Case Study: Container Store Never Should Have Gone Public
Classic example of how growth for the sake of meeting Wall Street expectations ruined a good thing.
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Two things:
First, If you missed my year-ender, including my commentary about how I rose to my level of incompetence, you can read it here. For paid subscribers, scroll to the end to see my entire Red Flag Alerts list.
Second, In that year-ender, I said I was taking a break until the New Year unless it absolutely positively couldn’t wait. Well… I can’t NOT comment on news that The Container Store has filed for bankruptcy.
It’s mind-boggling why The Container Store ever went public...
It was a win for the investment bankers, but a loss for everybody else including customers, shareholders and even the husband/wife co-cofounders who did the deal. At some point, as I recall, even the husband, Kip Tindell – who started out as CEO and chairman – publicly wondered as much.
It was one of those stock market train wrecks you could see coming well before the engine ran off the tracks. As I tweeted while going through its IPO prospectus…
That’s because by all accounts, as a customer, it wasn’t just a good operator, but a great operator… and going public clearly appeared destined to ruin a good thing.
To be sure, shortly after the IPO, my wife – a longtime customer – noticed a sharp drop in customer service and the overall friendliness of the staff. A few months later – after reporting its first quarter as a public company – I tweeted…
The reality of the company going public became exceedingly obvious by its second earnings report, when it blamed the weather for its woes. As I tweeted…
By its third quarter, it became obvious the company had made a mistake. As I wrote at the time, in “What Ails the Container Store”…
Whenever a retailer with a good concept goes public, the challenge is to balance the need to feed the street with protecting what made it so special.
In retrospect, that entire piece lays out what over the next 10 years would doom The Container Store.
Here’s that piece in its entirety…
What Ails the Container Store
July 9, 2014
NEW YORK (TheStreet) -- Whenever a retailer with a good concept goes public, the challenge is to balance the need to feed the street with protecting what made it so special.
Between blaming the weather and now an overall "retail funk," that appears to be at least part of the story behind what's ailing The Container Store (TCS).
The company, of course, doesn't come out and say that. The Container Store is, based on its earnings call commentary, a culturally "gosh" and "over-the-moon delighted" kind of company. It's the epitome of rah-rah and, and if you go to glassdoor.com and read what employees say, the term "cult-like" comes up more than once.
But as a public company, The Container Store no longer has the luxury of opening stores when and where it wants -- or even keeping its lauded "culture," known as being among the best places to work, intact.
As a private company, it needed to keep its eye on cash flow. As a public company, it needs to show growth -- and lots of it.
And that's where things may currently be getting dicey.
Four things struck out to from the call:
1. The focus on new store growth. New-store acceleration always seems to be the case for retailers that go public. To hear CEO Kip Tindell tell it, "We're even more excited about the experience of our newest stores. Never before, still, have our new stores contributed so much to the profitability of the Company." The trick, of course, is turning that into same-store sales growth, and so far on the same-store sales front, the trend is not The Container Store's friend.
2. The company says that "for some darn reason" its higher-end customers aren't shopping at The Container Store as frequently. Maybe it's because they've bought what they can buy or they have multiple choices to buy from, including online. Or maybe, just maybe, it's because, in California at least, where the company initially rolled out its POP Star frequent-customer promotion, their skin crawls each time they go to the register and they're asked "Are you a POP Star?" (I know my wife's does. And she finds the promotions less attractive than they were when the company was private. Yes, she's a focus group of one, but historically she has been a good focus group of one. And rather than their new POPs program, which tries to gives discounts on things you may not want or need, she misses their old November promotion that gave a $15 gift card for every $100 in purchases.)
3. This comment from Tindell in response to a question about whether the company should promote more to increase traffic: "We're looking at that. We're looking at SG&A reduction. We're looking at limited impact gross margin, more price promotion. We're doing everything that we've learned to be able to do in our careers when we get a little unexpected patch of sluggish sales." That's a mouthful, but did he say "SG&A reduction"? Indeed he did, and in a company that pays its part-timers a premium to minimum wage, that could hit the "attitude" and "service" thing I mentioned in the tweet. So far, SG&A has been running at around 50% of revenue, depending on the quarter. Key for investors: Will the company use that to goose earnings at the expense of the customer experience?
4. As traffic continues to fall, the company can't be any more effusive about how the average ticket continues to rise. Sounds good on the surface, but the average ticket can only increase so much -- whether it's the result of higher pricing (not sustainable) or upsell by salespeople. Obviously, based on overall results, something in that mix isn't working.
Reality: The Container Store had a good thing going on a small scale. Whether it can expand nationally, in the face of existing competition like Bed, Bath & Beyond (BBBY) , without losing what made it so great, remains to be seen. So far, not so good.
The kicker, of course, is that not only did Bed, Bath & Beyond itself wind up going bankrupt, but its successor – Beyond BYON 0.00%↑, the remnants of Overstock.com – had recently announced plans to give a $40 million lifeline to The Container Store. It later said it doubted the company could satisfy terms for that deal to be completed.
The bankruptcy brigade in retail rolls on.
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DISCLAIMER: This is solely my opinion based on my observations and interpretations of events, based on published facts and filings, and should not be construed as personal investment advice. (Because it isn’t!)
I can be reached at herb@herbgreenberg.com.