What happened
Shares of The container store group (TCS -11.96%), a retailer that sells closets and storage products, fell 10% in morning trading on Wednesday. While that decline was nearly halved as of 11 a.m. ET today, that doesn’t change the fact that the company’s earnings outlook has darkened.
So what
The Container Store’s fiscal first quarter of 2022 wasn’t inherently bad. Same-store sales increased 5.1%, driven by the key custom closet business, where sales jumped 14.7% year-over-year. This segment contributed 4.5 percentage points to the overall sales increase.
While this is good news, the company’s general merchandise segment was far less impressive, with year-over-year sales growth of just 0.8%, contributing the remaining 0.6 percentage points. to the overall composition. There are conflicting results here, but the company is known for its closet products, so that might not be such a bad thing.
Bottom line, meanwhile, adjusted earnings per share (EPS) came in at $0.21, down from $0.36 in the year-ago quarter. Rising costs were a big headwind, causing margins to squeeze.
While the bottom line is hardly shocking given the current inflationary environment, the headwind posed by rising costs is not expected to subside anytime soon.
For example, The Container Store expects sales to remain in line with its previous expectations, but it has lowered its earnings forecast. Previously, the outlook was for Adjusted EPS to be between $1.20 and $1.30, but that range has now fallen to $1.10 to $1.20. The low end is now the high end, which helps explain why investors are in a negative mood this morning.
Now what
There is no simple solution to the cost issues facing The Container Store, with selling, general and administrative expenses up a steep 10.7% year-over-year. Salaries and marketing were noted as the main pain points.
While this specialty retailer doesn’t appear to be struggling on the sales front, investors clearly have a half-empty view of things on the cost side of the equation in the face of significant and significant inflationary pressures in the economy. Based on the downside earnings forecast, that seems like a reasonable call.
