sold to the customer, at which time the deferred gain or loss is recognized through cost of sales. Any portion of a change in the fair value that is considered to be ineffective is immediately recorded in earnings as cost of sales.

Recently issued accounting pronouncements

On February 5, 2013, the FASB ratified ASU No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." The new disclosure requirements mandate that entities report, in one place, information about reclassifications out of Accumulated other comprehensive income (loss) ("AOCI"). The standard requires disclosure of the amount of the reclassification and the effect of the reclassification on the income statement line item. Upon adoption, the reclassification disclosures must be presented, in one place, either parenthetically on the face of the statement where net income is presented or in the notes. This ASU is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2012, and we adopted this ASU during first quarter 2013. This ASU did not have a material effect on our financial position or results of operations, but did change our disclosure policies for amounts reclassified out of AOCI.

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Jumpstart Our Business Startups Act of 2012

The JOBS Act permits us, as an "emerging growth company," to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to "opt out" of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Quantitative and qualitative disclosure of market risk

Foreign currency risk

We are subject to foreign currency risk in connection with the operations of Elfa. All assets and liabilities of foreign subsidiaries are translated at year end rates of exchange, with the exception of certain assets and liabilities that are translated at historical rates of exchange. Revenues, expenses, and cash flows of foreign subsidiaries are translated at weighted-average rates of exchange for the year. Based on the average exchange rate from Swedish krona to U.S. dollar during the first twenty six weeks of fiscal 2013, and results of operations and financial condition in functional currency, we do not believe that a 10% change in the exchange rate would have a material effect on our consolidated results of operations or financial condition.

We are also subject to foreign currency risk in connection with the purchase of inventory from Elfa. We utilize foreign currency forward contracts to mitigate this risk. In fiscal 2012 and fiscal 2011, we used forward contracts for 85% and 77% of inventory purchases in Swedish krona each year, respectively. For fiscal 2013, we currently have 64% of our planned purchases hedged at an average SEK rate of 6.73, compared to 90% of planned purchases hedged in fiscal 2012 at an average rate of 7.08.

Interest rate risk

We are subject to interest rate risk in connection with borrowings under the Senior Secured Term Loan Facility, the Revolving Credit Facility and the Elfa Senior Secured Credit Facilities, which accrue interest at variable rates. At August 31, 2013, borrowings subject to interest rate risk were $386.3 million, we had $63.4 million of additional availability under the Revolving Credit Facility and approximately $5.2 million of additional availability under the Elfa Revolving Credit Facility. We currently do not engage in any interest rate hedging activity and currently have no intention to do so in the foreseeable future. Based on the average interest rate on each of the Revolving Credit Facility and the Elfa Revolving Credit Facility during the first twenty six weeks of fiscal 2013, and to the extent that borrowings were outstanding, we do not believe that a 10% change in the interest rate would have a material effect on our consolidated results of operations or financial condition.

Impact of Inflation

Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have been immaterial.

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Changes in and disagreements with accountants on accounting and financial disclosure

None.

Internal control over financial reporting

The process of improving our internal controls has required and will continue to require us to expend significant resources to design, implement and maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. There can be no assurance that any actions we take will be completely successful. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an on-going basis. As part of this process, we may identify specific internal controls as being deficient.

We have begun documenting and testing our internal control procedures in order to comply with the requirements of Section 404 of the Sarbanes-Oxley Act. Section 404 requires annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent auditors addressing these assessments; however, for so long as we qualify as an emerging growth company, we will not be required to engage an auditor to report on our internal controls over financial reporting. We must comply with Section 404 no later than the time we file our annual report for fiscal 2014 with the SEC.

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Letter from our Chairman and Chief Executive Officer

GRAPHIC

To our prospective shareholders,

As we celebrate our 35th anniversary this year, I am thrilled, honored and proud to be writing this letter to you.

Since 1978, The Container Store