10-K 1 tcs-20200328x10k.htm 10-K tcs_Current_Folio_10K_Taxonomy2019

F

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

 

(Mark One)

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

For the fiscal year ended March 28, 2020

or

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

For the transition period from                          to                        

 

Commission File Number 001‑36161

THE CONTAINER STORE GROUP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware
(State or other jurisdiction of incorporation or organization)

26‑0565401
(I.R.S. Employer Identification No.)

500 Freeport Parkway Coppell, TX

75019

(Addresses of principal executive offices)

(Zip Code)

 

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

 

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

 

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

TCS

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐    NO ☑

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ☐    NO ☑

 

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

 

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

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

 

 

 

 

 

Large accelerated filer ☐

Accelerated filer ☑ 

Non‑accelerated filer ☐

Smaller reporting company ☑

 

 

 

Emerging growth company ☐

 

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  ☑

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act). YES ☐    NO ☑

 

As of September 27, 2019, the last business day of the registrant’s most recently completed second quarter, the approximate market value of the registrant’s common stock held by non-affiliates was $89,420,395. Solely for purposes of this disclosure, shares of common stock held by executive officers and directors of the registrant as of such date have been excluded because such persons may be deemed to be affiliates.

 

As of June 12, 2020, the number of shares of common stock outstanding was 50,362,520.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the registrant’s definitive Proxy Statement for its 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10‑K.

 

 

 

 

EXPLANATORY NOTE

 

As previously disclosed in the Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on June 10, 2020, the Company expected that the filing of this Annual Report on Form 10-K for the fiscal year ended March 28, 2020, originally due on June 11, 2020, would be delayed due to disruptions caused by the COVID-19 pandemic. In particular, the impact of the COVID-19 pandemic on the Company’s store operations and stock price resulted in the need to conduct an interim impairment assessment of the Company's intangibles, long-lived assets and goodwill. The uncertainty caused by the COVID-19 pandemic complicated the analysis required in connection with such impairment assessment, causing the Company to need to perform additional analyses and procedures. As a result, the Company required additional time to complete such assessment.

 

The Company is relying upon Release No. 34-88465 issued by the Securities and Exchange Commission on March 25, 2020, pursuant to Section 36 of the Securities Exchange Act of 1934, as amended, in filing this Annual Report on Form 10-K after the original due date of June 11, 2020.

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TABLE OF CONTENTS

 

 

 

PART I. 

 

 

Item 1. 

Business

5

Item 1A. 

Risk Factors

13

Item 1B. 

Unresolved Staff Comments

32

Item 2. 

Properties

32

Item 3. 

Legal Proceedings

33

Item 4. 

Mine Safety Disclosures

33

PART II. 

 

34

Item 5. 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

34

Item 6. 

Selected Financial and Operating Data

34

Item 7. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

42

Item 7A. 

Quantitative and Qualitative Disclosures About Market Risk

62

Item 8. 

Financial Statements and Supplementary Data

63

Item 9. 

Changes and Disagreements With Accountants on Accounting and Financial Disclosures

107

Item 9A. 

Controls and Procedures

107

Item 9B. 

Other Information

110

PART III. 

 

110

Item 10. 

Directors, Executive Officers and Corporate Governance

110

Item 11. 

Executive Compensation

110

Item 12. 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

110

Item 13. 

Certain Relationships and Related Transactions, and Director Independence

110

Item 14. 

Principal Accounting Fees and Services

110

PART IV. 

 

111

Item 15. 

Exhibits, Financial Statement Schedules

111

Item 16. 

Form 10‑K Summary

115

 

3

Cautionary note regarding forward‑looking statements

This Annual Report on Form 10‑K contains statements that constitute forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 Annual Report on Form 10-K include, but are not limited to, statements related to: the outbreak of COVID-19 and the anticipated impact on our business, results of operations and financial condition; anticipated financial performance and key metrics, expectations regarding the reduction of capital expenditures and anticipated benefits to free cash flow, anticipated tax rates, the sufficiency of our cash generated from operations and borrowings under our credit facilities, ability to increase our market share, expectations with respect to new store openings and other expansion opportunities, expectations regarding key growth initiatives, expectations regarding the impact of, and potential charges related to, marketing and expense savings programs,  and our ability to attract new customers and increase brand loyalty. These forward‑looking statements 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.

These forward‑looking statements speak only as of the date of this Annual Report on Form 10-K and are subject to a number of risks, uncertainties and assumptions, including the important factors described in the “Item 1A. Risk Factors” section of this Annual Report on Form 10‑K. 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 accurate 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 the date of this Annual Report on Form 10-K, whether as a result of any new information, future events or otherwise.

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

The following discussion contains references to fiscal 2020, fiscal 2019, fiscal 2018, fiscal 2017, fiscal 2016, and fiscal 2015, which represent our fiscal years ending April 3, 2021, March 28, 2020, March 30, 2019, March 31, 2018, April 1, 2017, and February 27, 2016, respectively.

 

 

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PART I

ITEM 1.  BUSINESS

General

The Container Store® is the original and leading specialty retailer of storage and organization products and solutions in the United States and the only national retailer solely devoted to the category. We provide a collection of creative, multifunctional and customizable storage and organization solutions that are sold in our stores and online through a high-service, differentiated shopping experience. We feature The Container Store Custom Closets consisting of our elfa® Classic, elfa® Décor, Avera® and Laren® closet lines. Our vision is to be a beloved brand and the first choice for customized organization solutions and services. Our customers are highly educated, very busy and primarily homeowners with a higher than average household income. We service them with storage and organization solutions that help them accomplish projects, maximize their space, and make the most of their home.

We were founded in 1978 in Dallas, Texas as The Container Store, Inc. In 2007, The Container Store, Inc. was sold to The Container Store Group, Inc. In November 2013, we completed the initial public offering of our common stock (the “IPO”). Our common stock trades on The New York Stock Exchange (“NYSE”) under the symbol “TCS.” In fiscal 2019, we generated consolidated net sales of $916.0 million. Today our operations consist of two operating segments:

·

The Container Store (“TCS”), which consists of our retail stores, website and call center (which includes business sales), as well as our installation and organizational services business. We operate 93 stores with an average size of approximately 25,000 square feet (19,000 selling square feet) in 33 states and the District of Columbia. Our stores present our products in a unique and engaging atmosphere. Our visual merchandising team works to ensure that all of our merchandise is appropriately showcased to show solutions to accomplish our customer’s projects, highlighting the value and functionality of our products, and to maximize the appeal of our image and brand. We maintain a relatively consistent store layout which creates a familiar shopping experience across our store base. Our stores are clean and spacious with orderly merchandising and strategic product solutions to optimize our selling space and increase productivity. We offer our customers their choice of how to shop—in-store, online or through our in-home services. Our stores receive substantially all of our products directly from one of our two distribution centers.  Our first distribution center in Coppell, Texas, is co‑located with our corporate headquarters and call center, and our second distribution center in Aberdeen, Maryland, became fully operational in fiscal 2019.  In fiscal 2019, TCS had net sales of $852.3 million, which represented approximately 93% of our total consolidated net sales.

·

Elfa, The Container Store, Inc.’s wholly owned Swedish subsidiary, Elfa International AB (“Elfa”), designs and manufactures component‑based shelving and drawer systems and made‑to‑measure sliding doors. Elfa was founded in 1948 and is headquartered in Malmö, Sweden. Elfa’s shelving and drawer systems are customizable for any area of the home, including closets, kitchens, offices and garages. Elfa operates three manufacturing facilities with two located in Sweden and one in Poland. The Container Store began selling elfa® products in 1978 and acquired Elfa in 1999. Today our TCS segment is the exclusive distributor of elfa® products in the U.S. and represented approximately 49% of Elfa’s total sales in fiscal 2019. Elfa also sells its products on a wholesale basis to various retailers in approximately 30 countries around the world, with a concentration in the Nordic region of Europe. In fiscal 2019, the Elfa segment had $63.6 million of third party net sales, which represented approximately 7% of our total consolidated net sales.

5

Business Update Related to Coronavirus

On March 13, 2020, the President of the United States declared a national emergency as a result of the novel coronavirus (“COVID-19”) pandemic in the U.S. COVID-19 had a negative impact on the Company’s fiscal 2019 operations and financial results, and we expect the pandemic will continue to negatively affect our operations and financial results in fiscal 2020. The full financial impact of the pandemic cannot be reasonably estimated at this time due to uncertainty as to its severity and duration. The Company has taken actions to tightly manage costs, working capital and capital expenditures to preserve the Company’s financial health. We will continue to monitor the impact of COVID-19 on the Company's business, results of operations, financial position and cash flows.

Our Key Differentiators

The Container Store Custom Closets:

Our growing focus on The Container Store Custom Closets, inclusive of elfa® Classic, elfa® Décor, Avera® and Laren® closet lines, full complementary space completion products, and installation and in-home services, provides a unique opportunity to drive comparable store sales through higher average ticket while differentiating the Company from other brick and mortar and online, items-based retailers. Our highly-trained and experienced sales force has been selling proprietary, custom-designed elfa® and other closet solutions for over 41 years. We believe there is no other comparable retailer executing this holistic approach to custom closets. We offer the complete custom closet solution—not just our full line custom closets, but the full array of closet organization products that accompany those closets, as well as a national footprint with millions of customers coming through the door and visiting our online site each year. We design and sell The Container Store Custom Closets in-store, in-home, online, through our call center, as well as through our Contained Home® in-home organization service.

Our elfa® Classic and elfa® Décor closet lines as well as other elfa® products continue to be an ever important, highly profitable and differentiating component in the growth of our Company and our commitment to dominating the custom closet market, all Elfa-produced products accounted for approximately 29% of our TCS retail sales in fiscal 2019. We expect our new Elfa-manufactured closet line, Avera® which was launched in fiscal 2019, to add to this differentiation and grow the percentage of our TCS retail sales coming from Elfa-produced products. Due to our vertical integration with Elfa, we have control over the sourcing and availability of elfa® Classic, elfa® Décor, and Avera®, our best selling and highest margin products. We are the exclusive distributor of Elfa-manufactured products in the United States. Approximately 19% of our fiscal 2019 TCS segment purchases were attributed to intercompany purchases from our Elfa segment.

Our Unique Product Collection—Accomplishing Projects in Every Area of the Home:

Our merchandising philosophy is to provide a carefully curated, one-of-a-kind collection of storage and organization solutions for every area of the home, at a variety of price points. We offer over 11,000 products designed to help our customers accomplish projects, maximize their space and make the most of their home. Each year, we introduce approximately 2,000 new SKUs. Our solutions-based selling approach (versus items-based) is delivered by our highly trained salespeople. We believe helping customers accomplish their organizational projects by selling solutions primarily consisting of exclusive, proprietary products differentiates us from other retailers. In fact, over half of our annual sales come from exclusive or proprietary products.

6

Currently, our stores are typically organized into 14 distinct lifestyle departments. The types of products sold in each department are as follows:

 

 

 

Lifestyle departments

    

Select products

Avera®

 

Closet System (our exclusive and patent-pending system with a custom built-in look, touch open full extension drawers with soft close, and integrated lighting)

 

 

 

Bath

 

Countertop Organizers, Cosmetic and Jewelry Organizers, Shower and Bathtub Organizers, Drawer Organization, Cabinet Storage

 

 

 

Closet

 

Shoe Racks, Hangers, Drawer Organizers, Boxes and Bins, Hanging Storage Bags

 

 

 

elfa® Classic & elfa® Decor

 

Includes elfa® collection of Ventilated and Solid Shelving and Drawer Components and Systems, Wall and Door Rack Solutions, Accessories, Utility and Garage Systems, Sliding Doors

 

 

 

Gift Packaging

 

Gift Wrap and Tags, Ribbons and Bows, Gift Wrap Organizers, Gift Bags and Sacks, Gift Boxes, Tape, Small Boxes, Small Baskets, Tins, Divided Boxes, Decorative Containers

 

 

 

Hooks

 

Wall Mounted, Self-adhesive, Magnetic, Overdoor, Removable

 

 

 

Kitchen

 

Canisters, Jars, Lunchtime Essentials, Bulk Food Storage, Plastic and Glass Food Storage, Drawer Liners and Organizers, Countertop Organizers, Dish Drying Racks, Cabinet Storage, Pantry Organizers

 

 

 

Laren®

 

Closet System (our exclusive luxury solid closet system with doors, drawers, integrated lighting and accessories)

 

 

 

Laundry

 

Step Stools, Hampers, Laundry Bags and Baskets, Clothes Drying Racks, Cleaning Tools

 

 

 

Office

 

Desktop Collections, Paper Storage, File Carts and Cabinets, Literature Organizers, Message Boards, Media Storage, Photo Storage, Display, Small Craft and Parts Organizers

 

 

 

Shelving

 

Free Standing Shelving, Wall Mounted Shelving, Cube Systems, Component Shelving, Desks, Chairs, Garage

 

 

 

Storage

 

Drawers, Boxes and Bins, Totes, Crates, Carts, Toy Storage, Garment Racks, Archival Storage, Corrugated Boxes, Packing Material, Storage Bags, Specialty Boxes

 

 

 

Trash

 

Recycle Bins, Wastebaskets, Open Cans, Step‑on Cans, Bags

 

 

 

Travel

 

Luggage, Totes, Clothing Organizers, Cosmetic and Jewelry Organizers, Travel Bottles

 

In order to offer our unique collection of products and to execute a competitive merchandising and business strategy, we work to form meaningful, long-lasting relationships with vendors from around the world. We believe these relationships benefit us in a number of ways, including providing us with an increased number of exclusive products and competitive pricing. We believe that by creatively crafting mutually beneficial vendor relationships we foster a unique sense of loyalty among our more than 700 product vendors. In fact, 18 of our top 20 vendors have been with us for at least 10 years and several of those vendors have been with us since our inception in 1978. For the TCS segment, our top 10 vendors, excluding Elfa, accounted for 31% of our total purchases in fiscal 2019. In order to maximize our purchasing flexibility, we generally do not enter into long-term contracts with our vendors.

7

Our Shopping Experience:

We strive to create an Air of Excitement® in each of our stores across the country. You can experience the Air of Excitement® through our employees’ smiling faces and their genuine interest in a customer’s organizational projects and in the bright visual displays of products and solutions.

This is coupled with our highly personalized approach to customer service. Our employees are trained to ask questions to understand our customers’ needs. We believe that if we discover the underlying storage and organization challenges of our customers, we truly help them and hopefully improve the quality of their life. Service and selling are synonymous at The Container Store. We believe we can best serve our customers by astonishing them with personalized service and providing the solutions they most need to accomplish their organizational projects.

We are a multi‑channel retailer, with a fully‑integrated website, responsive mobile site, and call center to complement our physical stores. Our website, containerstore.com, is intended to replicate the store experience offering virtually the same product assortment and providing real time inventory information for our stores, as well as certain products found exclusively online. We enhance the customer’s experience and deepen loyalty by creating consistent, relevant messages, regardless of which channel is being used. We offer free shipping on orders over $75 and our customers are able to purchase online and pick up at a store, with curbside pick‑up in most markets, or request same‑day home delivery in select markets. The website, mobile site, and call center sales channels combined accounted for approximately 21% of TCS net sales in fiscal 2019. As a result of the COVID-19 pandemic, we have seen a significant increase in our online sales, as our customers are utilizing more time at home as an opportunity to get organized and accomplish home projects.

As previously announced on April 6, 2020, the COVID-19 outbreak led to temporary changes in our customers’ shopping experience. During the temporary closure of all stores, the Company shifted to offering contactless curbside pick-up and in-store appointments for limited customers at a time, in select locations and where permitted to offer these services under local regulations. As of the date of this filing, all 93 stores are open, of which 88 stores are operating with strict health and safety protocols and allowing limited customers in the store at a time, and 5 stores are operating with contactless curbside pick-up only until local mandates allow for more extensive operations.

Our Stores:

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, existing, small and large markets. Our current footprint of 93 stores extends to 33 states and the District of Columbia. We opened a total of two new stores (including one relocation) in fiscal 2019 and we expect to open one new store in fiscal 2020, subject to the development of the COVID-19 pandemic and related national, state and local regulations. While our current expansion focus is on domestic markets, we believe international expansion may provide additional growth opportunities for us in the future.

We have a strong base of profitable stores and believe that our expansion opportunities in the United States are significant. We plan to continue to seek out strategic and profitable real estate expansion via a variety of store formats and sizes. In fiscal 2019, both of our new stores opened were designed as reduced‑sized footprint stores, located in Germantown, Tennessee, and Dallas, Texas, and our anticipated new store in fiscal 2020 is being designed as a reduced‑sized footprint store as well. Our typical new store opening includes a strategic marketing plan inclusive of public relations and comprehensive training for our store employees that includes product education, solution-selling education, operational education and company culture understanding – all of which we believe enables our new stores to deliver strong sales volume more quickly.

8

Our Employees and Culture

The Container Store has been helping its customers accomplish their projects and solve their organizational challenges for over 41 years, and since 1978, we have also been running our business guided by our values‑based set of principles. We are proud to be one of the founding companies in a movement called Conscious Capitalism®, which includes a group of like‑minded businesses, thought leaders, authors and academics all working together to change the way business is done in America and around the world. We have a firm belief that creating value for and optimizing relationships between all of the stakeholders of our business—employees, customers, vendors, communities and shareholders—is just simply the right thing to do.

Consistent with our commitment to Conscious Capitalism, we believe that valued and happy employees result in better performance and higher profits. We believe in putting employees first and staying true to our seven Foundation Principles®—simple business philosophies that guide each decision we make. One of those Foundation Principles is 1 Great Person = 3 Good People® in terms of business productivity—that’s our hiring philosophy. In fact, in fiscal 2019, we hired only 6% of job applicants. Our employee‑first culture includes a tremendous commitment to communication, training and career development that helps 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. We provide extensive formal training to full‑time store employees, especially during their first year of employment. Our stores offer flexible work schedules, comprehensive benefits and above retail industry average compensation to both full‑time and part‑time employees. As a result, our full‑time employee voluntary turnover rate was approximately 17% on average over the past two years, significantly below the retail average. It is for these reasons that The Container Store was named by FORTUNE Magazine to its annual list of 100 Best Companies to Work For® for 18 consecutive years. 

You can learn about our Foundation Principles and Conscious Capitalism on our blog, www.whatwestandfor.com. The information contained on our blog is not incorporated by reference into this Annual Report on Form 10‑K.

As a result of the COVID-19 pandemic, the Company has implemented strict health and safety protocols across our stores, distribution centers and home office to safeguard our employees and customers. These measures include reduced hours, special shopping hours for high-risk customers, intensive and frequent scheduled cleaning procedures, adding sanitizing stations in our stores for employees and customers, and limiting the number of customers allowed in store.  Precautionary health and sanitization measures, including frequent hand washing and cleaning, employees wearing masks, taking of temperatures before beginning work, installing plexiglass shields at point of sale locations and social distancing are in strict effect in these locations. The Company will continue to monitor the situation and follow guidance from the Centers for Disease Control and Prevention and local, state, and federal health officials and intends to reassess or adjust its policies accordingly as the situation continues to unfold. 

As of March 28, 2020, we had approximately 5,100 employees, of which approximately 4,600 were TCS employees and approximately 490 were Elfa employees. Of the 4,600 TCS employees, approximately 2,900 were part‑time employees. As a result of reduced store operations, the Company has temporarily transitioned to a substantially smaller workforce to execute on the critical activities of the business. As of April 6, 2020, the Company furloughed approximately 2,800 employees, primarily in its stores, as well as a portion of corporate employees. Our employee base as of June 12, 2020, consists of approximately  3,000 active employees, however, we anticipate increasing our workforce as our business operations allow. Additionally, the majority of our corporate employees have transitioned to working from home arrangements.

In connection with the employee furloughs, the Company also reduced the base salaries of its executive officers. Effective March 30, 2020 the base salaries of Melissa Reiff, Chairwoman and Chief Executive Officer, and the Company’s other executive officers, were reduced by 45% and 33%, respectively. Ms. Reiff and Jodi Taylor, Chief Financial Officer and Chief Administrative Officer, have also amended their employment contracts to temporarily defer the payment of any annual cash bonus for fiscal year 2019. In addition, the base salaries of all other members of the Company’s senior management team, as well as other certain salaried employees, were temporarily reduced by varying amounts. The Company’s senior management team’s performance-based cash bonuses have also been temporarily deferred. All furloughs and reductions of pay will remain in effect for a period to be determined and will be periodically

9

reassessed as the situation regarding COVID-19 develops. The non-employee members of the Company’s Board of Directors also agreed to waive their quarterly retainer fees that were scheduled to be paid on April 1, 2020. 

 Sustainability

We have a strong commitment to work towards a sustainable future and believe that the companies best positioned to succeed are committed to growing sustainably, by aligning their mission and business strategy with solutions that benefit customers and their communities. We strive to operate our business in a manner that results in positive impacts to the environment, our communities, our employees, customers, vendors, and shareholders which complements and advances our business priorities. The Board’s role includes overseeing the Company’s corporate strategy and enterprise risk management, including sustainability efforts. Our Board and its committees play a critical role in the oversight of our corporate culture, and hold management accountable for its maintenance of high ethical standards, governance practices and compliance programs to protect our business, employees and reputation.

 

Our top priorities are to develop policies and efforts that focus on the environment, social responsibility and our employees, respect for human rights and ethics. Our contribution to a sustainable society is to reduce environmental impacts of our products at each stage of development. Our Elfa-manufactured products, which contributed approximately 29% of our fiscal year 2019 retail sales, are largely made from recycled materials and Elfa has a robust sustainability program in place. Additionally, we desire to progress towards a fair, healthy and safe workplace, while creating work environment policies that promote diversity, equality and inclusion. We believe that when we create a workplace where our colleagues are engaged, committed and empowered for the long-term, we are better positioned to create value for our company, as well as for our shareholders. We are proud of our focus on promoting human rights across our operations – from our supply chain to our products – and are committed to build our business on a foundation of ethics.

 

Distribution

In the TCS segment, substantially all of our merchandise flows through one of our two distribution centers prior to transport to our retail stores. Our first distribution center is co‑located with our corporate office in Coppell, Texas. The approximately 1.1 million square foot facility was designed and constructed specifically for The Container Store and is comprised of approximately 93,000 square feet of corporate office space and approximately 1 million square feet of warehouse space. Our second distribution center located in Aberdeen, Maryland became fully operational in fiscal 2019 and is approximately 600,000 square feet, comprised primarily of warehouse space.

Our distribution centers are utilized for retail store replenishment and direct‑to‑customer orders. We utilize third party truckload carriers to transport all of our products to our stores. We utilize best in class logistics technology to optimize operations and current processes for picking, packing and shipping while providing a strong foundation for future growth. We continue to strengthen our distribution centers with ongoing process and material handling improvements, as well as automation, in order to achieve even greater efficiencies in service levels and the management of our inventory.

Within our distribution operations, we have a culture of safety and efficiency, with a robust metric program and a commitment to continuous improvement. All processes, teams and individuals are held to high efficiency and performance standards. After assessing our distribution and supply chain operations to ensure we are operating the most efficient and cost‑effective distribution network, the fiscal 2019 opening of our second distribution center will significantly improve service levels to our customers while at the same time reduce our supply chain and distribution costs. We also continue to invest in supply chain system enhancements for increased logistics network support.

Elfa utilizes a broad network of third‑party carriers to deliver products from its manufacturing facilities to customers worldwide.

Our distribution centers have been impacted by the COVID-19 pandemic. As a result of our temporary store closures and reduced store operations, we have seen a significant shift in customer trends from shopping in our stores to purchasing online. The increased online purchasing has resulted in delays in order processing and we have hired additional employees to work in our distribution centers. For the safety of our distribution center employees,

10

precautionary health and sanitization measures, including frequent hand washing and scheduled cleanings, employees wearing masks, taking of temperatures before beginning work, scheduling our work teams to minimize contact and social distancing are in strict effect at our distribution centers. We will continue to follow local, state and federal guidelines to ensure the safety of our employees.

Intellectual Property

Our “The Container Store®,” “Contain Yourself!®,” “Foundation Principles®,” “POP! Perfectly Organized Perks®,” “Laren®,” “Avera®,” “Contained Home®,” and “elfa®” trademarks and certain variations thereon, such as our “The Container Store” logo and many trademarks used for our product lines and sales campaigns are registered or are the subject of pending trademark applications with the U.S. Patent and Trademark Office and with the trademark registries of many foreign countries. In addition, we own many domain names, including “www.containerstore.com,” “www.whatwestandfor.com” and others that include our trademarks. We own several elfa® utility and design patents protecting Elfa’s closet and shelving systems, and a utility patent for TCS’ proprietary retail shopping computer systems, along with copyrights in our catalogs, websites, and other marketing material. We believe that our trademarks, product designs and copyrighted works have significant value and we vigorously protect them against infringement.

Competition

We operate within the storage and organization category which extends across many retail segments including custom closets, housewares, office supplies and travel, among others. However, we are the only national retailer solely devoted to it. Storage and organization products are sold by a variety of retailers, including mass merchants, specialty retail chains, and internet‑based retailers, but they devote a smaller portion of their overall merchandise assortment to storage and organization. One of our biggest differentiators is that we sell solutions, not items. Some of our competitors are larger and may have greater financial, marketing and other resources than The Container Store. However, we compete based on our customer service, product selection and quality, price, convenience, consumer marketing and promotional activities, and our ability to identify and satisfy emerging consumer preferences, vendor relationships, and brand recognition, among other things. In addition, we believe that the strength of our solutions‑based selling with highly trained employees, exclusive offerings and vendor relationships, our passionate and loyal customer base and the quality, differentiation and breadth of our product assortment compare favorably to those of our competitors.

Seasonality

Our storage and organization product offering makes us less susceptible to holiday season shopping patterns than many retailers. 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 traditionally starts in late December and runs into February. As such, our business has historically realized greater leverage on our selling, general and administrative expenses during our fiscal fourth quarter. In fact, over half of our adjusted net income was derived in the fiscal fourth quarter in fiscal years 2019,  2018, and 2017. For more information regarding our use of adjusted net income, and a reconciliation of adjusted net income to the generally accepted accounting principles financial measure of net income, see “Item 6. Selected Financial and Operating Data.”

Regulation and Legislation

We are subject to labor and employment laws, laws governing truth‑in‑advertising, privacy laws, safety regulations and other laws, including tax and trade policies and consumer protection regulations, such as the Consumer Product Safety Improvement Act of 2008, that regulate retailers and govern the promotion and sale of merchandise and the operation of stores and warehouse facilities. We monitor changes in these laws and believe that we are in material compliance with applicable laws. Any legal or regulatory changes that impose additional restrictions or requirements on us or on our potential customers, such as the imposition of potential additional tariffs or retaliatory trade restrictions in connection with recently enacted U.S. tariffs, could adversely affect us by increasing our operating costs or decreasing demand for our products or services, which could have a material adverse effect on our results of operations.

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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. Our policies and our vendor compliance agreements mandate compliance with applicable law, including these laws and regulations.

As result of the COVID-19 pandemic, the Company has been monitoring guidance from the Centers for Disease Control and Prevention and local, state, and federal health officials, as well as local, state and federal mandates surrounding business openings, and intends to continue to follow recommended mandates and protocols while operating its business.

Where You Can Find More Information

We maintain a website at http://investor.containerstore.com and make available, free of charge, through this site our Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K, Proxy Statements and Forms 3, 4 and 5 filed on behalf of directors and executive officers and holders of more than 10% of our common stock, as well as any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). We also put on our website the charters for our Board of Directors’ Audit Committee, Culture and Compensation Committee, and Nominating and Corporate Governance Committee, as well as our Code of Business Conduct and Ethics, which applies to all of our directors, officers, and employees, including our principal executive officer and our principal financial and accounting officers, our Corporate Governance Guidelines and other related materials. The information on our website is not part of this Annual Report on Form 10-K.

Our Investor Relations Department can be contacted at The Container Store Group, Inc., 500 Freeport Parkway, Coppell, TX 75019‑3863, Attention: Investor Relations; telephone: 972‑538‑6504; email:InvestorRelations@containerstore.com

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ITEM 1A.  RISK FACTORS

Our business faces significant risks and uncertainties. Certain important factors may have a material adverse effect on our business prospects, financial condition and results of operations, and you should carefully consider them. Accordingly, in evaluating our business, we encourage you to consider the following discussion of risk factors, in its entirety, in addition to other information contained in or incorporated by reference into this Annual Report on Form 10‑K and our other public filings with the SEC.

Store Operations and Infrastructure Risks

The COVID-19 outbreak has led to disruption of our store operations and has had a significant and continuing adverse impact on our results of operations, financial position and cash flows.

The COVID-19 pandemic continues to affect the U.S. and grow globally and has significantly affected our business operations. It is not possible to predict the ultimate impact of the COVID-19 pandemic as the situation is rapidly evolving. On March 13, 2020, the President of the United States declared a national emergency as a result of the COVID-19 outbreak in the U.S. We experienced significant disruptions in store operations, including the temporary closure of all stores and the shift to contactless curbside click and pick-up service and limited in-store appointments at select stores, which adversely affected our business, results of operations and financial condition. As of the date of filing this Annual Report on Form 10-K, all 93 stores have reopened, of which 88 stores are operating with strict health and safety protocols and allowing limited customers in the store at a time, and 5 stores are operating with contactless curbside pick-up only until local mandates allow for more extensive operations. There can be no assurance that the continuation of the COVID-19 pandemic will not materially impact our future business operations.

There can be no assurance that we will not be required by landlords or authorities at the local, state or federal level to close some or all of our stores again in the future, or as to how long any such closure would last. In general, during any such closure, we would still be obligated to make payments to landlords and for routine operating costs, such as utilities and insurance. Should there be further widespread store disruptions due to the COVID-19 pandemic, there can be no assurance that we will have sufficient cash flows from operations or other sources of liquidity to continue making such payments when due, or that efforts to reduce, offset or defer such obligations, such as entering into deferral agreements with landlords or other creditors, will be successful.

Although our distribution centers remain open and operational through the date of filing this Annual Report on Form 10-K, governmental mandates or illness or absence of a substantial number of distribution center employees could require that we temporarily close one or more of our distribution centers. This would complicate or prevent our fulfilling of online orders, and disrupt the operations of our stores by preventing our ability to supply merchandise to our stores.

Our customers may have been, and may continue to be negatively affected by layoffs or work reductions as a result of the global economic downturn caused by COVID-19, which may have negatively impacted, and could continue to negatively impact demand for our products as customers delay or reduce discretionary purchases. Any significant reduction in customer visits to and spending at our stores, caused directly or indirectly by COVID-19 would continue to result in a loss of revenue and profits and could result in other material adverse effects.

Our liquidity could be negatively impacted if these conditions continue or worsen for a significant period of time and we may be required to pursue additional sources of financing to obtain working capital, maintain appropriate inventory levels, and meet our financial obligations. Depending on the continued impact of the crisis, further actions may be required to improve the Company's cash position and capital structure. Concerns over the economic impact of the COVID-19 pandemic have caused extreme volatility in financial and capital markets, which has adversely impacted our stock price and may materially adversely affect our ability to access capital markets.

 

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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 and our second distribution center in Aberdeen, Maryland. Our stores are leased from third parties and generally have an initial term of 10 to 15 years. Many of our lease agreements also have additional five‑year renewal options and certain 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 lease payments based on a percentage of sales, or “percentage rent,” if sales at the respective stores exceed 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 lease payment 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;

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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 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.

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

Part of 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.

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.

Our quarterly results have fluctuated in the past and may fluctuate significantly in the future, depending upon a variety of factors, including 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, including economic downturns as a result of unforeseen events such as the COVID-19 pandemic, among other things, and may fluctuate significantly in the future. As a result of these factors, the demands on our product distribution and delivery network may fluctuate during the fiscal year. Accordingly, our results of operations may fluctuate on a seasonal and quarterly basis and relative to corresponding periods in prior years. We historically have 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 traditionally starts in late

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December and runs into February. In fact, over half of our adjusted net income was derived in the fiscal fourth quarter in fiscal years 2019, 2018, and 2017. In addition, 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.

Our costs may increase due to factors that may or may not be controllable by us, which may negatively affect our financial results. 

Increases in our costs that are beyond our control, including items such as increases in commodity prices for raw materials that are directly or indirectly related to the production and distribution of our products, such as the prices of steel, oil, resin and pulp, increases in fuel and transportation costs, higher interest rates, increases in losses from damaged merchandise, inflation, fluctuations in foreign currency rates, higher costs of labor, labor disputes around the world, increases in the costs of insurance and healthcare, including the potential for increased insurance premiums, medical claim costs and worker’s compensation claim costs and increased incremental costs of doing business, as a result of the COVID-19 pandemic, increases in postage and media costs, higher tax rates,  and the cost of compliance with changes in laws and regulations, including accounting standards, may negatively impact our financial results.

Brand Reputation Risks

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.

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 upon 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.

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Consumer Behavior Risks

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 general consumer spending on 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 and political conditions, and consumer perceptions of personal well‑being and security, including health epidemics or pandemics, such as the COVID-19 pandemic. For example, demand for certain of our products has decreased as a result of the economic impact of the COVID-19 pandemic, and a decrease in home purchases as a result of the pandemic or otherwise may lead to further 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 temporarily or permanently 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.

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 and convenient 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.  Our buying team, is primarily responsible for both sourcing products that meet our high specifications and identifying and responding to changing customer preferences. Failure to source 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, appealing and convenient shopping experience, including on our website. If we are not successful in creating a pleasant, appealing and convenient shopping experience we may lose customers or fail to obtain new 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, appealing and convenient 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.

If we fail to 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.

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In addition, we must manage our merchandise in stock and inventory levels to track consumer demand. As a result of the economic downturn caused by COVID-19, the Company has reduced inventory purchases consistent with customer 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 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

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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.

Competition Risks

Competition, including internet‑based competition, could negatively impact our business, adversely affecting our ability to generate higher net sales.

The retail industry is highly competitive, with few barriers to entry. Competition is characterized by many factors, including level of service, merchandise assortment, product quality, price, location, reputation, credit availability, and customer loyalty. A variety of retailers offer products that are similar to the products we offer in our stores and through our website. Competitive products can be found in mass merchants, as well as specialty retail chains. Some of our competitors, particularly the mass merchants, are larger and have greater financial resources than we do.

We also face competition from other internet‑based retailers, and traditional store‑based retailers. This results in increased price competition and customer selection of similar products.

In addition, we must successfully respond to changing consumer preferences and buying trends relating to e‑commerce usage. We may need to purchase new or improved technology, creative user interfaces and other e‑commerce marketing tools such as paid search and mobile applications, among others. This may result in increased costs and 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.

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.

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Supply Chain Risks

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, incur unexpected costs or be unable to effectively service our stores and online customers.

Our retail stores, corporate offices, distribution centers, 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 various natural disasters including earthquakes, tornadoes, hurricanes, fires, floods, as well as other unexpected events, such as civil unrest, 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 deductibles and repairing any damage beyond our applicable insurance coverage.

Material disruptions at one of our Elfa manufacturing facilities could negatively impact production, customer deliveries and overall financial results.

Elfa operates three manufacturing facilities: two in Sweden and one in Poland. 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, temporary or permanent factory closings, transportation failures affecting the supply and shipment of materials and finished goods, severe weather conditions, health epidemics or pandemics, including the COVID-19 pandemic, which could result in limitations on the ability to travel and return to work, and disruptions in utility services. Such a disruption could negatively impact production, customer deliveries and financial results.

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, including COVID-19.

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. 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.

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 payment 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

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·

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

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. Adverse market and economic events, such as the economic downturn caused by the COVID-19 pandemic, could impair our ability to obtain merchandise in sufficient quantities from these vendors. Such events include difficulties or problems associated with our vendors' business, finances, labor, ability to export or import, production, insurance and reputation, which our vendors are currently facing due to the COVID-19 pandemic. 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, and we may not be able to find similar merchandise with the same terms from larger vendors.

Product recalls and/or product liability, as well as changes in product safety and other consumer protection laws, may adversely impact our, 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. During fiscal 2019, 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 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, and additional labor costs associated with readying merchandise for sale. Our vendors may require long lead times on merchandise ordering cycles, which could increase the difficulty for us to plan and prepare for potential changes to applicable consumer protection 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 merchandise offerings, reputation, results of operations, cash flow and financial condition.

We face risks related to operating two distribution centers.

Our business depends upon the successful operation of our distribution centers, as well as our ability to fulfill orders and to deliver our merchandise to our customers in a timely manner. We currently handle merchandise distribution for all of our stores from two facilities, one in Coppell, Texas, a suburb of Dallas, Texas and the second in Aberdeen, Maryland. We use independent third-party transportation companies as well as leased trucks to deliver our merchandise to our stores and our customers. Any significant interruption in the operation of our distribution centers 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, temporary or government-mandated closures, or other causes, including health epidemics or pandemics such as COVID-19, 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 second distribution center in Aberdeen, Maryland became fully operational in fiscal 2019. We may not accurately anticipate all of the changing demands that our expanding operations will impose on our receiving and distribution system. We may not realize all of the expected expense savings from the opening of the second distribution center, and we may also experience increased costs not previously considered with our new distribution center.

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Disruption in our receiving and distribution system or increased costs as a result of opening our second distribution center could have a material adverse effect on our reputation, business, financial condition, and results of operations.

We are subject to duties, tariffs and quotas associated with our dependence on foreign imports for our merchandise.

During fiscal 2019, including purchases for Elfa which represented approximately 22% of our purchases, we purchased approximately 60% of our merchandise from vendors located outside the United States (including approximately 35% from vendors located in China) and approximately 40% of our merchandise from vendors located in the United States. In addition, some of the merchandise we purchase from vendors in the United States also depends, in whole or in part, on manufacturers 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.

Many of our imported products are subject to existing duties, tariffs and quotas that may limit the quantity of some types of goods that we may import into the United States. Because a large portion of our merchandise is sourced, directly or indirectly, from outside the United States, major changes in tax policy or trade relations, such as the disallowance of income tax deductions for imported merchandise or the imposition of additional tariffs or duties on imported products, could adversely affect our business, results of operations, effective income tax rate, liquidity and net income. For example, in recent years, the current U.S. presidential administration has imposed tariffs on many items sourced from China, including products and raw materials imported into the U.S., and the Chinese government has imposed retaliatory tariffs on U.S. manufactured goods. As a result, we continually evaluate the impact of enacted tariffs, along with any potential additional tariffs or retaliatory trade restrictions implemented by other countries. These tariffs could adversely affect our customer sales by causing potential delays in product received from our vendors, cost of goods sold and results of operations. We may not be able to fully or substantially mitigate the impact of such tariffs, pass price increases on to our customers, or secure adequate alternative sources of products or materials.

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 United States, freight cost increases, health epidemics or pandemics such as COVID-19, and 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 manufacturers 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 manufacturers 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 manufacturers 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 manufacturers, the failure of any of our manufacturers to adhere to our global compliance standards or the divergence of the labor practices followed by any of our manufacturers from those generally accepted in the United States, could disrupt our supply of products from our manufacturers 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.

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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 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, health epidemics or pandemics, such as COVID-19, which may impact a shipping company’s ability to provide delivery services that adequately meet our shipping needs. Our reputation for providing a high level of customer service is dependent on such third‑party transportation providers to timely deliver our product shipments. 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 our current independent third‑party transportation providers, which in turn would increase our costs.

Information Technology Risks

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

We sell merchandise over the Internet through our website, www.containerstore.com, and through mobile applications for smart phones and tablets. We are vulnerable to certain 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 for upgrades of our website software, computer viruses, changes in applicable federal and state regulations, security breaches, and consumer privacy concerns. The failure of our website or mobile applications to perform as expected could result in disruptions and costs to our operations and make it more difficult for customers to purchase merchandise online, which could adversely affect our results of operations and reputation.

A security breach or cyber‑attack of our website or information technology systems could damage our reputation and our relationships with our customers or employees, expose us to litigation risk and adversely affect our business and the trading price of our common stock.

In conducting our business, including our e-commerce business, we obtain and transmit confidential information about our customers, including credit card information, through our website and our information technology systems, and we depend on the secure transmission of such information. We also receive and maintain confidential information about our employees in the normal course of business. A security breach or cyber-attack could result in the disclosure of confidential information which may adversely affect our business and operations, including damaging our reputation and our relationships with our customers and employees, and exposing us to risks of litigation and liability. We cannot assure that any breaches, attacks or unauthorized disclosures will not occur. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, as a result of security breaches at a number of prominent retailers, the media and public scrutiny of information security and privacy has become more intense. As a result, we currently incur significant costs in maintaining cybersecurity protections and may incur significant costs to change our business practices or modify our service offerings in connection with the protection of personally identifiable information. Further, we may be subject to one or more claims or lawsuits related to intentional or unintentional exposure of our customers’ personally identifiable information. Any security breach or resulting lawsuit could cause our customers to lose confidence in the security of our information systems, and choose not to do business with us, thereby adversely affecting our business and the trading price of our common stock.

In addition, states and the federal government have increasingly enacted additional laws and regulations to protect consumers against identity theft, including laws governing treatment of personally identifiable information. These laws have increased the costs of doing business and we cannot assure you that our vendors and employees will comply with all applicable laws, regulations and contractual provisions pertaining to the use of personal information. If we fail to implement appropriate safeguards or we fail to detect and provide prompt notice of unauthorized access as

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required by some of these laws and regulations, we could be subject to potential claims for damages and other remedies. If we were required to pay any significant amounts in satisfaction of claims under these laws and regulations, our business, results of operations and financial condition could be adversely affected.

Finally, there can be no assurance that in the future we will be able to operate our business in accordance with the Payment Card Industry (“PCI”) Data Security Standards or other industry recommended practices. We intend to maintain compliance with PCI Data Security Standards and will incur additional expenses to maintain PCI compliance. Even if we are compliant with such standards, we still may be vulnerable and unable to prevent security breaches involving customer transaction data.

We rely upon third-party web service providers to operate certain aspects of our business operations and any disruption of or interference with such operations would materially and adversely impact our business.

Third-party web service providers provide a distributed computing infrastructure platform for business operations, or what is commonly referred to as a “cloud” computing service. We have architected our software and computer systems so as to utilize data processing, storage capabilities, and other services provided by these third‑party providers. Any disruption of or interference with our use of third-party service providers could have a material adverse effect on our business, financial condition, and results of operations.

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

We depend 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, slowness due to strain on internet connectivity due to employees working from home, 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.

We also rely 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 website, 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.

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Liquidity Risks

We face risks related to our indebtedness, resulting in a high degree of leverage on cash flow from operations to pay back debt.

As of March 28, 2020, we had total outstanding debt of $339.6 million and an additional $28.7 million of availability under our asset-based revolving credit agreement (the “Revolving Credit Facility”) and the 2019 Elfa revolving credit facility (the “2019 Elfa Revolving Credit Facilities”). Our senior secured term loan facility with JPMorgan Chase bank, N.A. (the “Senior Secured Term Loan Facility”), which matures September 14, 2023, represented $252.3 million of the total outstanding debt.

We may incur additional indebtedness in the future. Our high degree of leverage could have important consequences to us, including:

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exposing us to the risk of increased interest rates as our borrowings under our current debt facilities are at variable rates;

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

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limiting our ability to pay future dividends;

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

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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;

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

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requiring us to comply with financial and operational covenants as well as leverage 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;

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

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

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placing us at a competitive disadvantage compared to our competitors who may be less highly leveraged.

Consequences of this indebtedness may require 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 operations, capital expenditures, and future business opportunities; 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. 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

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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.

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

During fiscal 2019, approximately 81% 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 2019 were originally made in Swedish krona from our Elfa segment. Additionally, all assets and liabilities of our Elfa segment 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 our Elfa segment are translated at average rates of exchange for the year. As a result, our financial results may be adversely affected by fluctuations in the Swedish krona as compared to the U.S. dollar. Based on the average exchange rate from Swedish krona to U.S. dollar during fiscal 2019, and results of operations in functional currency, we believe that a 10% increase or decrease in the exchange rate of the Swedish krona would increase or decrease net income by approximately $1.0 million.

We will require significant capital to fund our expanding business, which may not be available to us on satisfactory terms or at all. If we are unable to maintain sufficient levels of operating cash flows, we may require additional financing which could adversely affect our financial health and impose covenants that limit our business activities.

We primarily depend on cash flow from operations, the Revolving Credit Facility (as defined below), and the 2019 Elfa Revolving Credit Facility (as defined below), 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.

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, many of which provide for periodic increases in operating lease expense. 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.

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

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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.

Changes to global financial markets may make it difficult for us to predict our future interest expenses.

In July 2017, the U.K. Financial Conduct Authority announced its intention to phase out the use of LIBOR by the end of 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing LIBOR with the Secured Overnight Financing Rate, or "SOFR", a new index calculated by short-term repurchase agreements, backed by Treasury securities. At this time, it is not possible to definitively predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates, including SOFR. Our Senior Secured Term Loan Facility and Revolving Credit Facility provide that in the event LIBOR rates are no longer available, we and our lenders will negotiate in good faith to adopt a replacement benchmark rate and an applicable margin for borrowings based on such replacement benchmark rate. We may incur increased interest expense using any such replacement benchmark rates, which could have an adverse effect on us, including our costs of funds, access to capital markets and financial results.

Human Resources Risks

We depend on key executive management.

We depend on the leadership and experience of our key executive management, including Melissa Reiff and Jodi Taylor. The loss of the services of any of our executive management members, whether in a planned transition or otherwise, could disrupt our business. As there is a high level of competition for experienced, successful personnel in the retail industry, we may not be able to find suitable individuals to replace departing 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. Our inability to meet our staffing requirements in the future could impair our growth and harm our business.

We have furloughed employees and there is uncertainty about their ability to return to work.

As a result of COVID-19, we have reduced store operations and temporarily furloughed a substantial number of employees. If our furloughed employees are unable or unwilling to return to work, it could have a material adverse effect on our business, sales and results of operations.

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. If we are unable to attract, train and retain employees in the future, we may not be able to serve our customers effectively, thus reducing our ability to continue our growth and to operate our existing stores as profitably as we have in the past. We hire 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.  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 performance and brand image.

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Organized labor activities could cause labor relation issues and higher labor costs.

As of March 28, 2020, approximately 60% of Elfa’s employees (approximately 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.

None of our U.S.‑based employees are 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.

Regulatory, Legal and Accounting Risks

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.

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

Periodically, 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.

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. 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 increase the costs of compliance and subject us to possible government penalties and litigation in the event of deemed noncompliance, which could negatively affect our results of operations.

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As result of the COVID-19 pandemic, the Company has been monitoring guidance from the Centers for Disease Control and Prevention and local, state, and federal health officials, as well as local, state and federal mandates surrounding business openings, and intends to continue to follow recommended mandates and protocols while operating its business.

Our total assets include intangible assets with an indefinite life, goodwill and trade names, and substantial amounts of long-lived assets. Changes in estimates or projections used to assess the fair value of these assets, or operating results that are lower than our current estimates, may cause us to incur impairment charges that could adversely affect our results of operation.

We make certain estimates and projections in connection with impairment analyses for these long‑lived assets, in accordance with FASB Accounting Standards Codification (“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.

As of our intangible annual impairment testing date of December 29, 2019, we determined that there was no impairment of goodwill or trade names. However, in the fourth quarter of fiscal 2019, we experienced significant disruptions to our operations, including temporary store closures and a decline in our market capitalization, due to the COVID-19 pandemic. Therefore, we conducted an additional interim impairment test of goodwill and trade names as of March 28, 2020. The interim impairment test included forecasts of future operations incorporating certain assumptions about the duration of the COVID-19 pandemic and its impact on our business. Based on the results of our interim impairment tests performed, we determined there was no impairment of intangible assets. Future impairment charges could be required if we do not achieve our current net sales and profitability projections or if our weighted average cost of capital increases. Moreover, changes in our market capitalization may impact certain assumptions used in our income approach calculations.

In addition, as a result of the significant disruptions to our operations due to the COVID-19 pandemic, we evaluated our long-lived assets for impairment as of March 28, 2020 and determined there were no impairments. The impairment test included forecasts of future operations incorporating certain assumptions about the duration of the COVID-19 pandemic and its impact on our business. Future impairment charges could be required if we do not achieve our current net sales and profitability projections. 

We may be subject to fluctuations in our tax obligations and effective tax rates 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 to have 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.

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Further, tax legislation may be enacted in the future which could negatively impact our current or future tax structure and effective tax rates, such as the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) which was signed into law on March 27, 2020. The CARES Act was enacted in response to the COVID-19 pandemic and contains numerous income tax provisions, such as relaxing limitations on the deductibility of interest, technical corrections to tax depreciation methods for qualified improvement property and net operating loss carryback periods.  

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 upon 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.

Organization and Common Stock Risks

Our common stock price may be volatile or may decline.

The market price for our common stock has been and may be volatile in the future. As a retailer, our results are significantly affected by various factors which can significantly affect our stock price, many of which are outside of our control, including the following:

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quarterly variations in our operating results compared to market expectations;

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changes in preferences of our customers and buying trends, and our ability to respond to such preferences and trends;

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

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size of the public float;

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stock price performance of our competitors;

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default on our indebtedness;

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actions by competitors or other shopping center tenants;

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changes in senior management or key personnel;

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changes in financial estimates by securities analysts;

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

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

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weather conditions, particularly during the holiday season and our Annual elfa® Sale;

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natural disasters or other similar events, including health epidemics or pandemics, such as the outbreak of

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COVID-19;

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issuances or expected issuances of common stock; and

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

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, shareholders 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 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. Such guidance is comprised of forward‑looking statements subject to the risks and uncertainties described in this Annual Report on Form 10-K and in our other public filings and public statements. Our actual results have not always been and may not always be in line with or exceed the guidance we have provided, especially in times of economic uncertainty or when there are periods of severe weather. 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 comparable store sales 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. This variability could cause our comparable store sales to fall below the expectations of securities analysts or investors, which could result in a decline in the market price of our common stock. Our comparable store sales growth could vary for many reasons, including the impact of new stores entering into the comparable store base, the opening of new stores that cannibalize store sales in existing locations, general economic conditions and uncertainty, the COVID-19 pandemic, which caused us to close all of our stores, including our comparable stores, in the first quarter of fiscal 2020, increased competition, price changes in response to competitive factors, possible supply shortages, and cycling against any prior year of above‑average sales results.

We are controlled by investment funds managed by Leonard Green and Partners, L.P. (“LGP”), whose interests in our business may be different from yours.

LGP owns approximately 27.5 million shares, or 55.7%, 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 shareholder approval. LGP is able to, subject to applicable law, 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 shareholders, including you.

We are a “controlled company” within the meaning of The New York Stock Exchange listing requirements and as a result, qualify for and intend to rely on exemptions from certain corporate governance requirements. You do not have the same protection afforded to shareholders 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, 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 culture and compensation committee and

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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 those standards are free of any conflicting interest that could influence their actions as directors.

We intend to continue to utilize these exemptions afforded to a “controlled company” in the future. Accordingly, you do not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of The New York Stock Exchange.

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, 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. All outstanding shares of our common stock are freely tradable without restriction under the Securities Act of 1933 (the “Securities Act”), except for any shares of our common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which are subject to restrictions under the Securities Act. Certain existing holders of a majority 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 shareholders. In 2018, we filed a registration statement on Form S-3 under which certain of our shareholders may sell, from time to time, up to 32,492,421 shares of our common stock that, if sold, will be freely tradable without restriction under the Securities Act. In the event a large number of shares of common stock are sold in the public market, such sales could reduce the trading price of our common stock.

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.

Failure to 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 required to comply with the rules of the SEC implementing Section 404 of the Sarbanes‑Oxley Act of 2002 (“Section 404”) and our management is therefore required to provide an annual report on the effectiveness of our internal control over financial reporting for that purpose. Because we are no longer an emerging growth company, our independent registered public accounting firm is required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404. As such, 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 Section 404, we have taken and may need to take 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. If we identify a material weakness 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 New York Stock Exchange, the SEC or other regulatory authorities, which could require additional financial and management resources.

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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 2019 Elfa Senior Secured Credit Facilities are currently restricted from paying cash dividends, and we expect these restrictions to continue in the future.

We incur costs as a public company and our management is required to devote substantial time to compliance matters.

As a public company, we incur significant legal, accounting, insurance and other expenses, including costs resulting from public company reporting obligations under the Exchange Act and rules and regulations regarding corporate governance practices, including those under the Sarbanes‑Oxley Act, the Dodd‑Frank Act, and the listing requirements of The New York Stock Exchange. Our management and other personnel devote a substantial amount of time to ensure that we comply with all of these reporting requirements, rules and regulations, and such requirements, rules and regulations increase our legal and financial compliance costs and make certain activities more time‑consuming and costly. In addition, these laws, rules and regulations also make it more difficult and more expensive for us to obtain certain types of insurance, including director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These factors could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, the committees of our Board of Directors 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.

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 shareholders.

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 shareholders. 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 shareholders to call special meetings;

·

requiring all shareholders’ actions to be taken at a meeting of our shareholders (i.e. no provision for shareholder 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 shareholders at shareholder meetings.

31

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 shareholder or group of shareholders who owns at least 15% of our common stock.

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 requires, 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 shareholders, (iii) any action asserting a claim against us arising pursuant to any provision of the General Corporation Law of the State of Delaware 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. This provision may have the effect of discouraging lawsuits against our directors and officers.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

None.

ITEM 2.  PROPERTIES

We lease all of our 93 retail stores. Our leases generally have a term of 10 to 15 years, with renewal options that generally range from 5 to 15 years. Most leases for our retail stores provide for minimum operating lease payments, typically including escalating lease payments. Further, certain leases also include lease payments that are based on a percentage of sales. The leases generally require us to pay insurance, utilities, real estate taxes and repair and maintenance expenses. A summary of our store locations by state as of March 28, 2020 is below:

 

 

 

 

 

 

 

 

 

 

 

Location

    

Store(s)

    

Location

    

Store(s)

    

Location

    

Store(s)

Arizona

 

 4

 

Massachusetts

 

 3

 

Oregon

 

 1

Arkansas

 

 1

 

Michigan

 

 2

 

Pennsylvania

 

 2

California

 

13

 

Minnesota

 

 1

 

Rhode Island

 

 1

Colorado

 

 3

 

Missouri

 

 1

 

Tennessee

 

 2

Delaware

 

 1

 

Nebraska

 

 1

 

Texas

 

13

Florida

 

 6

 

Nevada

 

 1

 

Utah

 

 1

Georgia

 

 3

 

New Jersey

 

 4

 

Virginia

 

 3

Illinois

 

 5

 

New Mexico

 

 1

 

Washington

 

 2

Iowa

 

 1

 

New York

 

 6

 

Wisconsin

 

 1

Indiana

 

 1

 

North Carolina

 

 2

 

District of Columbia

 

 1

Kansas

 

 1

 

Ohio

 

 3

 

 

 

 

Maryland

 

 1

 

Oklahoma

 

 1

 

Total

 

93

 

As previously announced on April 6, 2020, the COVID-19 outbreak led to the temporary closure of all stores. During the temporary closure of all stores, the Company shifted to offering contactless curbside pick-up and in-store appointments for limited customers at a time, in select locations and where permitted to offer these services under local regulations. As of the date of this filing, all 93 stores are open, of which 88 stores are operating with strict health and safety protocols and allowing limited customers in the store at a time, and 5 stores are operating with contactless curbside pick-up only until local mandates allow for more extensive operations.

We lease approximately 1.1 million square feet of space in Coppell, Texas for our corporate offices and distribution center for our TCS segment. The term for this lease expires in April 2025, and we retain three five-year renewal options. We also lease approximately 600,000 square feet of space in Aberdeen, Maryland for our second distribution center which became fully operational in fiscal 2019 for our TCS segment.  The term for this lease expires in November 2029.

32

Elfa leases its approximately 13,000 square foot group headquarters in Malmö, Sweden. In addition, Elfa owns three manufacturing facilities, located in Västervik, Sweden (approximately 200,000 square feet), Mullsjö, Sweden (approximately 100,000 square feet), and Koszalin, Poland (approximately 90,000 square feet).  The Elfa manufacturing facility in Lahti, Finland (approximately 60,000 square feet) was closed in fiscal 2017 and sold in fiscal 2018. 

ITEM 3.  LEGAL PROCEEDINGS

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

ITEM 4.  MINE SAFETY DISCLOSURES

None.

Information about our Executive Officers 

 

 

 

 

 

Name

    

Age

    

Position(s)

Executive Officers:

 

 

 

 

Melissa Reiff

 

65

 

Chairwoman of the Board of Directors, Chief Executive Officer and President

Jodi Taylor

 

57

 

Chief Financial Officer, Chief Administrative Officer and Secretary

Melissa Collins

 

53

 

Chief Marketing Officer

John Gehre

 

50

 

Chief Merchandising Officer

 

Melissa Reiff has served as our Chief Executive Officer since July 2016 and as our Chairwoman of the Board and President since August 2019. Previously, Ms. Reiff served as our President and Chief Operating Officer from March 2013 to July 2016, and as our President from 2006 to July 2016. She has also served on our Board of Directors since August 2007 (and on the Board of Directors of The Container Store, Inc. since February 2006). Ms. Reiff joined The Container Store in 1995 as Vice President of Sales and Marketing, and assumed the role of Executive Vice President of Stores and Marketing in 2003. She is a member of the International Women’s Foundation and C200, an organization of leading women in business dedicated to fostering growth and increasing opportunities for women entrepreneurs and corporate leaders worldwide. Ms. Reiff has served on the Board of Directors of Etsy since April 2015, where she is also a member of the compensation committee. She also serves on Southern Methodist University’s Cox School of Business Executive Board and is a sustaining member of the Junior League of Dallas. Ms. Reiff was honored with the 2012‑2013 SMU Cox School of Business Distinguished Alumna award. Ms. Reiff was selected to our Board of Directors because she possesses particular knowledge and experience in retail, marketing, merchandising, operations, communication and leadership.

Jodi Taylor has served as our Chief Financial Officer and Chief Administrative Officer since July 2016, Chief Financial Officer since December 2007, and as our Secretary since October 2013. Ms. Taylor is responsible for the business areas of Finance, Accounting, Investor Relations, Real Estate, Procurement, Payroll, Benefits, Legal, and Loss Prevention. Prior to joining us, Ms. Taylor served as Chief Financial Officer and Secretary from 1998 to 2007 at Harold’s, a then publicly traded apparel retailer. From 1986 to 1998, Ms. Taylor was an executive with Baby Superstore, Inc. or successor companies, which after an IPO in 1994, was ultimately acquired by Toys “R” Us, Inc. in 1996. Ms. Taylor was formerly an auditor with Deloitte, Haskins, & Sells (now Deloitte & Touche).

Melissa Collins has been with The Container Store for 22 years and has served as our Chief Marketing Officer since July 2016. Ms. Collins serves as the Company’s primary marketing strategist, and oversees such key functional areas as brand positioning, advertising, public relations, digital marketing, visual merchandising, e-commerce, social

33

media and “POP! Perfectly Organized Perks”, our customer engagement and loyalty program. Previously, from August 2008 to July 2016, Ms. Collins served as Vice President of Creative and Online. Prior to that, she served in a variety of roles with increasing responsibility, beginning as Art Director and progressing to Senior Director of Creative and Online Services.

 John Gehre has served as our Chief Merchandising Officer since August 2019 and, prior to that, as Executive Vice President of Merchandising and Planning since May 2018, with responsibility for product assortment, inventory allocation, global sourcing initiatives and private label strategy. Prior to joining The Container Store, Mr. Gehre served as the Vice President of General Merchandise, Global Sourcing, and Front End from February 2007 to January 2018 at H-E-B, an American supermarket chain. Mr. Gehre previously gained experience in merchandise planning, product development, omni-channel marketing, and supply chain with BJ’s Wholesale, Linens ‘n Things, Saks Fifth Avenue and Federated.

 

PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information and Dividend Policy

Our common stock trades on The New York Stock Exchange (“NYSE”), under the symbol “TCS.”

The number of stockholders of record of our common stock as of  June 12, 2020 was 55.  This number excludes stockholders whose stock is held in nominee or street name by brokers. No dividends have been declared or paid on our common stock. We do not currently anticipate that we will pay any cash dividends on our common stock in the foreseeable future.

 

ITEM 6.  SELECTED FINANCIAL AND OPERATING 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 Annual Report on Form 10‑K.

Change in Fiscal Year

On March 30, 2016, the Board of Directors of the Company (the “Board” or “Board of Directors”) approved a change in the Company’s fiscal year end from the 52‑ or 53‑week period ending on the Saturday closest to February 28 to the 52‑ or 53‑week period ending on the Saturday closest to March 31. The fiscal year change was effective beginning with the Company’s 2016 fiscal year, which began on April 3, 2016 and ended on April 1, 2017. As a result of the change, the Company had a March 2016 fiscal month transition period which began on February 28, 2016 and ended on April 2, 2016. The unaudited results of the transition period were reported in the Company’s Quarterly Report on Form 10‑Q filed for the new fiscal first quarter ended July 2, 2016 and the audited results were included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 1, 2017. The following selected financial and operating data presented herein includes the unaudited results for recast fiscal 2015 in addition to prior year audited results based on the February 28 fiscal year end calendar.

The following selected consolidated financial data for each of the years ended March 28, 2020 (fiscal 2019), March 30, 2019 (fiscal 2018), and March 31, 2018 (fiscal 2017), and the selected consolidated balance sheet data as of March 28, 2020 and March 30, 2019 have been derived from our audited consolidated financial statements, which are included elsewhere in this Annual Report on Form 10-K. The selected consolidated financial data for each of the years ended April 1, 2017 (fiscal 2016) and February 27, 2016 (fiscal 2015) and the selected consolidated balance sheet data as of March 31, 2018, April 1, 2017 and February 27, 2016, have been derived from our audited consolidated financial statements, which are not included in this Annual Report on Form 10-K. The table below also includes, for comparative

34

purposes, unaudited data for the recast 52-week period ended April 2, 2016. Historical results are not indicative of the results to be expected in the future. Fiscal 2019, fiscal 2018, fiscal 2017, fiscal 2016, and fiscal 2015 included 52 weeks.

All dollar amounts in this Selected Financial and Operating Data are in thousands, except per share amounts, unless otherwise stated.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year Ended

 

 

March 28,

 

March 30,

 

March 31,

 

April 1,

 

April 2,

 

February 27,

 

 

2020

 

2019

 

2018

 

2017 (1)

 

2016 (2)

 

2016

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

(unaudited)

 

 

Consolidated statement of operations

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Net sales

 

$

915,953

 

$

895,093

 

$

857,228

 

$

819,930

 

$

797,087

 

$

794,630

Cost of sales (excluding depreciation and amortization)

 

 

382,488

 

 

371,410

 

 

360,167

 

 

343,860

 

 

332,594

 

 

331,079

Gross profit

 

 

533,465

 

 

523,683

 

 

497,061

 

 

476,070

 

 

464,493

 

 

463,551

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

 

 

440,362

 

 

430,997

 

 

411,721

 

 

387,948

 

 

394,585

 

 

393,810

Stock‑based compensation

 

 

3,110

 

 

2,846

 

 

2,026

 

 

1,989

 

 

1,575

 

 

1,556

Pre‑opening costs

 

 

8,237

 

 

2,103

 

 

5,293

 

 

6,852

 

 

9,004

 

 

9,033

Depreciation and amortization

 

 

38,638

 

 

36,305

 

 

37,922

 

 

37,124

 

 

34,628

 

 

34,230

Other expenses

 

 

377

 

 

177

 

 

5,734

 

 

1,058

 

 

102

 

 

 —

(Gain) loss on disposal of assets

 

 

(2)

 

 

(63)

 

 

278

 

 

57

 

 

62

 

 

61

Income from operations

 

 

42,743

 

 

51,318

 

 

34,087

 

 

41,042

 

 

24,537

 

 

24,861

Interest expense, net

 

 

21,541

 

 

27,275

 

 

25,013

 

 

16,687

 

 

16,772

 

 

16,810

Loss on extinguishment of debt

 

 

 —

 

 

2,082

 

 

2,369

 

 

 —

 

 

 —

 

 

 —

Income before taxes

 

 

21,202

 

 

21,961

 

 

6,705

 

 

24,355

 

 

7,765

 

 

8,051

Provision (benefit) for income taxes (3)

 

 

6,715

 

 

281

 

 

(12,723)

 

 

9,402

 

 

2,907

 

 

2,909

Net income

 

$

14,487

 

$

21,680

 

$

19,428

 

$

14,953

 

$

4,858

 

$

5,142

Net income per common share—basic and diluted

 

$

0.30

 

$

0.45

 

$

0.40

 

$

0.31

 

$

0.10

 

$

0.11

Weighted-average common shares—basic

 

 

48,819,783

 

 

48,139,929

 

 

48,061,527

 

 

47,996,746

 

 

47,986,034

 

 

47,958,717

Weighted-average common shares—diluted

 

 

48,964,564

 

 

48,400,407

 

 

48,147,725

 

 

48,016,010

 

 

47,976,034

 

 

47,985,717

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year Ended

 

 

 

March 28,

 

March 30,

 

March 31,

 

April 1,

 

April 2,

 

February 27,

 

 

    

2020

 

2019

 

2018

 

2017 (1)

 

2016 (2)

 

2016

 

Operating data:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Comparable store sales growth for the period (4)

 

 

2.9

%  

 

3.5

%  

 

0.9

%  

 

(2.4)

%  

 

(0.8)

%  

 

0.0

%

Number of stores at end of period (5)

 

 

93

 

 

92

 

 

90

 

 

86

 

 

79

 

 

79

 

Non‑GAAP measures (6):

 

 

 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

Adjusted EBITDA (7)

 

$

90,771

 

$

96,347

 

$

89,603

 

$

86,559

 

$

68,362

 

$

68,159

 

Adjusted EBITDA margin (7)

 

 

9.9

%  

 

10.8

%  

 

10.5

%  

 

10.6

%  

 

8.6

%  

 

8.6

%

Adjusted net income (8)

 

$

14,777

 

$

20,432

 

$

13,594

 

$

13,393

 

$

4,858

 

$

5,142

 

Adjusted net income per common share—diluted (8)

 

$

0.30

 

$

0.42

 

$

0.28

 

$

0.28

 

$

0.10

 

$

0.11

 

 

35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

March 28,

 

March 30,

 

March 31,

 

April 1,

 

February 27,

 

    

2020

    

2019

    

2018

    

2017

    

2016

Consolidated balance sheet data:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Cash

 

$

67,755

 

$

7,364

 

$

8,399

 

$

10,736

 

$

13,609

Net working capital (9)

 

 

54,718

 

 

28,256

 

 

27,029

 

 

44,342

 

 

22,913

Total assets (10)

 

 

1,166,814

 

 

748,744

 

 

749,369

 

 

761,834

 

 

758,119

Long‑term debt (11)

 

 

333,487

 

 

267,487

 

 

285,165

 

 

317,471

 

 

321,508

Total stockholders’ equity

 

 

271,708

 

 

264,693

 

 

248,707

 

 

221,790

 

 

207,068


(1)

Beginning with fiscal 2016, the Company changed its fiscal year to a 52‑53 week period ending on the Saturday closest to March 31; previously, the Company’s fiscal year ended on the Saturday closest to February 28.

(2)

For comparative purposes, the Company has presented unaudited selected consolidated financial data for the 52‑week period ended April 2, 2016.

(3)

The difference between the Company’s effective tax rate and the statutory Federal tax rate can be attributed 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 including statutory changes in those rates, and the estimated impact in fiscal 2017 and the finalization in fiscal 2018 of the Tax Cuts and Jobs Act (the “Tax Act”).

(4)

A store is included in the comparable store sales calculation on the first day of the sixteenth full fiscal month following the store’s opening. Comparable store sales are net of discounts and returns. When a store is relocated, we continue to consider sales from that store to be comparable store sales. A store temporarily closed for more than seven days is not considered comparable in the fiscal month it is closed. The store then becomes comparable on the first day of the following fiscal month in which it reopens. Net sales from our website and call center are also included in calculations of comparable store sales.

In the first quarter of fiscal 2016, we changed our comparable store sales operating measure to reflect the point at which merchandise and service orders are fulfilled and delivered to customers, excluding shipping and delivery. Prior to the first quarter of fiscal 2016, our comparable store sales operating measure in a given period was based on merchandise and service orders placed in that period, excluding shipping and delivery, which did not always reflect the point at which merchandise and services were received by the customer and, therefore, recognized in our financial statements as net sales. We believe that changing the comparable store sales operating metric to better align with net sales presented in our financial statements will assist investors in evaluating our financial performance. The comparable store sales growth metric is an operating measure intended only as supplemental information and is not a substitute for net sales presented in accordance with generally accepted accounting principles in the United States of America (“GAAP”).

(5)

As of March 28, 2020, the Company operated a total of 93 store locations, of which 19 stores were temporarily closed for more than seven days in fiscal March as a result of COVID-19, and therefore were not considered comparable in that fiscal month.

(6)

We have presented EBITDA, Adjusted EBITDA, Adjusted EBITDA margin, adjusted net income, and adjusted net income per common share—diluted as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. These non‑GAAP measures should not be considered as alternatives to net income as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non‑recurring items. These non‑GAAP measures are key metrics used by management, our Board of Directors, and LGP to assess our financial performance. We present these non‑GAAP measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance and because we believe it is useful for investors to see the measures that management uses to evaluate the Company. These non‑GAAP measures are also frequently used by analysts, investors and other interested parties to evaluate

36

companies in our industry. In evaluating these non‑GAAP measures, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of these non‑GAAP measures should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using non‑GAAP measures supplementally. Our non‑GAAP measures are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation. Please refer to footnotes (7) and (8) of this table for further information regarding why we believe each non‑GAAP financial measure provides useful information to investors regarding our financial condition and results of operations, as well as the additional purposes for which management uses each of the non‑GAAP financial measures.

(7)

EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin have been presented in this Annual Report on Form 10‑K as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as net income before interest, taxes, depreciation, and amortization. Adjusted EBITDA is calculated in accordance with our Secured Term Loan Facility and the Revolving Credit Facility and is one of the components for performance evaluation under our executive compensation programs. Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of certain items, including certain non‑cash and other items, that we do not consider in our evaluation of ongoing operating performance from period to period as discussed further below. Adjusted EBITDA margin means, for any period, the Adjusted EBITDA for that period divided by the net sales for that period presented in accordance with GAAP.

EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin are included in this Annual Report on Form 10‑K because they are key metrics used by management, our Board of Directors and LGP to assess our financial performance. In addition, we use Adjusted EBITDA in connection with covenant compliance and executive performance evaluations, and we use Adjusted EBITDA and Adjusted EBITDA margin to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We believe it is useful for investors to see the measures that management uses to evaluate the Company, its executives and our covenant compliance, as applicable. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.

EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin are not GAAP measures of our financial performance or liquidity and should not be considered as alternatives to net income as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non‑recurring items. Additionally, EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as they do not reflect certain cash requirements such as tax payments, debt service requirements, capital expenditures, store openings and certain other cash costs that may recur in the future. EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin 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 and Adjusted EBITDA margin, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation, such as pre‑opening costs and stock compensation expense. Our presentation of Adjusted EBITDA and Adjusted EBITDA margin 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, Adjusted EBITDA, and Adjusted EBITDA margin supplementally. Our measures of EBITDA, Adjusted EBITDA, and Adjusted EBITDA margin are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.

37

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year Ended

 

 

March 28,

 

March 30,

 

March 31,

 

April 1,

 

April 2,

 

February 27,

 

 

2020

 

2019

 

2018

 

2017

 

2016

 

2016

 

    

 

 

    

 

    

 

 

    

 

    

 

(unaudited)

    

 

 

Net income

 

$

14,487

 

$

21,680

 

$

19,428

 

$

14,953

 

$

4,858

 

$

5,142

Depreciation and amortization

 

 

38,638

 

 

36,305

 

 

37,922

 

 

37,124

 

 

34,628

 

 

34,230

Interest expense, net

 

 

21,541

 

 

27,275

 

 

25,013

 

 

16,687

 

 

16,772

 

 

16,810

Income tax provision (benefit)

 

 

6,715

 

 

281

 

 

(12,723)

 

 

9,402

 

 

2,907

 

 

2,909

EBITDA

 

 

81,381

 

 

85,541

 

 

69,640

 

 

78,166

 

 

59,165

 

 

59,091

Pre-opening costs (a)

 

 

8,237

 

 

2,103

 

 

5,293

 

 

6,852

 

 

9,004

 

 

9,033

Non-cash lease expense (b)

 

 

(2,169)

 

 

(1,327)

 

 

(1,915)

 

 

(1,365)

 

 

(1,784)

 

 

(1,844)

Stock-based compensation (c)

 

 

3,110

 

 

2,846

 

 

2,026

 

 

1,989

 

 

1,575

 

 

1,556

Loss on extinguishment of debt (d)

 

 

 —

 

 

2,082

 

 

2,369

 

 

 

 

 —

 

 

Foreign exchange (gains) losses (e)

 

 

(167)

 

 

60

 

 

(596)

 

 

(342)

 

 

226

 

 

241

Optimization Plan implementation charges (f)

 

 

 —

 

 

4,864

 

 

11,479

 

 

 

 

 —

 

 

Elfa manufacturing facility closure (g)

 

 

 —

 

 

 —

 

 

803

 

 

 —

 

 

 —

 

 

Elfa France closure (h)

 

 

402

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Other adjustments (i)

 

 

(23)

 

 

178

 

 

504

 

 

1,259

 

 

176

 

 

82

Adjusted EBITDA

 

$

90,771

 

$

96,347

 

$

89,603

 

$

86,559

 

$

68,362

 

$

68,159


(a)

Non-capital expenditures associated with opening new stores, relocating stores, and net costs associated with opening the second distribution center, including marketing expenses, travel and relocation costs, and training costs. We adjust for these costs to facilitate comparisons of our performance from period to period.

(b)

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

(c)

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

(d)

Loss recorded as a result of the amendments made to the Senior Secured Term Loan Facility in August 2017 and September 2018, which we do not consider in our evaluation of our ongoing operations.

(e)

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

(f)

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

(g)

Charges related to the closure of an Elfa manufacturing facility in Lahti, Finland in December 2017, recorded in other expenses, which we do not consider in our evaluation of our ongoing performance.

(h)

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

38

(i)

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

(8)

Adjusted net income and adjusted net income per common share—diluted have been presented as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define adjusted net income as net income before restructuring charges, losses on extinguishment of debt, certain gains on disposal of assets, certain management transition costs incurred and benefits realized, charges incurred as part of the implementation of our Optimization Plan, charges associated with an Elfa manufacturing facility closure, charges related to the closure of Elfa France operations, and the tax impact of these adjustments and other unusual or infrequent tax items. We define adjusted net income per common share—diluted as adjusted net income divided by the diluted weighted average common shares outstanding. We use adjusted net income and adjusted net income per common share—diluted to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We present adjusted net income and adjusted net income per common share—diluted because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance and because we believe it is useful for investors to see the measures that management uses to evaluate the Company.

We have included a presentation of adjusted net income and adjusted net income per common share—diluted for fiscal 2016 to show the net impact of the amended and restated employment agreements entered into with key executives during fiscal 2016 (“management transition costs (benefits)”). Although we disclosed the net positive impact of the amended and restated employment agreements in our discussions of earnings per share and SG&A in our fiscal 2016 filings with the SEC, we did not adjust for the net impact of these agreements in our fiscal 2016 presentation of adjusted net income and adjusted net income per common share—diluted. However, in fiscal 2017 and fiscal 2018, our Optimization Plan caused us to incur similar charges that we believe are not indicative of our core operating performance. As a result, we believe that adjusting net income and net income per diluted share in fiscal 2016 for management transition costs (benefits), in addition to adjusting net income and net income per diluted share in fiscal 2017 and fiscal 2018 for charges incurred as part of the implementation of our Optimization Plan will assist investors in comparing our core operating performance across reporting periods on a consistent basis.

39

A reconciliation of the GAAP financial measures of net income and net income per common share—diluted to the non‑GAAP financial measures of adjusted net income and adjusted net income per common share—diluted is set forth below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year Ended

 

 

March 28,

 

March 30,

 

March 31,

 

April 1,

 

April 2,

 

February 27,

 

 

2020

 

2019

 

2018

 

2017

 

2016

 

2016

 

    

 

 

    

 

    

 

 

    

 

 

    

 

(unaudited)

 

 

Numerator:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Net income

 

$

14,487

 

$

21,680

 

$

19,428

 

$

14,953

 

$

4,858

 

$

5,142

Gain on disposal of real estate (a)

 

 

 —

 

 

(374)

 

 

 

 

 

 

 

 

 —

Management transition costs (b)

 

 

 —

 

 

 

 

 —

 

 

(2,852)

 

 

 

 

Elfa manufacturing facility closure (c)

 

 

 —

 

 

 —

 

 

803

 

 

 

 

 

 

Loss on extinguishment of debt (d)

 

 

 —

 

 

2,082

 

 

2,369

 

 

 

 

 

 

Elfa France closure (e)

 

 

402

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Optimization Plan implementation charges (f)

 

 

 —

 

 

4,864

 

 

11,479

 

 

 

 

 

 

Taxes (g)

 

 

(112)

 

 

(7,820)

 

 

(20,485)

 

 

1,292

 

 

 

 

 —

Adjusted net income

 

$

14,777

 

$

20,432

 

$

13,594

 

$

13,393

 

$

4,858

 

$

5,142

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding — diluted

 

 

48,964,564

 

 

48,400,407

 

 

48,147,725

 

 

48,016,010

 

 

47,976,034

 

 

47,985,717

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share — diluted

 

$

0.30

 

$

0.45

 

$

0.40

 

$

0.31

 

$

0.10

 

$

0.11

Adjusted net income per common share — diluted

 

$

0.30

 

$

0.42

 

$

0.28

 

$

0.28

 

$

0.10

 

$

0.11


(a)

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

(b)

Certain management transition costs incurred and benefits realized, including the impact of amended and restated employment agreements entered into with key executives during fiscal 2016, which resulted in the reversal of accrued deferred compensation associated with the original employment agreements, net of costs incurred to execute the agreements, partially offset by cash severance payments, which we do not consider in our evaluation of ongoing performance.

(c)

Charges related to the closure of an Elfa manufacturing facility in Lahti, Finland in fiscal 2017, recorded in other expenses, which we do not consider in our evaluation of our ongoing performance.

(d)

Loss recorded as a result of the amendments made to the Senior Secured Term Loan Facility in August 2017 and September 2018, which we do not consider in our evaluation of our ongoing operations.

(e)

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

(f)

Charges incurred to implement our Optimization Plan, which include certain consulting costs recorded in SG&A, cash severance payments associated with the elimination of certain full-time positions at the TCS segment recorded in other expenses, and cash severance payments associated with organizational realignment at the Elfa segment

40

recorded in other expenses, which we do not consider in our evaluation of ongoing performance.

(g)

Tax impact of adjustments to net income, as well as other unusual or infrequent tax items, the estimated impact of the Tax Act in fiscal 2017, the exclusion of the impact of certain valuation allowances on deferred tax assets, the tax benefit recorded in the first quarter of fiscal 2018 as a result of a reduction in the Swedish tax rate and the tax benefit recorded in the third quarter of fiscal 2018 as a result of the finalization of the impact of the Tax Act, and the tax impact related to the closure of Elfa France operations in the second quarter of fiscal 2019, which we do not consider in our evaluation of ongoing performance.

(9)

Net working capital is defined as current assets (excluding cash) less current liabilities (excluding the current portion of long‑term debt, revolving lines of credit and current operating lease liabilities).

(10)

Total assets as of March 28, 2020 increased significantly from previous fiscal years primarily due to the adoption of Accounting Standards Update  (“ASU”) 2016-02, Leases (Topic 842), in fiscal 2019.

(11)

Long‑term debt consists of the current and long‑term portions of the Senior Secured Term Loan Facility, the 2014 Elfa Term Loan Facility (as defined below), subsequently refinanced with the 2019 Elfa Senior Secured Credit Facilities, the Revolving Credit Facility, capital lease liabilities, and other mortgages and loans.

 

41

ITEM 7.  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 Annual Report on Form 10‑K. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, 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 report 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.

 

For a discussion of the Company’s results of operations for Fiscal 2017, including a year-to-year comparison between Fiscal 2017 and Fiscal 2018, refer to “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” in PART II of the Company’s Annual Report on Form 10-K for Fiscal 2018, filed with the SEC on May 30, 2019.

 

Overview

The Container Store® is the original and leading specialty retailer of storage and organization products and solutions in the United States and the only national retailer solely devoted to the category. We provide a collection of creative, multifunctional and customizable storage and organization solutions that are sold in our stores and online through a high-service, differentiated shopping experience. Our vision is to be a beloved brand and the first choice for customized organization solutions and services. Our customers are highly educated, very busy and primarily homeowners with a higher than average household income. We service them with storage and organization solutions that help them accomplish projects, maximize their space, and make the most of their home.

Our operations consist of two operating segments:

·

The Container Store (“TCS”), which consists of our retail stores, website and call center (which includes business sales), as well as our installation and organizational services business. As of March 28, 2020, we operated 93 stores with an average size of approximately 25,000 square feet (19,000 selling square feet) in 33 states and the District of Columbia. We also offer all of our products directly to customers through our website, responsive mobile site, and call center. Our stores receive substantially all of our products directly from one of our two distribution centers. Our first distribution center in Coppell, Texas, is co-located with our corporate headquarters and call center, and our second distribution center in Aberdeen, Maryland, became fully operational in fiscal 2019.

·

Elfa, The Container Store, Inc.’s wholly owned Swedish subsidiary, Elfa International AB (“Elfa”), designs and manufactures component‑based shelving and drawer systems and made‑to‑measure sliding doors. Elfa was founded in 1948 and is headquartered in Malmö, Sweden. Elfa’s shelving and drawer systems are customizable for any area of the home, including closets, kitchens, offices and garages. Elfa operates three manufacturing facilities with two located in Sweden and one in Poland. The Container Store began selling elfa® products in 1978 and acquired Elfa in 1999. Today our TCS segment is the exclusive distributor of elfa® products in the U.S. Elfa also sells its products on a wholesale basis to various retailers in approximately 30 countries around the world, with a concentration in the Nordic region of Europe.

Business Update Related to Coronavirus 

 

On March 13, 2020, the President of the United States declared a national emergency as a result of the novel coronavirus (“COVID-19”) pandemic in the U.S. COVID-19 had a negative impact on the Company’s fiscal 2019 operations and financial results, and we expect the pandemic will continue to negatively affect our operations and financial results in fiscal 2020. The full financial impact of the pandemic cannot be reasonably estimated at this time due

42

to uncertainty as to its severity and duration. The Company has taken actions to tightly manage costs, working capital and capital expenditures to preserve the Company’s financial health. We will continue to monitor the impact of COVID-19 on the Company's business, results of operations, financial position and cash flows.

 

As a result of the COVID-19 pandemic, we experienced significant disruptions to our operations in the fourth quarter of fiscal 2019, including the temporary closure of 51 stores (for more than one day) based on guidance from government officials and health authorities, as well as location-based factors. As of the date of this filing, all 93 stores are open, of which 88 stores are operating with strict health and safety protocols and allowing limited customers in the store at a time, and 5 stores are operating with contactless curbside pick-up only until local mandates allow for more extensive operations.

 

 Additionally, as a result of the COVID-19 pandemic, we have reduced store operations and temporarily furloughed a substantial number of employees. Additionally, the majority of our corporate employees have transitioned to working from home arrangements.  

 

In connection with the employee furloughs, the Company also reduced the base salaries of its executive officers. Effective March 30, 2020, the base salaries of Melissa Reiff, Chairwoman, President and Chief Executive Officer, and the Company’s other executive officers, were reduced by 45% and 33%, respectively.  Ms. Reiff and Jodi Taylor, Chief Financial Officer and Chief Administrative Officer, have also amended their employment contracts to temporarily defer the payment of any annual cash bonus for fiscal 2019. In addition, the base salaries of all other members of the Company’s senior management team, as well as other certain salaried employees, were temporarily reduced by varying amounts. The Company’s senior management team’s performance-based cash bonuses have also been temporarily deferred. All furloughs and reductions of pay will remain in effect for a period to be determined and will be periodically reassessed as the situation regarding COVID-19 develops. The non-employee members of the Company’s Board of Directors have also agreed to waive their quarterly retainer fees previously scheduled to be paid on April 1, 2020.