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UNITEDSTATESSECURITIESANDEXCHANGECOMMISSION
Washington,D.C.20549
Form10-K
CommissionFileNumber001-36161
THECONTAINERSTOREGROUP,INC.(Exactnameofregistrantasspecifiedinitscharter)
Delaware(Stateorotherjurisdictionofincorporationororganization)
26-0565401(IRSEmployerIdentificationNo.)
500FreeportParkwayCoppell,TX(Addressesofprincipalexecutive
offices)
75019(ZipCodes)
Registrant'stelephonenumberintheUnitedStates,includingareacode,is:(972)538-6000
SecuritiesregisteredpursuanttoSection12(b)oftheAct:
Titleofeachclass NameofeachexchangeonwhichregisteredCommonStock,parvalue$.01per
share NewYorkStockExchange
SecuritiesregisteredpursuanttoSection12(g)oftheAct:None
Indicatebycheckmarkiftheregistrantisawell-knownseasonedissuer,asdefinedinRule405oftheSecuritiesAct.YesoNoý
IndicatebycheckmarkiftheregistrantisnotrequiredtofilereportspursuanttoSection13orSection15(d)oftheAct.YesoNoý
Indicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.YesýNoo
IndicatebycheckmarkwhethertheregistranthassubmittedelectronicallyandpostedonitscorporateWebsite,ifany,everyInteractiveDataFilerequiredtobesubmittedandpostedpursuanttoRule405ofRegulationS-Tduringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtosubmitandpostsuchfiles.)YesýNoo
IndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-Kisnotcontainedherein,andwillnotbecontained,tothebestoftheregistrant'sknowledge,indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-KoranyamendmenttothisForm10-K.o
(MarkOne)
ý ANNUALREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934
ForthefiscalyearendedMarch31,2018
OR
o TRANSITIONREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934
Forthetransitionperiodfromto
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Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfiler,smallerreportingcompany,oranemerginggrowthcompany.Seethedefinitionsof"largeacceleratedfiler,""acceleratedfiler,""smallerreportingcompany,"and"emerginggrowthcompany"inRule12b-2oftheExchangeAct.
Ifanemerginggrowthcompany,indicatebycheckmarkiftheregistranthaselectednottousetheextendedtransitionperiodforcomplyingwithanyneworrevisedfinancialaccountingstandardsprovidedpursuanttoSection13(a)oftheExchangeAct.ý
Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2oftheAct).YesoNoý
AsofSeptember29,2017,thelastbusinessdayoftheregistrant'smostrecentlycompletedsecondquarter,theapproximatemarketvalueoftheregistrant'scommonstockheldbynon-affiliateswas$71,629,934.Solelyforpurposesofthisdisclosure,sharesofcommonstockheldbyexecutiveofficersanddirectorsoftheregistrantasofsuchdatehavebeenexcludedbecausesuchpersonsmaybedeemedtobeaffiliates.
AsofMay25,2018,thenumberofsharesofcommonstockoutstandingwas48,297,212.
DOCUMENTSINCORPORATEDBYREFERENCE
Portionsoftheregistrant'sdefinitiveProxyStatementforits2018AnnualMeetingofStockholdersareincorporatedbyreferenceintoPartIIIofthisAnnualReportonForm10-K.
Largeacceleratedfilero Acceleratedfilerý Non-acceleratedfilero(Donotcheckifa
smallerreportingcompany)
SmallerreportingcompanyoEmerginggrowthcompanyý
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TABLEOFCONTENTS
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PARTI. Item1. Business 5Item1A. RiskFactors 11Item1B. UnresolvedStaffComments 31Item2. Properties 31Item3. LegalProceedings 32Item4. MineSafetyDisclosures 32PARTII. Item5. MarketforRegistrant'sCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquity
Securities 34
Item6. SelectedFinancialandOperatingData 36Item7. Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations 43Item7A. QuantitativeandQualitativeDisclosuresAboutMarketRisk 65Item8. FinancialStatementsandSupplementaryData 67Item9. ChangesandDisagreementsWithAccountantsonAccountingandFinancialDisclosures 118Item9A. ControlsandProcedures 118Item9B. OtherInformation 118PARTIII. Item10. Directors,ExecutiveOfficersandCorporateGovernance 119Item11. ExecutiveCompensation 119Item12. SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholderMatters 119Item13. CertainRelationshipsandRelatedTransactions,andDirectorIndependence 119Item14. PrincipalAccountingFeesandServices 119PARTIV. Item15. Exhibits,FinancialStatementSchedules 120Item16. Form10-KSummary 125
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Cautionarynoteregardingforward-lookingstatements
ThisAnnualReportonForm10-Kcontainsstatementsthatconstituteforward-lookingstatementswithinthemeaningofthePrivateSecuritiesLitigationReformActof1995.Thesestatementsinvolveknownandunknownrisks,uncertaintiesandotherimportantfactorsthatmaycauseouractualresults,performanceorachievementstobemateriallydifferentfromanyfutureresults,performanceorachievementsexpressedorimpliedbytheforward-lookingstatements.
Insomecases,youcanidentifyforward-lookingstatementsbytermssuchas"may,""will,""should,""expects,""plans,""anticipates,""could,""intends,""target,""projects,""contemplates,""believes,""estimates,""predicts,""potential"or"continue"orthenegativeofthesetermsorothersimilarexpressions.Theforward-lookingstatementsinthisreportinclude,butarenotlimitedto,statementsrelatedto:anticipatedfinancialperformance,anticipatedtaxrates,thesufficiencyofourcashgeneratedfromoperationsandborrowingsunderourcreditfacilities,abilitytoincreaseourmarketshare,expectationswithrespecttonewstoreopeningsandrelocations,expectationsregardingkeygrowthinitiatives,expectationsregardingtheimpactof,andpotentialchargesrelatedto,marketingandexpensesavingsprograms,includingwithoutlimitationourOptimizationPlan,asdefinedherein,andourabilitytoattractnewcustomersandincreasebrandloyalty.Theseforward-lookingstatementsareonlypredictions.Wehavebasedtheseforward-lookingstatementslargelyonourcurrentexpectationsandprojectionsaboutfutureeventsandfinancialtrendsthatwebelievemayaffectourbusiness,financialconditionandresultsofoperations.
Theseforward-lookingstatementsspeakonlyasofthedateofthisreportandaresubjecttoanumberofrisks,uncertaintiesandassumptions,includingtheimportantfactorsdescribedinthe"RiskFactors"sectionofthisAnnualReportonForm10-K.Becauseforward-lookingstatementsareinherentlysubjecttorisksanduncertainties,someofwhichcannotbepredictedorquantified,youshouldnotrelyontheseforward-lookingstatementsasaccuratepredictionsoffutureevents.Theeventsandcircumstancesreflectedinourforward-lookingstatementsmaynotbeachievedoroccurandactualresultscoulddiffermateriallyfromthoseprojectedintheforward-lookingstatements.Exceptasrequiredbyapplicablelaw,wedonotplantopubliclyupdateorreviseanyforward-lookingstatementscontainedhereinafterthedateofthisreport,whetherasaresultofanynewinformation,futureeventsorotherwise.
Unlessthecontextotherwiserequires,referencesinthisAnnualReportonForm10-Ktothe"Company,""we,""us,"and"our"refertoTheContainerStoreGroup,Inc.and,whereappropriate,itssubsidiaries.
Thefollowingdiscussioncontainsreferencestofiscal2017,fiscal2016,fiscal2015,fiscal2014,andfiscal2013,whichrepresentourfiscalyearsendingMarch31,2018,April1,2017,February27,2016,February28,2015,andMarch1,2014,respectively.
ChangeinFiscalYear
OnMarch30,2016,theBoardofDirectorsoftheCompanyapprovedachangeintheCompany'sfiscalyearendfromthe52-or53-weekperiodendingontheSaturdayclosesttoFebruary28tothe52-or53-weekperiodendingontheSaturdayclosesttoMarch31.ThefiscalyearchangewaseffectivebeginningwiththeCompany's2016fiscalyear,whichbeganonApril3,2016andendedonApril1,2017.Asaresultofthechange,theCompanyhadaMarch2016fiscalmonthtransitionperiodwhichbeganonFebruary28,2016andendedonApril2,2016.TheunauditedresultsofthetransitionperiodwerereportedintheCompany'sForm10-QfiledforthenewfiscalfirstquarterendedJuly2,2016andtheauditedresultsarepresentedherein.BecausethefiscalyearchangewasnoteffectiveuntilafterthecompletionoftheCompany'sFebruary27,2016fiscalyear,theprioryearcomparativefinancialandotherinformationreportedintheFinancialStatementshereincontinuestobepresentedbasedontheCompany'spriorFebruary28fiscalyearendcalendar.However,forcomparativeanalysispurposes,the
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Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations("MD&A")presentedhereincomparestheauditedresultsforthe52-weekperiodendedApril1,2017("fiscal2016")totheunauditedresultsforthe52-weekperiodendedApril2,2016("recastfiscal2015")(inadditiontocomparingtheauditedresultsforthe52-weekperiodendedMarch31,2018("fiscal2017")totheauditedresultsforthe52-weekperiodendedApril1,2017("fiscal2016")).TheSelectedFinancialandOperatingDatapresentedhereinincludestheunauditedresultsforrecastfiscal2015inadditiontoprioryearauditedresultsbasedontheFebruary28fiscalyearendcalendar.
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PARTI
ITEM1.BUSINESS
General
TheContainerStore®istheoriginalandleadingspecialtyretailerofstorageandorganizationproductsandsolutionsintheUnitedStatesandtheonlynationalretailersolelydevotedtothecategory.Weprovideacollectionofcreative,multifunctionalandcustomizablestorageandorganizationsolutionsthataresoldinourstoresandonlinethroughahigh-service,differentiatedshoppingexperience.Ourvisionistobeabelovedbrandandthefirstchoiceforcustomizedorganizationsolutionsandservices.Ourcustomersarehighlyeducated,verybusyandprimarilyhomeownerswithahigherthanaveragehouseholdincome.Weservicethemwithstorageandorganizationsolutionsthathelpthemaccomplishprojects,maximizetheirspace,andmakethemostoftheirhome.Webelieveanorganizedlifeisahappylife.
Wewerefoundedin1978inDallas,TexasasTheContainerStore,Inc.In2007,TheContainerStore,Inc.wassoldtoTheContainerStoreGroup,Inc.InNovember2013,wecompletedtheinitialpublicofferingofourcommonstock(the"IPO").OurcommonstocknowtradesontheNewYorkStockExchange("NYSE")underthesymbol"TCS."Infiscal2017,wegeneratednetsalesof$857.2million.Todayouroperationsconsistoftwooperatingsegments:
• TheContainerStore("TCS"), whichconsistsofourretailstores,websiteandcallcenter,aswellasourinstallationandorganizationalservicesbusiness.Weoperate90storeswithanaveragesizeofapproximately25,000squarefeet(19,000sellingsquarefeet)in32statesandtheDistrictofColumbia.Ourstorespresentourproductsinauniqueandengagingatmosphere.Ourvisualmerchandisingteamworkstoensurethatallofourmerchandiseisappropriatelyshowcasedtoshowsolutionstoaccomplishourcustomer'sprojects,highlightingthevalueandfunctionalityofourproducts,andtomaximizetheappealofourimageandbrand.Wemaintainarelativelyconsistentstorelayoutwhichcreatesafamiliarshoppingexperienceacrossourstorebase.Ourstoresarecleanandspaciouswithorderlymerchandisingandstrategicproductplacementstooptimizeoursellingspaceandincreaseproductivity.Weallowourcustomerstoshopwithusinavarietyofways—anywhere,anytime,anywaytheywantthroughamulti-channelshoppingexperience.Ourstoresreceivesubstantiallyallofourproductsdirectlyfromourdistributioncenterco-locatedwithourcorporateheadquartersandcallcenterinCoppell,Texas.Infiscal2017,TCShadnetsalesof$787.4million,whichrepresentedapproximately92%ofourtotalnetsales.
• Elfa,TheContainerStore,Inc.'swhollyownedSwedishsubsidiary,ElfaInternationalAB("Elfa"),whichdesignsandmanufacturescomponent-basedshelvinganddrawersystemsandmade-to-measureslidingdoors.Elfawasfoundedin1948andisheadquarteredinMalmö,Sweden.Elfa'sshelvinganddrawersystemsarecustomizableforanyareaofthehome,includingclosets,kitchens,officesandgarages.ElfaoperatesthreemanufacturingfacilitieswithtwolocatedinSwedenandoneinPoland.TheContainerStorebegansellingelfa®productsin1978andacquiredElfain1999.TodayourTCSsegmentistheexclusivedistributorofelfa®productsintheU.S.andrepresentedapproximately44%ofElfa'stotalsalesinfiscal2017.Elfaalsosellsitsproductsonawholesalebasistovariousretailersinapproximately30countriesaroundtheworld,withaconcentrationintheNordicregionofEurope.Infiscal2017,theElfasegmenthad$69.9millionofthirdpartynetsales,whichrepresentedapproximately8%ofourtotalnetsales.
Forinformationonkeyfinancialhighlightsandsegmentfinancialinformation,seeItem6,SelectedFinancialandOperatingData,Item7,Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations,andItem8,FinancialStatementsandSupplementalDataandNote14thereto.Forfinancialinformationbygeographicarea,seeNote14toourauditedconsolidatedfinancialstatements.
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OurKeyDifferentiators
OurUniqueProductCollection—AccomplishingProjectsinEveryAreaoftheHome:
Ourmerchandisingphilosophyistoprovideacarefullycurated,oneofakindcollectionofstorageandorganizationsolutionsforeveryareaofthehome,atavarietyofpricepoints.Weofferapproximately10,000productsdesignedtoaccomplishprojectsandsavespaceandtime.Eachyear,weintroduceover2,000newSKUs.Oursolutions-basedsellingapproach(versusitems-based)isdeliveredbyourhighlytrainedsalespeople.Webelievehelpingcustomersaccomplishtheirorganizationalprojectsbysellingsolutionsprimarilyconsistingofexclusive,proprietaryproductsdifferentiatesusfromotherretailers.Infact,overhalfofourannualsalescomefromexclusiveorproprietaryproducts.
Currently,ourstoresaretypicallyorganizedinto15distinctlifestyledepartments.Thetypesofproductssoldineachdepartmentareasfollows:
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Lifestyledepartments SelectproductsBath CountertopOrganizers,CosmeticandJewelryOrganizers,ShowerandBathtubOrganizers,Drawer
Organization,CabinetStorage
Closet ShoeRacks,Hangers,DrawerOrganizers,BoxesandBins,HangingStorageBags
Collections MediaStorage,PhotoStorage,Display,SmallCraftandPartsOrganizers
elfa® Includeselfa®collectionofVentilatedandSolidShelvingandDrawercomponentsandsystems,WallandDoorRackSolutions,Accessories,UtilityandGarageSystems,andSlidingDoors
GiftPackaging GiftWrapandTags,RibbonsandBows,GiftWrapOrganizers,GiftBagsandSacks,GiftBoxes,Tape,SmallBoxes,SmallBaskets,Tins,DividedBoxes,DecorativeContainers
Hooks WallMounted,Self-adhesive,Magnetic,Overdoor,Removable
Kitchen Canisters,Jars,LunchtimeEssentials,BulkFoodStorage,PlasticandGlassFoodStorage,DrawerLinersandOrganizers,CountertopOrganizers,DishDryingRacks,CabinetStorage,PantryOrganizers
Laundry StepStools,Hampers,LaundryBagsandBaskets,ClothesDryingRacks,CleaningTools
Long-TermStorage GarmentRacks,ArchivalStorage,PlasticStorageTotes,CorrugatedBoxes,PackingMaterial,StorageBags,SpecialtyBoxes
Office DesktopCollections,PaperStorage,FileCartsandCabinets,LiteratureOrganizers,MessageBoards
Shelving FreeStandingShelving,WallMountedShelving,CubeSystems,ComponentShelving,Desks,Chairs
Storage Drawers,BoxesandBins,Totes,Crates,Carts
TCSClosets® Ourexclusiveluxurysolidclosetsystemwithdoors,drawers,integratedlightingandaccessories
Trash RecycleBins,Wastebaskets,OpenCans,Step-onCans,Bags
Travel Luggage,Totes,ClothingOrganizers,CosmeticandJewelryOrganizers,TravelBottles
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Inordertoofferouruniquecollectionofproductsandtoexecuteacompetitivemerchandisingandbusinessstrategy,weworktoformmeaningful,long-lastingrelationshipswithvendorsfromaroundtheworld.Webelievetheserelationshipsbenefitusinanumberofways,includingprovidinguswithanincreasednumberofexclusiveproductsandcompetitivepricing.Webelievethatbycreativelycraftingmutuallybeneficialvendorrelationshipswefosterauniquesenseofloyaltyamongourmorethan800productvendors.Seventeenofourtop20vendorshavebeenwithusforatleast10yearsandseveralofthosevendorshavebeenwithussinceourinceptionin1978.FortheTCSsegment,ourtop10vendors,excludingElfa,accountedfor30%ofourtotalpurchasesinfiscal2017.Inordertomaximizeourpurchasingflexibility,wegenerallydonotenterintolong-termcontractswithourvendors.
CustomClosets:
WecontinuetobelievethatourfocusonCustomClosets,inclusiveofelfa®productsolutions,TCSClosets®,closetcompletionproducts,andinstallationservicesprovidesauniqueopportunitytodrivecomparablestoresalesthroughhigheraverageticketwhiledifferentiatingtheCompanyfromonline,items-basedretailers.Ourhighly-trainedandexperiencedsalesforcehasbeensellingproprietary,custom-designedelfa®andotherclosetsolutionsforalmost40years.Webelievethereisnoothercomparableretailerexecutingthisholisticapproachtocustomclosets.Weofferthecompletecustomclosetsolution—notjusttheframeworkofthecloset,butthefullarrayofclosetorganizationproductsthataccompanythecloset,aswellasanationalfootprintwithmillionsofcustomerscomingthroughthedoorandvisitingouronlinesiteeachyear.WedesignandsellCustomClosetsin-store,online,throughourcallcenter,aswellasthroughourContainedHome®in-homeorganizationservice.
Ourelfa®productscontinuetobeaneverimportant,highlyprofitableanddifferentiatingcomponentinthegrowthofourcompanyandourcommitmenttodominatingthecustomclosetmarket,accountingforabout25%ofourTCSretailsales.DuetoourverticalintegrationwithElfa,wehavecontroloverthesourcingandavailabilityofelfa®,ourbestsellingandhighestmarginproduct.Wearetheexclusivedistributorofelfa®productsintheUnitedStates.Approximately20%ofourfiscal2017TCSsegmentpurchaseswereattributedtointercompanypurchasesfromourElfasegment.
OurShoppingExperience:
WestrivetocreateanAirofExcitement®ineachofourstoresacrossthecountry.Wesay,"threestepsinthedoorandyoucantellwhetherornotastorehasit."YoucanexperiencetheAirofExcitement®throughouremployees'smilingfacesandtheirgenuineinterestinacustomer'sorganizationalprojects;inthebrightvisualdisplaysofproductsandsolutions;inourclean,well-organizedstore;andinourenergeticproductdemonstrationsandupbeatmusic.
Thisiscoupledwithourhighlypersonalizedapproachtocustomerservice.Ouremployeesaretrainedtoaskquestionstounderstandourcustomers'needs.Webelievethatifwefailtodiscovertheunderlyingstorageandorganizationchallengesofourcustomers,wefailtotrulyhelpthemandmakethemhappy.ServiceandsellingarethesamethingatTheContainerStore.Webelievewecanbestserveourcustomersbyastonishingthemandgivingthemthesolutionstheytrulyneedtoaccomplishtheirorganizationalprojects.
Weareamulti-channelretailer,withafully-integratedwebsite,responsivemobilesite,andcallcentertocomplementourphysicalstores.Ourwebsite,containerstore.com,isintendedtoreplicatethestoreexperienceofferingthesameproductassortmentandprovidingrealtimeinventoryinformationforourstores,aswellascertainproductsfoundexclusivelyonline.Weenhancethecustomer'sexperienceanddeepenloyaltybycreatingconsistent,relevantmessages,regardlessofwhichchannelisbeingused—wearechannelagnostic.Weofferfreeshippingonordersover$75andourcustomersareabletopurchaseonlineandpickupatastore,withcurbsidepick-upinmostmarkets,orrequest
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same-dayhomedeliveryinselectmarkets.Thewebsite,mobilesite,andcallcentersaleschannelsaccountedforanaggregateofapproximately17%ofTCSnetsalesinfiscal2017.
OurStores:
Wehaveadoptedadisciplinedexpansionstrategydesignedtoleveragethestrengthofourbusinessmodelandnationallyrecognizedbrandnametosuccessfullydevelopnewstoresinanarrayofmarketsthatareprimedforgrowth,includingnew,existing,smallandlargemarkets.Ourcurrentfootprintof90storesextendsto32statesandtheDistrictofColumbia.Weopenedatotaloffivenewstores(includingonerelocation)inthe2017fiscalyearandweexpecttoopenatotaloffournewstores(includingtworelocations)inthe2018fiscalyear.Whileourcurrentexpansionfocusisondomesticmarkets,webelieveinternationalexpansionmayprovideadditionalgrowthopportunitiesforusinthefuture.
WehaveastrongbaseofprofitablestoresandbelievethatourexpansionopportunitiesintheUnitedStatesaresignificant.Weplantocontinuetoseekoutstrategicandprofitablerealestateexpansionviaavarietyofstoreformatsandsizes.Infiscal2017,weopenedareduced-sizedfootprintstoreinAlbuquerque,NewMexico,andthreeoftheanticipatedfournewstoresinfiscal2018arebeingdesignedasreduced-sizedfootprintstoresaswell.Wealsobeganacompletere-designofourflagshipstoreinDallas,whichwebelievewillprovideusinsighttodevelopnewstoreformatsandevolvethefutureofourexistingstores'experience.Ourstoreopeningstrategyinvolvesastrategicformulaoftraining,marketing,non-profitpartnershipsandpublicrelations,whichenablesournewstorestodeliverstrongsalesvolumemorequickly.
OurEmployeesandCulture:
TheContainerStorehasbeengettingpeopleorganizedforalmost40years,andsince1978,we'vealsobeenrunningourbusinessguidedbyourvalues-basedsetofprinciples.We'reproudtobeoneofthefoundingcompaniesinamovementcalledConsciousCapitalism®,whichincludesagroupoflike-mindedbusinesses,thoughtleaders,authorsandacademicsallworkingtogethertochangethewaybusinessisdoneinAmericaandaroundtheworld.Wehaveafirmbeliefthatcreatingvalueforandoptimizingrelationshipsbetweenallofthestakeholdersofourbusiness—employees,customers,vendors,communityandshareholders—istherightthingtodo.
ConsistentwithourcommitmenttoConsciousCapitalism,webelievethathappyemployeesleaddirectlytobetterperformanceandhigherprofits.WebelieveinputtingemployeesfirstandstayingtruetooursevenFoundationPrinciples®—simplebusinessphilosophiesthatguideeachdecisionwemake.OneofthoseFoundationPrinciplesis1GreatPerson=3GoodPeople®intermsofbusinessproductivity—that'sourhiringphilosophy.Infact,infiscal2017,wehiredonly6%ofjobapplicants.Ouremployee-firstcultureincludesatremendouscommitmenttocommunication,trainingandcareerdevelopmentthathelpsdeliveradifferentiatedexperiencetoourcustomers,whichwebelieveresultsinahigheraverageticket,repeatvisitsandfrequentreferralstootherpotentialcustomers.Weprovideextensiveformaltrainingtofull-timestoreemployees,especiallyduringtheirfirstyearofemployment.Ourstoresofferflexibleworkschedules,comprehensivebenefitsandaboveretailindustryaveragecompensationtobothfull-timeandpart-timeemployees.Asaresult,ourfull-timeemployeevoluntaryturnoverratewasapproximately15%onaverageoverthepasttwoyears,significantlybelowtheretailaverage.It'sforthesereasonsandmorethatTheContainerStorehasbeennamedbyFORTUNEMagazinetoitsannuallistof100BestCompaniestoWorkFor®19yearsinarow.
AsofMarch31,2018,wehadapproximately4,950employees,ofwhichapproximately4,400wereTCSemployeesandapproximately550wereElfaemployees.Ofthe4,400TCSemployees,approximately2,900werepart-timeemployees.
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YoucanlearnaboutourFoundationPrinciplesandConsciousCapitalismonourblog,www.whatwestandfor.com. TheinformationcontainedonourblogisnotincorporatedbyreferenceintothisAnnualReportonForm10-K.
Distribution
IntheTCSsegment,substantiallyallofourmerchandiseflowsthroughacentralizeddistributioncenterpriortotransporttoourretailstores.Ourdistributioncenterisco-locatedwithourcorporateofficesinCoppell,Texas.Theapproximately1.1millionsquarefootfacilitywasdesignedandconstructedspecificallyforTheContainerStoreandiscomprisedofapproximately93,000squarefeetofcorporateofficespaceandapproximately1millionsquarefeetofwarehousespace.
OurCoppell,Texasdistributioncenterisutilizedforretailstorereplenishmentanddirect-to-customerorders.WiththeexceptionoftheDallas/FortWorthmarket,weutilizethirdpartytruckloadcarrierstotransportallofourproductstoourstores.Weutilizebestinclasslogisticstechnologytooptimizeoperationsandcurrentprocessesforpicking,packingandshippingwhileprovidingastrongfoundationforfuturegrowth.Wecontinuetostrengthenourdistributioncenterwithongoingprocessandmaterialhandlingimprovements,aswellasautomation,inordertoachieveevengreaterefficienciesinservicelevelsandthemanagementofourinventory.
Withinourdistributionoperations,wehaveacultureofsafetyandefficiency,witharobustmetricprogramandacommitmenttocontinuousimprovement.Allprocesses,teamsandindividualsareheldtohighefficiencyandperformancestandards.Webelievethatthesizeandscalabilityofthedistributioncenterissufficienttosupportourfutureexpansionoverthenext2to3years.However,aswecontinuallyassessourdistributionandsupplychainoperationstoensureweareoperatingthemostefficientandcost-effectivedistributionnetwork,webelievethatopeningaseconddistributioncenterwillsignificantlyimproveservicelevelstoourcustomerswhileatthesametimereduceoursupplychainanddistributioncosts.WearecurrentlyintheprocessofopeningaseconddistributioncenterinthenortheasternUnitedStates,whichisexpectedtobeoperatinginlatefiscal2019.Wealsocontinuetoinvestinsupplychainsystemenhancementsforincreasedlogisticsnetworksupport.
Elfautilizesabroadnetworkofthird-partycarrierstodeliverproductsfromitsmanufacturingfacilitiestocustomersworldwide.
Intellectualproperty
Our"TheContainerStore,""ContainYourself","FoundationPrinciples","POP!PerfectlyOrganizedPerks","TCSClosets","ContainedHome",and"elfa"trademarksandcertainvariationsthereon,suchasour"TheContainerStore"logoandmanytrademarksusedforourproductlinesandsalescampaignsareregisteredorarethesubjectofpendingtrademarkapplicationswiththeU.S.PatentandTrademarkOfficeandwiththetrademarkregistriesofmanyforeigncountries.Inaddition,weownmanydomainnames,including"www.containerstore.com ,""www.whatwestandfor.com "andothersthatincludeourtrademarks.Weownseveralelfa®utilityanddesignpatentsprotectingElfa'sclosetandshelvingsystems,andautilitypatentforTCS'sproprietaryretailshoppingcomputersystems,alongwithcopyrightsinourcatalogs,websites,andothermarketingmaterial.Webelievethatourtrademarks,productdesignsandcopyrightedworkshavesignificantvalueandwevigorouslyprotectthemagainstinfringement.
Competition
Weoperatewithinthestorageandorganizationcategorywhichextendsacrossmanyretailsegmentsincludinghousewares,officesuppliesandtravel,amongothers.However,wearetheonlynationalretailersolelydevotedtoit.Storageandorganizationproductsaresoldbyavarietyofretailers,includingmassmerchants,specialtyretailchains,andinternet-basedretailers,buttheydevote
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asmallerportionoftheirmerchandiseassortmenttostorageandorganization.Someoftheseretailersarelargerandhavegreaterfinancial,marketingandotherresourcesthanTheContainerStore.Wecompetewithsuchretailersbasedonourcustomerservice,productselectionandquality,price,convenience,effectiveconsumermarketingandpromotionalactivities,theabilitytoidentifyandsatisfyemergingconsumerpreferences,vendorrelationships,andbrandrecognition,amongotherthings.Webelievethatthestrengthofoursolutions-basedsellingwithhighlytrainedemployees,exclusiveofferingsandvendorrelationships,ourpassionateandloyalcustomerbaseandthequality,differentiationandbreadthofproductassortmentcomparefavorablytothoseofourcompetitors.
Seasonality
Ourstorageandorganizationproductofferingmakesuslesssusceptibletoholidayseasonshoppingpatternsthanmanyretailers.Historically,ourbusinesshasrealizedahigherportionofnetsales,operatingincomeandcashflowsfromoperationsinthefourthfiscalquarter,attributableprimarilytotheimpactofOurAnnualelfa®Sale,whichtraditionallystartsonoraboutDecember24thandrunsintoFebruary.Assuch,ourbusinesshashistoricallyrealizedgreaterleverageonourselling,generalandadministrativeexpensesduringourfiscalfourthquarter.Infact,overhalfofouradjustednetincomewasderivedinthefiscalfourthquarterinfiscalyears2017,2016,and2015.Formoreinformationregardingouruseofadjustednetincome,andareconciliationofadjustednetincometotheGAAPfinancialmeasureofnetincome(loss)availabletocommonshareholders,see"Item6:SelectedFinancialandOperatingData."
Regulationandlegislation
Wearesubjecttolaborandemploymentlaws,lawsgoverningtruth-in-advertising,privacylaws,safetyregulationsandotherlaws,includingconsumerprotectionregulations,suchastheConsumerProductSafetyImprovementActof2008,thatregulateretailersandgovernthepromotionandsaleofmerchandiseandtheoperationofstoresandwarehousefacilities.Wemonitorchangesintheselawsandbelievethatweareinmaterialcompliancewithapplicablelaws.
WesourceasignificantportionofourproductsfromoutsidetheUnitedStates.TheU.S.ForeignCorruptPracticesAct,andothersimilaranti-briberyandanti-kickbacklawsandregulationsgenerallyprohibitcompaniesandtheirintermediariesfrommakingimproperpaymentstonon-U.S.officialsforthepurposeofobtainingorretainingbusiness.Ourpoliciesandourvendorcomplianceagreementsmandatecompliancewithapplicablelaw,includingtheselawsandregulations.
Whereyoucanfindmoreinformation
Wemaintainawebsiteathttp://investor.containerstore.com andmakeavailable,freeofcharge,throughthissiteourAnnualReportsonForm10-K,QuarterlyReportsonForm10-Q,CurrentReportsonForm8-K,ProxyStatementsandForms3,4and5filedonbehalfofdirectorsandexecutiveofficersandholdersofmorethan10%ofourcommonstock,aswellasanyamendmentstothosereportsfiledorfurnishedpursuanttotheSecuritiesExchangeActof1934,asamended(the"ExchangeAct")assoonasreasonablypracticableafterweelectronicallyfilesuchmaterialwith,orfurnishitto,theSEC.WealsoputonourwebsitesthechartersforourBoardofDirectors'AuditCommittee,CultureandCompensationCommittee,NominatingandCorporateGovernanceCommittee,aswellasourCodeofBusinessConductandEthics,whichappliestoallofourdirectors,officers,andemployees,includingourprincipalexecutiveofficerandourprincipalfinancialandaccountingofficers,ourCorporateGovernanceGuidelinesandotherrelatedmaterials.Theinformationonourwebsitesisnotpartofthisannualreport.
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OurInvestorRelationsDepartmentcanbecontactedatTheContainerStoreGroup,Inc.,500FreeportParkway,Coppell,TX75019-3863,Attention:InvestorRelations;telephone:972-538-6504;email:[email protected]
ITEM1A.RISKFACTORS
Ourbusinessfacessignificantrisksanduncertainties.Certainimportantfactorsmayhaveamaterialadverseeffectonourbusinessprospects,financialconditionandresultsofoperations,andyoushouldcarefullyconsiderthem.Accordingly,inevaluatingourbusiness,weencourageyoutoconsiderthefollowingdiscussionofriskfactors,initsentirety,inadditiontootherinformationcontainedinorincorporatedbyreferenceintothisAnnualReportonForm10-KandourotherpublicfilingswiththeSEC.
Risksrelatedtoourbusiness
Anoveralldeclineinthehealthoftheeconomyandconsumerspendingmayaffectconsumerpurchasesofdiscretionaryitems,whichcouldreducedemandforourproductsandmateriallyharmoursales,profitabilityandfinancialcondition.
Ourbusinessdependsonconsumerdemandforourproductsand,consequently,issensitivetoanumberoffactorsthatinfluenceconsumerspendinggenerallyandfordiscretionaryitemsinparticular.Factorsinfluencingconsumerspendingincludegeneraleconomicconditions,consumerdisposableincome,fuelprices,recessionandfearsofrecession,unemployment,warandfearsofwar,inclementweather,availabilityofconsumercredit,consumerdebtlevels,conditionsinthehousingmarket,interestrates,salestaxratesandrateincreases,inflation,consumerconfidenceinfutureeconomicconditionsandpoliticalconditions,andconsumerperceptionsofpersonalwell-beingandsecurity.Forexample,adecreaseinhomepurchasesmayleadtodecreasedconsumerspendingonhome-relatedproducts.Prolongedorpervasiveeconomicdownturnscouldslowthepaceofnewstoreopeningsorcausecurrentstorestoclose.Adversechangesinfactorsaffectingdiscretionaryconsumerspendinghavereducedandmaycontinuetofurtherreduceconsumerdemandforourproducts,thusreducingoursalesandharmingourbusinessandoperatingresults.Inparticular,consumerpurchasesofdiscretionaryitems,suchasourelfa®andTCSClosets®closetsystems,tendtodeclineduringrecessionaryperiodswhendisposableincomeislower.
Competition,includinginternet-basedcompetition,couldnegativelyimpactourbusiness,adverselyaffectingourabilitytogeneratehighernetsales.
Theretailindustryishighlycompetitive,withfewbarrierstoentry.Competitionischaracterizedbymanyfactors,includinglevelofservice,merchandiseassortment,productquality,price,location,reputation,creditavailability,andcustomerloyalty.Avarietyofretailersofferproductsthataresimilartotheonesweofferinourstoresandthroughourwebsite.Competitiveproductscanbefoundinmassmerchants,aswellasspecialtyretailchains.Someofourcompetitors,particularlythemassmerchants,arelargerandhavegreaterfinancialresourcesthanwedo.Wealsofacecompetitionfrominternet-basedretailers,inadditiontotraditionalstore-basedretailers.Thiscouldresultinincreasedpricecompetitionsinceourcustomerscanmorereadilysearchandcomparesimilarproducts.
Asecuritybreachorcyber-attackofourwebsiteorinformationtechnologysystemscoulddamageourreputationandourrelationshipswithourcustomersoremployees,exposeustolitigationriskandadverselyaffectourbusinessandthetradingpriceofourcommonstock.
Inconductingourbusiness,includingoure-commercebusiness,weobtainandtransmitconfidentialinformationaboutourcustomers,includingcreditcardinformation,throughourwebsiteandourinformationtechnologysystems,andwedependonthesecuretransmissionofsuch
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information.Wealsoreceiveandmaintainconfidentialinformationaboutouremployeesinthenormalcourseofbusiness.Asecuritybreachorcyber-attackcouldresultinthedisclosureofconfidentialinformationwhichmayadverselyaffectourbusinessandoperations,includingdamagingourreputationandourrelationshipswithourcustomersandemployees,andexposingustorisksoflitigationandliability.Wecannotassurethatanybreaches,attacksorunauthorizeddisclosureswillnotoccur.Becausetechniquesusedtoobtainunauthorizedaccessortosabotagesystemschangefrequentlyandoftenarenotrecognizeduntillaunchedagainstatarget,wemaybeunabletoanticipatethesetechniquesortoimplementadequatepreventativemeasures.Inaddition,asaresultofsecuritybreachesatanumberofprominentretailers,themediaandpublicscrutinyofinformationsecurityandprivacyhasbecomemoreintense.Asaresult,wecurrentlyincursignificantcostsinmaintainingcybersecurityprotectionsandmayincursignificantcoststochangeourbusinesspracticesormodifyourserviceofferingsinconnectionwiththeprotectionofpersonallyidentifiableinformation.Further,wemaybesubjecttooneormoreclaimsorlawsuitsrelatedtointentionalorunintentionalexposureofourcustomer'spersonallyidentifiableinformation.Anysecuritybreachorresultinglawsuitcouldcauseourcustomerstoloseconfidenceinthesecurityofourinformationsystems,andchoosenottodobusinesswithus,therebyadverselyaffectingourbusinessandthetradingpriceofourcommonstock.
Inaddition,statesandthefederalgovernmenthaveincreasinglyenactedadditionallawsandregulationstoprotectconsumersagainstidentitytheft,includinglawsgoverningtreatmentofpersonallyidentifiableinformation.Theselawshaveincreasedthecostsofdoingbusinessandwecannotassureyouthatourvendorsandemployeeswillcomplywithallapplicablelaws,regulationsandcontractualprovisionspertainingtotheuseofpersonalinformation.Ifwefailtoimplementappropriatesafeguardsorwefailtodetectandprovidepromptnoticeofunauthorizedaccessasrequiredbysomeoftheselawsandregulations,wecouldbesubjecttopotentialclaimsfordamagesandotherremedies.Ifwewererequiredtopayanysignificantamountsinsatisfactionofclaimsundertheselawsandregulations,ourbusiness,resultsofoperationsandfinancialconditioncouldbeadverselyaffected.
Finally,therecanbenoassurancethatinthefuturewewillbeabletooperateourbusinessinaccordancewiththePCIDataSecurityStandardsorotherindustryrecommendedpractices.WeintendtomaintaincompliancewithPCIDataSecurityStandardsandwillincuradditionalexpensestomaintainPCIcompliance.Evenifwearecompliantwithsuchstandards,westillmaybevulnerableandunabletopreventsecuritybreachesinvolvingcustomertransactiondata.
Ifouroperatingandfinancialperformanceinanygivenperioddoesnotmeettheguidancethatweprovidetothepublic,ourstockpricemaydecline.
Wemayprovidepublicguidanceonourexpectedoperatingandfinancialresultsforfutureperiods.Suchguidanceiscomprisedofforward-lookingstatementssubjecttotherisksanduncertaintiesdescribedinthisreportandinourotherpublicfilingsandpublicstatements.Ouractualresultshavenotalwaysbeenandmaynotalwaysbeinlinewithorexceedtheguidancewehaveprovided,especiallyintimesofeconomicuncertaintyorwhenthereareperiodsofsevereweather.If,inthefuture,ouroperatingorfinancialresultsforaparticularperioddonotmeetourguidanceortheexpectationsofinvestmentanalystsorifwereduceourguidanceforfutureperiods,themarketpriceofourcommonstockmaydeclineaswell.
Ourcomparablestoresaleshavefluctuatedsignificantlyinthepastbasedonanumberofeconomic,seasonal,andcompetitivefactors,andweexpectthemtocontinuetofluctuateinthefuture.Thisvariabilitycouldcauseourcomparablestoresalestofallbelowtheexpectationsofsecuritiesanalystsorinvestors,whichcouldresultinadeclineinthemarketpriceofourcommonstock.Ourcomparablestoresalesgrowthcouldvaryformanyreasons,includingtheimpactofnewstoresenteringintothecomparablestorebase,theopeningofnewstoresthatcannibalizestoresalesinexistinglocations,generaleconomicconditions,increasedcompetition,pricechangesinresponsetocompetitivefactors,possiblesupplyshortages,andcyclingagainstanyprioryearofabove-averagesalesresults.
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Weareundertakinganumberofsignificantbusinessinitiativesatthesametimeandiftheseinitiativesarenotsuccessful,theymayhaveanegativeimpactonouroperatingresults.
Weareincreasingthenumberofourstoresandareundertakingseveralbusinessinitiatives.Wemayincurcostsfortheseinitiativesbeforewerealizeanycorrespondingrevenue.Thenumberofcurrentbusinessinitiativescouldstrainourfinancial,operationalandmanagementresources.Inaddition,theseinitiativesmaynotbesuccessfulormaytakelongerthanplannedtobesuccessful.Ifwearenotsuccessfulinmanagingourcurrentstoregrowthandtheinitiativesthatareunderway,wecouldexperienceanadverseimpactonourfinancialconditionandresultsofoperations.Alloftheforegoingrisksmaybecompoundedinanyeconomicdownturn.Ifwefailtoachievetheintendedresultsofourcurrentbusinessinitiatives,oriftheimplementationoftheseinitiativesisdelayedorabandoned,divertsmanagement'sattentionorresourcesfromotheraspectsofourbusinessorcostsmorethananticipated,wemayexperienceinadequatereturnoninvestmentforsomeorallofourbusinessinitiatives,whichwouldhaveanegativeeffectonouroperatingresults.
Ifweareunabletosourceandmarketnewproductstomeetourhighstandardsandcustomerpreferencesorareunabletoofferourcustomersanaestheticallypleasingandconvenientshoppingenvironment,ourresultsofoperationsmaybeadverselyaffected.
Oursuccessdependsonourabilitytosourceandmarketnewproductsthatbothmeetourstandardsforqualityandappealtocustomers'preferences.Asmallnumberofouremployees,includingourbuyingteam,areprimarilyresponsibleforbothsourcingproductsthatmeetourhighspecificationsandidentifyingandrespondingtochangingcustomerpreferences.Failuretosourceandmarketsuchproducts,ortoaccuratelyforecastchangingcustomerpreferences,couldleadtoadecreaseinthenumberofcustomertransactionsatourstoresandadecreaseintheamountcustomersspendwhentheyvisitourstores.Inaddition,thesourcingofourproductsisdependent,inpart,onourrelationshipswithourvendors.Ifweareunabletomaintaintheserelationshipswemaynotbeabletocontinuetosourceproductsatcompetitivepricesthatbothmeetourstandardsandappealtoourcustomers.Wealsoattempttocreateapleasant,appealingandconvenientshoppingexperience.Ifwearenotsuccessfulincreatingapleasant,appealingandconvenientshoppingexperiencewemaylosecustomersorfailtoobtainnewcustomers.Ifwedonotsucceedinintroducingandsourcingnewproductsthatconsumerswanttobuyormaintaininggoodrelationshipswithourvendors,orareunabletoprovideapleasant,appealingandconvenientshoppingenvironmentormaintainourlevelofcustomerservice,oursales,operatingmarginsandmarketsharemaydecrease,whichwouldadverselyimpactourbusiness,financialconditionandresultsofoperations.
Wefacerisksrelatedtoourindebtedness.
AsofMarch31,2018,wehadtotaloutstandingdebtof$295.1millionandanadditional$82.4millionofavailabilityundertheRevolvingCreditFacilityandthe2014ElfaRevolvingCreditFacility.OurSeniorSecuredTermLoanFacility,whichmaturesAugust18,2021,represented$294.4millionofthetotaloutstandingdebt.Wemayincuradditionalindebtednessinthefuture.Ourhighdegreeofleveragecouldhaveimportantconsequencestous,including:
• exposingustotheriskofincreasedinterestratesasourborrowingsunderourtermloan,ortheSeniorSecuredTermLoanFacility,theRevolvingCreditFacilityandthe2014ElfaSeniorSecuredCreditFacilitiesareatvariablerates;
• makingitmoredifficultforustomakepaymentsonourdebt;
• limitingourabilitytopayfuturedividends;
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• increasingourvulnerabilitytodownturnsinourbusiness,thestorageandorganizationretailindustryorthegeneraleconomyandlimitingourflexibilityinplanningfor,orreactingto,changesinourbusiness;
• requiringasubstantialportionofcashflowfromoperationstobededicatedtothepaymentofprincipalandinterestonourdebt,therebyreducingourabilitytouseourcashflowtofundouroperations,capitalexpenditures,andfuturebusinessopportunities;
• restrictingusfrommakingstrategicacquisitionsorcausingustomakenon-strategicdivestitures;
• requiringustocomplywithfinancialandoperationalcovenants,restrictingus,amongotherthingsfromplacingliensonourassets,makinginvestments,incurringdebt,makingpaymentstoourequityordebtholdersandengagingintransactionswithaffiliates;
• limitingourabilitytoobtainadditionalfinancingforworkingcapital,capitalexpenditures,productdevelopment,debtservicerequirements,acquisitions,andgeneralcorporateorotherpurposes;
• preventingusfromtakingadvantageofbusinessopportunitiesastheyariseorsuccessfullycarryingoutourplanstoexpandourstorebaseandproductofferings;and
• placingusatacompetitivedisadvantagecomparedtoourcompetitorswhomaybelesshighlyleveraged.
Inaddition,ifwecannotgeneratesufficientcashflowfromoperationstoserviceourdebt,wemayneedtorefinanceourdebt,disposeofassetsorissueequitytoobtainnecessaryfunds.Wedonotknowwhetherwewouldbeabletotakeanyoftheseactionsonatimelybasis,ontermssatisfactorytous,oratall.Afailurebyusoroursubsidiariestocomplywiththeagreementsgoverningourindebtednesscouldresultinaneventofdefaultundersuchindebtedness,whichcouldadverselyaffectourabilitytorespondtochangesinourbusinessandmanageouroperations.Upontheoccurrenceofaneventofdefaultunderanyoftheagreementsgoverningourindebtedness,thelenderscouldelecttodeclareallamountsoutstandingtobedueandpayableandexerciseotherremediesassetforthintheagreements.Ifanyofourindebtednessweretobeaccelerated,therecanbenoassurancethatourassetswouldbesufficienttorepaythisindebtednessinfull,whichcouldhaveamaterialadverseeffectonourabilitytocontinuetooperateasagoingconcern.
Ifweareunabletoeffectivelymanageouronlinesales,ourreputationandoperatingresultsmaybeharmed.
WesellmerchandiseovertheInternetthroughourwebsite,www.containerstore.com,andthroughmobileapplicationsforsmartphonesandtablets.Wearevulnerabletocertainrisksanduncertaintiesassociatedwithoure-commercewebsites,including:changesinrequiredtechnologyinterfaces;websitedowntimeandothertechnicalfailures;costsandtechnicalissuesasweupgradeourwebsitesoftware;computerviruses;changesinapplicablefederalandstateregulations;securitybreaches;andconsumerprivacyconcerns.Thefailureofourwebsiteormobileapplicationstoperformasexpectedcouldresultindisruptionsandcoststoouroperationsandmakeitmoredifficultforcustomerstopurchasemerchandiseonline.
Inaddition,wemustsuccessfullyrespondtochangingconsumerpreferencesandbuyingtrendsrelatingtoe-commerceusage,includingtheuseofneworimprovedtechnology,creativeuserinterfacesandothere-commercemarketingtoolssuchaspaidsearchandmobileapplications,amongothers,whichmayincreaseourcostsandwhichmaynotsucceedinincreasingsalesorattractingcustomers.Ourcompetitors,someofwhomhavegreaterresourcesthanus,mayalsobeabletobenefitfromchangesine-commercetechnologies,whichcouldharmourcompetitiveposition.Ourfailuretosuccessfullyrespondtotheserisksanduncertaintiesmightadverselyaffectthesalesinoure-commercebusiness,aswellasdamageourreputationandbrands.
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Wecurrentlydependonasingledistributioncenterforallofourstores.
WecurrentlyhandlemerchandisedistributionforallofourstoresfromasinglefacilityinCoppell,Texas,asuburbofDallas,Texas.Weuseindependentthird-partytransportationcompaniesaswellasleasedtruckstodeliverourmerchandisetoourstoresandourcustomers.Anysignificantinterruptionintheoperationofourdistributioncenterorthedomestictransportationinfrastructureduetonaturaldisasters,accidents,inclementweather,systemfailures,workstoppages,slowdownsorstrikesbyemployeesofthetransportationcompanies,orothercausescoulddelayorimpairourabilitytodistributemerchandisetoourstores,whichcouldresultinlowersales,alossofloyaltytoourbrandsandexcessinventoryandwouldhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.Ourbusinessdependsuponthesuccessfuloperationofourdistributioncenter,aswellasourabilitytofulfillordersandtodeliverourmerchandisetoourcustomersinatimelymanner.
Wefacerisksrelatedtoopeningaseconddistributioncenter.
WearecurrentlyintheprocessofopeningaseconddistributioncenterinthenortheasternUnitedStates,whichisexpectedtobeoperatinginlatefiscal2019.Wemaynotaccuratelyanticipateallofthechangingdemandsthatourexpandingoperationswillimposeonourreceivinganddistributionsystem.Wemayalsoexperiencedelaysorincreasedcostsinopeningournewdistributioncenterorintegratingthecenterwithourexistingdistributionoperations.Disruptioninourreceivinganddistributionsystemorincreasedcostsasaresultofopeningaseconddistributioncentercouldhaveamaterialadverseeffectonourreputation,business,financialcondition,andresultsofoperations.
Werelyuponindependentthird-partytransportationprovidersforsubstantiallyallofourproductshipmentsandaresubjecttoincreasedshippingcostsaswellasthepotentialinabilityofourthird-partytransportationproviderstodeliveronatimelybasis.
Werelyuponindependentthird-partytransportationprovidersforsubstantiallyallofourproductshipments,includingshipmentstoandfromallofourstores.Ourutilizationofthesedeliveryservicesforshipmentsissubjecttorisks,includingincreasesinfuelprices,whichwouldincreaseourshippingcosts,andemployeestrikesandinclementweatherwhichmayimpactashippingcompany'sabilitytoprovidedeliveryservicesthatadequatelymeetourshippingneeds.Ourreputationforprovidingahighlevelofcustomerserviceisdependentonsuchthird-partytransportationproviderstotimelydeliverourproductshipments.Ifwechangetheshippingcompaniesweuse,wecouldfacelogisticaldifficultiesthatcouldadverselyaffectdeliveriesandwewouldincurcostsandexpendresourcesinconnectionwithsuchchange.Moreover,wemaynotbeabletoobtaintermsasfavorableasthosereceivedfromindependentthird-partytransportationproviders,whichinturnwouldincreaseourcosts.
Ourbusinessrequiresthatweleasesubstantialamountsofspaceandtherecanbenoassurancethatwewillbeabletocontinuetoleasespaceontermsasfavorableastheleasesnegotiatedinthepast.
WedonotownanyrealestateatourTCSsegment.Instead,weleaseallofourstorelocations,aswellasourcorporateheadquartersanddistributioncenterinCoppell,Texas.Ourstoresareleasedfromthirdpartiesandgenerallyhaveaninitialtermoftentofifteenyears.Manyofourleaseagreementsalsohaveadditionalfive-yearrenewaloptionsandcertainleaseshaveearlycancellationclauses,whichpermittheleasetobeterminatedbyusorthelandlordifcertainsaleslevelsarenotmetinspecificperiodsoriftheshoppingvenuedoesnotmeetspecifiedoccupancystandards.Inadditiontofixedminimumleasepayments,mostofourstoreleasesprovideforadditionalrentalpaymentsbasedonapercentageofsales,or"percentagerent,"ifsalesattherespectivestoresexceedspecifiedlevels,aswellasthepaymentofcommonareamaintenancecharges,realpropertyinsuranceandrealestatetaxes.Manyofourleaseagreementshavedefinedescalatingrentprovisionsovertheinitialtermand
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anyextensions.Increasesinouralreadysubstantialoccupancycostsanddifficultyinidentifyingeconomicallysuitablenewstorelocationscouldhavesignificantnegativeconsequences,whichinclude:
• requiringthatagreaterportionofouravailablecashbeappliedtopayourrentalobligations,thusreducingcashavailableforotherpurposesandreducingouroperatingprofitability;
• increasingourvulnerabilitytogeneraladverseeconomicandindustryconditions;and
• limitingourflexibilityinplanningfor,orreactingtochangesin,ourbusinessorintheindustryinwhichwecompete.
Additionalsitesthatweleasemaybesubjecttolong-termnon-cancelableleasesifweareunabletonegotiateourcurrentstandardleaseterms.Ifanexistingorfuturestoreisnotprofitable,andwedecidetocloseit,wemaynonethelessbecommittedtoperformourobligationsundertheapplicableleaseincluding,amongotherthings,payingthebaserentforthebalanceoftheleaseterm.Moreover,evenifaleasehasanearlycancellationclause,wemaynotsatisfythecontractualrequirementsforearlycancellationunderthatlease.Inaddition,ifwearenotabletoenterintonewleasesorrenewexistingleasesontermsacceptabletous,thiscouldhaveanadverseeffectonourresultsofoperations.
Ifwefailtosuccessfullyanticipateconsumerpreferencesanddemand,ortomanageinventorycommensuratewithdemand,ourresultsofoperationsmaybeadverselyaffected.
Oursuccessdependsinlargepartonourabilitytoidentify,originateanddefinestorageandorganizationproducttrends,aswellastoanticipate,gaugeandreacttochangingconsumerdemandsinatimelymanner.Ourproductsmustappealtoarangeofconsumerswhosepreferencescannotalwaysbepredictedwithcertainty.Wecannotassureyouthatwewillbeabletocontinuetodevelopproductsthatcustomersrespondtopositivelyorthatwewillsuccessfullymeetconsumerdemandsinthefuture.Anyfailureonourparttoanticipate,identifyorrespondeffectivelytoconsumerpreferencesanddemandcouldadverselyaffectsalesofourproducts.Ifthisoccurs,oursalesmaydecline,andwemayberequiredtomarkdowncertainproductstoselltheresultingexcessinventory,whichcouldhaveamaterialadverseeffectonourfinancialconditionandresultsofoperations.
Inaddition,wemustmanageourmerchandiseinstockandinventorylevelstotrackconsumerdemand.Muchofourmerchandiserequiresthatweprovidevendorswithsignificantorderingleadtime,frequentlybeforemarketfactorsareknown.Inaddition,thenatureofourproductsrequiresustocarryasignificantamountofinventorypriortopeaksellingseasons.Ifwearenotabletoanticipateconsumerdemandforourdifferentproductofferings,orsuccessfullymanageinventorylevelsforproductsthatareindemand,wemayexperience:
• backorders,ordercancellationsandlostsalesforproductsthatareinhighdemandforwhichwedidnotstockadequateinventory;and
• overstockinventorylevelsforproductsthathavelowerconsumerdemand,requiringustotakemarkdownsorotherstepstosellslowermovingmerchandise.
Asaresultoftheseandotherfactors,wearevulnerabletodemandandpricingshiftsandtomisjudgmentsintheselectionandtimingofmerchandisepurchases.
Newstoresinnewmarkets,wherewearelessfamiliarwiththetargetcustomerandlesswell-known,mayfacedifferentoradditionalrisksandincreasedcostscomparedtostoresoperatedinexistingmarketsornewstoresinexistingmarkets.Wealsomaynotbeabletoadvertisecost-effectivelyinneworsmallermarketsinwhichwehavelessstoredensity,whichcouldslowsalesgrowthatsuchstores.
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Ourfacilitiesandsystems,aswellasthoseofourvendors,arevulnerabletonaturaldisastersandotherunexpectedevents,andasaresultwemaylosemerchandiseandbeunabletoeffectivelydeliverittoourstoresandonlinecustomers.
Ourretailstores,corporateoffices,distributioncenter,infrastructureprojectsanddirect-to-customeroperations,aswellastheoperationsofourvendorsfromwhichwereceivegoodsandservices,arevulnerabletodamagefromearthquakes,tornadoes,hurricanes,fires,floods,powerlosses,telecommunicationsfailures,hardwareandsoftwarefailures,computervirusesandsimilarevents.Ifanyoftheseeventsresultindamagetoourfacilitiesorsystems,orthoseofourvendors,wemayexperienceinterruptionsinourbusinessuntilthedamageisrepaired,resultinginthepotentiallossofcustomersandrevenues.Inaddition,wemayincurcostsinrepairinganydamagebeyondourapplicableinsurancecoverage.
Materialdamageto,orinterruptionsin,ourinformationsystemsasaresultofexternalfactors,staffingshortagesanddifficultiesinupdatingourexistingsoftwareordevelopingorimplementingnewsoftwarecouldhaveamaterialadverseeffectonourbusinessorresultsofoperations.
Wedependuponourinformationtechnologysystemsintheconductofallaspectsofouroperations.Suchsystemsaresubjecttodamageorinterruptionfrompoweroutages,computerandtelecommunicationsfailures,computerviruses,securitybreaches,fireandnaturaldisasters.Damageorinterruptiontoourinformationsystemsmayrequireasignificantinvestmenttofixorreplacethem,andwemaysufferinterruptionsinouroperationsintheinterim.Inaddition,costsandpotentialproblemsandinterruptionsassociatedwiththeimplementationofneworupgradedsystemsandtechnologyorwithmaintenanceoradequatesupportofexistingsystemscouldalsodisruptorreducetheefficiencyofouroperations.Anymaterialinterruptionsorfailuresinourinformationsystemsmayhaveamaterialadverseeffectonourbusinessorresultsofoperations.
Wealsorelyonourinformationtechnologystaff.Ifwecannotmeetourstaffingneedsinthisarea,wemaynotbeabletofulfillourtechnologyinitiativeswhilecontinuingtoprovidemaintenanceonexistingsystems.
Werelyoncertainsoftwarevendorstomaintainandperiodicallyupgrademanyofthesesystemssothattheycancontinuetosupportourbusiness.Thesoftwareprogramssupportingmanyofoursystemswerelicensedtousbyindependentsoftwaredevelopers.Theinabilityofthesedevelopersorustocontinuetomaintainandupgradetheseinformationsystemsandsoftwareprogramswoulddisruptorreducetheefficiencyofouroperationsifwewereunabletoconverttoalternatesystemsinanefficientandtimelymanner.
Wearevulnerabletovariousrisksanduncertaintiesassociatedwithourwebsites,includingchangesinrequiredtechnologyinterfaces,websitedowntimeandothertechnicalfailures,costsandtechnicalissuesasweupgradeourwebsitesoftware,computerviruses,changesinapplicablefederalandstateregulation,securitybreaches,legalclaimsrelatedtoourwebsiteoperationsande-commercefulfillmentandotherconsumerprivacyconcerns.Ourfailuretosuccessfullyrespondtotheserisksanduncertaintiescouldreducewebsitesalesandhaveamaterialadverseeffectonourbusinessorresultsofoperations.
Werelyuponthirdpartywebserviceproviderstooperatecertainaspectsofourbusinessoperationsandanydisruptionoforinterferencewithsuchoperationswouldmateriallyandadverselyimpactourbusiness.
Thirdpartywebserviceprovidersprovideadistributedcomputinginfrastructureplatformforbusinessoperations,orwhatiscommonlyreferredtoasa"cloud"computingservice.Wehavearchitectedoursoftwareandcomputersystemssoastoutilizedataprocessing,storagecapabilities,andotherservicesprovidedbythesethird-partyproviders.Anydisruptionoforinterferencewithouruseof
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thirdpartyserviceproviderscouldhaveamaterialadverseeffectonourbusiness,financialcondition,andresultsofoperations.
Costsandrisksrelatingtonewstoreopeningscouldseverelylimitourgrowthopportunities.
Ourgrowthstrategydependsonopeningstoresinnewandexistingmarkets.Wemustsuccessfullychoosestoresites,executefavorablerealestatetransactionsontermsthatareacceptabletous,hirecompetentpersonnelandeffectivelyopenandoperatethesenewstores.Ourplanstoincreaseournumberofretailstoreswilldependinpartontheavailabilityofexistingretailstoresorstoresites.Alackofavailablefinancingontermsacceptabletorealestatedevelopersoratighteningcreditmarketmayadverselyaffectthenumberorqualityofretailsitesavailabletous.Wecannotassureyouthatstoresorsiteswillbeavailabletous,orthattheywillbeavailableontermsacceptabletous.Ifadditionalretailstoresitesareunavailableonacceptableterms,wemaynotbeabletocarryoutasignificantpartofourgrowthstrategy.
Ourbusinessdependsinpartonastrongbrandimage.Ifwearenotabletoprotectourbrand,wemaybeunabletoattractasufficientnumberofcustomersorsellsufficientquantitiesofourproducts.
Webelievethatthebrandimagewehavedevelopedhascontributedsignificantlytothesuccessofourbusinesstodate.WealsobelievethatprotectingTheContainerStorebrandisintegraltoourbusinessandtotheimplementationofourstrategiesforexpandingourbusiness.Ourbrandimagemaybediminishedifwedonotcontinuetomakeinvestmentsinareassuchasmarketingandadvertising,aswellastheday-to-dayinvestmentsrequiredforstoreoperations,catalogmailings,onlinesalesandemployeetraining.Ourbrandimagemaybefurtherdiminishedifnewproductsfailtomaintainorenhanceourdistinctivebrandimage.Furthermore,ourreputationcouldbejeopardizedifwefailtomaintainhighstandardsformerchandisequality,ifwefailtomaintainhighethical,socialandenvironmentalstandardsforallofouroperationsandactivities,ifwefailtocomplywithlocallawsandregulationsorifweexperiencenegativepublicityorothernegativeeventsthataffectourimageorreputation,someofwhichmaybebeyondourabilitytocontrol,suchastheeffectsofnegativepublicityregardingourvendors.Anyfailuretomaintainastrongbrandimagecouldhaveanadverseeffectonoursalesandresultsofoperations.
Expansionincreasesthecomplexityofourbusinessandwemaynotbeabletoeffectivelymanageourgrowth,whichmaycauseourbrandimageandfinancialperformancetosuffer.
Ourexpansioninnewandexistingmarketsmaypresentcompetitive,distribution,merchandisingandregulatorychallengesthatdifferfromourcurrentchallenges,includingcompetitionamongourstores,diminishednoveltyofourstoredesignandconcept,addedstrainonourdistributioncenter,additionalinformationtobeprocessedbyourmanagementinformationsystemsanddiversionofmanagementattentionfromoperations,suchasthecontrolofinventorylevelsinourstores.Wealsocannotguaranteethatwewillbeabletoobtainanddistributeadequateproductsuppliestoourstoresormaintainadequatewarehousinganddistributioncapabilityatacceptablecosts.Newstoresalsomayhavelowerthananticipatedsalesvolumesrelativetopreviouslyopenedstoresduringtheircomparableyearsofoperation,andsalesvolumesatnewstoresmaynotbesufficienttoachievestore-levelprofitabilityorprofitabilitycomparabletothatofexistingstores.Totheextentthatwearenotabletomeetthesevariouschallenges,oursalescoulddecrease,ouroperatingcostscouldincreaseandouroperatingprofitabilitycouldbeimpacted.
Ourcostsandfinancialresultsmaychangeasaresultofcurrencyexchangeratefluctuations.
Duringfiscal2017,approximately81%ofourmerchandisewasmanufacturedabroadbasedoncostofmerchandisepurchased.ThepriceschargedbyforeignmanufacturersmaybeaffectedbythefluctuationoftheirlocalcurrencyagainsttheU.S.dollar.Wesourcegoodsfromvariouscountries,
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includingChina,andthuschangesinthevalueoftheU.S.dollarcomparedtoothercurrenciesmayaffectthecostsofgoodsthatwepurchase.
OurlargestexposuretocurrencyexchangeratefluctuationsisbetweentheU.S.dollarandSwedishkrona.TheTCSsegmentpurchasesallproductsfromtheElfasegmentinSwedishkrona.Approximately20%ofourU.S.dollarmerchandisepurchasesintheTCSsegmentinfiscal2017wereoriginallymadeinSwedishkronafromourElfasegment.Additionally,allassetsandliabilitiesofourElfasegmentaretranslatedatyearendratesofexchange,withtheexceptionofcertainassetsandliabilitiesthataretranslatedathistoricalratesofexchange.Revenues,expenses,andcashflowsofourElfasegmentaretranslatedataverageratesofexchangefortheyear.Asaresult,ourfinancialresultsmaybeadverselyaffectedbyfluctuationsintheSwedishkronaascomparedtotheU.S.dollar.BasedontheaverageexchangeratefromSwedishkronatoU.S.dollarduringfiscal2017,andresultsofoperationsinfunctionalcurrency,webelievethata10%increaseordecreaseintheexchangerateoftheSwedishkronawouldincreaseordecreasenetincome(loss)byapproximately$0.3million.
Ourcostsmayincreaseduetofactorsthatmayormaynotbecontrollablebyus,whichmaynegativelyaffectourfinancialresults.
Increasesinourcoststhatarebeyondourcontrol,includingitemssuchasincreasesincommoditypricesforrawmaterialsthataredirectlyorindirectlyrelatedtotheproductionanddistributionofourproducts,suchasthepricesofsteel,oil,resinandpulp,increasesinfuelandtransportationcosts,higherinterestrates,increasesinlossesfromdamagedmerchandise,inflation,fluctuationsinforeigncurrencyrates,highercostsoflabor,labordisputesaroundtheworld,increasesinthecostsofinsuranceandhealthcare,increasesinpostageandmediacosts,highertaxratesandthecostofcompliancewithchangesinlawsandregulations,includingaccountingstandards,maynegativelyimpactourfinancialresults.
Wewillrequiresignificantcapitaltofundourexpandingbusiness,whichmaynotbeavailabletousonsatisfactorytermsoratall.Weplantousecashfromoperationstofundouroperationsandexecuteourgrowthstrategy.Ifweareunabletomaintainsufficientlevelsofcashflow,wemaynotmeetourgrowthexpectationsorwemayrequireadditionalfinancingwhichcouldadverselyaffectourfinancialhealthandimposecovenantsthatlimitourbusinessactivities.
Weplantocontinueourgrowthandexpansion,includingopeningnewstores,remodelingexistingstoresandupgradingourinformationtechnologysystemsandotherinfrastructure,includinganewdistributioncenter,asopportunitiesarise.Ourplanstoexpandourstorebasemaynotbesuccessfulandtheimplementationoftheseotherplansmaynotresultinexpectedincreasesinournetsaleseventhoughtheyincreaseourcosts.Wewillrequiresignificantcapitaltosupportourexpandingbusinessandexecuteonourgrowthstrategy.
Weprimarilydependoncashflowfromoperations,theRevolvingCreditFacility,andthe2014ElfaRevolvingCreditFacility,tofundourbusinessandgrowthplans.Ifourbusinessdoesnotgeneratesufficientcashflowfromoperationstofundtheseactivities,wemayneedadditionalequityordebtfinancing.Ifsuchfinancingisnotavailabletous,orisnotavailableonsatisfactoryterms,ourabilitytooperateandexpandourbusinessorrespondtocompetitivepressureswouldbecurtailedandwemayneedtodelay,limitoreliminateplannedstoreopeningsoroperationsorotherelementsofourgrowthstrategy.Ifweraiseadditionalcapitalbyissuingequitysecuritiesorsecuritiesconvertibleintoequitysecurities,yourownershipwouldbediluted.
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Disruptionsintheglobalfinancialmarketsmaymakeitdifficultforustoborrowasufficientamountofcapitaltofinancethecarryingcostsofinventoryandtopayforcapitalexpendituresandoperatingcosts,whichcouldnegativelyaffectourbusiness.
Disruptionsintheglobalfinancialmarketsandbankingsystemshavemadecreditandcapitalmarketsmoredifficultforcompaniestoaccess,evenforsomecompanieswithestablishedrevolvingorothercreditfacilities.UndertheRevolvingCreditFacility,eachmemberofthesyndicatefortheRevolvingCreditFacilityisresponsibleforprovidingaportionoftheloanstobemadeunderthefacility.FactorsthathavepreviouslyaffectedourborrowingabilityundertheRevolvingCreditFacilityhaveincludedtheborrowingbaseformulalimitations,adjustmentsintheappraisedvalueofourinventoryusedtocalculatetheborrowingbaseandtheavailabilityofeachofthelenderstoadvanceitsportionofrequestedborrowingdrawdownsunderthefacility.If,inconnectionwithadisruptionintheglobalfinancialmarketsorotherwise,anyparticipant,orgroupofparticipants,withasignificantportionofthecommitmentsintheRevolvingCreditFacilityfailstosatisfyitsobligationstoextendcreditunderthefacilityandweareunabletofindareplacementforsuchparticipantorgroupofparticipantsonatimelybasis(ifatall),ourliquidityandourbusinessmaybemateriallyadverselyaffected.
Wearesubjecttorisksassociatedwithourdependenceonforeignimportsforourmerchandise.
Duringfiscal2017,includingpurchasesforElfa,wepurchasedapproximately57%fromvendorslocatedoutsidetheUnitedStates(includingapproximately37%fromvendorslocatedinChina)andapproximately43%ofourmerchandisefromvendorslocatedintheUnitedStates.Inaddition,someofthemerchandisewepurchasefromvendorsintheUnitedStatesalsodepends,inwholeorinpart,onmanufacturerslocatedoutsidetheUnitedStates.Asaresult,ourbusinessdependsonglobaltrade,aswellastradeandcostfactorsthatimpactthespecificcountrieswhereourvendorsarelocated,includingAsia.Ourfuturesuccesswilldependinpartuponourabilitytomaintainourexistingforeignvendorrelationshipsandtodevelopnewones.Whilewerelyonourlong-termrelationshipswithourforeignvendors,wehavenolong-termcontractswiththemandtransactbusinessonanorderbyorderbasis.
Manyofourimportedproductsaresubjecttoexistingduties,tariffsandquotasthatmaylimitthequantityofsometypesofgoodswhichwemayimportintotheUnitedStates.Additionally,thecurrentUnitedStatespresidentialadministrationhasmadestatementsandtakenactionsthatsignalachangeintradepolicybetweentheUnitedStatesandothercountries,includingChina.Becausealargeportionofourmerchandiseissourced,directlyorindirectly,fromoutsidetheUnitedStates,majorchangesintaxpolicyortraderelations,suchasthedisallowanceofincometaxdeductionsforimportedmerchandiseortheimpositionofadditionaltariffsordutiesonimportedproducts,couldadverselyaffectourbusiness,resultsofoperations,effectiveincometaxrate,liquidityandnetincome.Ourdependenceonforeignimportsalsomakesusvulnerabletorisksassociatedwithproductsmanufacturedabroad,including,amongotherthings,risksofdamage,destructionorconfiscationofproductswhileintransittoourdistributioncenterslocatedintheUnitedStates,chargesonorassessmentofadditionalimportduties,tariffsandquotas,lossof"mostfavorednation"tradingstatusbytheUnitedStatesinrelationtoaparticularforeigncountry,workstoppages,includingwithoutlimitationasaresultofeventssuchaslongshoremenstrikes,transportationandotherdelaysinshipments,includingwithoutlimitationasaresultofheightenedsecurityscreeningandinspectionprocessesorotherport-of-entrylimitationsorrestrictionsintheUnitedStates,freightcostincreases,economicuncertainties,includinginflation,foreigngovernmentregulations,traderestrictions,includingtheUnitedStatesretaliatingagainstprotectionistforeigntradepracticesandpoliticalunrest,increasedlaborcostsandothersimilarfactorsthatmightaffecttheoperationsofourmanufacturersinspecificcountriessuchasChina.
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Aninterruptionordelayinsupplyfromourforeignsources,ortheimpositionofadditionalduties,taxesorotherchargesontheseimports,couldhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperationsunlessanduntilalternativesupplyarrangementsaresecured.
Inaddition,thereisariskthatcompliancelapsesbyourmanufacturerscouldoccurwhichcouldleadtoinvestigationsbyU.S.governmentagenciesresponsibleforinternationaltradecompliance.Resultingpenaltiesorenforcementactionscoulddelayfutureimports/exportsorotherwisenegativelyimpactourbusiness.Inaddition,thereremainsariskthatoneormoreofourforeignmanufacturerswillnotadheretoapplicablelegalrequirementsorourglobalcompliancestandardssuchasfairlaborstandards,theprohibitiononchildlaborandotherproductsafetyormanufacturingsafetystandards.Theviolationofapplicablelegalrequirements,includinglabor,manufacturingandsafetylaws,byanyofourmanufacturers,thefailureofanyofourmanufacturerstoadheretoourglobalcompliancestandardsorthedivergenceofthelaborpracticesfollowedbyanyofourmanufacturersfromthosegenerallyacceptedintheUnitedStates,coulddisruptoursupplyofproductsfromourmanufacturersortheshipmentofproductstous,resultinpotentialliabilitytousandharmourreputationandbrand,anyofwhichcouldnegativelyaffectourbusinessandoperatingresults.
Ourabilitytoobtainmerchandiseonatimelybasisatcompetitivepricescouldsufferasaresultofanydeteriorationorchangeinourvendorrelationshipsoreventsthatadverselyaffectourvendorsortheirabilitytoobtainfinancingfortheiroperations.
Webelieveourvendorrelationshipsarecriticaltooursuccess.Wedonothavelong-termcontractswithanyofourvendorsandwegenerallytransactbusinessonanorder-by-orderbasis,operatingwithoutanycontractualassurancesofcontinuedsupply,pricingoraccesstonewproducts.Anyofourvendorscoulddiscontinuesupplyinguswithdesiredproductsinsufficientquantitiesforavarietyofreasons.
Thebenefitswecurrentlyexperiencefromourvendorrelationshipscouldbeadverselyaffectedifourvendors:
• discontinuesellingmerchandisetous;
• enterintoexclusivityarrangementswithourcompetitors;
• sellsimilarmerchandisetoourcompetitorswithsimilarorbetterpricing,manyofwhomalreadypurchasemerchandiseinsignificantlygreatervolumeand,insomecases,atlowerpricesthanwedo;
• raisethepricestheychargeus;
• changepricingtermstorequireustopayondeliveryorupfront,includingasaresultofchangesinthecreditrelationshipssomeofourvendorshavewiththeirvariouslendinginstitutions;
• lengthentheirleadtimes;or
• initiateorexpandsalesofstorageandorganizationproductstoretailcustomersdirectlythroughtheirownstores,catalogsorontheinternetandcompetewithusdirectly.
Wehistoricallyhaveestablishedexcellentworkingrelationshipswithmanysmall-tomid-sizevendorsthatgenerallyhavemorelimitedresources,productioncapacitiesandoperatinghistories.Marketandeconomiceventsthatadverselyimpactourvendorscouldimpairourabilitytoobtainmerchandiseinsufficientquantities.Sucheventsincludedifficultiesorproblemsassociatedwithourvendors'business,finances,labor,abilitytoexportorimport,asthecasemaybe,merchandise,costs,production,insuranceandreputation.Therecanbenoassurancethatwewillbeabletoacquiredesiredmerchandiseinsufficientquantitiesonacceptabletermsoratallinthefuture,especiallyifweneedsignificantlygreateramountsofinventoryinconnectionwiththegrowthofourbusiness.Wemay
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needtodevelopnewrelationshipswithlargervendors,asourcurrentvendorsmaybeunabletosupplyuswithneededquantitiesandwemaynotbeabletofindsimilarmerchandiseonthesametermsfromlargervendors.Ifweareunabletoacquiresuitablemerchandiseinsufficientquantities,atacceptablepriceswithadequatedeliverytimesduetothelossoforadeteriorationorchangeinourrelationshipwithoneormoreofourkeyvendorsoreventsharmfultoourvendorsoccur,itmayadverselyaffectourbusinessandresultsofoperations.
Thereisariskthatourvendorsmaysellsimilaroridenticalproductstoourcompetitors,whichcouldharmourbusiness.
AlthoughmanyofourproductsaresoldbyourvendorsonlytoTheContainerStore,productsrelatedtothemajorityofournon-elfa®salesarenotsoldtousonanexclusivebasis.Ofthenon-elfa®productsthatwepurchaseonanexclusivebasis,noneoftheseproductsaresoldpursuanttoagreementswithexclusivityprovisions.Asaresult,mostofourvendorshavenoobligationtorefrainfromsellingsimilaroridenticalproductstoourcompetitors,someofwhompurchaseproductsinsignificantlygreatervolume,orenteringintoexclusivearrangementswithotherretailersthatcouldlimitouraccesstotheirproducts.OurvendorscouldalsoinitiateorexpandsalesoftheirproductsthroughtheirownstoresorthroughtheInternettotheretailmarketandthereforecompetewithusdirectlyorselltheirproductsthroughoutletcentersordiscountstores,increasingthecompetitivepricingpressureweface.
Wedependonkeyexecutivemanagement.
Wedependontheleadershipandexperienceofourkeyexecutivemanagement,includingMelissaReiff,SharonTindell,andJodiTaylor.Thelossoftheservicesofanyofourexecutivemanagementmemberscouldhaveamaterialadverseeffectonourbusinessandprospects.Asthereisahighlevelofcompetitionforexperienced,successfulpersonnelintheretailindustry,wemaynotbeabletofindsuitableindividualstoreplacesuchpersonnelonatimelybasisorwithoutincurringincreasedcosts,oratall.Wedonotmaintainkey-manlifeinsurancepoliciesonanyofourexecutiveofficers.Webelievethatourfuturesuccesswilldependonourcontinuedabilitytoattractandretainhighlyskilledandqualifiedpersonnel.Ourinabilitytomeetourstaffingrequirementsinthefuturecouldimpairourgrowthandharmourbusiness.
Ifweareunabletofind,trainandretainkeypersonnel,includingnewemployeesthatreflectourbrandimageandembodyourculture,wemaynotbeabletogroworsustainouroperations.
Oursuccessdependsinpartuponourabilitytoattract,motivateandretainasufficientnumberofstoreemployees,includinggeneralmanagersandstoremanagers,whounderstandandappreciateourcustomers,products,brandandcorporateculture,andareabletoadequatelyandeffectivelyrepresentourcultureandestablishcredibilitywithourcustomers.Ourplannedgrowthwillrequireustohireandtrainevenmorepersonneltomanagesuchgrowth.Ifweareunabletohireandretainpersonnelcapableofconsistentlyprovidingahighlevelofcustomerservice,asdemonstratedbytheirenthusiasmforourculture,understandingofourcustomersandknowledgeofthemerchandiseweoffer,ourabilitytoopennewstoresmaybeimpaired,theperformanceofourexistingandnewstorescouldbemateriallyadverselyaffectedandourbrandimagemaybenegativelyimpacted.Thereisahighlevelofcompetitionforexperienced,qualifiedpersonnelintheretailindustryandwecompeteforpersonnelwithavarietyofcompanieslookingtohireforretailpositions.Ourgrowthplanscouldstrainourabilitytostaffournewstores,particularlyatthestoremanagerlevel,whichcouldhaveanadverseeffectonourabilitytomaintainacohesiveandconsistentlystrongteam,whichinturncouldhaveanadverseimpactonourbusiness.Ifweareunabletoattract,trainandretainemployeesinthefuture,wemaynotbeabletoserveourcustomerseffectively,thusreducingourabilitytocontinueourgrowthandtooperateourexistingstoresasprofitablyaswehaveinthepast.
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Laboractivitiescouldcauselaborrelationsdifficultiesforus.
NoneofourU.S.-basedemployeesiscurrentlysubjecttoacollectivebargainingagreement.Aswecontinuetogrowandenterdifferentregions,unionsmayattempttoorganizeallorpartofouremployeebaseatcertainstoresorwithincertainregions.Respondingtosuchorganizationattemptsmaydistractmanagementandemployeesandmayhaveanegativefinancialimpactonindividualstores,oronourbusinessasawhole.
AsofMarch31,2018,approximately62%ofElfa'semployees(approximately7%ofourtotalemployees)werecoveredbycollectivebargainingagreements.Adisputewithaunionoremployeesrepresentedbyaunion,includingafailuretoextendorrenewourcollectivebargainingagreements,couldresultinproductioninterruptionscausedbyworkstoppages.Ifastrikeorworkstoppageweretooccur,ourresultsofoperationscouldbeadverselyaffected.
Becauseofourinternationaloperations,wecouldbeadverselyaffectedbyviolationsoftheU.S.ForeignCorruptPracticesActandsimilarworldwideanti-briberyandanti-kickbacklaws.
WesourceasignificantportionofourproductsfromoutsidetheUnitedStates.TheU.S.ForeignCorruptPracticesAct,andothersimilaranti-briberyandanti-kickbacklawsandregulationsgenerallyprohibitcompaniesandtheirintermediariesfrommakingimproperpaymentstonon-U.S.officialsforthepurposeofobtainingorretainingbusiness.Whileourvendorcomplianceagreementsmandatecompliancewithapplicablelaw,wecannotassureyouthatwewillbesuccessfulinpreventingouremployeesorotheragentsfromtakingactionsinviolationoftheselawsorregulations.Suchviolations,orallegationsofsuchviolations,coulddisruptourbusinessandresultinamaterialadverseeffectonourfinancialcondition,resultsofoperationsandcashflows.
Ourfixedleaseobligationscouldadverselyaffectourfinancialperformance.
Ourfixedleaseobligationswillrequireustouseasignificantportionofcashgeneratedbyouroperationstosatisfytheseobligations,andcouldadverselyimpactourabilitytoobtainfuturefinancingtosupportourgrowthorotheroperationalinvestments.Wewillrequiresubstantialcashflowsfromoperationstomakeourpaymentsunderouroperatingleases,manyofwhichprovideforperiodicincreasesinrent.Ifwearenotabletomaketherequiredpaymentsundertheleases,thelendersorownersofthestoresmay,amongotherthings,repossessthoseassets,whichcouldadverselyaffectourabilitytoconductouroperations.Inaddition,ourfailuretomakepaymentsunderouroperatingleasescouldtriggerdefaultsunderotherleasesorunderagreementsgoverningourindebtedness,whichcouldcausethecounterpartiesunderthoseagreementstoacceleratetheobligationsduethereunder.
Thereareclaimsmadeagainstusfromtimetotimethatmayresultinlitigationthatcoulddistractmanagementfromourbusinessactivitiesandresultinsignificantliabilityordamagetoourbrand.
Fromtimetotimeweareinvolvedinlitigation,claimsandotherproceedingsrelatingtotheconductofourbusiness,includingbutnotlimitedtoconsumerprotectionclassactionlitigation,claimsrelatedtoourbusiness,oremploymentpracticesandclaimsofintellectualpropertyinfringement.Inaddition,fromtimetotime,wearesubjecttoproductliabilityandpersonalinjuryclaimsfortheproductsthatwesellandthestoresweoperate.Ourpurchaseordersgenerallyrequirethevendortoindemnifyusagainstanyproductliabilityclaims;however,ifthevendordoesnothaveinsuranceorbecomesinsolvent,wemaynotbeindemnified.Inaddition,wecouldfaceawidevarietyofemployeeclaimsagainstus,includinggeneraldiscrimination,privacy,laborandemployment,EmployeeRetirementIncomeSecurityActof1974,asamended,anddisabilityclaims.Anyclaimscouldalsoresultinlitigationagainstusandcouldalsoresultinregulatoryproceedingsbeingbroughtagainstusbyvariousfederalandstateagenciesthatregulateourbusiness,includingtheU.S.EqualEmploymentOpportunityCommission.Oftenthesecasesraisecomplexfactualandlegalissues,whicharesubjectto
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risksanduncertaintiesandwhichcouldrequiresignificantmanagementtime.Litigationandotherclaimsandregulatoryproceedingsagainstuscouldresultinunexpectedexpensesandliabilityandcouldalsomateriallyadverselyaffectouroperationsandourreputation.
Productrecallsand/orproductliability,aswellaschangesinproductsafetyandotherconsumerprotectionlaws,mayadverselyimpactouroperations,merchandiseofferings,reputation,resultsofoperations,cashflowandfinancialcondition.
Wearesubjecttoregulationsbyavarietyoffederal,stateandinternationalregulatoryauthorities,includingtheConsumerProductSafetyCommission.Duringfiscal2017,wepurchasedmerchandisefromapproximately800vendors.Ifourvendorsfailtomanufactureorimportmerchandisethatadherestoproductsafetyrequirementsorourqualitycontrolstandards,ourreputationandbrandscouldbedamaged,potentiallyleadingtoincreasesincustomerlitigationagainstus.Itispossiblethatoneormoreofourvendorsmightnotadheretoproductsafetyrequirementsorourqualitycontrolstandards,andwemightnotidentifythedeficiencybeforemerchandiseissold.Anyissuesofproductsafetycouldcauseustorecallsomeofthoseproducts.Ifourvendorsareunableorunwillingtorecallproductsfailingtomeetproductsafetyrequirementsorourqualitystandards,wemayberequiredtorecallthoseproductsatasubstantialcosttous.Furthermore,totheextentweareunabletoreplaceanyrecalledproducts,wemayhavetoreduceourmerchandiseofferings,resultinginadecreaseinsales,especiallyifarecalloccursnearaseasonalperiod.
Moreover,changesinproductsafetyorotherconsumerprotectionlawscouldleadtoincreasedcoststousforcertainmerchandise,oradditionallaborcostsassociatedwithreadyingmerchandiseforsale.Longleadtimesonmerchandiseorderingcyclesincreasethedifficultyforustoplanandprepareforpotentialchangestoapplicablelaws.Inparticular,TheConsumerProductSafetyImprovementActof2008imposessignificantrequirementsonmanufacturing,importing,testingandlabelingrequirementsforsomeofourproducts.Intheeventthatweareunabletotimelycomplywithregulatorychanges,significantfinesorpenaltiescouldresult,andcouldadverselyaffectourreputation,resultsofoperations,cashflowandfinancialcondition.
Changesinstatutory,regulatory,accounting,andotherlegalrequirementscouldpotentiallyimpactouroperatingandfinancialresults.
Wearesubjecttonumerousstatutory,regulatoryandlegalrequirements,domesticallyandabroad.Ouroperatingresultscouldbenegativelyimpactedbydevelopmentsintheseareasduetothecostsofcomplianceinadditiontopossiblegovernmentpenaltiesandlitigationintheeventofdeemednoncompliance.Changesintheregulatoryenvironmentintheareaofproductsafety,environmentalprotection,privacyandinformationsecurity,wageandhourlaws,amongothers,couldpotentiallyimpactouroperationsandfinancialresults.
WeleaseallofourpropertiesattheTCSsegmentandthegroupheadquartersandsalesofficesattheElfasegment,andeachisclassifiedasanoperatinglease.InFebruary2016,theFinancialAccountingStandardsBoard("FASB")issuedAccountingStandardsUpdate("ASU")2016-02,Leases (Topic 842) ,toreviseleaseaccountingguidance.Theupdaterequiresmostleasestoberecordedonthebalancesheetasaleaseliability,withacorrespondingright-of-useasset,whereastheseleasescurrentlyhaveanoff-balancesheetclassification.ASU2016-02willbeeffectivefortheCompanyinthefirstquarteroffiscal2019.Wearestillevaluatingtheimpactofimplementationofthisstandardonourfinancialstatements,butweexpectthatadoptionwillhaveamaterialimpacttoourtotalassetsandliabilitiesgiventhatwehaveasignificantnumberofoperatingleasesnotcurrentlyrecognizedonourbalancesheet.
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Ourtotalassetsincludeintangibleassetswithanindefinitelife,goodwillandtrademarks,andsubstantialamountsofpropertyandequipment.Changesinestimatesorprojectionsusedtoassessthefairvalueoftheseassets,oroperatingresultsthatarelowerthanourcurrentestimatesatcertainstorelocations,maycauseustoincurimpairmentchargesthatcouldadverselyaffectourresultsofoperation.
Ourtotalassetsincludeintangibleassetswithanindefinitelife,goodwillandtrademarks,andsubstantialamountsofpropertyandequipment.Wemakecertainestimatesandprojectionsinconnectionwithimpairmentanalysesfortheselong-livedassets,inaccordancewithFASBAccountingStandardsCodification("ASC")360,"Property,PlantandEquipment"("ASC360"),andASC350,"Intangibles—GoodwillandOther"("ASC350").WealsoreviewthecarryingvalueoftheseassetsforimpairmentonanannualbasisandwhenevereventsorchangesincircumstancesindicatethatthecarryingvalueoftheassetmaynotberecoverableinaccordancewithASC360orASC350.Wewillrecordanimpairmentlosswhenthecarryingvalueoftheunderlyingasset,assetgrouporreportingunitexceedsitsfairvalue.Thesecalculationsrequireustomakeanumberofestimatesandprojectionsoffutureresults.Iftheseestimatesorprojectionschange,wemayberequiredtorecordadditionalimpairmentchargesoncertainoftheseassets.Iftheseimpairmentchargesaresignificant,ourresultsofoperationswouldbeadverselyaffected.
Fluctuationsinourtaxobligationsandeffectivetaxrateandrealizationofourdeferredtaxassets,includingnetoperatinglosscarryforwards,mayresultinvolatilityofouroperatingresults.
WearesubjecttoincometaxesinvariousU.S.andcertainforeignjurisdictions.Werecordtaxexpensebasedonourestimatesoffuturepayments,whichmayincludereservesforuncertaintaxpositionsinmultipletaxjurisdictions,andvaluationallowancesrelatedtocertainnetdeferredtaxassets,includingnetoperatinglosscarryforwards.Atanyonetime,manytaxyearsaresubjecttoauditbyvarioustaxingjurisdictions.Theresultsoftheseauditsandnegotiationswithtaxingauthoritiesmayaffecttheultimatesettlementoftheseissues.Weexpectthatthroughouttheyeartherecouldbeongoingvariabilityinourquarterlytaxratesaseventsoccurandexposuresareevaluated.
Inaddition,oureffectivetaxrateinagivenfinancialstatementperiodmaybemateriallyimpactedbyavarietyoffactorsincludingbutnotlimitedtochangesinthemixandlevelofearnings,varyingtaxratesinthedifferentjurisdictionsinwhichweoperate,fluctuationsinthevaluationallowance,timingoftheutilizationofnetoperatinglosscarryforwards,orbychangestoexistingaccountingrulesorregulations.Further,taxlegislationmaybeenactedinthefuturewhichcouldnegativelyimpactourcurrentorfuturetaxstructureandeffectivetaxrates.
RecentlyenactedchangestoU.S.taxlawsmayhaveamaterialimpactonourbusinessinthefuture
TheTaxCutsandJobsAct(the"TaxAct")wassignedintolawonDecember22,2017.TheTaxActmadenumerouschangestofederalcorporatetaxlaw,includingapermanentreductiontothefederalcorporateincometaxrate,changesinthedeductibilityofinterestoncorporatedebtobligations,accelerationofdepreciationforcertainassets,andlimitationsonthedeductibilityofcertainexecutivecompensationarrangements,amongothers,thatweexpectintheaggregatewillreduceoureffectivetaxrateinfutureperiods.Additionally,theTaxActimplementedaone-timetransitiontaxonaccumulatedforeignearningsthatwerenotpreviouslysubjectU.S.federalincometax.
Ourfiscal2017effectiveincometaxratereflectsasignificantbenefitprimarilyduetotheprovisionalremeasurementofourdeferredtaxbalancesandincludesaprovisionalamountfortheone-timetransitiontaxonforeignearnings.Changestothetaxationofundistributedforeignearningscouldalsoaffectourfutureintentionsregardingreinvestmentofsuchearnings.Inaddition,anyfuturelimitationsontaxdeductionsforinterestpaidonoutstandingindebtednessorexecutivecompensationarrangementsasaresultoftheTaxActcouldhaveamaterialadverseeffectonourresultsofoperationsandliquidity.
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TheprovisionalimpactoftheTaxActisbasedonmanagement'scurrentknowledgeandassumptions,andfinalrecognizedimpactsonourfinancialresultscouldbemateriallydifferentfromcurrentestimates.Aswecollectandpreparethenecessarydata,andfurtheranalyzetheTaxActandanyadditionalguidanceissuedbytheU.S.TreasuryDepartment,theIRS,andotherstandard-settingbodies,wemaymakeadjustmentstotheprovisionalamountsinfutureperiods.Thoseadjustmentsmaymateriallyimpactourprovisionforincometaxesandeffectivetaxrateintheperiodinwhichtheadjustmentsaremadeandcouldimpactourresultsofoperations,consolidatedcashflowsandliquidity.
Ouroperatingresultsaresubjecttoquarterlyandseasonalfluctuations,andresultsforanyquartermaynotnecessarilybeindicativeoftheresultsthatmaybeachievedforthefullfiscalyear.
Ourquarterlyresultshavefluctuatedinthepastandmayfluctuatesignificantlyinthefuture,dependinguponavarietyoffactors,includingourproductofferings,promotionalevents,storeopenings,theweather,remodelingorrelocations,shiftsinthetimingofholidays,timingofcatalogreleasesorsales,timingofdeliveryoforders,competitivefactorsandgeneraleconomicconditions,amongotherthings,andmayfluctuatesignificantlyinthefuture.Asaresultofthesefactors,thedemandsonourproductdistributionanddeliverynetworkmayfluctuateduringthefiscalyear.Accordingly,ourresultsofoperationsmayfluctuateonaseasonalandquarterlybasisandrelativetocorrespondingperiodsinprioryears.Wehistoricallyhaverealizedahigherportionofnetsales,operatingincomeandcashflowsfromoperationsinthefourthfiscalquarter,attributableprimarilytotheimpactofOurAnnualelfa®Sale,whichtraditionallystartsonoraboutDecember24thandrunsintoFebruary.Infact,overhalfofouradjustednetincomewasderivedinthefiscalfourthquarterinfiscalyears2017,2016,and2015.Inaddition,wemaytakecertainpricingormarketingactionsthatcouldhaveadisproportionateeffectonourbusiness,financialconditionandresultsofoperationsinaparticularquarterorsellingseason.Theseinitiativesmaydisproportionatelyimpactresultsinaparticularquarterandwebelievethatcomparisonsofouroperatingresultsfromperiodtoperiodarenotnecessarilymeaningfulandcannotberelieduponasindicatorsoffutureperformance.
MaterialdisruptionsatoneofourElfamanufacturingfacilitiescouldnegativelyaffectourbusiness.
Elfaoperatesthreemanufacturingfacilities:twoinSwedenandoneinPoland.AmaterialoperationaldisruptioninoneofourElfamanufacturingfacilitiescouldoccurasaresultofanynumberofeventsincluding,butnotlimitedto,majorequipmentfailures,laborstoppages,transportationfailuresaffectingthesupplyandshipmentofmaterialsandfinishedgoods,severeweatherconditionsanddisruptionsinutilityservices.Suchadisruptioncouldnegativelyimpactproduction,customerdeliveriesandfinancialresults.
Ourfailureorinabilitytoprotectourintellectualpropertyrightscoulddiminishthevalueofourbrandandweakenourcompetitiveposition.
Weattempttoprotectourintellectualpropertyrights,bothintheUnitedStatesandinforeigncountries,throughacombinationofcopyright,patent,trademark,tradesecret,tradedressandunfaircompetitionlaws,aswellasconfidentialityprocedures,andassignmentandlicensingarrangements.Ourfailuretoobtainormaintainadequateprotectionofourintellectualpropertyrightsforanyreasoncouldhaveamaterialadverseeffectonourbusiness,resultsofoperationsandfinancialcondition.Further,wecannotassureyouthatcompetitorsorotherthirdpartieswillnotinfringeourintellectualpropertyrights,orthatwewillhaveadequateresourcestoenforceourintellectualpropertyrights.
Inaddition,intellectualpropertyprotectionmaybeunavailableorlimitedinsomeforeigncountrieswherelawsorlawenforcementpracticesmaynotprotectourintellectualpropertyrightsasfullyasintheUnitedStates,anditmaybemoredifficultforustosuccessfullychallengetheuseofourintellectualpropertyrightsbyotherpartiesinsuchcountriesandourcompetitivepositionmaysuffer.
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Ifthirdpartiesclaimthatweinfringeupontheirintellectualpropertyrights,ouroperatingresultscouldbeadverselyaffected.
Wefacetheriskofclaimsthatwehaveinfringedthirdparties'intellectualpropertyrights.Anyclaimsofintellectualpropertyinfringement,eventhosewithoutmerit,could(i)beexpensiveandtimeconsumingtodefend;(ii)causeustoceasemaking,licensingorusingproductsormethodsthatallegedlyinfringe;(iii)requireustoredesign,reengineer,orrebrandourproductsorpackaging,iffeasible;(iv)divertmanagement'sattentionandresources;or(v)requireustoenterintoroyaltyorlicensingagreementsinordertoobtaintherighttouseathirdparty'sintellectualproperty.Anyroyaltyorlicensingagreements,ifrequired,maynotbeavailabletousonacceptabletermsoratall.Asuccessfulclaimofinfringementagainstuscouldresultinourbeingrequiredtopaysignificantdamages,enterintocostlylicenseorroyaltyagreements,orstopthesaleofcertainproducts,anyofwhichcouldhaveanegativeimpactonouroperatingresultsandharmourfutureprospects.
Risksrelatedtoourorganizationandownershipofourcommonstock
Ourcommonstockpricemaybevolatileormaydecline.
Themarketpriceforourcommonstockhasbeenandmaybevolatile.Asaretailer,ourresultsaresignificantlyaffectedbyvariousfactorswhichcansignificantlyaffectourstockprice,manyofwhichareoutsideofourcontrol,includingthefollowing:
• quarterlyvariationsinouroperatingresultscomparedtomarketexpectations;
• changesinpreferencesofourcustomersandbuyingtrends,andourabilitytorespondtosuchpreferencesandtrends;
• announcementsofnewproductsorsignificantpricereductionsbyusorourcompetitors;
• sizeofthepublicfloat;
• stockpriceperformanceofourcompetitors;
• defaultonourindebtedness;
• actionsbycompetitorsorothershoppingcentertenants;
• changesinseniormanagementorkeypersonnel;
• changesinfinancialestimatesbysecuritiesanalysts;
• negativeearningsorotherannouncementsbyusorotherretailhomegoodscompanies;
• downgradesinourcreditratingsorthecreditratingsofourcompetitors;
• weatherconditions,particularlyduringtheholidayseasonandourAnnualelfa®Sale;
• naturaldisastersorothersimilarevents;
• issuancesorexpectedissuancesofcapitalstock;and
• globaleconomic,legalandregulatoryfactorsunrelatedtoourperformance.
Inaddition,stockmarketshaveexperiencedextremepriceandvolumefluctuationsthathaveaffectedandcontinuetoaffectthemarketpricesofequitysecuritiesofmanyretailcompanies.Inthepast,shareholdershaveinstitutedsecuritiesclassactionlitigationfollowingperiodsofmarketvolatility.Ifwewereinvolvedinsecuritieslitigation,wecouldincursubstantialcostsandourresourcesandtheattentionofmanagementcouldbedivertedfromourbusiness.
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WearecontrolledbyinvestmentfundsmanagedbyLeonardGreenandPartners,L.P.("LGP"),whoseinterestsinourbusinessmaybedifferentfromyours.
LGPownsapproximately27.5millionshares,or56.9%,ofouroutstandingcommonstock.LGPwill,fortheforeseeablefuture,havesignificantinfluenceoverourreportingandcorporatemanagementandaffairs,andwillbeabletocontrolvirtuallyallmattersrequiringshareholderapproval.LGPisableto,subjecttoapplicablelaw,designateamajorityofthemembersofourboardofdirectorsandcontrolactionstobetakenbyusandourboardofdirectors,includingamendmentstoourcertificateofincorporationandbylawsandapprovalofsignificantcorporatetransactions,includingmergersandsalesofsubstantiallyallofourassets.Thedirectorssoelectedwillhavetheauthority,subjecttothetermsofourindebtednessandourrulesandregulations,toissueadditionalstock,implementstockrepurchaseprograms,declaredividendsandmakeotherdecisions.ItispossiblethattheinterestsofLGPmayinsomecircumstancesconflictwithourinterestsandtheinterestsofourothershareholders,includingyou.
Wearea"controlledcompany"withinthemeaningoftheNewYorkStockExchangelistingrequirementsandasaresult,qualifyforandintendtorelyonexemptionsfromcertaincorporategovernancerequirements.Youdonothavethesameprotectionaffordedtoshareholdersofcompaniesthataresubjecttosuchcorporategovernancerequirements.
BecauseoftheaggregatevotingpoweroverourCompanyheldbycertainaffiliatesofLGP,weareconsidereda"controlledcompany"forthepurposesoftheNewYorkStockExchangelistingrequirements.Assuch,weareexemptfromthecorporategovernancerequirementsthatourboardofdirectors,ourcultureandcompensationcommitteeandournominatingandcorporategovernancecommitteemeetthestandardofindependenceestablishedbythosecorporategovernancerequirements.Theindependencestandardsareintendedtoensurethatdirectorswhomeetthosestandardsarefreeofanyconflictinginterestthatcouldinfluencetheiractionsasdirectors.
Weintendtocontinuetoutilizetheseexemptionsaffordedtoa"controlledcompany"inthefuture.Accordingly,youdonothavethesameprotectionsaffordedtoshareholdersofcompaniesthataresubjecttoallofthecorporategovernancerequirementsoftheNewYorkStockExchange.
Substantialfuturesalesofourcommonstock,ortheperceptioninthepublicmarketsthatthesesalesmayoccur,maydepressourstockprice.
Salesofsubstantialamountsofourcommonstockinthepublicmarket,ortheperceptionthatthesesalescouldoccur,couldadverselyaffectthepriceofourcommonstockandcouldimpairourabilitytoraisecapitalthroughthesaleofadditionalshares.AlloutstandingsharesofourcommonstockarefreelytradablewithoutrestrictionundertheSecuritiesActof1933(the"SecuritiesAct"),exceptforanysharesofourcommonstockthatmaybeheldoracquiredbyourdirectors,executiveofficersandotheraffiliates,asthattermisdefinedintheSecuritiesAct,whicharesubjecttorestrictionsundertheSecuritiesAct.Certainexistingholdersofamajorityofourcommonstockhaverights,subjecttocertainconditions,torequireustofileregistrationstatementscoveringtheirsharesortoincludetheirsharesinregistrationstatementsthatwemayfileforourselvesorothershareholders.Iftheofferandsaleofthesesharesareregistered,theywillbefreelytradablewithoutrestrictionundertheSecuritiesAct.Intheeventsuchregistrationrightsareexercisedandalargenumberofsharesofcommonstockaresoldinthepublicmarket,suchsalescouldreducethetradingpriceofourcommonstock.
Inthefuture,wemayalsoissueoursecuritiesifweneedtoraisecapitalinconnectionwithacapitalraiseoracquisitions.Theamountofsharesofourcommonstockissuedinconnectionwithacapitalraiseoracquisitioncouldconstituteamaterialportionofourthen-outstandingsharesofourcommonstock.
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Wedonotcurrentlyexpecttopayanycashdividends.
Thecontinuedoperationandexpansionofourbusinesswillrequiresubstantialfunding.Accordingly,wedonotcurrentlyexpecttopayanycashdividendsonsharesofourcommonstock.Anydeterminationtopaydividendsinthefuturewillbeatthediscretionofourboardofdirectorsandwilldependuponresultsofoperations,financialcondition,contractualrestrictions,restrictionsimposedbyapplicablelawandotherfactorsourboardofdirectorsdeemsrelevant.Additionally,theobligorsundertheSeniorSecuredTermLoanFacility,theRevolvingCreditFacilityandthe2014ElfaSeniorSecuredCreditFacilitiesarecurrentlyrestrictedfrompayingcashdividends,andweexpecttheserestrictionstocontinueinthefuture.
FailuretomaintaineffectiveinternalcontrolsinaccordancewithSection404oftheSarbanes-OxleyActcouldhaveamaterialadverseeffectonourbusinessandstockprice.
WearerequiredtocomplywiththerulesoftheSECimplementingSection404oftheSarbanes-OxleyActandourmanagementisthereforerequiredtoprovideanannualreportontheeffectivenessofourinternalcontroloverfinancialreportingforthatpurpose.Asanemerginggrowthcompany,ourindependentregisteredpublicaccountingfirmwillnotberequiredtoformallyattesttotheeffectivenessofourinternalcontroloverfinancialreportingpursuanttoSection404untilthedatewearenolongeranemerginggrowthcompany.Atsuchtime,ourindependentregisteredpublicaccountingfirmmayissueareportthatisadverseintheeventitisnotsatisfiedwiththelevelatwhichourcontrolsaredocumented,designedoroperating.
TocomplywiththerequirementsofSection404,wehavetakenandmayneedtotakevariousactions,suchasimplementingnewinternalcontrolsandproceduresandhiringadditionalaccountingorinternalauditstaff.Testingandmaintaininginternalcontrolcandivertourmanagement'sattentionfromothermattersthatareimportanttotheoperationofourbusiness.Inaddition,whenevaluatingourinternalcontroloverfinancialreporting,wemayidentifymaterialweaknessesthatwemaynotbeabletoremediateintimetomeettheapplicabledeadlineimposeduponusforcompliancewiththerequirementsofSection404.IfweidentifyamaterialweaknessinourinternalcontroloverfinancialreportingorareunabletocomplywiththerequirementsofSection404inatimelymannerorassertthatourinternalcontroloverfinancialreportingiseffective,orifourindependentregisteredpublicaccountingfirmisunabletoexpressanopinionastotheeffectivenessofourinternalcontroloverfinancialreporting,investorsmayloseconfidenceintheaccuracyandcompletenessofourfinancialreportsandthemarketpriceofourcommonstockcouldbenegativelyaffected,andwecouldbecomesubjecttoinvestigationsbytheNewYorkStockExchange,theSECorotherregulatoryauthorities,whichcouldrequireadditionalfinancialandmanagementresources.
Weincurcostsasapubliccompanyandourmanagementisrequiredtodevotesubstantialtimetocompliancematters.
Asapubliccompany,weincursignificantlegal,accounting,insuranceandotherexpenses,includingcostsresultingfrompubliccompanyreportingobligationsundertheExchangeActandrulesandregulationsregardingcorporategovernancepractices,includingthoseundertheSarbanes-OxleyAct,theDodd-FrankAct,andthelistingrequirementsoftheNewYorkStockExchange.Ourmanagementandotherpersonneldevoteasubstantialamountoftimetoensurethatwecomplywithallofthesereportingrequirements,rules,andregulations,andsuchrequirements,rulesandregulationsincreaseourlegalandfinancialcompliancecostsandmakecertainactivitiesmoretime-consumingandcostly.Inaddition,theselaws,rulesandregulationsalsomakeitmoredifficultandmoreexpensiveforustoobtaincertaintypesofinsurance,includingdirectorandofficerliabilityinsurance,andwemayberequiredtoacceptreducedpolicylimitsandcoverageorincursubstantiallyhighercoststoobtainthesameorsimilarcoverage.Thesefactorscouldalsomakeitmoredifficultforustoattractandretainqualifiedpersonstoserveonourboardofdirectors,ourboardcommitteesorasourexecutiveofficers.
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Furthermore,ifweareunabletosatisfyourobligationsasapubliccompany,wecouldbesubjecttodelistingofourcommonstock,fines,sanctionsandotherregulatoryactionandpotentiallycivillitigation.
Ouranti-takeoverprovisionscouldpreventordelayachangeincontrolofourCompany,evenifsuchchangeincontrolwouldbebeneficialtoourshareholders.
ProvisionsofouramendedandrestatedcertificateofincorporationandamendedandrestatedbylawsaswellasprovisionsofDelawarelawcoulddiscourage,delayorpreventamerger,acquisitionorotherchangeincontrolofourCompany,evenifsuchchangeincontrolwouldbebeneficialtoourshareholders.Theseinclude:
• authorizingtheissuanceof"blankcheck"preferredstockthatcouldbeissuedbyourboardofdirectorstoincreasethenumberofoutstandingsharesandthwartatakeoverattempt;
• aprovisionforaclassifiedboardofdirectorssothatnotallmembersofourboardofdirectorsareelectedatonetime;
• theremovalofdirectorsonlyforcause;
• noprovisionfortheuseofcumulativevotingfortheelectionofdirectors;
• limitingtheabilityofshareholderstocallspecialmeetings;
• requiringallshareholdersactionstobetakenatameetingofourshareholders(i.e.noprovisionforshareholderactionbywrittenconsent);and
• establishingadvancenoticerequirementsfornominationsforelectiontotheboardofdirectorsorforproposingmattersthatcanbeacteduponbyshareholdersatshareholdermeetings.
Inaddition,theDelawareGeneralCorporationLaw,towhichwearesubject,prohibitsus,exceptunderspecifiedcircumstances,fromengaginginanymergers,significantsalesofstockorassetsorbusinesscombinationswithanyshareholderorgroupofshareholderswhoownsatleast15%ofourcommonstock.
TheprovisionofourcertificateofincorporationrequiringexclusivevenueintheCourtofChanceryintheStateofDelawareforcertaintypesoflawsuitsmayhavetheeffectofdiscouraginglawsuitsagainstourdirectorsandofficers.
Ourcertificateofincorporationrequires,tothefullestextentpermittedbylaw,that(i)anyderivativeactionorproceedingbroughtonourbehalf,(ii)anyactionassertingaclaimofbreachofafiduciarydutyowedbyanyofourdirectors,officersorotheremployeestousorourshareholders,(iii)anyactionassertingaclaimagainstusarisingpursuanttoanyprovisionoftheGeneralCorporationLawoftheStateofDelawareorourcertificateofincorporationorthebylawsor(iv)anyactionassertingaclaimagainstusgovernedbytheinternalaffairsdoctrinewillhavetobebroughtonlyintheCourtofChanceryintheStateofDelaware.Thisprovisionmayhavetheeffectofdiscouraginglawsuitsagainstourdirectorsandofficers.
Takingadvantageofthereduceddisclosurerequirementsapplicableto"emerginggrowthcompanies"maymakeourcommonstocklessattractivetoinvestors.
TheJOBSActprovidesthat,solongasacompanyqualifiesasan"emerginggrowthcompany,"itwill,amongotherthings:
• beexemptfromtheprovisionsofSection404(b)oftheSarbanes-OxleyActrequiringthatitsindependentregisteredpublicaccountingfirmprovideanattestationreportontheeffectivenessofitsinternalcontroloverfinancialreporting;
• beexemptfromthe"sayonpay"and"sayongoldenparachute"advisoryvoterequirementsoftheDodd-FrankWallStreetReformandCustomerProtectionAct(the"Dodd-FrankAct");
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• beexemptfromcertaindisclosurerequirementsoftheDodd-FrankActrelatingtocompensationofitsexecutiveofficersandbepermittedtoomitthedetailedcompensationdiscussionandanalysisfromproxystatementsandreportsfiledundertheSecuritiesExchangeActof1934,asamended(the"ExchangeAct");and
• insteadprovideareducedlevelofdisclosureconcerningexecutivecompensationandbeexemptfromanyrulesthatmaybeadoptedbythePublicCompanyAccountingOversightBoardrequiringmandatoryauditfirmrotationsorasupplementtotheauditor'sreportonthefinancialstatements.
Wewillremainanemerginggrowthcompanyuntiltheearlierof(1)thelastdayofthefiscalyear(a)followingthefifthanniversaryofthecompletionofourinitialpublicoffering,whichisMarch30,2019,(b)inwhichwehavetotalannualgrossrevenueofatleast$1.07billion,or(c)inwhichwearedeemedtobealargeacceleratedfiler,whichmeansthemarketvalueofourcommonstockthatisheldbynon-affiliatesexceeds$700millionasofthepriorJune30th,or(2)thedateonwhichwehaveissuedmorethan$1.0billioninnon-convertibledebtsecuritiesduringthepriorthree-yearperiod.
Wearecurrentlytakingadvantageofthereduceddisclosurerequirementsregardingexecutivecompensation.WehaveirrevocablyelectednottotakeadvantageoftheextensionoftimetocomplywithneworrevisedfinancialaccountingstandardsavailableunderSection107(b)oftheJOBSAct.Wearealsotakingadvantageofotherexemptions,includingtheexemptionsfromtheadvisoryvoterequirementsandexecutivecompensationdisclosuresundertheDodd-FrankActandtheexemptionfromtheprovisionsofSection404(b)oftheSarbanes-OxleyAct.Investorsmayfindourcommonstocklessattractiveduetoourrelianceontheseexemptions,andtakingadvantageoftheseexemptionsmayresultinlessactivetradingormorevolatilityinthepriceofourcommonstock.Also,asaresultofourdecisiontotakeadvantageofthereducedregulatoryandreportingrequirementsthatwillbeavailabletousaslongaswequalifyasan"emerginggrowthcompany,"ourfinancialstatementsmaynotbecomparabletocompaniesthatfullycomplywithregulatoryandreportingrequirementsuponthepubliccompanyeffectivedates.
ITEM1B.UNRESOLVEDSTAFFCOMMENTS
None.
ITEM2.PROPERTIES
Weleaseallofour90retailstores.Ourleasesgenerallyhaveatermof10to15years,withrenewaloptionsthatgenerallyrangefrom5to15years.Mostleasesforourretailstoresprovideforaminimumrent,typicallyincludingescalatingrentincreases.Further,certainleasesalsoincludeapercentagerentbaseduponsalesaftercertainminimumthresholdsareachieved.Theleasesgenerally
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requireustopayinsurance,utilities,realestatetaxesandrepairandmaintenanceexpenses.AsummaryofourstorelocationsbystateasofMarch31,2018isbelow:
Wealsoleaseapproximately1.1millionsquarefeetofspaceinCoppell,TexasforourcorporateofficesanddistributioncenterforourTCSsegment.ThetermforthisleaseexpiresinApril2025,andweretainthreefive-yearrenewaloptions.
Elfaleasesitsapproximately13,000squarefootgroupheadquartersinMalmö,Sweden.Inaddition,Elfaownsfourmanufacturingfacilities,locatedinVästervik,Sweden(approximately200,000squarefeet),Mullsjö,Sweden(approximately100,000squarefeet),Koszalin,Poland(approximately90,000squarefeet),andLahti,Finland(approximately60,000squarefeet).WeclosedtheElfamanufacturingfacilityinLahti,FinlandinDecember2017.
ITEM3.LEGALPROCEEDINGS
Wearesubjecttovariouslegalproceedingsandclaims,includingemploymentclaims,wageandhourclaims,intellectualpropertyclaims,contractualandcommercialdisputesandothermattersthatariseintheordinarycourseofbusiness.Whiletheoutcomeoftheseandotherclaimscannotbepredictedwithcertainty,managementdoesnotbelievethattheoutcomeofthesematterswillhaveamaterialadverseeffectonourbusiness,resultsofoperationsorfinancialconditiononanindividualbasisorintheaggregate.
ITEM4.MINESAFETYDISCLOSURES
None.
ExecutiveOfficersoftheRegistrant
Melissa Reiff hasservedasourChiefExecutiveOfficersinceJuly2016,succeedingWilliamA.("Kip")Tindell,III.Previously,Ms.ReiffservedasourPresidentandChiefOperatingOfficersinceMarch2013andasourPresidentsince2006.ShehasalsoservedonourboardofdirectorssinceAugust2007(andontheboardofdirectorsofTheContainerStore,Inc.sinceFebruary2006).Ms.ReiffjoinedTheContainerStorein1995asVicePresidentofSalesandMarketingandassumedtheroleofExecutiveVicePresidentofStoresandMarketingin2003.Sheisamemberofthe
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Location Store(s) Location Store(s) Location Store(s) Arizona 4 Maryland 1 Ohio 3Arkansas 1 Massachusetts 3 Oregon 1California 13 Michigan 2 Pennsylvania 2Colorado 3 Minnesota 1 RhodeIsland 1Delaware 1 Missouri 1 Tennessee 1Florida 6 Nebraska 1 Texas 13Georgia 3 Nevada 1 Utah 1Illinois 5 NewJersey 3 Virginia 3Iowa 1 NewMexico 1 Washington 2Indiana 1 NewYork 6 Wisconsin 1Kansas 1 NorthCarolina 2 DistrictofColumbia 1
Total 90
Name Age Position(s)Executive Officers: MelissaReiff 63 ChiefExecutiveOfficerandDirectorSharonTindell 62 President,ChiefMerchandisingOfficerandDirectorJodiTaylor 55 ChiefFinancialOfficer,ChiefAdministrativeOfficerandSecretaryWilliamA.("Kip")Tindell,III 65 ChairmanoftheBoardofDirectors
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InternationalWomen'sFoundationandC200,anorganizationofleadingwomeninbusinessdedicatedtofosteringgrowthandincreasingopportunitiesforwomenentrepreneursandcorporateleadersworldwide.Ms.ReiffhasservedontheboardofdirectorsofEtsysinceApril2015,wheresheisalsoamemberoftheCompensationCommittee.ShealsoservesonSouthernMethodistUniversity'sCoxSchoolofBusinessExecutiveBoardandisasustainingmemberoftheJuniorLeagueofDallas.Ms.Reiffwashonoredwiththe2012-2013SMUCoxSchoolofBusinessDistinguishedAlumnaaward.Ms.Reiffwasselectedtoourboardofdirectorsbecauseshepossessesparticularknowledgeandexperienceinretail,marketing,merchandising,operations,communicationandleadership.
Sharon Tindell hasservedasourPresidentandChiefMerchandisingOfficersinceJuly2016,ChiefMerchandisingOfficersince2006andhasservedonourboardofdirectorssinceAugust2007(andontheboardofdirectorsofTheContainerStore,Inc.sinceApril1988).In1980shejoinedusfull-timeworkingonthesalesfloor,managinginventoryandparticipatinginothertasksthatputherindirecttouchwiththestore'sinnovativeproductmixandcustomers'storageandorganizationchallengesandbecameourfirstbuyerin1981.Inhercurrentrole,Tindellleadstheretailer'smerchandisingvision,aswellasitsfocusoncustomclosetsolutions,developmentofexclusiveandproprietaryproducts,storeformatanddesign,andthevisualimpactofthecustomer'sshoppingexperience.Shealsooverseessupplychainandlogistics,aswellastheCompany'sElfaInternationalABsubsidiaryservingasitsBoardChair.In2006,Ms.TindellwasinductedintotheRetailingHallofFame,thefirstwomanselectedforthishonor.Ms.TindellalsoservesontheboardofdirectorsofthePerotMuseumofNatureandScience.Ms.Tindellwasselectedtoourboardofdirectorsbecauseshepossessesparticularknowledgeandexperienceinretailandmerchandisingaswellasanunderstandingofourbusinessandourcustomer.SharonTindellismarriedtoWilliamA."Kip"Tindell,III,ChairmanoftheBoardofDirectors.
Jodi Taylor hasservedasourChiefFinancialOfficerandChiefAdministrativeOfficersinceJuly2016,ChiefFinancialOfficersinceDecember2007,andasourSecretarysinceOctober2013.Ms.TaylorisresponsibleforthebusinessareasofFinance,Accounting,InvestorRelations,RealEstate,Procurement,Payroll,Benefits,LegalandLossPrevention.Priortojoiningus,Ms.TaylorservedasChiefFinancialOfficerandSecretaryfrom1998to2007atHarold's,athenpublicly-tradedapparelretailerwhichfiledforbankruptcyin2008.From1986-1998,Ms.TaylorwasanexecutivewithBabySuperstore,Inc.orsuccessorcompanies,whichafteranIPOin1994,wasultimatelyacquiredbyToys"R"Us,Inc.in1996.Ms.TaylorwasformerlyanauditorwithDeloitte,Haskins,&Sells(nowDeloitte&Touche).
William A. ("Kip") Tindell, III hasservedasChairmanofourBoardofDirectorssinceAugust2007(andontheBoardofDirectorsofTheContainerStore,Inc.sinceJuly1978).Mr.TindellservedasourChiefExecutiveOfficerfrom2006to2016.Priortothat,heservedasPresidentandChiefOperatingOfficerofTheContainerStorethrough2005.Mr.TindellwaspresentedErnst&Young'sEntrepreneuroftheYearawardin1991andisarecipientoftheNationalRetailFederation's1998InnovatoroftheYearAward.In2006hewasinductedintotheRetailingHallofFameandisa2009JuniorAchievementofDallasBusinessHallofFameinductee.In2011Mr.TindellreceivedtheNationalRetailFederation'sGoldMedalAward,whichisgenerallyregardedastheindustry'stopaccolade,giventoindividualswhohaveservedtheindustrywithdistinctionandachievedanationalreputationforexcellencetotheretailcraft.HeisamemberoftheDallasArboretumCEOAdvisoryCouncilandservesontheboardofdirectorsofBaylorHealthcareSystemsFoundation.Mr.TindellalsoservesontheexecutiveboardoftheNationalRetailFederationasitschairman,andservedontheboardofdirectorsoftheNationalRetailFederationFoundationfrom2010to2013.HeservesontheboardofConsciousCapitalismInstituteandConsciousCapitalism,Inc.,acommunityoflike-mindedbusiness,thoughtandacademicleadersworkingtoelevatehumanitythroughaconsciousapproachtobusiness.Mr.TindellisanactivememberoftheDallasSalesmanshipClub,anonprofitorganizationdedicatedtotransformingchildren'sfuturesbyservingatriskfamiliesintheGreaterDallasarea.Mr.Tindellwasselectedtoourboardofdirectorsbecauseoftheperspective,experienceandoperationalexpertiseinourbusinessthathedevelopedwhilehewasourChiefExecutiveOfficer.Mr.TindellismarriedtoSharonTindell,ourPresidentandChiefMerchandisingOfficer.
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PARTII
ITEM5.MARKETFORREGISTRANT'SCOMMONEQUITY,RELATEDSTOCKHOLDERMATTERSANDISSUERPURCHASESOFEQUITYSECURITIES
MarketInformationandDividendPolicy
OurcommonstocktradesonTheNewYorkStockExchange("NYSE"),underthesymbol"TCS."ThefollowingtablesetsforththehighestandlowestsalespricesforourcommonstockontheNYSEfortheperiodsindicated.
ThenumberofstockholdersofrecordofourcommonstockasofMay25,2018was64.Thisnumberexcludesstockholderswhosestockisheldinnomineeorstreetnamebybrokers.Nodividendshavebeendeclaredorpaidonourcommonstock.Wedonotcurrentlyanticipatethatwewillpayanycashdividendsonourcommonstockintheforeseeablefuture.
StockPerformanceGraph
This performance graph shall not be deemed "soliciting material" or to be "filed" with the SEC for purposes of Section 18 of the Exchange Act or otherwisesubject to the liabilities under that section, and shall not be deemed to be incorporated by reference into any filing of The Container Store Group, Inc. under theSecurities Act or the Exchange Act.
ThefollowinggraphandtablecomparethecumulativetotalstockholderreturnforourcommonstockduringtheperiodfromNovember1,2013(thedateourcommonstockcommencedtradingontheNYSE)throughMarch31,2018incomparisontotheNYSECompositeIndexandtheS&PRetailingSelectIndex.Thegraphandthetablebelowassumethat$100wasinvestedatthemarketcloseonNovember1,2013inthecommonstockofTheContainerStoreGroup,Inc.,theNYSECompositeIndexandtheS&PRetailingSelectIndex.DatafortheNYSECompositeIndexandtheS&PRetailingSelectIndexassumesreinvestmentsofdividends.Thecomparisonsinthegraphand
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Highest Lowest Fiscal2016 FirstquarterendedJuly2,2016 $ 7.98 $ 4.47SecondquarterendedOctober1,2016 $ 6.22 $ 4.76ThirdquarterendedDecember31,2016 $ 8.34 $ 4.58FourthquarterendedApril1,2017 $ 6.74 $ 3.75
Fiscal2017 FirstquarterendedJuly1,2017 $ 6.12 $ 3.81SecondquarterendedSeptember30,2017 $ 6.37 $ 4.02ThirdquarterendedDecember30,2017 $ 6.27 $ 3.53FourthquarterendedMarch31,2018 $ 5.86 $ 3.57
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tablearerequiredbytheSECandarenotintendedtobeindicativeofpossiblefutureperformanceofourcommonstock.
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11/1/2013 3/1/2014 2/28/2015 2/27/2016 4/1/2017 3/31/2018 TheContainerStoreGroup,Inc. 100.00 98.92 50.88 14.56 11.69 15.03NYSECompositeIndex 100.00 104.07 110.43 96.02 114.72 124.30S&PRetailingSelectIndex 100.00 101.21 116.35 102.88 100.44 105.28
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ITEM6.SELECTEDFINANCIALANDOPERATINGDATA
Youshouldreadthefollowingselectedconsolidatedfinancialdatainconjunctionwith"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations"andourconsolidatedfinancialstatementsandtherelatednotesappearingelsewhereinthisAnnualReportonForm10-K.
ThefollowingselectedconsolidatedfinancialdataforeachoftheyearsendedMarch31,2018(fiscal2017),April1,2017(fiscal2016),andFebruary27,2016(fiscal2015),andtheselectedconsolidatedbalancesheetdataasofMarch31,2018andApril1,2017havebeenderivedfromourauditedconsolidatedfinancialstatements,whichareincludedelsewhereinthisAnnualReportonForm10-K.TheselectedconsolidatedfinancialdataforeachoftheyearsendedFebruary28,2015(fiscal2014)andMarch1,2014(fiscal2013)andtheselectedconsolidatedbalancesheetdataasofFebruary27,2016,February28,2015,andMarch1,2014havebeenderivedfromourauditedconsolidatedfinancialstatements,whicharenotincludedinthisAnnualReportonForm10-K.Thetablebelowalsoincludes,forcomparativepurposes,unauditeddatafortherecast52-weekperiodendedApril2,2016.Historicalresultsarenotindicativeoftheresultstobeexpectedinthefuture.Fiscal2017,fiscal2016,fiscal2015,fiscal2014,andfiscal2013included52weeks.
AlldollaramountsinthisSelectedFinancialandOperatingDataareinthousands,exceptpershareamounts,unlessotherwisestated.
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Fiscalyearended
March31,
2018 April1,2017(1)
April2,2016(2)
February27,2016
February28,2015
March1,2014
(unaudited) Consolidatedstatementofoperations Netsales $ 857,228 $ 819,930 $ 797,087 $ 794,630 $ 781,866 $ 748,538Costofsales(excludingdepreciationandamortization) 360,167 343,860 332,594 331,079 323,800 308,755
Grossprofit 497,061 476,070 464,493 463,551 458,066 439,783Selling,generalandadministrativeexpenses(excludingdepreciationandamortization) 411,721 387,948 394,585 393,810 372,867 354,271
Stock-basedcompensation 2,026 1,989 1,575 1,556 1,289 15,137Pre-openingcosts 5,293 6,852 9,004 9,033 8,283 6,672Depreciationandamortization 37,922 37,124 34,628 34,230 31,011 30,353Otherexpenses 5,734 1,058 102 — 1,132 1,585Loss(gain)ondisposalofassets 278 57 62 61 (3,487) 206Incomefromoperations 34,087 41,042 24,537 24,861 46,971 31,027Interestexpense,net 25,013 16,687 16,772 16,810 17,105 21,185Lossonextinguishmentofdebt 2,369 — — — — 1,229Incomebeforetaxes 6,705 24,355 7,765 8,051 29,866 8,613(Benefit)provisionforincometaxes(3) (12,723) 9,402 2,907 2,909 7,193 447Netincome $ 19,428 $ 14,953 $ 4,858 $ 5,142 $ 22,673 $ 8,166Less:Distributionsaccumulatedtopreferredshareholders(4) — — — — — (59,747)
Netincome(loss)availabletocommonshareholders(4) $ 19,428 $ 14,953 $ 4,858 $ 5,142 $ 22,673 $ (51,581)
Netincome(loss)percommonshare—basicanddiluted(4) $ 0.40 $ 0.31 $ 0.10 $ 0.11 $ 0.47 $ (2.87)
Weighted-averagecommonshares—basic 48,061,527 47,996,746 47,986,034 47,985,717 47,971,243 17,955,757Weighted-averagecommonshares—diluted 48,147,725 48,016,010 47,976,034 47,985,717 48,520,865 17,955,757
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Fiscalyearended
March31,
2018 April1,2017(1)
April2,2016(2)
February27,2016
February28,2015
March1,2014
Operatingdata: Comparablestoresalesgrowthfortheperiod(5) 0.9% (2.4)% (0.8)% 0.0% (1.4)% 2.9%Numberofstoresopenatendofperiod 90 86 79 79 70 63
Non-GAAPmeasures(6): AdjustedEBITDA(7) $ 89,603 $ 86,559 $ 68,362 $ 68,159 $ 88,230 $ 86,101AdjustedEBITDAmargin(7) 10.5% 10.6% 8.6% 8.6% 11.3% 11.5%Adjustednetincome(8) $ 13,594 $ 13,393 $ 4,858 $ 5,142 $ 16,501 $ 16,354Adjustednetincomepercommonshare—diluted(8) $ 0.28 $ 0.28 $ 0.10 $ 0.11 $ 0.34 $ 0.33
Asof
March31,
2018 April1,2017
February27,2016
February28,2015
March1,2014
Consolidatedbalancesheetdata: Cash $ 8,399 $ 10,736 $ 13,609 $ 24,994 $ 18,046Networkingcapital(9) 27,029 44,342 22,913 20,965 34,832Totalassets 749,369 761,834 758,119 761,579 773,841Long-termdebt(10) 285,165 317,471 321,508 324,616 325,943Totalstockholders'equity 248,707 221,790 207,068 201,862 197,186
(1) Beginningwithfiscal2016,theCompanychangeditsfiscalyeartoa52-53weekperiodendingontheSaturdayclosesttoMarch31;previously,theCompany'sfiscalyearendedontheSaturdayclosesttoFebruary28.SeeNote17totheFinancialStatementsforfinancialdataforthefive-weektransitionperiodendedApril2,2016.
(2) Forcomparativepurposes,theCompanyhaspresentedunauditedselectedconsolidatedfinancialdataforthe52-weekperiodendedApril2,2016.
(3) ThedifferencebetweentheCompany'seffectivetaxrateandthestatutoryFederaltaxratecanbeattributedtofluctuationsinthevaluationallowancerecordedagainstnetdeferredassetsnotexpectedtoberealized,indefinite-livedintangibleassetimpairmentchargesnotdeductiblefortaxpurposes,theeffectsofpriorperiodadjustments,theeffectsofforeignincometaxedatadifferentrateincludingstatutorychangesinthoserates,intra-periodtaxallocationsbetweencontinuingoperationsandothercomprehensiveincome,andtheestimatedimpactoftheTaxCutsandJobsAct.
(4) Forfiscal2013,commonstockholdersdidnotshareinnetincomeduetoearningsnotexceedingtheaccrueddistributionsontheCompany'spreferredstock.Forfiscal2013,basicanddilutednetlosspercommonsharearethesame,asanyadditionalcommonstockequivalentswouldbeanti-dilutive.
(5) Astoreisincludedinthecomparablestoresalescalculationonthefirstdayofthesixteenthfullfiscalmonthfollowingthestore'sopening.Comparablestoresalesarenetofdiscountsandreturns.Whenastoreisrelocated,wecontinuetoconsidersalesfromthatstoretobecomparablestoresales.Netsalesfromourwebsiteandcallcenterarealsoincludedincalculationsofcomparablestoresales.Priortofiscal2015,thecomparablestoresalesgrowthoperatingmeasuredoesnotincludenetsalesfromservices.
Inthefirstquarteroffiscal2016,wechangedourcomparablestoresalesoperatingmeasuretoreflectthepointatwhichmerchandiseandserviceordersarefulfilledanddeliveredtocustomers,excludingshippinganddelivery.Priortothefirstquarteroffiscal2016,ourcomparablestoresalesoperatingmeasureinagivenperiodwasbasedonmerchandiseandserviceordersplacedinthatperiod,excludingshippinganddelivery,whichdidnotalwaysreflectthepointatwhichmerchandiseandserviceswerereceivedbythecustomerand,therefore,recognizedinourfinancialstatementsasnetsales.Webelievethatchangingthecomparablestoresalesoperatingmetrictobetteralignwithnetsalespresentedinourfinancialstatementswillassistinvestorsinevaluatingourfinancialperformance.Thecomparablestoresalesgrowthmetricisanoperatingmeasureintendedonlyassupplementalinformationandisnotasubstitutefornetsalespresentedinaccordancewithgenerallyacceptedaccountingprinciples("GAAP").
(6) WehavepresentedEBITDA,AdjustedEBITDA,AdjustedEBITDAmargin,adjustednetincome,andadjustednetincomepercommonshare—dilutedassupplementalmeasuresoffinancialperformancethatarenotrequiredby,orpresentedinaccordancewith,GAAP.Thesenon-GAAPmeasuresshouldnotbeconsideredasalternativestonetincome(loss)asameasureoffinancialperformanceorcashflowsfromoperationsasameasureofliquidity,oranyotherperformancemeasurederivedinaccordancewithGAAPandtheyshouldnotbeconstruedasaninferencethatourfutureresultswillbe
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unaffectedbyunusualornon-recurringitems.Thesenon-GAAPmeasuresarekeymetricsusedbymanagement,ourboardofdirectors,andLGPtoassessourfinancialperformance.Wepresentthesenon-GAAPmeasuresbecausewebelievetheyassistinvestorsincomparingourperformanceacrossreportingperiodsonaconsistentbasisbyexcludingitemsthatwedonotbelieveareindicativeofourcoreoperatingperformanceandbecausewebelieveitisusefulforinvestorstoseethemeasuresthatmanagementusestoevaluatetheCompany.Thesenon-GAAPmeasuresarealsofrequentlyusedbyanalysts,investorsandotherinterestedpartiestoevaluatecompaniesinourindustry.Inevaluatingthesenon-GAAPmeasures,youshouldbeawarethatinthefuturewewillincurexpensesthatarethesameasorsimilartosomeoftheadjustmentsinthispresentation.Ourpresentationofthesenon-GAAPmeasuresshouldnotbeconstruedtoimplythatourfutureresultswillbeunaffectedbyanysuchadjustments.ManagementcompensatesfortheselimitationsbyrelyingonourGAAPresultsinadditiontousingnon-GAAPmeasuressupplementally.Ournon-GAAPmeasuresarenotnecessarilycomparabletoothersimilarlytitledcaptionsofothercompaniesduetodifferentmethodsofcalculation.Pleaserefertofootnotes(7)and(8)ofthistableforfurtherinformationregardingwhywebelieveeachnon-GAAPfinancialmeasureprovidesusefulinformationtoinvestorsregardingourfinancialconditionandresultsofoperations,aswellastheadditionalpurposesforwhichmanagementuseseachofthenon-GAAPfinancialmeasures.
(7) EBITDA,AdjustedEBITDA,andAdjustedEBITDAmarginhavebeenpresentedinthisAnnualReportonForm10-Kassupplementalmeasuresoffinancialperformancethatarenotrequiredby,orpresentedinaccordancewith,GAAP.WedefineEBITDAasnetincomebeforeinterest,taxes,depreciation,andamortization.AdjustedEBITDAiscalculatedinaccordancewithourSecuredTermLoanFacilityandtheRevolvingCreditFacilityandisoneofthecomponentsforperformanceevaluationunderourexecutivecompensationprograms.AdjustedEBITDAreflectsfurtheradjustmentstoEBITDAtoeliminatetheimpactofcertainitems,includingcertainnon-cashandotheritems,thatwedonotconsiderinourevaluationofongoingoperatingperformancefromperiodtoperiodasdiscussedfurtherbelow.AdjustedEBITDAmarginmeans,foranyperiod,theAdjustedEBITDAforthatperioddividedbythenetsalesforthatperiodpresentedinaccordancewithGAAP.
EBITDA,AdjustedEBITDA,andAdjustedEBITDAmarginareincludedinthisAnnualReportonForm10-Kbecausetheyarekeymetricsusedbymanagement,ourboardofdirectorsandLGPtoassessourfinancialperformance.Inaddition,weuseAdjustedEBITDAinconnectionwithcovenantcomplianceandexecutiveperformanceevaluations,andweuseAdjustedEBITDAandAdjustedEBITDAmargintosupplementGAAPmeasuresofperformancetoevaluatetheeffectivenessofourbusinessstrategies,tomakebudgetingdecisionsandtocompareourperformanceagainstthatofotherpeercompaniesusingsimilarmeasures.WebelieveitisusefulforinvestorstoseethemeasuresthatmanagementusestoevaluatetheCompany,itsexecutivesandourcovenantcompliance,asapplicable.EBITDAandAdjustedEBITDAarealsofrequentlyusedbyanalysts,investorsandotherinterestedpartiestoevaluatecompaniesinourindustry.
EBITDA,AdjustedEBITDA,andAdjustedEBITDAmarginarenotGAAPmeasuresofourfinancialperformanceorliquidityandshouldnotbeconsideredasalternativestonetincome(loss)asameasureoffinancialperformanceorcashflowsfromoperationsasameasureofliquidity,oranyotherperformancemeasurederivedinaccordancewithGAAPandtheyshouldnotbeconstruedasaninferencethatourfutureresultswillbeunaffectedbyunusualornon-recurringitems.Additionally,EBITDAandAdjustedEBITDAarenotintendedtobemeasuresoffreecashflowformanagement'sdiscretionaryuse,astheydonotreflectcertaincashrequirementssuchastaxpayments,debtservicerequirements,capitalexpenditures,storeopeningsandcertainothercashcoststhatmayrecurinthefuture.EBITDA,AdjustedEBITDA,andAdjustedEBITDAmargincontaincertainotherlimitations,includingthefailuretoreflectourcashexpenditures,cashrequirementsforworkingcapitalneedsandcashcoststoreplaceassetsbeingdepreciatedandamortized.InevaluatingAdjustedEBITDAandAdjustedEBITDAmargin,youshouldbeawarethatinthefuturewewillincurexpensesthatarethesameasorsimilartosomeoftheadjustmentsinthispresentation,suchaspre-openingcostsandstockcompensationexpense.OurpresentationofAdjustedEBITDAandAdjustedEBITDAmarginshouldnotbeconstruedtoimplythatourfutureresultswillbeunaffectedbyanysuchadjustments.ManagementcompensatesfortheselimitationsbyrelyingonourGAAPresultsinadditiontousingEBITDA,AdjustedEBITDA,andAdjustedEBITDAmarginsupplementally.OurmeasuresofEBITDA,AdjustedEBITDA,andAdjustedEBITDAmarginarenotnecessarilycomparabletoothersimilarlytitledcaptionsofothercompaniesduetodifferentmethodsofcalculation.
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AreconciliationofnetincometoEBITDAandAdjustedEBITDAissetforthbelow:
Fiscalyearended
March31,
2018 April1,2017
April2,2016
February27,2016
February28,2015
March1,2014
(unaudited) Netincome $ 19,428 $ 14,953 $ 4,858 $ 5,142 $ 22,673 $ 8,166Depreciationandamortization 37,922 37,124 34,628 34,230 31,011 30,353Interestexpense,net 25,013 16,687 16,772 16,810 17,105 21,185Incometax(benefit)expense (12,723) 9,402 2,907 2,909 7,193 447EBITDA 69,640 78,166 59,165 59,091 77,982 60,151Managementfees(a) — — — — — 667Pre-openingcosts(b) 5,293 6,852 9,004 9,033 8,283 6,672IPOcosts(c) — — — — — 1,259Noncashrent(d) (1,915) (1,365) (1,784) (1,844) (374) 260Restructuringcharges(e) — — — — — 532Stock-basedcompensation(f) 2,026 1,989 1,575 1,556 1,289 15,137Lossonextinguishmentofdebt(g) 2,369 — — — — 1,229Foreignexchange(gains)losses(h) (596) (342) 226 241 (171) (224)OptimizationPlanimplementationcharges(i) 11,479 — — — — —
Elfamanufacturingfacilityclosure(j) 803 — — — — —Otheradjustments(k) 504 1,259 176 82 1,221 418AdjustedEBITDA $ 89,603 $ 86,559 $ 68,362 $ 68,159 $ 88,230 $ 86,101
(a) FeespaidtoLGPinaccordancewithourmanagementservicesagreement,whichwasterminatedonNovember6,2013inassociationwithourIPO.
(b) Non-capitalexpendituresassociatedwithopeningnewstoresandrelocatingstores,includingrent,marketingexpenses,travelandrelocationcosts,andtrainingcosts.Weadjustforthesecoststofacilitatecomparisonsofourperformancefromperiodtoperiod.
(c) ChargesincurredinconnectionwithourIPO,whichwedonotexpecttorecuranddonotconsiderinourevaluationofongoingperformance.
(d) ReflectstheextenttowhichourannualGAAPrentexpensehasbeenaboveorbelowourcashrentpaymentduetoleaseaccountingadjustments.Theadjustmentvariesdependingontheaverageageofourleaseportfolio(weightedforsize),asourGAAPrentexpenseonyoungerleasestypicallyexceedsourcashcost,whileourGAAPrentexpenseonolderleasesistypicallylessthanourcashcost.
(e) IncludeschargesincurredtorestructurebusinessoperationsatElfa,whichwedonotconsiderinourevaluationofourongoingperformance.
(f) Non-cashchargesrelatedtostock-basedcompensationprograms,whichvaryfromperiodtoperioddependingonvolumeandvestingtimingofawards.Weadjustforthesechargestofacilitatecomparisonsfromperiodtoperiod.
(g) LossrecordedasaresultoftheamendmentsmadetotheSeniorSecuredTermLoanFacilityinApril2013,November2013andAugust2017,whichwedonotconsiderinourevaluationofourongoingoperations.
(h) Realizedforeignexchangetransactionalgains/lossesourmanagementdoesnotconsiderinourevaluationofourongoingoperations.
(i) ChargesincurredtoimplementourOptimizationPlan,whichincludecertainconsultingcostsrecordedinselling,generalandadministrativeexpenses,cashseverancepaymentsassociatedwiththeeliminationofcertainfull-timepositionsattheTCSsegmentrecordedinotherexpenses,andcashseverancepaymentsassociatedwithorganizationalrealignmentattheElfasegmentrecordedinotherexpenses,whichwedonotconsiderinourevaluationofongoingperformance.
(j) ChargesrelatedtotheclosureofanElfamanufacturingfacilityinLahti,FinlandinDecember2017,recordedinotherexpenses,whichwedonotconsiderinourevaluationofourongoingperformance.
(k) Otheradjustmentsincludeamountsourmanagementdoesnotconsiderinourevaluationofourongoingoperations,includingcertainseverance,costsincurredinpreparationforbeingapubliccompany,andothercharges.
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(8) Adjustednetincomeandadjustednetincomepercommonshare—dilutedhavebeenpresentedassupplementalmeasuresoffinancialperformancethatarenotrequiredby,orpresentedinaccordancewith,GAAP.Wedefineadjustednetincomeasnetincome(loss)availabletocommonshareholdersbeforedistributionsaccumulatedtopreferredshareholders,stock-basedcompensationandothercostsinconnectionwithourIPO,restructuringcharges,impairmentchargesrelatedtointangibleassets,lossesonextinguishmentofdebt,certaingainsondisposalofassets,certainmanagementtransitioncostsincurredandbenefitsrealized,chargesincurredaspartoftheimplementationofourOptimizationPlan,chargesassociatedwithanElfamanufacturingfacilityclosure,andthetaximpactoftheseadjustmentsandotherunusualorinfrequenttaxitems.Wedefineadjustednetincomepercommonshare—dilutedasadjustednetincomedividedbythedilutedweightedaveragecommonsharesoutstanding;however,forfiscal2013adjusteddilutedweightedaveragecommonsharesoutstandingiscalculatedbasedontheassumptionthatthenumberofsharesoutstandingasofMarch1,2014wasoutstandingatthebeginningoftheperiod.Weuseadjustednetincomeandadjustednetincomepercommonshare—dilutedtosupplementGAAPmeasuresofperformancetoevaluatetheeffectivenessofourbusinessstrategies,tomakebudgetingdecisionsandtocompareourperformanceagainstthatofotherpeercompaniesusingsimilarmeasures.Wepresentadjustednetincomeandadjustednetincomepercommonshare—dilutedbecausewebelievetheyassistinvestorsincomparingourperformanceacrossreportingperiodsonaconsistentbasisbyexcludingitemsthatwedonotbelieveareindicativeofourcoreoperatingperformanceandbecausewebelieveitisusefulforinvestorstoseethemeasuresthatmanagementusestoevaluatetheCompany.
Wehaveincludedapresentationofadjustednetincomeandadjustednetincomeperdilutedshareforfiscal2016toshowthenetimpactoftheamendedandrestatedemploymentagreementsenteredintowithkeyexecutivesduringthefiscal2016("managementtransitioncosts(benefits)").Althoughwedisclosedthenetpositiveimpactoftheamendedandrestatedemploymentagreementsinourdiscussionsofearningspershareandselling,generalandadministrativeexpenses("SG&A")inourfiscal2016filingswiththeSEC,wedidnotadjustforthenetimpactoftheseagreementsinourfiscal2016presentationofadjustednetincomeandadjustednetincomeperdilutedshare.However,infiscal2017,ourOptimizationPlanhascausedustoincursimilarchargesthatwebelievearenotindicativeofourcoreoperatingperformance.Asaresult,webelievethatadjustingnetincomeandnetincomeperdilutedshareinfiscal2016formanagementtransitioncosts(benefits),inadditiontoadjustingnetincomeandnetincomeperdilutedshareinfiscal2017forchargesincurredaspartoftheimplementationofourOptimizationPlanwillassistinvestorsincomparingourcoreoperatingperformanceacrossreportingperiodsonaconsistentbasis.
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AreconciliationoftheGAAPfinancialmeasuresofnetincome(loss)availabletocommonshareholdersanddilutednetincome(loss)percommonsharetothenon-GAAPfinancialmeasuresofadjustednetincomeandadjustednetincomepercommonshare—dilutedissetforthbelow:
Fiscalyearended
March31,
2018 April1,2017
April2,2016
February27,2016
February28,2015
March1,2014
(unaudited) Numerator: Netincome(loss)availabletocommonshareholders $ 19,428 $ 14,953 $ 4,858 $ 5,142 $ 22,673 $ (51,581)
Distributionsaccumulatedtopreferredshareholders(a) — — — — — 59,747
IPOrelatedstock-basedcompensation(b) — — — — — 14,602
IPOcosts(c) — — — — — 1,259Restructuringcharges(d) — — — — — 532Gainondisposalofsubsidiaryandrealestate(e) — — — — (3,681) —
Managementtransitioncosts(f) — (2,852) — — — —Elfamanufacturingfacilityclosure(g) 803 — — — — —
Lossonextinguishmentofdebt(h) 2,369 — — — — 1,229
OptimizationPlanimplementationcharges(i) 11,479 — — — — —
Taxes(j) (20,485) 1,292 — — (2,491) (9,434)Adjustednetincome $ 13,594 $ 13,393 $ 4,858 $ 5,142 $ 16,501 $ 16,354Denominator: Weightedaveragecommonsharesoutstanding—diluted 48,147,725 48,016,010 47,976,034 47,985,717 48,520,865 17,955,757
Adjustweightingfactorofoutstandingshares(k) — — — — — 30,939,876
Adjustedweightedaveragecommonsharesoutstanding—diluted 48,147,725 48,016,010 47,976,034 47,985,717 48,520,865 48,895,633
Adjustednetincomepercommonshare—diluted $ 0.28 $ 0.28 $ 0.10 $ 0.11 $ 0.34 $ 0.33
(a) DistributionsaccumulatedtopreferredshareholdersinarrearswereeliminatedasofNovember6,2013throughtheDistributionandExchange(asdefinedinNote8toourauditedconsolidatedfinancialstatements),andarenotconsideredinourevaluationofongoingperformance.
(b) Non-cashchargesrelatedtostock-basedcompensationprogramsincurredinconnectionwithourIPO,whichwedonotconsiderinourevaluationofourongoingperformance.
(c) ChargesincurredinconnectionwithourIPO,whichwedonotexpecttorecuranddonotconsiderinourevaluationofongoingperformance.
(d) IncludeschargesincurredtorestructurebusinessoperationsatElfa,whichwedonotconsiderinourevaluationofourongoingperformance.
(e) GainrecordedasaresultofthesaleofaNorwegiansubsidiary,whoseprimaryassetwasamanufacturingfacilitythatwasshutdownandconsolidatedintoalikefacilityinSwedenaspartofElfa'srestructuringeffortsinfiscal2012,aswellasthesaleofabuildingatElfainfiscal2014,whichwedonotconsiderinourevaluationofongoingperformance.
(f) Certainmanagementtransitioncostsincurredandbenefitsrealized,includingtheimpactofamendedandrestatedemploymentagreementsenteredintowithkeyexecutivesduringfiscal2016,whichresultedinthereversalofaccrueddeferredcompensationassociatedwiththeoriginalemploymentagreements,netofcostsincurredtoexecutetheagreements,partiallyoffsetbycashseverancepayments,whichwedonotconsiderinourevaluationofongoingperformance.
(g) ChargesrelatedtotheclosureofanElfamanufacturingfacilityinLahti,FinlandinDecember2017,recordedinotherexpenses,whichwedonotconsiderinourevaluationofourongoingperformance.
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(h) LossrecordedasaresultoftheamendmentsmadetotheSeniorSecuredTermLoanFacilityinApril2013,November2013andAugust2017,whichwedonotconsiderinourevaluationofourongoingoperations.
(i) ChargesincurredtoimplementourOptimizationPlan,whichincludecertainconsultingcostsrecordedinselling,generalandadministrativeexpenses,cashseverancepaymentsassociatedwiththeeliminationofcertainfull-timepositionsattheTCSsegmentrecordedinotherexpenses,andcashseverancepaymentsassociatedwithorganizationalrealignmentattheElfasegmentrecordedinotherexpenses,whichwedonotconsiderinourevaluationofongoingperformance.
(j) Taximpactofadjustmentstonetincome(loss),aswellasotherunusualorinfrequenttaxitems,includingtheimpactofa$1.8millionreductionintaxexpenserecordedinfiscal2014primarilyrelatedtoarefundoftaxpaidinapriorperiod,theestimatedimpactoftheTaxCutsandJobsActinfiscal2017,aswellastheexclusionoftheimpactofcertainvaluationallowancesondeferredtaxassets,whichwedonotconsiderinourevaluationofongoingperformance.
(k) Fiscal2013iscalculatedbasedontheassumptionthatthenumberofsharesoutstandingasofMarch1,2014wasoutstandingatthebeginningofthefiscalyear.
(9) Networkingcapitalisdefinedascurrentassets(excludingcash)lesscurrentliabilities(excludingthecurrentportionoflong-termdebtandrevolvinglinesofcredit).
(10) Long-termdebtconsistsofthecurrentandlong-termportionsoftheSeniorSecuredTermLoanFacility,the2014ElfaTermLoanFacility,ElfaTermLoanFacility,theRevolvingCreditFacility,capitalleaseliabilities,andothermortgagesandloans.
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ITEM7.MANAGEMENT'SDISCUSSIONANDANALYSISOFFINANCIALCONDITIONANDRESULTSOFOPERATIONS
YoushouldreadthefollowingdiscussionandanalysisofourfinancialconditionandresultsofoperationstogetherwithourconsolidatedfinancialstatementsandtherelatednotesandotherfinancialinformationincludedelsewhereinthisAnnualReportonForm10-K.Someoftheinformationcontainedinthisdiscussionandanalysisorsetforthelsewhereinthisreport,includinginformationwithrespecttoourplansandstrategyforourbusiness,includesforward-lookingstatementsthatinvolverisksanduncertainties.Youshouldreviewthe"CautionaryNoteRegardingForward-LookingStatements"and"RiskFactors"sectionsofthisreportforadiscussionofimportantfactorsthatcouldcauseactualresultstodiffermateriallyfromtheresultsdescribedinorimpliedbytheforward-lookingstatementscontainedinthefollowingdiscussionandanalysis.
Overview
TheContainerStore®istheoriginalandleadingspecialtyretailerofstorageandorganizationproductsandsolutionsintheUnitedStatesandtheonlynationalretailersolelydevotedtothecategory.Weprovideacollectionofcreative,multifunctionalandcustomizablestorageandorganizationsolutionsthataresoldinourstoresandonlinethroughahigh-service,differentiatedshoppingexperience.Ourvisionistobeabelovedbrandandthefirstchoiceforcustomizedorganizationsolutionsandservices.Ourcustomersarehighlyeducated,verybusyandprimarilyhomeownerswithahigherthanaveragehouseholdincome.Weservicethemwithstorageandorganizationsolutionsthathelpthemaccomplishprojects,maximizetheirspace,andmakethemostoftheirhome.Webelieveanorganizedlifeisahappylife.
Ouroperationsconsistoftwooperatingsegments:
• The Container Store ("TCS"), whichconsistsofourretailstores,websiteandcallcenter,aswellasourinstallationandorganizationalservicesbusiness.AsofMarch312018,weoperated90storeswithanaveragesizeofapproximately25,000squarefeet(19,000sellingsquarefeet)in32statesandtheDistrictofColumbia.Wealsoofferallofourproductsdirectlytocustomersthroughourwebsite,responsivemobilesite,andcallcenter.Ourstoresreceivesubstantiallyallofourproductsdirectlyfromourdistributioncenterco-locatedwithourcorporateheadquartersandcallcenterinCoppell,Texas.
• Elfa, TheContainerStore,Inc.'swhollyownedSwedishsubsidiary,ElfaInternationalAB("Elfa"),whichdesignsandmanufacturescomponent-basedshelvinganddrawersystemsandmade-to-measureslidingdoors.Elfawasfoundedin1948andisheadquarteredinMalmö,Sweden.Elfa'sshelvinganddrawersystemsarecustomizableforanyareaofthehome,includingclosets,kitchens,officesandgarages.ElfaoperatesthreemanufacturingfacilitieswithtwolocatedinSwedenandoneinPoland.TheContainerStorebegansellingelfa®productsin1978andacquiredElfain1999.TodayourTCSsegmentistheexclusivedistributorofelfa®productsintheU.S.Elfaalsosellsitsproductsonawholesalebasistovariousretailersinapproximately30countriesaroundtheworld,withaconcentrationintheNordicregionofEurope.
Howweassesstheperformanceofourbusiness
Weconsideravarietyoffinancialandoperatingmeasuresinassessingtheperformanceofourbusiness.Thekeymeasuresweusetodeterminehowourbusinessisperformingarenetsales,grossprofit,grossmargin,andselling,generalandadministrativeexpenses.Inaddition,wealsoreviewotherimportantoperatingmetricssuchascomparablestoresalesandnon-GAAPmeasuressuchasEBITDA,AdjustedEBITDA,andadjustednetincome.
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OptimizationPlan
AspreviouslyannouncedonMay23,2017,theCompanylaunchedafour-partoptimizationplantodriveimprovedsalesandprofitability(the"OptimizationPlan").Thisplanincludessalesinitiatives,certainfull-timepositioneliminationsatTCS,whichwereconcludedinthefirstquarteroffiscal2017,organizationalrealignmentatElfaandongoingsavingsandefficiencyefforts.Infiscal2016,theCompany'ssavingsprogramwasprimarilyfocusedwithinselling,generalandadministrativeexpenses.However,aspartoftheOptimizationPlan,theCompanyhasalsofocusedonsavingsandefficiencyeffortswithincostofsales,inadditiontoselling,generalandadministrativeexpenses.
TheCompanyincurredpre-taxchargesassociatedwiththeimplementationoftheOptimizationPlanofapproximately$11millioninfiscal2017.Theexpectedannualizedpre-taxsavingsassociatedwiththeOptimizationPlancontinuetobeapproximately$20million,ofwhichapproximately$12millionwasrealizedinfiscal2017.
Infiscal2018,theCompanyexpectstocompletetheOptimizationPlanthroughtheexecutionofapriceoptimizationinitiative.TheCompanyexpectstoincurapproximately$5millionofpre-taxchargesinthefirstquarteroffiscal2018associatedwiththeimplementationofthepriceoptimizationinitiative.
Netsales
Netsalesreflectoursalesofmerchandiseplusotherservicesprovided,suchasinstallation,shipping,delivery,andorganizationservices,lessreturnsanddiscounts.NetsalesalsoincludewholesalesalesbyElfa.RevenuefromourTCSsegmentisrecognizeduponreceiptoftheproductbyourcustomersoruponcompletionoftheservicetoourcustomers.Elfasegmentrevenueisrecordeduponshipmenttocustomers.
Theretailandwholesalebusinessesinwhichweoperatearecyclical,andconsequentlyoursalesareaffectedbygeneraleconomicconditions.Purchasesofourproductsaresensitivetotrendsinthelevelsofconsumerspending,whichareaffectedbyanumberoffactorssuchasconsumerdisposableincome,housingmarketconditions,stockmarketperformance,consumerdebt,interestrates,taxratesandoverallconsumerconfidence.
Ournetsalesaremoderatelyseasonal.Asaresult,ourrevenuesfluctuatefromquartertoquarter,whichoftenaffectsthecomparabilityofourinterimresults.NetsalesarehistoricallyhigherinthefourthquarterdueprimarilytotheimpactofOurAnnualelfa®Sale,whichtraditionallybeginsonoraboutDecember24thandrunsintoFebruary.
Grossprofitandgrossmargin
Grossprofitisequaltoournetsaleslesscostofsales.Grossprofitasapercentageofnetsalesisreferredtoasgrossmargin.CostofsalesinourTCSsegmentincludesthepurchasecostofinventorylessvendorrebates,in-boundfreight,aswellasinventoryshrinkage.Directinstallationandorganizationcosts,aswellascostsincurredtoshipordelivermerchandisetocustomers,arealsoincludedincostofsalesinourTCSsegment.Elfasegmentcostofsalesfrommanufacturingoperationsincludescostsassociatedwithproduction,primarilymaterial,wages,freightandothervariablecosts,andapplicablemanufacturingoverhead.Thecomponentsofourcostofsalesmaynotbecomparabletothecomponentsofcostofsalesorsimilarmeasuresbyotherretailers.Asaresult,datainthisreportregardingourgrossprofitandgrossmarginmaynotbecomparabletosimilardatamadeavailablebyotherretailers.
Ourgrossprofitisvariableinnatureandgenerallyfollowschangesinnetsales.Ourgrossmargincanbeimpactedbychangesinthemixofproductsandservicessold.Forexample,salesfromourTCSsegmenttypicallyprovideahighergrossmarginthansalestothirdpartiesfromourElfasegment.Additionally,salesofproductstypicallyprovideahighergrossmarginthansalesofservices.Gross
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marginforourTCSsegmentisalsosusceptibletoforeigncurrencyriskaspurchasesofelfa®productsfromourElfasegmentareinSwedishkrona,whilesalesoftheseproductsareinU.S.dollars.Wemitigatethisriskthroughtheuseofforwardcontracts,wherebywehedgepurchasesofinventorybylockinginforeigncurrencyexchangeratesinadvance.Similarly,grossmarginforourElfasegmentissusceptibletoforeigncurrencyriskascertainpurchasesofrawmaterialsaretransactedincurrenciesotherthanSwedishkrona,whichisthefunctionalcurrencyofElfa.
Selling,generalandadministrativeexpenses
Selling,generalandadministrativeexpensesincludealloperatingcostsnotincludedincostofsales,stock-basedcompensation,andpre-openingcosts.ForourTCSsegment,theseincludepayrollandpayroll-relatedexpenses,marketingexpenses,occupancyexpenses(whichincluderent,realestatetaxes,commonareamaintenance,utilities,telephone,propertyinsurance,andrepairsandmaintenance),coststoshipproductfromthedistributioncentertoourstores,andsuppliesexpenses.Wealsoincurcostsforourdistributionandcorporateofficeoperations.ForourElfasegment,theseincludesalesandmarketingexpenses,productdevelopmentcosts,andallexpensesrelatedtooperationsatheadquarters.Depreciationandamortizationareexcludedfrombothgrossprofitandselling,generalandadministrativeexpenses.
Selling,generalandadministrativeexpensesincludebothfixedandvariablecomponentsand,therefore,isnotdirectlycorrelatedwithnetsales.Thecomponentsofourselling,generalandadministrativeexpensesmaynotbecomparabletothecomponentsofsimilarmeasuresofotherretailers.Weexpectthatourselling,generalandadministrativeexpenseswillincreaseinfutureperiodswithexpectedfuturestoregrowth.
Pre-openingcosts
Non-capitalexpendituresassociatedwithopeningnewstoresandrelocatingstores,includingrent,marketingexpenses,travelandrelocationcosts,trainingcosts,andcertaincorporateoverheadcosts,areexpensedasincurredandareincludedinpre-openingcostsintheconsolidatedstatementofoperations.
Comparablestoresales
Astoreisincludedinthecomparablestoresalescalculationonthefirstdayofthesixteenthfullfiscalmonthfollowingthestore'sopening.Comparablestoresalesarenetofdiscountsandreturns.Whenastoreisrelocated,wecontinuetoconsidersalesfromthatstoretobecomparablestoresales.Netsalesfromourwebsiteandcallcenterarealsoincludedincalculationsofcomparablestoresales.
Inthefirstquarteroffiscal2016,wechangedourcomparablestoresalesoperatingmeasuretoreflectthepointatwhichmerchandiseandserviceordersarefulfilledanddeliveredtocustomers,excludingshippinganddelivery.Priortothefirstquarteroffiscal2016,ourcomparablestoresalesoperatingmeasureinagivenperiodwasbasedonmerchandiseandserviceordersplacedinthatperiod,excludingshippinganddelivery,whichdidnotalwaysreflectthepointatwhichmerchandiseandserviceswerereceivedbythecustomerand,therefore,recognizedinourfinancialstatementsasnetsales.Webelievethatchangingthecomparablestoresalesoperatingmetrictobetteralignwithnetsalespresentedinourfinancialstatementswillassistinvestorsinevaluatingourfinancialperformance.
Comparablestoresalesallowustoevaluatehowourretailstorebaseisperformingbymeasuringthechangeinperiod-over-periodnetsalesinstoresthathavebeenopenforfifteenmonthsormore.Thecomparablestoresalesgrowthmetricisanoperatingmeasureintendedonlyassupplementalinformationandisnotasubstitutefornetsalespresentedinaccordancewithgenerallyacceptedaccountingprinciples.Variousfactorsaffectcomparablestoresales,including:
• nationalandregionaleconomictrendsintheUnitedStates;
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• changesinourmerchandisemix;
• changesinpricing;
• changesintimingofpromotionaleventsorholidays;and
• weather.
Openingnewstoresispartofourgrowthstrategy.Aswecontinuetopursueourgrowthstrategy,weanticipatethataportionofournetsaleswillcomefromstoresnotincludedinourcomparablestoresalescalculation.Accordingly,comparablestoresalesisonlyonemeasureweusetoassessthesuccessofourgrowthstrategy.
EBITDAandAdjustedEBITDA
EBITDAandAdjustedEBITDAarekeymetricsusedbymanagement,ourboardofdirectorsandLGPtoassessourfinancialperformance.Inaddition,weuseAdjustedEBITDAinconnectionwithcovenantcompliance,executiveperformanceevaluations,andtosupplementGAAPmeasuresofperformancetoevaluatetheeffectivenessofourbusinessstrategies,tomakebudgetingdecisionsandtocompareourperformanceagainstthatofotherpeercompaniesusingsimilarmeasures.WebelieveitisusefulforinvestorstoseethemeasuresthatmanagementusestoevaluatetheCompany,itsexecutivesandourcovenantcompliance,asapplicable.EBITDAandAdjustedEBITDAarealsofrequentlyusedbyanalysts,investorsandotherinterestedpartiestoevaluatecompaniesinourindustry.
WedefineEBITDAasnetincome(loss)beforeinterest,taxes,depreciation,andamortization.AdjustedEBITDAiscalculatedinaccordancewiththeSeniorSecuredTermLoanFacilityandtheRevolvingCreditFacilityandisoneofthecomponentsforperformanceevaluationunderourexecutivecompensationprograms.AdjustedEBITDAreflectsfurtheradjustmentstoEBITDAtoeliminatetheimpactofcertainitems,includingcertainnon-cashandotheritems,thatwedonotconsiderrepresentativeofourongoingoperatingperformance.ForreconciliationofAdjustedEBITDAtothemostdirectlycomparableGAAPmeasure,referto"Item 6: Selected Financial and Operating Data. "
Adjustednetincomeandadjustednetincomepercommonshare—diluted
Weuseadjustednetincomeandadjustednetincomepercommonshare—dilutedtosupplementGAAPmeasuresofperformancetoevaluatetheeffectivenessofourbusinessstrategies,tomakebudgetingdecisionsandtocompareourperformanceagainstthatofotherpeercompaniesusingsimilarmeasures.Wepresentadjustednetincomeandadjustednetincomepercommonshare—dilutedbecausewebelievetheyassistinvestorsincomparingourperformanceacrossreportingperiodsonaconsistentbasisbyexcludingitemsthatwedonotbelieveareindicativeofourcoreoperatingperformanceandbecausewebelieveitisusefulforinvestorstoseethemeasuresthatmanagementusestoevaluatetheCompany.Adjustednetincomeisasupplementalmeasureoffinancialperformancethatisnotrequiredby,orpresentedinaccordancewith,GAAP.
Wedefineadjustednetincomeasnetincome(loss)availabletocommonshareholdersbeforedistributionsaccumulatedtopreferredshareholders,stock-basedcompensationandothercostsinconnectionwithourIPO,restructuringcharges,lossesonextinguishmentofdebt,certaingainsondisposalofassets,certainmanagementtransitioncostsincurredandbenefitsrealized,chargesincurredaspartoftheimplementationofourOptimizationPlan,chargesassociatedwithanElfamanufacturingfacilityclosure,andthetaximpactoftheseadjustmentsandunusualorinfrequenttaxitems.Wedefineadjustednetincomepercommonshare—dilutedasadjustednetincomedividedbythedilutedweightedaveragecommonsharesoutstanding.ForareconciliationofadjustednetincometothemostdirectlycomparableGAAPmeasure,referto"Item 6: Selected Financial and Operating Data. "
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Adjustmentforcurrencyexchangeratefluctuations
Additionally,thisManagement'sDiscussionandAnalysisalsoreferstoElfathirdpartynetsalesaftertheconversionofElfa'snetsalesfromSwedishkronatoU.S.dollarsusingtheprioryear'sconversionrate.TheCompanybelievesthedisclosureofElfathirdpartynetsaleswithouttheeffectsofcurrencyexchangeratefluctuationshelpsinvestorsunderstandtheCompany'sunderlyingperformance.
NoteonDollarAmounts
AlldollaramountsinthisManagement'sDiscussionandAnalysisofFinancialConditionandResultsofOperationsareinthousands,exceptpershareamounts,unlessotherwisestated.
ResultsofOperations
ThefollowingdatarepresentstheamountsshowninourauditedconsolidatedstatementsofoperationsforthefiscalyearsendedMarch31,2018andApril1,2017,andthefive-weeksendedApril2,2016alongwithcomparableunauditeddatafortherecastfiscalyearendedApril2,2016andthefive-weeksendedApril4,2015expressedindollarsandasapercentageofnetsalesandcertainoperatingdataandnon-GAAPfinancialinformation.Forsegmentdata,seeNote14toourauditedconsolidatedfinancialstatementsincludedelsewhereinthisAnnualReportonForm10-K.
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Fiscalyearended FiveWeeksEnded
March31,
2018 April1,2017
April2,2016
April2,2016
April4,2015
(unaudited) (unaudited) Netsales $ 857,228 $ 819,930 $ 797,087 $ 69,218 $ 66,761Costofsales(excludingdepreciationandamortization) 360,167 343,860 332,594 29,023 27,507Grossprofit 497,061 476,070 464,493 40,195 39,254Selling,general,andadministrativeexpenses(excludingdepreciationandamortization) 411,721 387,948 394,585 34,504 33,728
Stock-basedcompensation 2,026 1,989 1,575 147 129Pre-openingcosts 5,293 6,852 9,004 191 220Depreciationandamortization 37,922 37,124 34,628 3,009 2,612Otherexpenses 5,734 1,058 102 102 —Lossondisposalofassets 278 57 62 — —Incomefromoperations 34,087 41,042 24,537 2,242 2,565Interestexpense 25,013 16,687 16,772 1,550 1,587Lossonextinguishmentofdebt 2,369 — — — —Incomebeforetaxes 6,705 24,355 7,765 692 978(Benefit)provisionforincometaxes (12,723) 9,402 2,907 338 340Netincome $ 19,428 $ 14,953 $ 4,858 $ 354 $ 638
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Fiscalyearended FiveWeeksEnded(3)
March31,
2018 April1,2017
April2,2016
April2,2016
April4,2015
(unaudited) (unaudited) Percentageofnetsales:
Netsales 100.0% 100.0% 100.0% 100.0% 100.0%Costofsales(excludingdepreciationandamortization) 42.0% 41.9% 41.7% 41.9% 41.2%Grossprofit 58.0% 58.1% 58.3% 58.1% 58.8%Selling,general,andadministrativeexpenses(excludingdepreciationandamortization) 48.0% 47.3% 49.5% 49.8% 50.5%
Stock-basedcompensation 0.2% 0.2% 0.2% 0.2% 0.2%Pre-openingcosts 0.6% 0.8% 1.1% 0.3% 0.3%Depreciationandamortization 4.4% 4.5% 4.3% 4.3% 3.9%Otherexpenses 0.7% 0.1% 0.0% 0.1% 0.0%Lossondisposalofassets 0.0% 0.0% 0.0% 0.0% 0.0%Incomefromoperations 4.0% 5.0% 3.1% 3.2% 3.8%Interestexpense 2.9% 2.0% 2.1% 2.2% 2.4%Lossonextinguishmentofdebt 0.3% 0.0% 0.0% 0.0% 0.0%Incomebeforetaxes 0.8% 3.0% 1.0% 1.0% 1.5%(Benefit)provisionforincometaxes (1.5)% 1.1% 0.4% 0.5% 0.5%Netincome 2.3% 1.8% 0.6% 0.5% 1.0%Operatingdata: Comparablestoresalesgrowthfortheperiod(1) 0.9% (2.4)% (0.8)% Numberofstoresopenatendofperiod 90 86 79 Non-GAAPmeasures(2): AdjustedEBITDA(2) $ 89,603 $ 86,559 $ 68,362 Adjustednetincome(2) $ 13,594 $ 13,393 $ 4,858 Adjustednetincomepercommonshare—diluted(2) $ 0.28 $ 0.28 $ 0.10
(1) Astoreisincludedinthecomparablestoresalescalculationonthefirstdayofthesixteenthfullfiscalmonthfollowingthestore'sopening.Comparablestoresalesarenetofdiscountsandreturns.Whenastoreisrelocated,wecontinuetoconsidersalesfromthatstoretobecomparablestoresales.Netsalesfromourwebsiteandcallcenterarealsoincludedincalculationsofcomparablestoresales.
Inthefirstquarteroffiscal2016,wechangedourcomparablestoresalesoperatingmeasuretoreflectthepointatwhichmerchandiseandserviceordersarefulfilledanddeliveredtocustomers,excludingshippinganddelivery.Priortothefirstquarteroffiscal2016,ourcomparablestoresalesoperatingmeasureinagivenperiodwasbasedonmerchandiseandserviceordersplacedinthatperiod,excludingshippinganddelivery,whichdidnotalwaysreflectthepointatwhichmerchandiseandserviceswerereceivedbythecustomerand,therefore,recognizedinourfinancialstatementsasnetsales.Webelievethatchangingthecomparablestoresalesoperatingmetrictobetteralignwithnetsalespresentedinourfinancialstatementswillassistinvestorsinevaluatingourfinancialperformance.Thecomparablestoresalesgrowthmetricisanoperatingmeasureintendedonlyassupplementalinformationandisnotasubstitutefornetsalespresentedinaccordancewithgenerallyacceptedaccountingprinciples("GAAP").
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Fiscal2017comparedtoFiscal2016
Netsales
Thefollowingtablesummarizesournetsalesforfiscal2017andfiscal2016:
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(2) WehavepresentedEBITDA,AdjustedEBITDA,adjustednetincome,andadjustednetincomepercommonshare—dilutedassupplementalmeasuresoffinancialperformancethatarenotrequiredby,orpresentedinaccordancewith,GAAP.Thesenon-GAAPmeasuresshouldnotbeconsideredasalternativestonetincome(loss)asameasureoffinancialperformanceorcashflowsfromoperationsasameasureofliquidity,oranyotherperformancemeasurederivedinaccordancewithGAAPandtheyshouldnotbeconstruedasaninferencethatourfutureresultswillbeunaffectedbyunusualornon-recurringitems.Thesenon-GAAPmeasuresarekeymetricsusedbymanagement,ourboardofdirectors,andLGPtoassessourfinancialperformance.Wepresentthesenon-GAAPmeasuresbecausewebelievetheyassistinvestorsincomparingourperformanceacrossreportingperiodsonaconsistentbasisbyexcludingitemsthatwedonotbelieveareindicativeofourcoreoperatingperformanceandbecausewebelieveitisusefulforinvestorstoseethemeasuresthatmanagementusestoevaluatetheCompany.Thesenon-GAAPmeasuresarealsofrequentlyusedbyanalysts,investorsandotherinterestedpartiestoevaluatecompaniesinourindustry.Inevaluatingthesenon-GAAPmeasures,youshouldbeawarethatinthefuturewewillincurexpensesthatarethesameasorsimilartosomeoftheadjustmentsinthispresentation.Ourpresentationofthesenon-GAAPmeasuresshouldnotbeconstruedtoimplythatourfutureresultswillbeunaffectedbyanysuchadjustments.ManagementcompensatesfortheselimitationsbyrelyingonourGAAPresultsinadditiontousingnon-GAAPmeasuressupplementally.Ournon-GAAPmeasuresarenotnecessarilycomparabletoothersimilarlytitledcaptionsofothercompaniesduetodifferentmethodsofcalculation.FormoreinformationregardingouruseofEBITDAandAdjustedEBITDAandareconciliationofEBITDAandAdjustedEBITDAtotheGAAPfinancialmeasureofnetincome(loss)see"Howweassesstheperformanceofourbusiness"aboveand"Item 6: Selected Financial and OperatingData. "Formoreinformationregardingouruseofadjustednetincomeandadjustednetincomepercommonshare—diluted,andareconciliationofadjustednetincomeandadjustednetincomepercommonshare—dilutedtotheGAAPfinancialmeasuresofnetincome(loss)availabletocommonshareholdersanddilutednetincome(loss)percommonshare,see"Howweassesstheperformanceofourbusiness"aboveand"Item 6: Selected Financial and Operating Data ."
(3) Wehavenotpresentedoperatingdataornon-GAAPmeasuresforthefiveweekperiodsendedApril2,2016andApril4,2015.
March31,
2018 %total April1,2017 %total
TCSnetsales $ 787,375 91.9%$ 752,675 91.8%Elfathirdpartynetsales 69,853 8.1% 67,255 8.2%Netsales $ 857,228 100.0%$ 819,930 100.0%
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Netsalesinfiscal2017increasedby$37,298,or4.5%,comparedtofiscal2016.Thisincreaseiscomprisedofthefollowingcomponents:
Duringfiscal2017,thirteennewstoresgenerated$27,662ofincrementalnetsales,nineofwhichwereopenedpriortoorduringfiscal2016andfourofwhichwereopenedinfiscal2017.Additionally,comparablestoresgenerated$6,601,or0.9percentagepoints,ofthe4.5%increaseinnetsales.Elfathirdpartynetsalesincreased$2,598duringfiscal2017,primarilyduetothepositiveimpactofforeigncurrencytranslation,whichincreasedthirdpartynetsalesby$2,675.AfterconvertingElfa'sthirdpartynetsalesfromSwedishkronatoU.S.dollarsusingtheprioryear'sconversionrateforfiscal2017andfiscal2016,Elfathirdpartynetsalesdecreased$77primarilyduetolowernetsalesintheNordicmarkets,partiallyoffsetbyhighernetsalesinRussia.
Grossprofitandgrossmargin
Grossprofitinfiscal2017increasedby$20,991,or4.4%,comparedtofiscal2016.Theincreaseingrossprofitwasprimarilytheresultofincreasedconsolidatednetsales,partiallyoffsetbylowerconsolidatedgrossmargin.Thefollowingtablesummarizesthegrossmarginforfiscal2017andfiscal2016bysegmentandtotal.Thesegmentmarginsincludetheimpactofinter-segmentsalesfromtheElfasegmenttotheTCSsegment:
TCSgrossmarginincreased10basispointsduringfiscal2017,primarilyduetolowercostofgoodssoldassociatedwiththeOptimizationPlanandthebenefitoffavorableforeigncurrencycontracts,partiallyoffsetbyagreaterportionofsalesgeneratedbymerchandisecampaignsandhighercostsassociatedwithourinstallationservicesbusiness.Elfasegmentgrossmargindecreased180basispoints,primarilyduetohigherdirectmaterialscosts.Onaconsolidatedbasis,grossmargindeclined10basispoints,astheimprovementinTCSgrossmarginwasmorethanoffsetbythedeclineinElfagrossmargin.
Selling,generalandadministrativeexpenses
Selling,generalandadministrativeexpensesinfiscal2017increasedby$23,773,or6.1%,comparedtofiscal2016.Asapercentageofconsolidatednetsales,selling,generalandadministrativeexpenses
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Netsales Netsalesforfiscal2016 $ 819,930Incrementalnetsalesincrease(decrease)dueto: Newstores 27,662Comparablestores(includinga$11,398,or20.3%,increaseinonlinesales) 6,601Elfathirdpartynetsales(excludingimpactofforeigncurrencytranslation) (77)ImpactofforeigncurrencytranslationonElfathirdpartynetsales 2,675Shippinganddelivery 437Netsalesforfiscal2017 $ 857,228
March31,
2018 April1,2017
TCSgrossmargin 57.2% 57.1%Elfagrossmargin 38.1% 39.9%Totalgrossmargin 58.0% 58.1%
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increasedby70basispoints.Thefollowingtablesummarizesselling,generalandadministrativeexpensesasapercentageofconsolidatednetsalesforfiscal2017andfiscal2016:
TCSselling,generalandadministrativeexpensesincreasedby100basispointsasapercentageofconsolidatednetsales.TheincreasewasprimarilyduetoconsultingcostsincurredaspartoftheOptimizationPlan,whichcontributed80basispointstotheincreaseinfiscal2017.Additionally,theimpactofamendedandrestatedemploymentagreementsenteredintowithkeyexecutivesduringfiscal2016,whichledtothereversalofaccrueddeferredcompensationassociatedwiththeoriginalemploymentagreements,netofcostsincurredtoexecutetheagreements,contributeda50basispointsbenefitinfiscal2016.Thiscombined130basispointsyear-over-yearincreasewaspartiallyoffsetbya30basispointimprovementinTCSselling,generalandadministrativeexpensesasapercentageofnetsales,primarilyduetoongoingsavingsandefficiencyefforts,inclusiveofsavingsfromtheOptimizationPlan,partiallyoffsetbyincreasedoccupancycosts.Elfaselling,generalandadministrativeexpensesdecreasedby30basispointsasapercentageofconsolidatednetsalesprimarilyduetoongoingsavingsandefficiencyefforts.
Pre-openingcosts
Pre-openingcostsdecreasedby$1,559,or22.8%infiscal2017to$5,293,ascomparedto$6,852infiscal2016,duetoadecreaseinthenumberofstoresopenedinfiscal2017ascomparedtofiscal2016.Weopenedfivestores,inclusiveofonerelocation,infiscal2017,andweopenedsevenstoresinfiscal2016.
Otherexpenses
Infiscal2017,werecorded$5,734ofotherexpenses,whichwereprimarilyrelatedtoseverancecostsassociatedwiththeOptimizationPlan.TheCompanyincurred$1,836ofseverancechargesassociatedwiththeeliminationofcertainfull-timepositionsatTCS,aswellas$2,727ofseverancechargesassociatedwithorganizationalrealignmentatElfa.Additionally,otherexpensesof$803wererecordedinconnectionwiththeclosureofanElfamanufacturingfacilityinLahti,FinlandinDecember2017.Wealsorecorded$368ofseveranceexpensesinfiscal2017thatwerenotassociatedwiththeOptimizationPlan.Infiscal2016,werecorded$1,058ofotherexpenses,whichwereprimarilyrelatedtomanagementtransitioncosts.
Interestexpenseandlossonextinguishmentofdebt
Interestexpenseincreasedby$8,326,or49.9%,infiscal2017to$25,013,ascomparedto$16,687infiscal2016.OnAugust18,2017,theCompanyenteredintoafourthamendment(the"TermLoanAmendment")totheSeniorSecuredTermLoanFacilitydatedasofApril6,2012.ThefourthamendmentamendedtheSeniorSecuredTermLoanFacilityto,amongotherthings,increasetheapplicableinterestratemarginto7.00%forLIBORloansand6.00%forbaserateloans,whichresultedinincreasedinterestexpenseduringfiscal2017.
Additionally,asaresultoftheTermLoanAmendment,theCompanyrecorded$2,369oflossonextinguishmentofdebtinfiscal2017.
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March31,2018%ofnetsales
April1,2017%ofnetsales
TCSselling,generalandadministrative 44.1% 43.1%Elfaselling,generalandadministrative 3.9% 4.2%Totalselling,generalandadministrative 48.0% 47.3%
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Taxes
Thebenefitforincometaxesinfiscal2017was$12,723ascomparedtoaprovisionof$9,402infiscal2016.Theeffectivetaxrateforfiscal2017was–189.8%,ascomparedto38.6%infiscal2016.ThedecreaseintheeffectivetaxrateisprimarilyduetotheestimatedimpactoftheTaxActenactedinfiscal2017,whichwasprimarilydrivenbytheremeasurementofdeferredtaxbalancesresultingintherecognitionofaprovisionalbenefitof$24,210infiscal2017,partiallyoffsetbyaprovisionalaccrualoftheone-timetransitiontaxonforeignearningsof$8,521.
TheCompanyhasmadeprovisionalestimatesoftheimpactofremeasuringitsdeferredtaxbalancesduringfiscal2017,aswellastheone-timetransitiontaxontheearningsofforeignsubsidiaries.PursuanttoStaffAccountingBulletinNo.118,theCompany'smeasurementperiodforimplementingtheaccountingchangesrequiredbytheTaxActwillclosebeforeDecember22,2018andtheCompanyanticipatescompletingtheaccountingunderASCTopic740inasubsequentreportingperiodwithinthemeasurementperiod.
Theeffectivetaxrateforfiscal2018andbeyondisestimatedtobeinthehigh-20%tolow-30%range,excludingtheimpactofanyfutureadjustmentstotheprovisionalamountsrecognizedfortheremeasurementofdeferredtaxbalancesandtheone-timetransitiontaxonforeignearnings,asthetimingandamountoffutureadjustmentscannotbereasonablyestimated.
YearEndedApril1,2017("Fiscal2016")comparedtoYearEndedApril2,2016("RecastFiscal2015")
Netsales
ThefollowingtablesummarizesournetsalesforeachofthefiscalyearsendedApril1,2017andApril2,2016:
NetsalesinthefiscalyearendedApril1,2017increasedby$22,843,or2.9%,comparedtothefiscalyearendedApril2,2016.Thisincreaseiscomprisedofthefollowingcomponents:
Inthefifty-twoweeksendedApril1,2017,seventeennewstoresgenerated$41,715ofincrementalnetsales,tenofwhichwereopenedpriortoApril2,2016andsevenofwhichwereopenedinfiscal2016.Theincreaseinnetsalesgeneratedbynewstoreswaspartiallyoffsetbya$17,234,or2.4%,decreaseinsalesfromcomparablestores.Elfathirdpartynetsalesdecreased$2,173duringfiscal2016.AfterconvertingElfa'sthirdpartynetsalesfromSwedishkronatoU.S.dollarsusingtheprioryear's
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April1,2017 %total
April2,2016 %total
TCSnetsales $ 752,675 91.8%$ 727,659 91.3%Elfathirdpartynetsales 67,255 8.2% 69,428 8.7%Netsales $ 819,930 100.0%$ 797,087 100.0%
Netsales NetsalesforthefiscalyearendedApril2,2016 $ 797,087Incrementalnetsalesincrease(decrease)dueto: Newstores 41,715Comparablestores(includinga$2,607,or4.4%,decreaseinonlinesales) (17,234)Elfathirdpartynetsales(excludingimpactofforeigncurrencytranslation) (490)ImpactofforeigncurrencytranslationonElfathirdpartynetsales (1,683)Shippinganddelivery 535NetsalesforthefiscalyearendedApril1,2017 $ 819,930
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conversionrateforfiscal2016andfiscal2015,Elfathirdpartynetsalesdecreased$490primarilyduetolowernetsalesinRussia.
Grossprofitandgrossmargin
GrossprofitinthefiscalyearendedApril1,2017increasedby$11,577,or2.5%,comparedtothefiscalyearendedApril2,2016.Theincreaseingrossprofitwasprimarilytheresultofincreasedsales,partiallyoffsetbylowergrossmargins.ThefollowingtablesummarizesthegrossmarginforthefiscalyearendedApril1,2017andthefiscalyearendedApril2,2016bysegmentandtotal.Thesegmentmarginsincludetheimpactofinter-segmentsalesfromtheElfasegmenttotheTCSsegment:
TCSgrossmargindecreased60basispointsduringfiscal2016,primarilyduetoanincreasedmixoflower-marginproductandservicesales,combinedwithincreasedsalesassociatedwithpromotionalactivitiesandpartiallyoffsetbytheimpactofastrongerU.S.dollar.Elfasegmentgrossmarginincreased120basispoints,primarilyduetoimprovedproductionefficiencies.Onaconsolidatedbasis,grossmargindeclined20basispoints,astheimprovementinElfagrossmarginwasmorethanoffsetbythedeclineinTCSgrossmargin,duetoalargerpercentageofconsolidatednetsalescomingfromtheTCSsegment.
Selling,generalandadministrativeexpenses
Selling,generalandadministrativeexpensesinthefiscalyearendedApril1,2017decreasedby$6,637,or1.7%,comparedtothefiscalyearendedApril2,2016.Asapercentageofconsolidatednetsales,selling,generalandadministrativeexpensesdecreasedby220basispoints.Thefollowingtablesummarizesselling,generalandadministrativeexpensesasapercentageofconsolidatednetsalesforthefiscalyearendedApril1,2017andthefiscalyearendedApril2,2016:
TCSselling,generalandadministrativeexpensesdecreasedby180basispointsasapercentageofconsolidatednetsales.ThedecreasewasprimarilyaresultoftheCompany'sSG&Asavingsprogramwhichcontributedtodecreasedspending,includingon401(k)costs,storepayroll,andcertainmajorinitiatives.Additionally,weexperiencedlowerhealthcarecostsduringfiscal2016.Also,theimpactofamendedandrestatedemploymentagreementsenteredintowithkeyexecutivesduringthefirstquarteroffiscal2016contributedtothedecreaseofselling,generalandadministrativeexpensesduetothereversalofaccrueddeferredcompensationassociatedwiththeoriginalemploymentagreements,netofcostsincurredtoexecutetheagreements,of$3,910,or50basispoints.Thepositiveimpactoftheseitemswaspartiallyoffsetbydeleveragingofoccupancycostsassociatedwithnegativecomparablestoresalesgrowth.Elfaselling,generalandadministrativeexpensesdecreasedby40basispointsasapercentageofconsolidatednetsalesprimarilyduetoapositiveimpactfromforeigncurrencyexchangeratesandasmallerpercentageofconsolidatednetsalescomingfromtheElfasegment.
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April1,2017
April2,2016
TCSgrossmargin 57.1% 57.7%Elfagrossmargin 39.9% 38.7%Totalgrossmargin 58.1% 58.3%
April1,2017%ofnetsales
April2,2016%ofnetsales
TCSselling,generalandadministrative 43.1% 44.9%Elfaselling,generalandadministrative 4.2% 4.6%Totalselling,generalandadministrative 47.3% 49.5%
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Pre-openingcosts
Pre-openingcostsdecreasedby$2,152,or23.9%inthefiscalyearendedApril1,2017to$6,852,ascomparedto$9,004inthefiscalyearendedApril2,2016.Thedecreasewastheresultofopeningsevennewstoresinfiscal2016,ascomparedtoopeningofninenewstoresandrelocatingonestoreinfiscal2015.
Depreciationandamortization
Depreciationandamortizationincreasedby$2,496,or7.2%,inthefiscalyearendedApril1,2017to$37,124,ascomparedto$34,628inthefiscalyearendedApril2,2016.Theincreaseindepreciationandamortizationisprimarilyrelatedtoanincreaseinthenumberofstores.
Otherexpenses
InthefiscalyearendedApril1,2017,werecorded$1,058ofotherexpenses,whichwereprimarilyrelatedtomanagementtransitioncosts.
Taxes
TheprovisionforincometaxesinthefiscalyearendedApril1,2017was$9,402ascomparedto$2,907inthefiscalyearendedApril2,2016.TheeffectivetaxratefortheyearendedApril1,2017was38.6%,ascomparedto37.4%intheyearendedApril2,2016.Theincreaseintheeffectivetaxrateisprimarilyduetochangesinthemixofdomesticandforeignearnings,combinedwiththeexpensingofcertaindeferredtaxassetsduetotheexpirationofcertainstockbasedcompensationawards.
Five-weekauditedtransitionperiodendedApril2,2016comparedtofive-weekunauditedperiodendedApril4,2015
Netsalesinthefive-weektransitionperiodendedApril2,2016increasedby$2,457,or3.7%,comparedtothefive-weekperiodendedApril4,2015.Theincreasewasprimarilyduetoincrementalsalesfromtennewstores,partiallyoffsetbyadecreaseinElfathird-partysalesandadecreaseinshippinganddeliverysalesduetotheintroductionoffreeshippingonordersover$75inApril2015.Grossprofitincreasedby$941,or2.4%,comparedtotheprioryearcomparableperiod,primarilyduetotheincreaseinnetsalesandpartiallyoffsetbya70basispointsdeclineingrossmargin.ThedeclineingrossmarginisprimarilyduetoashiftintimingofOurAnnualelfa®Saleextension,whichresultedindecreasedsalesofelfa®productinthefive-weeksendedApril2,2016ascomparedtotheprioryearcomparableperiod.Selling,generalandadministrativeexpensesincreasedby$776,or2.3%,comparedtotheprioryearcomparableperiod,primarilyduetotheincreaseinsales.Asapercentofnetsales,selling,generalandadministrativeexpensesdeclined70basispoints,primarilyduetoimprovedleverageonstorepayrollduringthemonth.Basicanddilutedearningspershareremainedconsistentat$0.01inthefive-weektransitionperiodendedApril2,2016ascomparedtothefive-weekperiodendedApril4,2015.
Seasonality
Ourstorageandorganizationproductofferingmakesuslesssusceptibletoholidayshoppingpatternsthanmanyretailers.Historically,ourbusinesshasrealizedahigherportionofnetsales,operatingincomeandcashflowsfromoperationsinthefourthfiscalquarter,attributableprimarilytotheimpactofOurAnnualelfa®Sale,whichtraditionallystartsonoraboutDecember24thandrunsintoFebruary.Overhalfofouradjustednetincomewasderivedinthefiscalfourthquarterinfiscalyears2017,2016,and2015.
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LiquidityandCapitalResources
Werelyoncashflowsfromoperations,a$100,000asset-basedrevolvingcreditagreement(the"RevolvingCreditFacility"asfurtherdiscussedunder"RevolvingCreditFacility"below),andtheSEK140.0million(approximately$16,743asofMarch31,2018)2014Elfarevolvingcreditfacility(the"2014ElfaRevolvingCreditFacility"asfurtherdiscussedunder"ElfaSeniorSecuredCreditFacilitiesand2014ElfaSeniorSecuredCreditFacilities"below)asourprimarysourcesofliquidity.Ourprimarycashneedsareformerchandiseinventories,directmaterials,payroll,storerent,capitalexpendituresassociatedwithopeningnewstoresandupdatingexistingstores,aswellasinformationtechnologyandinfrastructure,includingdistributioncenterandElfamanufacturingfacilityenhancements.Themostsignificantcomponentsofouroperatingassetsandliabilitiesaremerchandiseinventories,accountsreceivable,prepaidexpensesandotherassets,accountspayable,othercurrentandnon-currentliabilities,taxesreceivableandtaxespayable.Ourliquidityfluctuatesasaresultofourbuildinginventoryforkeysellingperiods,andasaresult,ourborrowingsaregenerallyhigherduringtheseperiodswhencomparedtotherestofourfiscalyear.OurborrowingsgenerallyincreaseinoursecondandthirdfiscalquartersasweprepareforourAnnualShelvingSale,theholidayseason,andOurAnnualelfa®Sale.WebelievethatcashexpectedtobegeneratedfromoperationsandtheavailabilityofborrowingsundertheRevolvingCreditFacilityandthe2014ElfaRevolvingCreditFacilitywillbesufficienttomeetliquidityrequirements,anticipatedcapitalexpendituresandpaymentsdueunderourexistingcreditfacilitiesforatleastthenext12months.Inthefuture,wemayseektoraiseadditionalcapital,whichcouldbeintheformofloans,bonds,convertibledebtorequity,tofundouroperationsandcapitalexpenditures.Therecanbenoassurancethatwewillbeabletoraiseadditionalcapitalonfavorabletermsoratall.
AtMarch31,2018,wehad$8,399ofcash,ofwhich$8,397washeldbyourforeignsubsidiaries.Inaddition,wehad$65,625ofadditionalavailabilityundertheRevolvingCreditFacilityandapproximately$16,743ofadditionalavailabilityunderthe2014ElfaRevolvingCreditFacilityatMarch31,2018.Therewere$3,901inlettersofcreditoutstandingundertheRevolvingCreditFacilityandothercontractsatthatdate.
PursuanttotheTaxAct,wewillberequiredtopayaone-timetransitiontaxonearningsofcertainforeignsubsidiariesthatwerepreviouslytaxdeferred.TheCompanyrecordedaprovisionalamountfortheone-timetransitiontaxinfiscal2017.FutureamountsearnedinourforeignsubsidiariesarenotexpectedtobesubjecttofederalincometaxesupontransfertotheUnitedStates.However,ifthesefundsweretransferredtotheUnitedStates,wemayberequiredtopaytaxesincertaininternationaljurisdictionsaswellascertainstates.ItisourintenttoindefinitelyreinvestthesefundsoutsidetheUnitedStates.
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Cashflowanalysis
Asummaryofourkeycomponentsandmeasuresofliquidityareshowninthefollowingtable:
Netcashprovidedby(usedin)operatingactivities
Cashfromoperatingactivitiesconsistsprimarilyofnetincomeadjustedfornon-cashitems,includingdepreciationandamortization,deferredtaxesandtheeffectofchangesinoperatingassetsandliabilities.
Netcashprovidedbyoperatingactivitieswas$62,176forthefiscalyearendedMarch31,2018.Netincomeof$19,428wascombinedwithnon-cashitemsof$19,941(primarilydepreciationandamortizationoffsetbydeferredtaxbenefit)andadecreaseinworkingcapitalof$22,807.Thedecreaseinworkingcapitalduringfiscal2017wasprimarilyduetoadecreaseininventoryandaccountsreceivablealongwithincreasesinaccountspayableandaccruedliabilitiesandothernoncurrentliabilities.Thedecreaseininventoryisduetoimprovedinventorymanagementcombinedwithpositivecomparablestoresalesinfiscal2017.Thedecreaseinaccountsreceivableisprimarilyrelatedtoashiftintimingofreceiptofrebateandlandlordreceivablesduringfiscal2017,aswellasadecreaseintradereceivablesforbusinesssales.Theincreaseinaccountspayableandaccruedliabilitiesisprimarilyduetoanincreaseindeferredrevenue.Theincreaseinothernoncurrentliabilitieswasprimarilyrelatedtotheliabilityrecordedfortheprovisionalone-timetransitiontaxonforeignearnings.
Netcashprovidedbyoperatingactivitieswas$44,639forthefiscalyearendedApril1,2017,asnon-cashitems(primarilydepreciationandamortizationaswellasstock-basedcompensationcharges)of$40,966werecombinedwith$14,953ofnetincomeandpartiallyoffsetbyanincreaseinworkingcapitalof$11,280.Theincreaseinworkingcapitalduringfiscal2016wasprimarilyduetoanincreaseininventoryandaccountsreceivable,partiallyoffsetbyincreasesinaccountspayableandaccruedliabilitiesandincometaxespayable.Theincreaseininventory,aswellastheincreaseinaccountspayableandaccruedliabilities,isprimarilyduetoachangeinpromotionalcampaigncadency,combinedwithanincreaseinthenumberofstores.Theincreaseinaccountsreceivableisprimarilyrelatedtoanincreaseintradereceivablesforbusinesssales,aswellasashiftintimingofreceiptofrebateandlandlordreceivablesduringthefiscalyear.Theincreaseinincometaxespayablewasprimarilyrelatedtoashiftinthetimingoftaxpaymentsduringthefiscalyear.
Netcashprovidedbyoperatingactivitieswas$42,307forthefiscalyearendedFebruary27,2016,asnon-cashitems(primarilydepreciationandamortizationaswellasstock-basedcompensationcharges)of$39,047werecombinedwith$5,142ofnetincomeandpartiallyoffsetbyanincreaseinworkingcapitalof$1,882.Theincreaseinworkingcapitalduringfiscal2015wasprimarilyduetoanincreaseinaccountsreceivableandinventory,partiallyoffsetbyanincreaseinaccountspayableand
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FiscalYearEnded
FiveWeeksEndedApril2,2016
March31,
2018 April1,2017
February27,2016
Netcashprovidedby(usedin)operatingactivities $ 62,176 $ 44,639 $ 42,307 $ (9,540)Netcashusedininvestingactivities (27,550) (28,508) (45,750) (2,434)Netcash(usedin)providedbyfinancingactivities (37,688) (13,981) (7,516) 6,942Effectofexchangeratechangesoncash 725 (223) (426) 232Net(decrease)increaseincash $ (2,337) $ 1,927 $ (11,385) $ (4,800)
Freecashflow(Non-GAAP)(1) $ 34,530 $ 16,124 $ (4,124) $ (11,975)
(1) Seebelowforadiscussionofthisnon-GAAPfinancialmeasureandreconciliationtoitsmostdirectlycomparableGAAPfinancialmeasure.
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accruedliabilities.Theincreaseinaccountsreceivable,aswellastheincreaseinaccountspayableandaccruedliabilities,wasprimarilyrelatedtoashiftintimingoftheendofOurAnnualelfa®Saleinfiscal2015.Theincreaseininventorywasprimarilyrelatedtotheadditionofninenewstoresduringthefiscalyear.
Netcashusedinoperatingactivitieswas$9,540forthefive-weeksendedApril2,2016,asanincreaseinworkingcapitalof$14,073waspartiallyoffsetbynon-cashitems(primarilydepreciationandamortizationaswellasstock-basedcompensationcharges)of$4,179,combinedwith$354ofnetincome.TheincreaseinworkingcapitalduringthefiveweeksendedApril2,2016wasprimarilyduetoadecreaseinaccountspayableandaccruedliabilities,whichwasprimarilyrelatedtodeliveryofcustomerordersrelatedtotheendofOurAnnualelfa®Saleinfiscal2015,interestpaymentsonlong-termdebt,andashiftintimingofotherpaymentsduringthefiveweeksendedApril2,2016.
Netcashusedininvestingactivities
Investingactivitiesconsistprimarilyofcapitalexpendituresfornewstoreopenings,existingstoreremodels,infrastructure,informationsystems,andourdistributioncenter.
OurtotalcapitalexpendituresforthefiscalyearendedMarch31,2018were$27,646withnewstoreopeningsandexistingstoreremodelsaccountingfor$15,665.Theremainingcapitalexpendituresof$11,981wereprimarilyforinvestmentsininformationsystemsandElfamanufacturingfacilityenhancements.
OurtotalcapitalexpendituresforthefiscalyearendedApril1,2017were$28,515withnewstoreopeningsandexistingstoreremodelsaccountingfor$16,001.Theremainingcapitalexpendituresof$12,514wereprimarilyforinvestmentsininformationsystemsanddistributioncenterequipment,aswellasElfamanufacturingfacilityenhancements.
OurtotalcapitalexpendituresforthefiscalyearendedFebruary27,2016were$46,431withnewstoreopeningsandexistingstoreremodelsaccountingfor$19,226.Theremainingcapitalexpendituresof$27,205wereprimarilyforstrategicinitiativesanddistributioncenterautomation,aswellasinvestmentsininfrastructuretosupportgrowthandElfamanufacturingfacilityenhancements.
Ourtotalcapitalexpendituresforthefive-weeksendedApril2,2016were$2,435withnewstoreopeningsandexistingstoreremodelsaccountingfor$790.Theremainingcapitalexpendituresof$1,645wereprimarilyforinvestmentsininformationsystemsandElfamanufacturingfacilityenhancements,aswellasdistributioncenterequipment.
Netcashusedin(providedby)financingactivities
FinancingactivitiesconsistprimarilyofborrowingsandpaymentsundertheSeniorSecuredTermLoanFacility,theRevolvingCreditFacility,andthe2014ElfaSeniorSecuredCreditFacilities.
Netcashusedinfinancingactivitieswas$37,688forthefiscalyearendedMarch31,2018.Thisincludednetpaymentsof$26,403forrepaymentoflong-termindebtedness,$11,246forpaymentofdebtissuancecosts,and$39fortaxespaidinconnectionwiththewithholdingofsharesuponvestingofrestrictedstockawards.
Netcashusedinfinancingactivitieswas$13,981forthefiscalyearendedApril1,2017,whichwasmainlyattributabletopaymentsof$5,496primarilyonindebtednessoutstandingundertheSeniorSecuredTermLoanFacilityandthe2014ElfaSeniorSecuredTermLoanFacility.Inaddition,theCompanymadenetpaymentsof$5,000ontheRevolvingCreditFacilityduringfiscal2016,andmadenetpaymentsof$3,485onthe2014ElfaRevolvingCreditFacility.
Netcashusedinfinancingactivitieswas$7,516forthefiscalyearendedFebruary27,2016,whichwasmainlyattributabletopaymentsof$5,246onindebtednessoutstandingundertheSeniorSecured
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TermLoanFacilityandthe2014ElfaSeniorSecuredTermLoanFacility.TheCompanyborrowedandrepaid$33,000ontheRevolvingCreditFacilityduringfiscal2015,andmadenetpaymentsof$2,063onthe2014ElfaRevolvingCreditFacility(asfurtherdiscussedanddefinedunder"ElfaSeniorSecuredCreditFacilitiesand2014ElfaSeniorSecuredCreditFacilities"below).TheCompanyalsopaid$266indebtissuancecostsrelatedtoAmendmentNo.2totheRevolvingCreditFacility(asfurtherdiscussedanddefinedunder"RevolvingCreditFacility"below).Inaddition,theCompanyreceivedproceedsof$59fromtheexerciseofstockoptions.
Netcashprovidedbyfinancingactivitieswas$6,942forthefive-weeksendedApril2,2016,whichwasmainlyattributabletoborrowingsof$5,000ontheRevolvingCreditFacilityandnetborrowingsof$2,886onthe2014ElfaRevolvingCreditFacility.TheCompanyalsomadepaymentsof$944primarilyonindebtednessoutstandingundertheSeniorSecuredTermLoanFacilityduringtheperiod.
AsofMarch31,2018,wehadatotalof$65,625ofunusedborrowingavailabilityundertheRevolvingCreditFacility,and$3,490inlettersofcreditissuedundertheRevolvingCreditFacility.TherewerenoborrowingsoutstandingundertheRevolvingCreditFacilityasofMarch31,2018.
AsofMarch31,2018,Elfahadatotalof$16,743ofunusedborrowingavailabilityunderthe2014ElfaRevolvingCreditFacilityandnoborrowingsoutstandingunderthe2014ElfaRevolvingCreditFacility.
Freecashflow(Non-GAAP)
TheCompanypresentsfreecashflow,whichtheCompanydefinesasnetcashprovidedby(usedin)operatingactivitiesinaperiodminuspaymentsforpropertyandequipmentmadeinthatperiod,becauseitbelievesitisausefulindicatoroftheCompany'soverallliquidity,astheamountoffreecashflowgeneratedinanyperiodisrepresentativeofcashthatisavailablefordebtrepayment,investment,andotherdiscretionaryandnon-discretionarycashuses.Accordingly,webelievethatfreecashflowprovidesusefulinformationtoinvestorsinunderstandingandevaluatingourliquidityinthesamemannerasmanagement.Ourdefinitionoffreecashflowislimitedinthatitdoesnotsolelyrepresentresidualcashflowsavailablefordiscretionaryexpendituresduetothefactthatthemeasuredoesnotdeductthepaymentsrequiredfordebtserviceandothercontractualobligations.Therefore,webelieveitisimportanttoviewfreecashflowasameasurethatprovidessupplementalinformationtoourConsolidatedStatementsofCashFlows.Althoughothercompaniesreporttheirfreecashflow,numerousmethodsmayexistforcalculatingacompany'sfreecashflow.Asaresult,themethodusedbyourmanagementtocalculateourfreecashflowmaydifferfromthemethodsusedbyothercompaniestocalculatetheirfreecashflow.
Thefollowingtablesetsforthareconciliationoffreecashflow,anon-GAAPfinancialmeasure,tonetcashprovidedby(usedin)operatingactivities,whichwebelievetobetheGAAPfinancialmeasuremostdirectlycomparabletofreecashflow:
SeniorSecuredTermLoanFacility
OnApril6,2012,TheContainerStoreGroup,Inc.,TheContainerStore,Inc.andcertainofitsdomesticsubsidiariesenteredintoacreditagreementwithJPMorganChaseBank,N.A.,as
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FiscalYearEnded
FiveWeeksEndedApril2,2016
March31,
2018 April1,2017
February27,2016
Netcashprovidedby(usedin)operatingactivities $ 62,176 $ 44,639 $ 42,307 $ (9,540)Less:Additionstopropertyandequipment (27,646) (28,515) (46,431) (2,435)Freecashflow $ 34,530 $ 16,124 $ (4,124) $ (11,975)
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AdministrativeAgentandCollateralAgent,andthelenderspartythereto(asamended,the"SeniorSecuredTermLoanFacility").OnAugust18,2017,weenteredintoafourthamendment(the"TermLoanAmendment")totheSeniorSecuredTermLoanFacilitydatedasofApril6,2012.ThefourthamendmentamendedtheSeniorSecuredTermLoanFacilityto,amongotherthings,(i)extendthematuritydateoftheloansundertheSeniorSecuredTermLoanFacilitytoAugust18,2021,(ii)addamaximumleveragecovenantof5.0:1.0whichstepsdownby0.25xonJune30ofeachyearcommencingonJune30,2018,(iii)increasetheapplicableinterestratemarginto7.00%forLIBORloansand6.00%forbaserateloans,(iv)reducetheaggregateprincipalamountoftheSeniorSecuredTermLoanFacilityto$300,000,(v)increaseprincipalamortizationto2.5%perannum,(vi)requirea3.0%upfrontfeeontheaggregateprincipalamountoftheSeniorSecuredTermLoanFacility,and(vii)imposea1%premiumifavoluntaryprepaymentismadefromtheproceedsofarepricingtransactionwithin12monthsafterAugust18,2017.AnaffiliateofLeonardGreen&Partners,L.P.("LGP"),which,togetherwithcertainofitsaffiliates,beneficiallyownsamajorityofouroutstandingcommonstock,funded$20,000ofthe$300,000SeniorSecuredTermLoanFacility.AsofMarch31,2018,theprincipalamountduetotheLGPaffiliatewaszero,asitsolditsinterestintheloansyndicate.
UndertheSeniorSecuredTermLoanFacility,wehad$294,375inoutstandingborrowingsasofMarch31,2018andtheinterestrateonsuchborrowingsisLIBOR+7.00%,subjecttoaLIBORfloorof1.00%.TheSeniorSecuredTermLoanFacilityprovidesthatwearerequiredtomakequarterlyprincipalrepaymentsof$1,875throughJune30,2021,withaballoonpaymentfortheremainingbalancedueonAugust18,2021.
TheSeniorSecuredTermLoanFacilityissecuredby(a)afirstprioritysecurityinterestinsubstantiallyallofourassets(excludingstockinforeignsubsidiariesinexcessof65%,assetsofnon-guarantorsandsubjecttocertainotherexceptions)(otherthanthecollateralthatsecurestheRevolvingCreditFacilitydescribedbelowonafirst-prioritybasis)and(b)asecondprioritysecurityinterestintheassetssecuringtheRevolvingCreditFacilitydescribedbelowonafirst-prioritybasis.ObligationsundertheSeniorSecuredTermLoanFacilityareguaranteedbyTheContainerStoreGroup,Inc.andeachofTheContainerStore,Inc.'sU.S.subsidiaries.TheSeniorSecuredTermLoanFacilitycontainsanumberofcovenantsthat,amongotherthings,restrictourability,subjecttospecifiedexceptions,toincuradditionaldebt;incuradditionalliensandcontingentliabilities;sellordisposeofassets;mergewithoracquireothercompanies;liquidateordissolveourselves,engageinbusinessesthatarenotinarelatedlineofbusiness;makeloans,advancesorguarantees;engageintransactionswithaffiliates;andmakeinvestments.Inaddition,thefinancingagreementscontaincertaincross-defaultprovisions.AsofMarch31,2018,wewereincompliancewithallcovenantsandnoEventofDefault(assuchtermisdefinedintheSeniorSecuredTermLoanFacility)hadoccurred.
RevolvingCreditFacility
OnApril6,2012,TheContainerStoreGroup,Inc.,TheContainerStore,Inc.andcertainofitsdomesticsubsidiariesenteredintoanasset-basedrevolvingcreditagreementwiththelenderspartythereto,JPMorganChaseBank,N.A.,asAdministrativeAgentandCollateralAgent,andWellsFargoBank,NationalAssociation,asSyndicationAgent(asamended,the"RevolvingCreditFacility").OnAugust18,2017,weenteredintoafourthamendment(the"RevolvingAmendment")totheRevolvingCreditFacilitydatedasofApril6,2012,which,amongotherthings,extendedthematuritydateoftheloansundertheRevolvingCreditFacilitytotheearlierof(i)August18,2022and(ii)May18,2021ifanyportionoftheSeniorSecuredTermLoanFacilityremainsoutstandingonsuchdateandthematuritydateoftheSeniorSecuredTermLoanFacilityisnotextended.
Theaggregateprincipalamountofthefacilityis$100,000.BorrowingsundertheRevolvingCreditFacilityaccrueinterestatLIBOR+1.25%.Inaddition,theRevolvingCreditFacilityincludesanuncommittedincrementalrevolvingfacilityintheamountof$50,000,whichissubjecttoreceiptoflendercommitmentsandsatisfactionofspecifiedconditions.
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TheRevolvingCreditFacilityprovidesthatproceedsaretobeusedforworkingcapitalandothergeneralcorporatepurposes,andallowsforswinglineadvancesofupto$15,000andtheissuanceoflettersofcreditofupto$40,000.
TheavailabilityofcreditatanygiventimeundertheRevolvingCreditFacilityislimitedbyreferencetoaborrowingbaseformulabaseduponnumerousfactors,includingthevalueofeligibleinventory,eligibleaccountsreceivable,andreservesestablishedbytheadministrativeagent.Asaresultoftheborrowingbaseformula,theactualborrowingavailabilityundertheRevolvingCreditFacilitycouldbelessthanthestatedamountoftheRevolvingCreditFacility(asreducedbytheactualborrowingsandoutstandinglettersofcreditundertheRevolvingCreditFacility).
TheRevolvingCreditFacilityissecuredby(a)afirst-prioritysecurityinterestinsubstantiallyallofourpersonalproperty,consistingofinventory,accountsreceivable,cash,depositaccounts,andothergeneralintangibles,and(b)asecond-prioritysecurityinterestinthecollateralthatsecurestheSeniorSecuredTermLoanFacilityonafirst-prioritybasis,asdescribedabove(excludingstockinforeignsubsidiariesinexcessof65%,andassetsofnon-guarantorsubsidiariesandsubjecttocertainotherexceptions).ObligationsundertheRevolvingCreditFacilityareguaranteedbyTheContainerStoreGroup,Inc.andeachofTheContainerStore,Inc.'sU.S.subsidiaries.
TheRevolvingCreditFacilitycontainsanumberofcovenantsthat,amongotherthings,restrictourability,subjecttospecifiedexceptions,toincuradditionaldebt;incuradditionalliensandcontingentliabilities;sellordisposeofassets;mergewithoracquireothercompanies;liquidateordissolveourselves,engageinbusinessesthatarenotinarelatedlineofbusiness;makeloans,advancesorguarantees;engageintransactionswithaffiliates;andmakeinvestments.Inaddition,thefinancingagreementscontaincertaincross-defaultprovisions.Wearerequiredtomaintainaconsolidatedfixed-chargecoverageratioof1.0to1.0ifexcessavailabilityislessthan$10,000atanytime.AsofMarch31,2018,wewereincompliancewithallcovenantsandnoEventofDefault(assuchtermisdefinedintheRevolvingCreditFacility)hadoccurred.
2014ElfaSeniorSecuredCreditFacilities
OnApril1,2014,ElfaenteredintoamastercreditagreementwithNordeaBankAB("Nordea"),whichconsistsofaSEK60.0million(approximately$7,175asofMarch31,2018)termloanfacility(the"2014ElfaTermLoanFacility")andaSEK140.0million(approximately$16,743asofMarch31,2018)revolvingcreditfacility(the"2014ElfaRevolvingCreditFacility,"andtogetherwiththe2014ElfaTermLoanFacility,the"2014ElfaSeniorSecuredCreditFacilities").The2014ElfaSeniorSecuredCreditFacilitiestermbeganonAugust29,2014andmaturesonAugust29,2019.Theremainingbalanceofthe2014ElfaTermLoanFacilitywaspaidonFebruary18,2018,whichwaspriortothematuritydate.Elfawasrequiredtomakequarterlyprincipalpaymentsunderthe2014ElfaTermLoanFacilityintheamountofSEK3.0million(approximately$359asofMarch31,2018).The2014ElfaRevolvingCreditFacilitybearsinterestatNordea'sbaserate+1.4%.Inthefourthquarteroffiscal2016,ElfaandNordeaagreedthatthestatedrateswouldapplythroughmaturity.
The2014ElfaSeniorSecuredCreditFacilitiescontainanumberofcovenantsthat,amongotherthings,restrictElfa'sability,subjecttospecifiedexceptions,toincuradditionalliens,sellordisposeofassets,mergewithothercompanies,engageinbusinessesthatarenotinarelatedlineofbusinessandmakeguarantees.Inaddition,Elfaisrequiredtomaintain(i)aconsolidatedequityratio(asdefinedinthe2014ElfaSeniorSecuredCreditFacilities)ofnotlessthan30%inyearoneandnotlessthan32.5%thereafterand(ii)aconsolidatedratioofnetdebttoEBITDA(asdefinedinthe2014ElfaSeniorSecuredCreditFacilities)oflessthan3.2,theconsolidatedequityratiotestedattheendofeachcalendarquarterandtheratioofnetdebttoEBITDAtestedasoftheendofeachfiscalquarter.AsofMarch31,2018,ElfawasincompliancewithallcovenantsandnoEventofDefault(asdefinedinthe2014ElfaSeniorSecuredCreditFacilities)hadoccurred.
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Criticalaccountingpoliciesandestimates
ThepreparationoffinancialstatementsinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesrequiresmanagementtomakeestimatesandassumptionsaboutfutureeventsthataffectamountsreportedinourconsolidatedfinancialstatementsandrelatednotes,aswellastherelateddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatements.Managementevaluatesitsaccountingpolicies,estimates,andjudgmentsonanon-goingbasis.Managementbasesitsestimatesandjudgmentsonhistoricalexperienceandvariousotherfactorsthatarebelievedtobereasonableunderthecircumstances.Actualresultsmaydifferfromtheseestimatesunderdifferentassumptionsandconditions.
Managementevaluatedthedevelopmentandselectionofitscriticalaccountingpoliciesandestimatesandbelievesthatthefollowinginvolveahigherdegreeofjudgmentorcomplexityandaremostsignificanttoreportingourresultsofoperationsandfinancialposition,andarethereforediscussedascritical.Thefollowingcriticalaccountingpoliciesreflectthesignificantestimatesandjudgmentsusedinthepreparationofourconsolidatedfinancialstatements.Withrespecttocriticalaccountingpolicies,evenarelativelyminorvariancebetweenactualandexpectedexperiencecanpotentiallyhaveamateriallyfavorableorunfavorableimpactonsubsequentresultsofoperations.MoreinformationonallofoursignificantaccountingpoliciescanbefoundinNote1—Nature of Business andSummary of Significant Accounting Policies toourauditedconsolidatedfinancialstatementsincludedelsewhereinthisAnnualReportonForm10-K.
Revenuerecognition
WerecognizerevenuesandtherelatedcostofgoodssoldforourTCSsegmentwhenmerchandiseisreceivedbyourcustomers,whichreflectsanestimateofshipmentsthathavenotyetbeenreceivedbythecustomer.Thisestimateisbasedonshippingtermsandhistoricaldeliverytimes.WerecognizerevenuesandtherelatedcostofgoodssoldforourElfasegmentuponshipment.
Werecognizeshippingandhandlingfeesasrevenuewhenthemerchandiseisshippedtothecustomer.Costsofshippingandhandlingareincludedincostofgoodssold.Werecognizefeesforinstallationandotherservicesasrevenueuponcompletionoftheservicetothecustomer.Costsofinstallationandotherservicesareincludedincostofgoodssold.
Salestaxcollectedisnotrecognizedasrevenueasitisultimatelyremittedtogovernmentalauthorities.
Wereserveforprojectedmerchandisereturnsbasedonhistoricalexperienceandvariousotherassumptionsthatwebelievetobereasonable.Thereservereducessalesandcostofsales,accordingly.Merchandiseexchangesofsimilarproductandpricearenotconsideredmerchandisereturnsand,therefore,areexcludedwhencalculatingthesalesreturnsreserve.
Inventories
Inventoriesatretailstoresarecomprisedoffinishedgoodsandarevaluedatthelowerofcostorestimatednetrealizablevalue,withcostdeterminedonaweighted-averagecostmethodincludingassociatedfreightcosts.Manufacturinginventoriesarecomprisedofrawmaterials,workinprocess,andfinishedgoodsandarevaluedonafirst-in,firstoutbasisusingfullabsorptionaccountingwhichincludesmaterial,labor,othervariablecosts,andotherapplicablemanufacturingoverhead.Todetermineifthevalueofinventoryisrecoverableatcost,weconsidercurrentandanticipateddemand,customerpreferenceandthemerchandiseage.Thesignificantestimatesusedininventoryvaluationareobsolescence(includingexcessandslow-movinginventory)andestimatesofinventoryshrinkage.Weadjustourinventoryforobsolescencebasedonhistoricaltrends,agingreports,specificidentificationandourestimatesoffutureretailsalesprices.
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Reservesforshrinkageareestimatedandrecordedthroughouttheperiodasapercentageofcostofsalesbasedonhistoricalshrinkageresultsandcurrentinventorylevels.Actualshrinkageisrecordedthroughouttheyearbaseduponperiodiccyclecounts.Actualinventoryshrinkagecanvaryfromestimatesduetofactorsincludingthemixofourinventoryandexecutionagainstlosspreventioninitiativesinourstoresanddistributioncenter.
Duetothesefactors,ourobsolescenceandshrinkagereservescontainuncertainties.Bothestimateshavecalculationsthatrequiremanagementtomakeassumptionsandtoapplyjudgmentsregardinganumberoffactors,includingmarketconditions,thesellingenvironment,historicalresultsandcurrentinventorytrends.Ifactualobsolescenceorshrinkageestimateschangefromouroriginalestimates,wewilladjustourinventoryreservesaccordinglythroughouttheperiod.Managementdoesnotbelievethatchangesintheassumptionsusedintheseestimateswouldhaveasignificanteffectonourinventorybalances.Wehavenotmadeanymaterialchangestoourassumptionsincludedinthecalculationsoftheobsolescenceandshrinkagereservesduringtheperiodspresented.
Incometaxes
WeaccountforincometaxesutilizingFASBASC740,Income Taxes ("ASC740").ASC740requiresanassetandliabilityapproach,whichrequirestherecognitionofdeferredtaxliabilitiesandassetsfortheexpectedfuturetaxconsequencesoftemporarydifferencesbetweenthecarryingamountsandthetaxbasesofassetsandliabilities.Valuationallowancesareestablishedagainstdeferredtaxassetswhenitismore-likely-than-notthattherealizationofthosedeferredtaxassetswillnotoccur.Valuationallowancesarereleasedaspositiveevidenceoffuturetaxableincomesufficienttorealizetheunderlyingdeferredtaxassetsbecomesavailable(e.g.,three-yearcumulativefinancialincome).
Deferredtaxassetsandliabilitiesaremeasuredusingtheenactedtaxratesineffectintheyearswhenthosetemporarydifferencesareexpectedtoreverse.Theeffectondeferredtaxesfromachangeinthetaxrateisrecognizedthroughcontinuingoperationsintheperiodthatincludestheenactmentofthechange.Changesintaxlawsandratescouldaffectrecordeddeferredtaxassetsandliabilitiesinthefuture.
WeoperateincertainjurisdictionsoutsidetheUnitedStates.ASC740-30providesthattheundistributedearningsofaforeignsubsidiarybeaccountedforasatemporarydifferenceunderthepresumptionthatallundistributedearningswillbedistributedtotheparentcompanyasadividend.Sufficientevidenceoftheintenttopermanentlyreinvesttheearningsinthejurisdictionwhereearnedprecludesacompanyfromrecordingthetemporarydifference.ForpurposesofASC740-30,wearepartiallyreinvestedinourSwedishsubsidiaryElfaandthusdonotrecordatemporarydifference.WearepartiallyreinvestedsincewehavepermanentlyreinvestedourpastearningsatElfa;however,wedonotassertthatallfutureearningswillbereinvestedintoElfa.
Leases
Rentexpenseonoperatingleases,includingrentholidaysandscheduledrentincreases,isrecordedonastraight-linebasisoverthetermofthelease,commencingonthedatewetakepossessionoftheleasedproperty.Rentexpenseisrecordedinselling,generalandadministrativeexpenses.Pre-openingrentexpenseisrecordedinpre-openingcostsintheconsolidatedstatementofoperations.Thenetexcessofrentexpenseovertheactualcashpaidhasbeenrecordedasdeferredrentintheaccompanyingconsolidatedbalancesheets.Tenantimprovementallowancesarealsoincludedintheaccompanyingconsolidatedbalancesheetsasdeferredrentliabilitiesandareamortizedasareductionofrentexpenseoverthetermoftheleasefromthepossessiondate.Contingentrentalpayments,typicallybasedonapercentageofsales,arerecognizedinrentexpensewhenpaymentofthecontingentrentisprobable.
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Intangiblesandlong-livedassets
Goodwill
Weevaluategoodwillannuallytodeterminewhetheritisimpaired.Goodwillisalsotestedbetweenannualimpairmenttestsifaneventoccursorcircumstanceschangethatwouldindicatethatthefairvalueofareportingunitislessthanitscarryingamount.Conditionsthatmayindicateimpairmentinclude,butarenotlimitedto,asignificantadversechangeincustomerdemandorbusinessclimatethatcouldaffectthevalueofanasset.Ifanimpairmentindicatorexists,wetestgoodwillforrecoverability.Wehaveidentifiedtworeportingunitsandwehaveselectedthefirstdayofthefourthfiscalquartertoperformourannualgoodwillimpairmenttesting.
Priortotestinggoodwillforimpairment,weperformaqualitativeassessmenttodeterminewhetheritismorelikelythannotthatgoodwillisimpairedforeachreportingunit.Iftheresultsofthequalitativeassessmentindicatethatthelikelihoodofimpairmentisgreaterthan50%,thenweperformanimpairmenttestongoodwill.Totestforimpairment,wecomparethefairvalueofthereportingunittoitscarryingvalue.Ifthefairvalueofthereportingunitexceedsthecarryingvalueofthenetassetsassignedtothatunit,goodwillisconsiderednotimpairedandwearenotrequiredtoperformfurthertesting.Ifthecarryingvalueofthenetassetsassignedtothereportingunitexceedsthefairvalueofthereportingunit,thenwewouldrecordanimpairmentlossequaltothedifference.
Thefairvalueofeachreportingunitisdeterminedbyusingadiscountedcashflowanalysisusingtheincomeapproach,aswellasamarketapproachtocomparetheestimatedfairvaluetocomparablecompanies.Thedeterminationoffairvaluerequiresassumptionsandestimatesofmanycriticalfactors,includingamongothers,ournatureandourhistory,financialandeconomicconditionsaffectingus,ourindustryandthegeneraleconomy,pastresults,ourcurrentoperationsandfutureprospects,salesofsimilarbusinessesorcapitalstockofpubliclyheldsimilarbusinesses,aswellasprices,termsandconditionsaffectingpastsalesofsimilarbusinesses.Forecastsoffutureoperationsarebased,inpart,onoperatingresultsandmanagement'sexpectationsastofuturemarketconditions.Thesetypesofanalysescontainuncertaintiesbecausetheyrequiremanagementtomakeassumptionsandtoapplyjudgmentstoestimateindustryeconomicfactorsandtheprofitabilityoffuturebusinessstrategies.Ifactualresultsarenotconsistentwithourestimatesandassumptions,wemaybeexposedtofutureimpairmentlossesthatcouldbematerial.
Tradenames
Weannuallyevaluatewhetherthetradenamescontinuetohaveanindefinitelife.Tradenamesarereviewedforimpairmentannuallyinthefourthquarterandmaybereviewedmorefrequentlyifindicatorsofimpairmentarepresent.Conditionsthatmayindicateimpairmentinclude,butarenotlimitedto,asignificantadversechangeincustomerdemandorbusinessclimatethatcouldaffectthevalueofanasset,aproductrecalloranadverseactionorassessmentbyaregulator.
Theimpairmentreviewisperformedbycomparingthecarryingvaluetotheestimatedfairvalue,determinedusingadiscountedcashflowmethodology.Iftherecordedcarryingvalueofthetradenameexceedsitsestimatedfairvalue,animpairmentchargeisrecordedtowritethetradenamedowntoitsestimatedfairvalue.Factorsusedinthevaluationofintangibleassetswithindefinitelivesinclude,butarenotlimitedto,futurerevenuegrowthassumptions,estimatedmarketroyaltyratesthatcouldbederivedfromthelicensingofourtradenamestothirdparties,andarateusedtodiscounttheestimatedroyaltycashflowprojectionstotheirpresentvalue(orestimatedfairvalue).
Thevaluationoftradenamesrequiresassumptionsandestimatesofmanycriticalfactors,whichareconsistentwiththefactorsdiscussedunder"Goodwill"above.Forecastsoffutureoperationsarebased,inpart,onoperatingresultsandmanagement'sexpectationsastofuturemarketconditions.Thesetypesofanalysescontainuncertaintiesbecausetheyrequiremanagementtomakeassumptions
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andtoapplyjudgmentstoestimateindustryeconomicfactorsandtheprofitabilityoffuturebusinessstrategies.Ifactualresultsarenotconsistentwithourestimatesandassumptions,wemaybeexposedtofutureimpairmentlossesthatcouldbematerial.
Long-livedassets
Long-livedassets,suchaspropertyandequipmentandintangibleassetssubjecttoamortization,arereviewedforimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingamountofanassetmaynotberecoverable.Conditionsthatmayindicateimpairmentinclude,butarenotlimitedto,asignificantadversechangeincustomerdemandorbusinessclimatethatcouldaffectthevalueofanasset,aproductrecalloranadverseactionorassessmentbyaregulator.Ifthesumoftheestimatedundiscountedfuturecashflowsrelatedtotheassetarelessthanthecarryingvalue,werecognizealossequaltothedifferencebetweenthecarryingvalueandthefairvalue,usuallydeterminedbytheestimateddiscountedcashflowanalysisoftheasset.
ForourTCSsegment,wegenerallyevaluatelong-livedtangibleassetsatthestorelevel,whichisthelowestlevelatwhichindependentcashflowscanbeidentified.Weevaluatecorporateassetsorotherlong-livedassetsthatarenotstore-specificattheconsolidatedlevel.ForourElfasegment,weevaluatelong-livedtangibleassetsatthesegmentlevel.
Sincethereistypicallynoactivemarketforourlong-livedtangibleassets,weestimatefairvaluesbasedontheexpectedfuturecashflows.Weestimatefuturecashflowsbasedonstore-levelhistoricalresults,currenttrends,andoperatingandcashflowprojections.Ourestimatesaresubjecttouncertaintyandmaybeaffectedbyanumberoffactorsoutsideourcontrol,includinggeneraleconomicconditionsandthecompetitiveenvironment.Whilewebelieveourestimatesandjudgmentsaboutfuturecashflowsarereasonable,futureimpairmentchargesmayberequirediftheexpectedcashflowestimates,asprojected,donotoccurorifeventschangerequiringustoreviseourestimates.
Contractualobligations
Weenterintolong-termobligationsandcommitmentsinthenormalcourseofbusiness,primarilydebtobligationsandnon-cancelableoperatingleases.AsofMarch31,2018,ourcontractualcashobligationsoverthenextseveralperiodswereasfollows:
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Paymentsduebyperiod
Total Within1Year 1-3Years 3-5Years After5Years
Recordedcontractualobligations Termloans $ 294,375 $ 7,500 $ 15,000 $ 271,875 $ —Revolvingloans — — — — —Capitalleaseobligations 662 241 421 — —Otherlong-termobligations(1) 8,521 1,470 1,343 1,931 3,777
Unrecordedcontractualobligations Estimatedinterest(2) 84,948 26,058 49,810 9,080 —Operatingleases(3) 552,504 87,525 161,715 118,741 184,523Lettersofcredit 3,901 3,901 — — —Purchaseobligations(4) 36,474 32,697 3,501 239 37
Total(5) $ 981,385 $ 159,392 $ 231,790 $ 401,866 $ 188,337
(1) One-timetransitiontaxonforeignearningsthatwillbepaidover8years.
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Off-BalanceSheetArrangements
Otherthantheoperatingleases,lettersofcredit,andpurchaseobligationsdiscussedabove,wearenotpartytoanyoff-balancesheetarrangements.
RecentAccountingPronouncements
PleaserefertoNote1—Nature of Business and Summary of Significant Accounting Policies toourauditedconsolidatedfinancialstatementsincludedelsewhereinthisAnnualReportonForm10-Kforasummaryofrecentaccountingpronouncementsandourcriticalaccountingpolicies.
ITEM7A.QUANTITATIVEANDQUALITATIVEDISCLOSURESABOUTMARKETRISK
Foreigncurrencyrisk
WearesubjecttoforeigncurrencyriskinconnectionwiththeoperationsofourSwedishsubsidiary,Elfa.Allassetsandliabilitiesofforeignsubsidiariesaretranslatedatyearendratesofexchange,withtheexceptionofcertainassetsandliabilitiesthataretranslatedathistoricalratesofexchange.Revenues,expenses,andcashflowsofforeignsubsidiariesaretranslatedataverageratesofexchangefortheyear.ThefunctionalcurrencyofElfaistheSwedishkrona.BasedontheaverageexchangeratefromSwedishkronatoU.S.dollarduringfiscal2017,andresultsofoperationsinfunctionalcurrency,webelievethata10%increaseordecreaseintheexchangerateoftheSwedishkronawouldincreaseordecreasenetincome(loss)byapproximately$0.3million.
WearealsosubjecttoforeigncurrencyriskinconnectionwiththepurchaseofinventoryfromElfa.Weutilizeforeigncurrencyhedgeinstrumentstomitigatethisrisk.Forfiscal2017andfiscal2016,weusedforwardcurrencyhedgeinstrumentsfor80%and78%ofinventorypurchasesinSwedishkronaatanaverageSEKrateof9.0and8.6eachyear,respectively.Currently,wehavehedged60%ofourplannedinventorypurchasesforfiscal2018atanaveragerateof8.1.
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(2) Forpurposesofthistable,interesthasbeenestimatedbasedoninterestratesineffectforourindebtednessasofMarch31,2018,andestimatedborrowinglevelsinthefuture.Actualborrowinglevelsandinterestcostsmaydiffer.
(3) Weenterintooperatingleasesduringthenormalcourseofbusiness.Mostleasearrangementsprovideuswiththeoptiontorenewtheleasesatdefinedterms.Thefutureoperatingleaseobligationswouldchangeifweweretoexercisetheseoptions,orifweweretoenterintoadditionaloperatingleases.
(4) Purchaseobligationsincludelegallybindingcontractssuchasfirmcommitmentsforinventory,equipmentpurchases,marketing-relatedcontracts,softwareacquisition/licensecommitments,aswellascommitmentstomakecapitalexpenditures,andlegallybindingservicecontracts.Purchaseordersforotherservicesarenotincludedinthetableabove.Purchaseordersrepresentauthorizationstopurchaseratherthanbindingagreements.Forthepurposesofthistable,contractualobligationsforthepurchaseofgoodsorservicesaredefinedasagreementsthatareenforceableandlegallybindingandthatspecifyallsignificantterms,including:fixedorminimumquantitiestobepurchased;fixed,minimumorvariablepriceprovisions;andtheapproximatetimingofthetransaction.
(5) Thetableaboveexcludesdeferredleaseincentivesanddefinedbenefitpensionplanobligationswhichwereincludedin"Deferredrentandotherlong-termliabilities"intheconsolidatedbalancesheetasofMarch31,2018.Deferredleaseincentiveswereexcludedfromthetableaboveassuchamountsdonotrepresentknowncontractualobligationsforfuturecashpayments.Definedbenefitpensionplanobligationswereexcludedfromthetableasthetimingoftheforthcomingcashpaymentsisuncertain.
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Interestraterisk
WearesubjecttointerestrateriskinconnectionwithborrowingsundertheSeniorSecuredTermLoanFacility,theRevolvingCreditFacilityandthe2014ElfaSeniorSecuredCreditFacilities,whichaccrueinterestatvariablerates.AtMarch31,2018,borrowingssubjecttointerestrateriskwere$294.4million,wehad$65.6millionofadditionalavailabilityundertheRevolvingCreditFacilityandapproximately$16.7millionofadditionalavailabilityunderthe2014ElfaRevolvingCreditFacility.Wecurrentlydonotengageinanyinterestratehedgingactivity;howeverwewillcontinuetomonitortheinterestrateenvironment.BasedontheaverageinterestrateoneachoftheRevolvingCreditFacilityandthe2014ElfaRevolvingCreditFacilityduringfiscal2017,andtotheextentthatborrowingswereoutstanding,wedonotbelievethata10%changeintheinterestratewouldhaveamaterialeffectonourconsolidatedresultsofoperationsorfinancialcondition.
Impactofinflation
Ourresultsofoperationsandfinancialconditionarepresentedbasedonhistoricalcost.Whileitisdifficulttoaccuratelymeasuretheimpactofinflationduetotheimprecisenatureoftheestimatesrequired,webelievetheeffectsofinflation,ifany,onourresultsofoperationsandfinancialconditionhavebeenimmaterial.
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ITEM8.FINANCIALSTATEMENTSANDSUPPLEMENTARYDATA
ReportofIndependentRegisteredPublicAccountingFirm
TotheShareholdersandtheBoardofDirectorsofTheContainerStoreGroup,Inc.
OpinionontheFinancialStatements
WehaveauditedtheaccompanyingconsolidatedbalancesheetsofTheContainerStoreGroup,Inc.(theCompany)asofMarch31,2018andApril1,2017,therelatedconsolidatedstatementsofoperations,comprehensiveincome,shareholders'equityandcashflowsforeachofthetwoyearsintheperiodendedMarch31,2018,fortheyearendedFebruary27,2016andtherelatedconsolidatedstatementsofoperations,comprehensiveincomeandcashflowsforthefiveweektransitionperiodendedApril2,2016andtherelatednotesandthefinancialstatementschedulelistedintheIndexatItem15(2)(collectivelyreferredtoasthe"consolidatedfinancialstatements").Inouropinion,theconsolidatedfinancialstatementspresentfairly,inallmaterialrespects,thefinancialpositionoftheCompanyatMarch31,2018andApril1,2017,andtheresultsofitsoperationsanditscashflowsforeachofthetwoyearsintheperiodendedMarch31,2018,fortheyearendedFebruary27,2016,andthefiveweektransitionperiodendedApril2,2016,inconformitywithU.S.generallyacceptedaccountingprinciples.
BasisforOpinion
ThesefinancialstatementsaretheresponsibilityoftheCompany'smanagement.OurresponsibilityistoexpressanopinionontheCompany'sfinancialstatementsbasedonouraudits.WeareapublicaccountingfirmregisteredwiththePublicCompanyAccountingOversightBoard(UnitedStates)(PCAOB)andarerequiredtobeindependentwithrespecttotheCompanyinaccordancewiththeU.S.federalsecuritieslawsandtheapplicablerulesandregulationsoftheSecuritiesandExchangeCommissionandthePCAOB.
WeconductedourauditsinaccordancewiththestandardsofthePCAOB.Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement,whetherduetoerrororfraud.TheCompanyisnotrequiredtohave,norwereweengagedtoperform,anauditofitsinternalcontroloverfinancialreporting.AspartofourauditswearerequiredtoobtainanunderstandingofinternalcontroloverfinancialreportingbutnotforthepurposeofexpressinganopinionontheeffectivenessoftheCompany'sinternalcontroloverfinancialreporting.Accordingly,weexpressnosuchopinion.
Ourauditsincludedperformingprocedurestoassesstherisksofmaterialmisstatementofthefinancialstatements,whetherduetoerrororfraud,andperformingproceduresthatrespondtothoserisks.Suchproceduresincludedexamining,onatestbasis,evidenceregardingtheamountsanddisclosuresinthefinancialstatements.Ourauditsalsoincludedevaluatingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,aswellasevaluatingtheoverallpresentationofthefinancialstatements.Webelievethatourauditsprovideareasonablebasisforouropinion.
/s/Ernst&YoungLLP
WehaveservedastheCompany'sauditorsince2000.
Dallas,TexasMay31,2018
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TheContainerStoreGroup,Inc.
Consolidatedbalancesheets
Seeaccompanyingnotes.
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(Inthousands) March31,
2018 April1,2017
Assets Currentassets: Cash $ 8,399 $ 10,736Accountsreceivable,net 25,528 27,476Inventory 97,362 103,120Prepaidexpenses 11,281 10,550Incometaxesreceivable 15 16Othercurrentassets 11,609 10,787
Totalcurrentassets 154,194 162,685Noncurrentassets: Propertyandequipment,net 158,389 165,498Goodwill 202,815 202,815Tradenames 229,401 226,685Deferredfinancingcosts,net 312 320Noncurrentdeferredtaxassets,net 2,404 2,139Otherassets 1,854 1,692
Totalnoncurrentassets 595,175 599,149Totalassets $ 749,369 $ 761,834
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TheContainerStoreGroup,Inc.
Consolidatedbalancesheets(Continued)
Seeaccompanyingnotes.
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(Inthousands,exceptshareandpershareamounts) March31,
2018 April1,2017
Liabilitiesandshareholders'equity Currentliabilities: Accountspayable $ 43,692 $ 44,762Accruedliabilities 70,494 60,107Revolvinglinesofcredit — —Currentportionoflong-termdebt 7,771 5,445Incometaxespayable 4,580 2,738
Totalcurrentliabilities 126,537 113,052Noncurrentliabilities: Long-termdebt 277,394 312,026Noncurrentdeferredtaxliabilities,net 54,839 80,679Deferredrentandotherlong-termliabilities 41,892 34,287
Totalnoncurrentliabilities 374,125 426,992Totalliabilities 500,662 540,044
Commitmentsandcontingencies(Note 12)
Shareholders'equity: Commonstock,$0.01parvalue,250,000,000sharesauthorized;48,072,187sharesissuedatMarch31,2018and48,045,114sharesissuedatApril1,2017 481 480
Additionalpaid-incapital 861,263 859,102Accumulatedothercomprehensiveloss (17,316) (22,643)Retaineddeficit (595,721) (615,149)
Totalshareholders'equity 248,707 221,790Totalliabilitiesandshareholders'equity $ 749,369 $ 761,834
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TheContainerStoreGroup,Inc.
Consolidatedstatementsofoperations
Seeaccompanyingnotes.
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FiscalYearEnded
FiveWeeksEndedApril2,2016
(Inthousands,exceptshareandpershareamounts) March31,
2018 April1,2017
February27,2016
Netsales $ 857,228 $ 819,930 $ 794,630 $ 69,218Costofsales(excludingdepreciationandamortization) 360,167 343,860 331,079 29,023Grossprofit 497,061 476,070 463,551 40,195Selling,general,andadministrativeexpenses(excludingdepreciationandamortization) 411,721 387,948 393,810 34,504
Stock-basedcompensation 2,026 1,989 1,556 147Pre-openingcosts 5,293 6,852 9,033 191Depreciationandamortization 37,922 37,124 34,230 3,009Otherexpenses 5,734 1,058 — 102Lossondisposalofassets 278 57 61 —Incomefromoperations 34,087 41,042 24,861 2,242Interestexpense 25,013 16,687 16,810 1,550Lossonextinguishmentofdebt 2,369 — — —Incomebeforetaxes 6,705 24,355 8,051 692(Benefit)provisionforincometaxes (12,723) 9,402 2,909 338Netincome $ 19,428 $ 14,953 $ 5,142 $ 354Netincomepercommonshare—basicanddiluted $ 0.40 $ 0.31 $ 0.11 $ 0.01Weighted-averagecommonshares—basic 48,061,527 47,996,746 47,985,717 47,986,975Weighted-averagecommonshares—diluted 48,147,725 48,016,010 47,985,717 47,986,975
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TheContainerStoreGroup,Inc.
Consolidatedstatementsofcomprehensiveincome
Seeaccompanyingnotes.
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Fiscalyearended
FiveWeeksEndedApril2,2016
(Inthousands) March31,
2018 April1,2017
February27,2016
Netincome $ 19,428 $ 14,953 $ 5,142 $ 354Unrealizedgain(loss)onfinancialinstruments,netoftaxprovision(benefit)of$30,$(85),$606,and$7 53 (138) 853 12
Pensionliabilityadjustment,netoftaxprovisionof$98,$142,$39,and$0 (349) (386) 175 (66)
Foreigncurrencytranslationadjustment 5,623 (6,283) (2,521) 4,053Comprehensiveincome $ 24,755 $ 8,146 $ 3,649 $ 4,353
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TheContainerStoreGroup,Inc.
Consolidatedstatementsofshareholders'equity
Seeaccompanyingnotes.
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Commonstock
Accumulatedother
comprehensiveincome(loss)
Parvalue
Additionalpaid-incapital
Retaineddeficit
Totalshareholders'
equity
(Inthousands,exceptshareamounts) Shares Amount BalanceatFebruary28,2015 $ 0.01 47,983,660 $ 480 $ 855,322 $ (18,342) $ (635,598) $ 201,862Netincome — — — — 5,142 5,142Stock-basedcompensation — — 1,556 — — 1,556Excesstaxprovisionfromstock-basedcompensation — — (58) — — (58)
Stockoptionexercises 3,315 — 59 — — 59Foreigncurrencytranslationadjustment — — — (2,521) — (2,521)
Unrealizedgainonfinancialinstruments,netof$606taxprovision — — — 853 — 853
Pensionliabilityadjustment,netof$39taxprovision — — — 175 — 175
BalanceatFebruary27,2016 47,986,975 480 856,879 (19,835) (630,456) 207,068Netincome — — — — 354 354Stock-basedcompensation — — 147 — — 147Foreigncurrencytranslationadjustment — — — 4,053 — 4,053
Unrealizedgainonfinancialinstruments,netof$7taxprovision — — — 12 — 12
Pensionliabilityadjustment,netof$0taxprovision — — — (66) — (66)
BalanceatApril2,2016 47,986,975 480 857,026 (15,836) (630,102) 211,568Netincome — — — — 14,953 14,953Stock-basedcompensation — — 1,989 — — 1,989Vestingofrestrictedstockawards 31,216 — — — — —Taxesrelatedtonetsharesettlementofrestrictedstockawards — — (39) — — (39)
Commonstockgrantedtonon-employees 26,923 — 135 — — 135
Excesstaxprovisionfromstock-basedcompensation — — (9) — — (9)
Foreigncurrencytranslationadjustment — — — (6,283) — (6,283)
Unrealizedlossonfinancialinstruments,netof$85taxbenefit — — — (138) — (138)
Pensionliabilityadjustment,netof$142taxprovision — — — (386) — (386)
BalanceatApril1,2017 48,045,114 480 859,102 (22,643) (615,149) 221,790Netincome — — — — 19,428 19,428Stock-basedcompensation — — 2,026 — — 2,026Commonstockgrantedtonon-employees 27,073 1 135 — — 136
Foreigncurrencytranslationadjustment — — — 5,623 — 5,623
Unrealizedgainonfinancialinstruments,netof$30taxprovision — — — 53 — 53
Pensionliabilityadjustment,netof$98taxprovision — — — (349) — (349)
BalanceatMarch31,2018 $ 0.01 48,072,187 $ 481 $ 861,263 $ (17,316) $ (595,721) $ 248,707
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TheContainerStoreGroup,Inc.
Consolidatedstatementsofcashflows
Seeaccompanyingnotes.
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FiscalYearEnded
FiveWeeksEndedApril2,2016
(Inthousands) March31,
2018 April1,2017
February27,2016
Operatingactivities Netincome $ 19,428 $ 14,953 $ 5,142 $ 354Adjustmentstoreconcilenetincometonetcashprovidedby(usedin)operatingactivities: Depreciationandamortization 37,922 37,124 34,230 3,009Stock-basedcompensation 2,026 1,989 1,556 147Lossondisposalofassets 278 57 61 —Lossonextinguishmentofdebt 2,369 — — —Deferredtax(benefit)expense (25,545) (96) 859 818Noncashinterest 2,664 1,921 1,940 160Other 227 (29) 401 45Changesinoperatingassetsandliabilities: Accountsreceivable 3,192 (5,861) (5,338) 6,958Inventory 8,406 (19,598) (1,929) 1,516Prepaidexpensesandotherassets (2,133) 4,028 487 (7,371)Accountspayableandaccruedliabilities 6,249 10,965 5,840 (14,258)Incometaxes 625 3,527 (1,330) (719)Othernoncurrentliabilities 6,468 (4,341) 388 (199)
Netcashprovidedby(usedin)operatingactivities 62,176 44,639 42,307 (9,540)
Investingactivities Additionstopropertyandequipment (27,646) (28,515) (46,431) (2,435)Proceedsfrominvestmentgrant — — 479 —Proceedsfromsaleofpropertyandequipment 96 7 202 1Netcashusedininvestingactivities (27,550) (28,508) (45,750) (2,434)
Financingactivities Borrowingsonrevolvinglinesofcredit 47,486 42,731 55,872 4,958Paymentsonrevolvinglinesofcredit (47,486) (46,216) (57,935) (2,072)Borrowingsonlong-termdebt 335,000 30,000 33,000 5,000Paymentsonlong-termdebtandcapitalleases (361,403) (40,496) (38,246) (944)Paymentofdebtissuancecosts (11,246) — (266) —Paymentoftaxeswithshareswithhelduponrestrictedstockvesting (39) — — —Proceedsfromtheexerciseofstockoptions — — 59 —Netcash(usedin)providedbyfinancingactivities (37,688) (13,981) (7,516) 6,942
Effectofexchangeratechangesoncash 725 (223) (426) 232Net(decrease)increaseincash (2,337) 1,927 (11,385) (4,800)Cashatbeginningoffiscalyear 10,736 8,809 24,994 13,609Cashatendoffiscalyear $ 8,399 $ 10,736 $ 13,609 $ 8,809
Supplementalinformation: Cashpaidduringtheyearfor: Interest $ 22,119 $ 14,656 $ 14,850 $ 3,552Taxes $ 4,740 $ 7,651 $ 891 $ 236
Supplementalinformationfornon-cashinvestingandfinancingactivities: Purchasesofpropertyandequipment(includedinaccountspayable) $ 741 $ 138 $ 1,386 $ 1,114Capitalleaseobligationincurred $ 215 $ 691 $ 541 $ 60
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TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
1.Natureofbusinessandsummaryofsignificantaccountingpolicies
Descriptionofbusiness
TheContainerStore,Inc.wasfoundedin1978inDallas,Texas,asaretailerwithamissiontoprovidecustomerswithstorageandorganizationsolutionstoaccomplishtheirprojectsthroughanassortmentofinnovativeproductsandunparalleledcustomerservice.In2007,TheContainerStore,Inc.wassoldtoTheContainerStoreGroup,Inc.(the"Company"),aholdingcompany,ofwhichamajoritystakewaspurchasedbyLeonardGreenandPartners,L.P.("LGP"),withtheremainderheldbycertainemployeesofTheContainerStore,Inc.OnNovember6,2013,theCompanycompletedtheinitialpublicofferingofitscommonstock(the"IPO").Asthemajorityshareholder,LGPretainscontrollinginterestintheCompany.
TheContainerStore,Inc.consistsofourretailstores,websiteandcallcenter,aswellasourinstallationandorganizationalservicesbusiness.AsofMarch31,2018,TheContainerStore,Inc.operated90storeswithanaveragesizeofapproximately25,000squarefeet(19,000sellingsquarefeet)in32statesandtheDistrictofColumbia.TheContainerStore,Inc.alsooffersallofitsproductsdirectlytoitscustomers,includingbusiness-to-businesscustomers,throughitswebsiteandcallcenter.TheContainerStore,Inc.'swhollyownedSwedishsubsidiary,ElfaInternationalAB("Elfa"),designsandmanufacturescomponent-basedshelvinganddrawersystemsandmade-to-measureslidingdoorsthatarecustomizableforanyareaofthehome.elfa®brandedproductsaresoldexclusivelyintheUnitedStatesinTheContainerStore®retailstores,website,andcallcenterandElfasellstovariousretailersanddistributorsprimarilyintheNordicregionandthroughoutEuropeonawholesalebasis.
Basisofpresentation
TheaccompanyingconsolidatedfinancialstatementshavebeenpreparedinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica(U.S.GAAP).
Basisofconsolidation
TheconsolidatedfinancialstatementsincludeouraccountsandthoseoftheCompany'swhollyownedsubsidiaries.TheCompanyeliminatesallsignificantintercompanybalancesandtransactions,includingintercompanyprofits,inconsolidation.
Fiscalyear
TheCompanyfollowsa4-4-5fiscalcalendar,wherebyeachfiscalquarterconsistsofthirteenweeksgroupedintotwofour-week"months"andonefive-week"month",anditsfiscalyearendsontheSaturdayclosesttoMarch31st.Elfa'sfiscalyearendsonthelastdayofthecalendarmonthofMarch.Priortofiscalyear2016,theCompany'sfiscalyearendedontheSaturdayclosesttoFebruary28th.
Allreferenceshereinto"fiscal2017"representtheresultsofthe52-weekfiscalyearendedMarch31,2018,andreferencesto"fiscal2016"representtheresultsofthe52-weekfiscalyearendedApril1,2017.Inaddition,allreferenceshereinto"fiscal2015"representtheresultsofthe52-weekfiscalyearendedFebruary27,2016.
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
1.Natureofbusinessandsummaryofsignificantaccountingpolicies(Continued)
Managementestimates
ThepreparationoftheCompany'sconsolidatedfinancialstatementsinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesrequiresmanagementtomakeestimatesandassumptionsthataffectthereportedamountsofassetsandliabilitiesanddisclosureofcontingentassetsandliabilitiesandthereportedamountsofrevenuesandexpenses.Actualresultscoulddifferfromthoseestimates.Significantaccountingjudgmentsandestimatesincludefairvalueestimatesforindefinite-livedintangibleassets,inventorylossreserve,assessmentsoflong-livedassetimpairments,giftcardbreakage,andassessmentofvaluationallowancesondeferredtaxassets.
Revenuerecognition
Revenuefromsalesrelatedtoretailoperationsisrecognizedwhenthemerchandiseisdeliveredtothecustomeratthepointofsale.Revenuefromsalesthatareshippedordelivereddirectlytocustomersisrecognizeduponestimateddeliverytothecustomerandincludesapplicableshippingordeliveryrevenue.Revenuefromsalesthatareinstalledisrecognizeduponcompletionoftheinstallationservicetothecustomerandincludesapplicableinstallationrevenue.Revenuefromsalesofotherservicesisrecognizeduponthecompletionoftheservice.Revenuefromsalesrelatedtomanufacturingoperationsisrecordeduponshipment.Salesarerecordednetofsalestaxescollectedfromcustomers.Asalesreturnallowanceisrecordedforestimatedreturnsofmerchandisesubsequenttothebalancesheetdatethatrelatetosalespriortothebalancesheetdate.Thereturnsallowanceisbasedonhistoricalreturnpatternsandreducessalesandcostofsales,accordingly.Merchandiseexchangesofsimilarproductandpricearenotconsideredmerchandisereturnsand,therefore,areexcludedwhencalculatingthesalesreturnsallowance.
Giftcardsandmerchandisecredits
Giftcardsaresoldtocustomersinretailstores,throughthecallcenterandwebsite,andthroughcertainthirdparties.Weissuemerchandisecreditsinourstoresandthroughourcallcenter.Revenuefromsalesofgiftcardsandissuancesofmerchandisecreditsisrecognizedwhenthegiftcardisredeemedbythecustomer,orthelikelihoodofthegiftcardbeingredeemedbythecustomerisremote(giftcardbreakage).Thegiftcardbreakagerateisdeterminedbaseduponhistoricalredemptionpatterns.Anestimateoftherateofgiftcardbreakageisappliedovertheperiodofestimatedperformance(48monthsasoftheendoffiscal2017)andthebreakageamountsareincludedinnetsalesintheconsolidatedstatementofoperations.TheCompanyrecorded$1,656,$1,072,$948,and$73ofgiftcardbreakageinfiscalyears2017,2016,2015,andthefiveweeksendedApril2,2016,respectively.
Costofsales
Costofsalesrelatedtoretailoperationsincludesthepurchasecostofinventorysold(netofvendorrebates),in-boundfreight,aswellasinventorylossreserves.Costsincurredtoshipordelivermerchandisetocustomers,aswellasdirectinstallationandorganizationservicescosts,arealsoincludedincostofsales.Costofsalesfrommanufacturingoperationsincludescostsassociatedwith
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
1.Natureofbusinessandsummaryofsignificantaccountingpolicies(Continued)
production,includingmaterials,wages,othervariableproductioncosts,andotherapplicablemanufacturingoverhead.
Leases
Rentexpenseonoperatingleases,includingrentholidaysandscheduledrentincreases,isrecordedonastraight-linebasisoverthetermofthelease,commencingonthedatetheCompanytakespossessionoftheleasedproperty.Rentexpenseisrecordedinselling,general,andadministrativeexpenses.Pre-openingrentexpenseisrecordedinpre-openingcostsintheconsolidatedincomestatement.Thenetexcessofrentexpenseovertheactualcashpaidhasbeenrecordedasdeferredrentintheaccompanyingconsolidatedbalancesheets.Tenantimprovementallowancesarealsoincludedintheaccompanyingconsolidatedbalancesheetsasdeferredrentliabilitiesandareamortizedasareductionofrentexpenseoverthetermoftheleasefromthepossessiondate.Contingentrentalpayments,typicallybasedonapercentageofsales,arerecognizedinrentexpensewhenpaymentofthecontingentrentisprobable.
Advertising
AlladvertisingcostsoftheCompanyareexpensedwhenincurred,oruponthereleaseoftheinitialadvertisement,exceptforproductioncostsrelatedtocatalogsanddirectmailingstocustomers,whichareinitiallycapitalized.Productioncostsrelatedtocatalogsanddirectmailingsconsistprimarilyofprintingandpostageandareexpensedwhenmailedtothecustomer,exceptfordirectmailingsrelatedtopromotionalcampaigns,whichareexpensedovertheperiodduringwhichthepromotionalsalesareexpectedtooccur.Advertisingcostsarerecordedinselling,general,andadministrativeexpenses.Pre-openingadvertisingcostsarerecordedinpre-openingcosts.
CataloganddirectmailingscostscapitalizedatMarch31,2018andApril1,2017,amountedto$375and$605respectively,andarerecordedinprepaidexpensesontheaccompanyingconsolidatedbalancesheets.Totaladvertisingexpenseincurredforfiscalyears2017,2016,2015,andthefive-weeksendedApril2,2016was$32,860,$31,525,$32,343,and$2,164,respectively.
Pre-openingcosts
Non-capitalexpendituresassociatedwithopeningnewstores,includingrent,marketingexpenses,travelandrelocationcosts,andtrainingcosts,areexpensedasincurredandareincludedinpre-openingcostsintheconsolidatedstatementofoperations.
Incometaxes
WeaccountforincometaxesutilizingFinancialAccountingStandardsBoard("FASB")AccountingStandardsCodification("ASC")740,Income Taxes .ASC740requiresanassetandliabilityapproach,whichrequirestherecognitionofdeferredtaxliabilitiesandassetsfortheexpectedfuturetaxconsequencesoftemporarydifferencesbetweenthecarryingamountsandthetaxbasesofassetsandliabilities.Werecognizeinterestandpenaltiesrelatedtounrecognizedtaxbenefitsinincometaxexpense.TherewerenouncertaintaxpositionsrequiringaccrualasofMarch31,2018andApril1,
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
1.Natureofbusinessandsummaryofsignificantaccountingpolicies(Continued)
2017.Valuationallowancesareestablishedagainstdeferredtaxassetswhenitismore-likely-than-notthattherealizationofthosedeferredtaxassetswillnotoccur.Valuationallowancesarereleasedaspositiveevidenceoffuturetaxableincomesufficienttorealizetheunderlyingdeferredtaxassetsbecomesavailable.
Deferredtaxassetsandliabilitiesaremeasuredusingtheenactedtaxratesineffectintheyearswhenthosetemporarydifferencesareexpectedtoreverse.Theeffectondeferredtaxesfromachangeinthetaxrateisrecognizedthroughcontinuingoperationsintheperiodthatincludestheenactmentofthechange.Changesintaxlawsandratescouldaffectrecordeddeferredtaxassetsandliabilitiesinthefuture.
WeoperateincertainjurisdictionsoutsidetheUnitedStates.ASC740-30providesthattheundistributedearningsofaforeignsubsidiarybeaccountedforasatemporarydifferenceunderthepresumptionthatallundistributedearningswillbedistributedtotheparentcompanyasadividend.Sufficientevidenceoftheintenttopermanentlyreinvesttheearningsinthejurisdictionwhereearnedprecludesacompanyfromrecordingthetemporarydifference.ForpurposesofASC740-30,wearepartiallyreinvestedinourSwedishsubsidiaryElfaandthusdonotrecordatemporarydifference.WearepartiallyreinvestedsincewehavepermanentlyreinvestedourpastearningsatElfa;however,wedonotassertthatallfutureearningswillbereinvestedintoElfa.
Stock-basedcompensation
TheCompanyaccountsforstock-basedcompensationinaccordanceASC718,Compensation-Stock Compensation ,whichrequiresthefairvalueofstock-basedpaymentstoberecognizedintheconsolidatedfinancialstatementsascompensationexpenseovertherequisiteserviceperiod.Fortime-basedawards,compensationexpenseisrecognizedonastraightlinebasis,netofforfeitures,overtherequisiteserviceperiodforawardsthatactuallyvest.Forperformance-basedawards,compensationexpenseisestimatedbasedonachievementoftheperformanceconditionandisrecognizedusingtheacceleratedattributionmethodovertherequisiteserviceperiodforawardsthatactuallyvest.Stock-basedcompensationexpenseisrecordedinthestock-basedcompensationlineintheconsolidatedstatementsofoperations.
Stock Options
TheBoarddeterminestheexercisepriceofstockoptionsbasedontheclosingpriceoftheCompany'scommonstockasreportedonTheNewYorkStockExchangeonthegrantdate.TheCompanyestimatesthefairvalueofeachstockoptiongrantonthedateofgrantbasedupontheBlack-Scholesoption-pricingmodel.Thismodelrequiresvarioussignificantjudgmentalassumptionsinordertoderiveafinalfairvaluedeterminationforeachtypeofawardincluding:
• ExpectedTerm—Theexpectedtermoftheoptionsrepresentstheperiodoftimebetweenthegrantdateoftheoptionsandthedatetheoptionsareeitherexercisedorcanceled,includinganestimateofoptionsstilloutstanding.
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
1.Natureofbusinessandsummaryofsignificantaccountingpolicies(Continued)
• ExpectedVolatility—Theexpectedvolatilityincorporateshistoricalandimpliedvolatilityofcomparablepubliccompaniesforaperiodapproximatingtheexpectedterm.
• ExpectedDividendYield—TheexpecteddividendyieldisbasedontheCompany'sexpectationofnotpayingdividendsonitscommonstockfortheforeseeablefuture.
• Risk-FreeInterestRate—Therisk-freeinterestrateisbasedontheU.S.Treasuryyieldcurveineffectatthetimeofgrantandwithamaturitythatapproximatestheexpectedterm.
Restricted Stock Awards
ThefairvalueofeachrestrictedstockawardisdeterminedbasedontheclosingpriceoftheCompany'scommonstockasreportedonTheNewYorkStockExchangeonthegrantdate.
Accountsreceivable
Accountsreceivableconsistprimarilyoftradereceivables,receivablesfromTheContainerStore,Inc.'screditcardprocessorsforsalestransactions,andtenantimprovementallowancesfromTheContainerStore,Inc.'slandlordsinconnectionwithnewleases.Anallowancefordoubtfulaccountsisestablishedontradereceivables,ifnecessary,forestimatedlossesresultingfromtheinabilityofcustomerstomakerequiredpayments.Factorssuchaspaymentterms,historicallossexperience,andeconomicconditionsaregenerallyconsideredindeterminingtheallowancefordoubtfulaccounts.Accountsreceivablearepresentednetofallowancesfordoubtfulaccountsof$170and$305atMarch31,2018andApril1,2017,respectively.
Inventories
Inventoriesatretailstoresarecomprisedoffinishedgoodsandarevaluedatthelowerofcostorestimatednetrealizablevalue,withcostdeterminedonaweighted-averagecostmethodincludingassociatedfreightcosts.Manufacturinginventoriesarecomprisedofrawmaterials,workinprocess,andfinishedgoodsandarevaluedonafirst-in,firstoutbasisusingfullabsorptionaccountingwhichincludesmaterial,labor,othervariablecosts,andotherapplicablemanufacturingoverhead.Todetermineifthevalueofinventoryisrecoverableatcost,weconsidercurrentandanticipateddemand,customerpreferenceandthemerchandiseage.Thesignificantestimatesusedininventoryvaluationareobsolescence(includingexcessandslow-movinginventory)andestimatesofinventoryshrinkage.Weadjustourinventoryforobsolescencebasedonhistoricaltrends,agingreports,specificidentificationandourestimatesoffutureretailsalesprices.
Reservesforshrinkageareestimatedandrecordedthroughouttheperiodasapercentageofcostofsalesbasedonhistoricalshrinkageresultsandcurrentinventorylevels.Actualshrinkageisrecordedthroughouttheyearbaseduponperiodiccyclecounts.Actualinventoryshrinkagecanvaryfromestimatesduetofactorsincludingthemixofourinventoryandexecutionagainstlosspreventioninitiativesinourstoresanddistributioncenter.
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
1.Natureofbusinessandsummaryofsignificantaccountingpolicies(Continued)
Propertyandequipment
Propertyandequipmentarerecordedatcostlessaccumulateddepreciation.Significantadditionsandimprovementsarecapitalized,andexpendituresformaintenanceandrepairsareexpensed.Gainsandlossesonthedispositionofpropertyandequipmentarerecognizedintheperiodincurred.
Depreciation,includingamortizationofassetsrecordedundercapitalleaseobligations,isprovidedusingthestraight-linemethodovertheestimatedusefullivesofdepreciableassetsasfollows:
CostsofdevelopingorobtainingsoftwareforinternaluseordevelopingtheCompany'swebsite,suchasexternaldirectcostsofmaterialsorservicesandinternalpayrollcostsdirectlyrelatedtothesoftwaredevelopmentprojectsarecapitalized.ForthefiscalyearsendedMarch31,2018,April1,2017,andFebruary27,2016,theCompanycapitalized$4,397,$4,392,and$3,272,respectively,andamortized$4,346,$3,498,and$3,258,respectively,ofcostsinconnectionwiththedevelopmentofinternallyusedsoftware.Forthefive-weekperiodendedApril2,2016,theCompanycapitalized$299andamortized$296ofcostsinconnectionwiththedevelopmentofinternallyusedsoftware.
Long-livedassets
Long-livedassets,suchaspropertyandequipmentandintangibleassetssubjecttoamortization,arereviewedforimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingamountofanassetmaynotberecoverable.Conditionsthatmayindicateimpairmentinclude,butarenotlimitedto,asignificantadversechangeincustomerdemandorbusinessclimatethatcouldaffectthevalueofanasset,aproductrecalloranadverseactionorassessmentbyaregulator.Ifthesumoftheestimatedundiscountedfuturecashflowsrelatedtotheassetislessthanthecarryingvalue,werecognizealossequaltothedifferencebetweenthecarryingvalueandthefairvalue,usuallydeterminedbytheestimateddiscountedcashflowanalysisoftheasset.
ForourTCSsegment,wegenerallyevaluatelong-livedtangibleassetsatastorelevel,oratthelowestlevelatwhichindependentcashflowscanbeidentified.Weevaluatecorporateassetsorotherlong-livedassetsthatarenotstore-specificattheconsolidatedlevel.ForourElfasegment,weevaluatelong-livedtangibleassetsatthesegmentlevel.
Sincethereistypicallynoactivemarketforourlong-livedtangibleassets,weestimatefairvaluesbasedontheexpectedfuturecashflows.Weestimatefuturecashflowsbasedonstore-levelhistoricalresults,currenttrends,andoperatingandcashflowprojections.Ourestimatesaresubjecttouncertaintyandmaybeaffectedbyanumberoffactorsoutsideourcontrol,includinggeneraleconomicconditionsandthecompetitiveenvironment.Whilewebelieveourestimatesandjudgmentsabout
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Buildings 30yearsFurniture,fixtures,andequipment 3to10yearsComputersoftware 2to5yearsLeaseholdimprovements ShorterofusefullifeorleasetermCapitalleases Shorterofusefullifeorleaseterm
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
1.Natureofbusinessandsummaryofsignificantaccountingpolicies(Continued)
futurecashflowsarereasonable,futureimpairmentchargesmayberequirediftheexpectedcashflowestimates,asprojected,donotoccurorifeventschangerequiringustoreviseourestimates.
Foreigncurrencyforwardcontracts
WeaccountforforeigncurrencyforwardcontractsinaccordancewithASC815,Derivatives and Hedging .IntheTCSsegment,wemayutilizeforeigncurrencyforwardcontractsinSwedishkronatostabilizeourretailgrossmarginsandtoprotectourdomesticoperationsfromdownwardcurrencyexposurebyhedgingpurchasesofinventoryfromourwhollyownedsubsidiary,Elfa.IntheElfasegment,wemayutilizeforeigncurrencyforwardcontractstohedgepurchasesofrawmaterialsthataretransactedincurrenciesotherthanSwedishkrona,whichisthefunctionalcurrencyofElfa.
Generally,theCompany'sforeigncurrencyforwardcontractshavetermsfrom1to12monthsandrequiretheCompanytoexchangecurrenciesatagreed-uponratesatsettlement.TheCompanydoesnotholdorenterintofinancialinstrumentsfortradingorspeculativepurposes.TheCompanyrecordsallforeigncurrencyforwardcontractsonitsconsolidatedbalancesheetatfairvalue.TheCompanyrecordsitsforeigncurrencyforwardcontractsonagrossbasis.Forwardcontractsnotdesignatedashedgesareadjustedtofairvaluethroughincomeasselling,generalandadministrativeexpenses.TheCompanyaccountsforitsforeigncurrencyhedgeinstrumentsascashflowhedges,asdefined.Changesinthefairvalueoftheforeigncurrencyhedgeinstrumentsthatareconsideredtobeeffective,asdefined,arerecordedinothercomprehensiveincome(loss)untilthehedgeditem(inventory)issoldtothecustomer,atwhichtimethedeferredgainorlossisrecognizedthroughcostofsales.Anyportionofachangeintheforeigncurrencyhedgeinstrument'sfairvaluethatisconsideredtobeineffective,asdefined,orthattheCompanyhaselectedtoexcludefromitsmeasurementofeffectiveness,isimmediatelyrecordedinearningsascostofsales.
Self-insuredliabilities
Weareprimarilyself-insuredforworkers'compensation,employeehealthbenefitsandgeneralliabilityclaims.Werecordself-insuranceliabilitiesbasedonclaimsfiled,includingthedevelopmentofthoseclaims,andanestimateofclaimsincurredbutnotyetreported.Factorsaffectingtheseestimatesincludefutureinflationrates,changesinseverity,benefitlevelchanges,medicalcostsandclaimsettlementpatterns.Shouldadifferentamountofclaimsoccurcomparedtowhatwasestimated,orcostsoftheclaimsincreaseordecreasebeyondwhatwasanticipated,reservesmayneedtobeadjustedaccordingly.Wedetermineourworkers'compensationliabilityandgeneralliabilityclaimsreservesbasedonananalysisofhistoricalclaimsdata.Self-insurancereservesforemployeehealthbenefits,workers'compensationandgeneralliabilityclaimsarerecordedintheaccruedliabilitieslineitemoftheconsolidatedbalancesheetandwere$2,810and$3,016asofMarch31,2018andApril1,2017,respectively.
Goodwill
Weevaluategoodwillannuallytodeterminewhetheritisimpaired.Goodwillisalsotestedbetweenannualimpairmenttestsifaneventoccursorcircumstanceschangethatwouldindicatethatthefair
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
1.Natureofbusinessandsummaryofsignificantaccountingpolicies(Continued)
valueofareportingunitislessthanitscarryingamount.Conditionsthatmayindicateimpairmentinclude,butarenotlimitedto,asignificantadversechangeincustomerdemandorbusinessclimatethatcouldaffectthevalueofanasset.Ifanimpairmentindicatorexists,wetestgoodwillforrecoverability.Wehaveidentifiedtworeportingunitsandwehaveselectedthefirstdayofthefourthfiscalquartertoperformourannualgoodwillimpairmenttesting.
Priortotestinggoodwillforimpairment,weperformaqualitativeassessmenttodeterminewhetheritismorelikelythannotthatgoodwillisimpairedforeachreportingunit.Iftheresultsofthequalitativeassessmentindicatethatthelikelihoodofimpairmentisgreaterthan50%,thenweperformanimpairmenttestongoodwill.Totestforimpairment,wecomparethefairvalueofthereportingunittoitscarryingvalue.Ifthefairvalueofthereportingunitexceedsthecarryingvalueofthenetassetsassignedtothatunit,goodwillisconsiderednotimpairedandwearenotrequiredtoperformfurthertesting.Ifthecarryingvalueofthenetassetsassignedtothereportingunitexceedsthefairvalueofthereportingunit,thenwewouldrecordanimpairmentlossequaltothedifference.
Thefairvalueofeachreportingunitisdeterminedbyusingadiscountedcashflowanalysisusingtheincomeapproach.Wealsouseamarketapproachtocomparetheestimatedfairvaluetocomparablecompanies.Thedeterminationoffairvaluerequiresassumptionsandestimatesofmanycriticalfactors,includingamongothers,ournatureandourhistory,financialandeconomicconditionsaffectingus,ourindustryandthegeneraleconomy,pastresults,ourcurrentoperationsandfutureprospects,salesofsimilarbusinessesorcapitalstockofpubliclyheldsimilarbusinesses,aswellasprices,termsandconditionsaffectingpastsalesofsimilarbusinesses.Forecastsoffutureoperationsarebased,inpart,onoperatingresultsandmanagement'sexpectationsastofuturemarketconditions.Thesetypesofanalysescontainuncertaintiesbecausetheyrequiremanagementtomakeassumptionsandtoapplyjudgmentstoestimateindustryeconomicfactorsandtheprofitabilityoffuturebusinessstrategies.Ifactualresultsarenotconsistentwithourestimatesandassumptions,wemaybeexposedtofutureimpairmentlossesthatcouldbematerial.
Tradenames
Weannuallyevaluatewhetherthetradenamescontinuetohaveanindefinitelife.Tradenamesarereviewedforimpairmentannuallyonthefirstdayofthefourthfiscalquarterandmaybereviewedmorefrequentlyifindicatorsofimpairmentarepresent.Conditionsthatmayindicateimpairmentinclude,butarenotlimitedto,asignificantadversechangeincustomerdemandorbusinessclimatethatcouldaffectthevalueofanasset,aproductrecalloranadverseactionorassessmentbyaregulator.
Theimpairmentreviewisperformedbycomparingthecarryingvaluetotheestimatedfairvalue,determinedusingadiscountedcashflowmethodology.Iftherecordedcarryingvalueofthetradenameexceedsitsestimatedfairvalue,animpairmentchargeisrecordedtowritethetradenamedowntoitsestimatedfairvalue.Factorsusedinthevaluationofintangibleassetswithindefinitelivesinclude,butarenotlimitedto,futurerevenuegrowthassumptions,estimatedmarketroyaltyratesthatcouldbederivedfromthelicensingofourtradenamestothirdparties,andarateusedtodiscounttheestimatedroyaltycashflowprojections.
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
1.Natureofbusinessandsummaryofsignificantaccountingpolicies(Continued)
Thevaluationoftradenamesrequiresassumptionsandestimatesofmanycriticalfactors,whichareconsistentwiththefactorsdiscussedunder"Goodwill"above.Forecastsoffutureoperationsarebased,inpart,onoperatingresultsandmanagement'sexpectationsastofuturemarketconditions.Thesetypesofanalysescontainuncertaintiesbecausetheyrequiremanagementtomakeassumptionsandtoapplyjudgmentstoestimateindustryeconomicfactorsandtheprofitabilityoffuturebusinessstrategies.Ifactualresultsarenotconsistentwithourestimatesandassumptions,wemaybeexposedtofutureimpairmentlossesthatcouldbematerial.
Foreigncurrencytranslation
TheCompanyoperatesforeignsubsidiariesinthefollowingcountries:Sweden,Norway,Finland,Denmark,Germany,Poland,andFrance.ThefunctionalcurrencyoftheCompany'sforeignoperationsistheapplicablecountry'scurrency.Allassetsandliabilitiesofforeignsubsidiariesandaffiliatesaretranslatedatyear-endratesofexchange.Revenuesandexpensesofforeignsubsidiariesandaffiliatesaretranslatedataverageratesofexchangefortheyear.Unrealizedgainsandlossesontranslationarereportedascumulativetranslationadjustmentsthroughothercomprehensiveincome(loss).
ThefunctionalcurrencyfortheCompany'swhollyownedsubsidiary,Elfa,istheSwedishkrona.Duringfiscal2017,therateofexchangefromU.S.dollartoSwedishkronadecreasedfrom8.9to8.4.ThecarryingamountofassetsrelatedtoElfaandsubjecttocurrencyfluctuationwas$119,995and$108,707asofMarch31,2018andApril1,2017,respectively.Foreigncurrencyrealizedgainsof$596,realizedgainsof$342,realizedlossesof$241,andrealizedgainsof$60areincludedinselling,general,andadministrativeexpensesintheconsolidatedstatementsofoperationsinfiscal2017,fiscal2016,fiscal2015,andthefive-weeksendedApril2,2016,respectively.
Recentaccountingpronouncements
InFebruary2016,theFinancialAccountingStandardBoard("FASB")issuedAccountingStandardsUpdate("ASU")2016-02,Leases (Topic 842) ,toreviseleaseaccountingguidance.Theupdaterequiresmostleasestoberecordedonthebalancesheetasaleaseliability,withacorrespondingright-of-useasset,whereastheseleasescurrentlyhaveanoff-balancesheetclassification.ASU2016-02mustbeappliedonamodifiedretrospectivebasisandiseffectiveforfiscalyearsbeginningafterDecember15,2018,andinterimperiodswithinthoseyears,withearlyadoptionpermitted.TheCompanycurrentlyintendstoadoptthisstandardinthefirstquarteroffiscal2019.TheCompanyisstillevaluatingtheimpactofimplementationofthisstandardonitsfinancialstatements,butexpectsthatadoptionwillhaveamaterialimpacttotheCompany'stotalassetsandliabilitiesgiventheCompanyhasasignificantnumberofoperatingleasesnotcurrentlyrecognizedonitsbalancesheet.
InMay2014,theFASBissuedASU2014-09,Revenue from Contracts with Customers ,anupdatedstandardonrevenuerecognition(codifiedasAccountingStandardsCodification("ASC")Topic606).ASU2014-09providesenhancementstothequalityandconsistencyofhowrevenueisreportedwhilealsoimprovingcomparabilityinthefinancialstatementsofcompaniesreportingusingIFRSandGAAP.Thecoreprincipleofthenewstandardisforcompaniestorecognizerevenuetodepictthetransferofgoodsorservicestocustomersinamountsthatreflecttheconsideration(thatis,payment)towhichthe
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
1.Natureofbusinessandsummaryofsignificantaccountingpolicies(Continued)
Companyexpectstobeentitledinexchangeforthosegoodsorservices.Thenewstandardalsowillresultinenhanceddisclosuresaboutrevenue,provideguidancefortransactionsthatwerenotpreviouslyaddressedcomprehensively(forexample,servicerevenueandcontractmodifications)andimproveguidanceformultiple-elementarrangements.TheCompanyhasidentifiedcertainimpactstoouraccountingforgiftcardsgivenawayforpromotionalormarketingpurposes.UndercurrentGAAP,thevalueofpromotionalgiftcardsarerecordedasselling,general,andadministrativeexpense.Thenewstandardrequiresthesetypesofgiftcardstobeaccountedforasareductionofrevenue(i.e.adiscount).Additionally,ASU2014-09willdisallowthecapitalizationofdirect-responseadvertisingcostswhichwillimpactthetimingofrecognitionofcertainadvertisingproductionanddistributioncosts.ThisstandardiseffectiveforannualreportingperiodsbeginningafterDecember15,2017,includinginterimperiodswithinthatreportingperiod,withearlyadoptionpermittedforinterimandannualperiodsbeginningafterDecember15,2016.TheCompanyintendstoadoptthisstandardinthefirstquarteroffiscal2018andtheCompanyhaselectedtousethemodified-retrospectiveapproachforimplementationofthestandard.Overall,theCompanydoesnotexpecttheadoptionofASU2014-09tohaveamaterialimpactonthefinancialstatements.UpontransitiononApril1,2018,theCompanyexpectstorecordacumulativeadjustmenttoincreaseretainedearnings/(deficit)anddecreaseaccruedliabilitiesbyapproximately$400relatedtothechangeforgiftcardsgivenawayforpromotionalormarketingpurposes.TheCompanyalsoexpectstoreclassifytheassetbalancefortheestimateoffuturereturnedmerchandise,whichwasapproximately$900asofMarch31,2018,fromthe"Inventory"linetothe"Othercurrentassets"lineonthebalancesheet.
InMarch2016,theFASBissuedASU2016-09,Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based PaymentAccounting ,whichoutlinednewprovisionsintendedtosimplifyvariousaspectsrelatedtoaccountingforshare-basedpayments,includingincometaxconsequences,forfeitures,andclassificationinthestatementofcashflows.Underthenewguidance,anentitywillnolongerrecordexcesstaxbenefitsandcertaintaxdeficienciesinadditionalpaid-incapital("APIC").Instead,theywillrecordallexcesstaxbenefitsandtaxdeficienciesasincometaxexpenseorbenefitintheincomestatementwhentheawardsvestoraresettled.ThisstandardwaseffectiveforandadoptedbytheCompanyinthefirstquarteroffiscal2017andtheCompanynowrecognizesallincometaxeffectsofshare-basedpaymentsintheincomestatementonaprospectivebasis.TheCompanyelectedtocontinuetoestimateforfeituresexpectedtooccurtodeterminetheamountofshare-basedcompensationcosttorecognizeineachperiod,aspermittedbyASU2016-09.TheadoptionofASU2016-09didnotresultinamaterialimpacttotheCompany'sfinancialstatements.
InOctober2016,theFASBissuedASU2016-16,Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory ,whichrequiresentitiestorecognizetheincometaxeffectsofintercompanysalesandtransfersofassets,otherthaninventory,intheperiodinwhichthetransferoccurs.ThisisachangefromcurrentGAAP,whichrequiresentitiestodefertheincometaxeffectsofintercompanytransfersofassetsuntiltheassethasbeensoldtoanoutsidepartyorotherwiserecognized(i.e.depreciated,amortized,impaired).Theincometaxeffectsofintercompanysalesandtransfersofinventorywillcontinuetobedeferreduntiltheinventoryissoldtoanoutsideparty.ThisASUiseffectiveforfiscalyearsbeginningafterDecember15,2017,andinterimperiodswithinthoseyears,withearlyadoptionpermitted.TheCompanycurrentlyintendstoadoptthisstandardinthefirst
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
1.Natureofbusinessandsummaryofsignificantaccountingpolicies(Continued)
quarteroffiscal2018,andtheCompanydoesnotexpectthisstandardtohaveamaterialimpactonitsfinancialstatements.
InJanuary2017,theFASBissuedASU2017-04,Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ,whichprovidesguidancetosimplifythesubsequentmeasurementofgoodwillbyeliminatingStep2fromthegoodwillimpairmenttestunderASCTopic350.Underthenewguidance,anentityshouldperformgoodwillimpairmenttestingbycomparingthefairvalueofareportingunitwithitscarryingamount.Ifthereportingunit'scarryingamountexceedsitsfairvalue,anentityshouldrecognizeanimpairmentchargebasedonthatdifference,limitedtothetotalamountofgoodwillallocatedtothatreportingunit.TheCompanyelectedtoearlyadoptthisstandardinthethirdquarteroffiscal2017onaprospectivebasis.TheadoptionofASU2017-04didnotresultinamaterialimpacttotheCompany'sfinancialstatements.
InMarch2017,theFASBissuedASU2017-07,Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Costand Net Periodic Postretirement Benefit Cost ,whichprovidesguidancethatrequiresanemployertopresenttheservicecostcomponentseparatefromtheothercomponentsofnetperiodicbenefitcost.Theupdaterequiresthatemployerspresenttheservicecostcomponentofthenetperiodicbenefitcostinthesameincomestatementlineitemasotheremployeecompensationcostsarisingfromservicesrenderedbyparticipatingemployeesduringtheperiod.Theothercomponentsofthenetperiodicbenefitcostarerequiredtobepresentedseparatelyfromthelineitemthatincludesservicecostandoutsideofthesubtotalofincomefromoperations.Ifaseparatelineitemisnotused,thelineitemusedintheincomestatementmustbedisclosed.Inaddition,onlytheservicecostcomponentiseligibleforcapitalizationinassets.ThisASUwillbeappliedretrospectivelyandiseffectiveforfiscalyearsbeginningafterDecember15,2017,andinterimperiodswithinthoseyears,withearlyadoptionpermitted.TheCompanydoesnotexpectthisstandardtohaveamaterialimpactonitsfinancialstatements.
InMay2017,theFASBissuedASU2017-09,Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting ,whichclarifieswhenmodificationaccountingshouldbeappliedforchangestotermsorconditionsofashare-basedpaymentaward.ThisASUwillbeappliedprospectivelyandiseffectiveforfiscalyearsbeginningafterDecember15,2017,andinterimperiodswithinthoseyears,withearlyadoptionpermitted.TheCompanycurrentlyintendstoadoptthisstandardinthefirstquarteroffiscal2018,andtheCompanydoesnotexpectthisstandardtohaveamaterialimpactonitsfinancialstatements.
InAugust2017,theFASBissuedASU2017-12,Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ,whichisintendedtoimproveandsimplifyhedgeaccountingandimprovethedisclosuresofhedgingarrangements.ThisASUiseffectiveforfiscalyearsbeginningafterDecember15,2018,includinginterimperiodswithinthosefiscalyears,withearlyadoptionpermitted.TheCompanyiscurrentlyevaluatingtheimpactofadoptingthenewstandardonitsfinancialstatements.
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
2.Goodwillandtradenames
Theestimatedgoodwillandtradenamefairvaluesarecomputedusingestimatesasofthemeasurementdate,whichisdefinedasthefirstdayofthefiscalfourthquarter.TheCompanymakesestimatesandassumptionsaboutsales,grossmargins,profitmargins,anddiscountratesbasedonbudgetsandforecasts,businessplans,economicprojections,anticipatedfuturecashflows,andmarketplacedata.Assumptionsarealsomadeforvaryingperpetualgrowthratesforperiodsbeyondthelong-termbusinessplanperiod.Thereareinherentuncertaintiesrelatedtothesefactorsandmanagement'sjudgmentinapplyingthesefactors.Anotherestimateusingdifferent,butstillreasonable,assumptionscouldproducedifferentresults.Astherearenumerousassumptionsandestimationsutilizedtoderivetheestimatedenterprisefairvalueofeachreportingunit,itispossiblethatactualresultsmaydifferfromestimatedresultsrequiringfutureimpairmentcharges.
TheCompanyrecordednoimpairmentsduringfiscal2017,fiscal2016,andfiscal2015asaresultofthegoodwillandtradenamesimpairmenttestsperformed.
Thechangesinthecarryingamountofgoodwillandtradenameswereasfollowsinfiscal2017,fiscal2016,andthefiveweeksendedApril2,2016:
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Goodwill Tradenames BalanceatFebruary27,2016 Grossbalance 410,467 259,902Accumulatedimpairmentcharges (207,652) (31,534)Total,net $ 202,815 $ 228,368
Foreigncurrencytranslationadjustments — 2,423BalanceatApril2,2016 Grossbalance 410,467 262,325Accumulatedimpairmentcharges (207,652) (31,534)Total,net $ 202,815 $ 230,791
Foreigncurrencytranslationadjustments — (4,106)BalanceatApril1,2017 Grossbalance 410,467 258,219Accumulatedimpairmentcharges (207,652) (31,534)Total,net $ 202,815 $ 226,685
Foreigncurrencytranslationadjustments — 2,716BalanceatMarch31,2018 Grossbalance 410,467 260,935Accumulatedimpairmentcharges (207,652) (31,534)Total,net $ 202,815 $ 229,401
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
3.Detailofcertainbalancesheetaccounts
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March31,
2018 April1,2017
Accountsreceivable,net: Tradereceivables,net $ 15,968 $ 15,873Creditcardreceivables 6,939 6,531Tenantallowances 998 2,353Otherreceivables 1,623 2,719
$ 25,528 $ 27,476Inventory: Finishedgoods $ 91,970 $ 98,438Rawmaterials 4,840 4,183Workinprogress 552 499
$ 97,362 $ 103,120Propertyandequipment,net: Landandbuildings $ 22,981 $ 20,758Furnitureandfixtures 69,777 68,837Machineryandequipment 87,105 83,523Computersoftwareandequipment 90,512 81,380Leaseholdimprovements 157,858 152,630Constructioninprogress 12,114 13,188Leasedvehiclesandother 658 917
441,005 421,233Lessaccumulateddepreciationandamortization (282,616) (255,735)
$ 158,389 $ 165,498AccruedLiabilities: Accruedpayroll,benefitsandbonuses $ 24,940 $ 20,897Unearnedrevenue 11,080 7,708Accruedtransactionandpropertytax 12,846 11,086Giftcardsandstorecreditsoutstanding 8,891 9,229Accruedleaseliabilities 5,105 4,767Accruedinterest 292 143Otheraccruedliabilities 7,340 6,277
$ 70,494 $ 60,107
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
4.Long-termdebtandrevolvinglinesofcredit
Long-termdebtandrevolvinglinesofcreditconsistofthefollowing:
ScheduledtotalrevolvinglinesofcreditanddebtmaturitiesforthefiscalyearssubsequenttoMarch31,2018,areasfollows:
SeniorSecuredTermLoanFacility
OnApril6,2012,TheContainerStoreGroup,Inc.,TheContainerStore,Inc.andcertainofitsdomesticsubsidiariesenteredintoacreditagreementwithJPMorganChaseBank,N.A.,asAdministrativeAgentandCollateralAgent,andthelenderspartythereto(asamended,the"SeniorSecuredTermLoanFacility").OnAugust18,2017,theCompanyenteredintoafourthamendment(the"TermLoanAmendment")totheSeniorSecuredTermLoanFacilitydatedasofApril6,2012.ThefourthamendmentamendedtheSeniorSecuredTermLoanFacilityto,amongotherthings,(i)extendthematuritydateoftheloansundertheSeniorSecuredTermLoanFacilitytoAugust18,2021,(ii)addamaximumleveragecovenantof5.0:1.0whichstepsdownby0.25xonJune30ofeachyearcommencingonJune30,2018,(iii)increasetheapplicableinterestratemarginto7.00%forLIBORloansand6.00%forbaserateloans,(iv)reducetheaggregateprincipalamountoftheSeniorSecuredTermLoanFacilityto$300,000,(v)increaseprincipalamortizationto2.5%perannum,
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March31,
2018 April1,2017
Seniorsecuredtermloanfacility $ 294,375 $ 316,7602014Elfatermloanfacility — 3,3582014Elfarevolvingcreditfacility — —Obligationsundercapitalleases 662 901Otherloans 16 119Revolvingcreditfacility — —Totaldebt 295,053 321,138
Lesscurrentportion (7,771) (5,445)Lessdeferredfinancingcosts(1) (9,888) (3,667)Totallong-termdebt $ 277,394 $ 312,026
(1) RepresentsdeferredfinancingcostsrelatedtoourSeniorSecuredTermLoanFacility,whicharepresentednetoflong-termdebtintheconsolidatedbalancesheet.
Within1year $ 7,7712years 7,7613years 7,6464years 271,8755years —Thereafter —
$ 295,053
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
4.Long-termdebtandrevolvinglinesofcredit(Continued)
(vi)requirea3.0%upfrontfeeontheaggregateprincipalamountoftheSeniorSecuredTermLoanFacility,and(vii)imposea1%premiumifavoluntaryprepaymentismadefromtheproceedsofarepricingtransactionwithin12monthsafterAugust18,2017.
UndertheSeniorSecuredTermLoanFacility,wehad$294,375inoutstandingborrowingsasofMarch31,2018andtheinterestrateonsuchborrowingsisLIBOR+7.00%,subjecttoaLIBORfloorof1.00%.TheSeniorSecuredTermLoanFacilityprovidesthatwearerequiredtomakequarterlyprincipalrepaymentsof$1,875throughJune30,2021,withaballoonpaymentfortheremainingbalancedueonAugust18,2021.
TheSeniorSecuredTermLoanFacilityissecuredby(a)afirstprioritysecurityinterestinsubstantiallyallofourassets(excludingstockinforeignsubsidiariesinexcessof65%,assetsofnon-guarantorsandsubjecttocertainotherexceptions)(otherthanthecollateralthatsecurestheRevolvingCreditFacilitydescribedbelowonafirst-prioritybasis)and(b)asecondprioritysecurityinterestintheassetssecuringtheRevolvingCreditFacilitydescribedbelowonafirst-prioritybasis.ObligationsundertheSeniorSecuredTermLoanFacilityareguaranteedbyTheContainerStoreGroup,Inc.andeachofTheContainerStore,Inc.'sU.S.subsidiaries.
TheSeniorSecuredTermLoanFacilityincludesrestrictionsontheabilityoftheCompany'ssubsidiariestoincuradditionalliensandindebtedness,makeinvestmentsanddispositions,paydividendsormakeotherdistributions,makeloans,prepaycertainindebtednessandenterintosaleandleasebacktransactions,amongotherrestrictions.UndertheSeniorSecuredTermLoanFacility,providednoeventofdefaulthasoccurredandiscontinuing,TheContainerStore,Inc.ispermittedtopaydividendstoTheContainerStoreGroup,Inc.inanamountnottoexceedthesumof$10,000plusifaftergivingeffecttosuchdividendonaproformabasis,theConsolidatedLeverageRatio(asdefinedintheSeniorSecuredTermLoanFacility)doesnotexceed2.0to1.0,theAvailableAmount(asdefinedintheSeniorSecuredTermLoanFacility)duringthetermoftheSeniorSecuredTermLoanFacility,andpursuanttocertainotherlimitedexceptions.TherestrictednetassetsoftheCompany'sconsolidatedsubsidiarieswas$236,207asofMarch31,2018.AsofMarch31,2018,wewereincompliancewithallSeniorSecuredTermLoanFacilitycovenantsandnoEventofDefault(assuchtermisdefinedintheSeniorSecuredTermLoanFacility)hadoccurred.
Related Party Debt
OnAugust18,2017,GreenCreditInvestors,L.P.funded$20,000ofthe$300,000SeniorSecuredTermLoanFacilitybasedonthesameterms,includinginterestrates,repaymentterms,andcollateral,asallotherlenders.GreenCreditInvestors,L.P.isarelatedpartyduetoitsaffiliationwithLGP,themajorityshareholderoftheoutstandingcommonstockoftheCompany.AsofMarch31,2018,theprincipalamountduetoGreenCreditInvestors,L.P.waszero,asitsolditsinterestintheloansyndicate.
RevolvingCreditFacility
OnApril6,2012,TheContainerStoreGroup,Inc.,TheContainerStore,Inc.andcertainofitsdomesticsubsidiariesenteredintoanasset-basedrevolvingcreditagreementwiththelendersparty
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
4.Long-termdebtandrevolvinglinesofcredit(Continued)
thereto,JPMorganChaseBank,N.A.,asAdministrativeAgentandCollateralAgent,andWellsFargoBank,NationalAssociation,asSyndicationAgent(asamended,the"RevolvingCreditFacility").OnAugust18,2017,theCompanyalsoenteredintoafourthamendment(the"RevolvingAmendment")totheRevolvingCreditFacilitydatedasofApril6,2012,which,amongotherthings,extendedthematuritydateoftheloansundertheRevolvingCreditFacilitytotheearlierof(i)August18,2022and(ii)May18,2021ifanyportionoftheSeniorSecuredTermLoanFacilityremainsoutstandingonsuchdateandthematuritydateoftheSeniorSecuredTermLoanFacilityisnotextended.
Theaggregateprincipalamountofthefacilityis$100,000.BorrowingsundertheRevolvingCreditFacilityaccrueinterestatLIBOR+1.25%.Inaddition,theRevolvingCreditFacilityincludesanuncommittedincrementalrevolvingfacilityintheamountof$50,000,whichissubjecttoreceiptoflendercommitmentsandsatisfactionofspecifiedconditions.
InconnectionwiththeclosingoftheTermLoanAmendmentandtheRevolvingAmendment,theCompanyborrowedanetamountof$20,000ontheRevolvingCreditFacility.Inaddition,theCompanyrecordedalossonextinguishmentofdebtof$2,369inthesecondquarteroffiscal2017associatedwiththeTermLoanAmendmentandtheRevolvingAmendment.
TheRevolvingCreditFacilityprovidesthatproceedsaretobeusedforworkingcapitalandothergeneralcorporatepurposes,andallowsforswinglineadvancesofupto$15,000andtheissuanceoflettersofcreditofupto$40,000.
TheavailabilityofcreditatanygiventimeundertheRevolvingCreditFacilityislimitedbyreferencetoaborrowingbaseformula,whichisthesumof(i)90%ofeligiblecreditcardreceivablesand(ii)90%oftheappraisedvalueofeligibleinventory;minus(iii)certainavailabilityreservesand(iv)outstandingcreditextensionsincludinglettersofcreditandexistingrevolvingloans.
TheRevolvingCreditFacilityissecuredby(a)afirst-prioritysecurityinterestinsubstantiallyallofourpersonalproperty,consistingofinventory,accountsreceivable,cash,depositaccounts,andothergeneralintangibles,and(b)asecond-prioritysecurityinterestinthecollateralthatsecurestheSeniorSecuredTermLoanFacilityonafirst-prioritybasis,asdescribedabove(excludingstockinforeignsubsidiariesinexcessof65%,andassetsofnon-guarantorsubsidiariesandsubjecttocertainotherexceptions).ObligationsundertheRevolvingCreditFacilityareguaranteedbyTheContainerStoreGroup,Inc.andeachofTheContainerStore,Inc.'sU.S.subsidiaries.
TheRevolvingCreditFacilitycontainsanumberofcovenantsthat,amongotherthings,restrictourability,subjecttospecifiedexceptions,toincuradditionaldebt;incuradditionalliensandcontingentliabilities;sellordisposeofassets;mergewithoracquireothercompanies;liquidateordissolveourselves,engageinbusinessesthatarenotinarelatedlineofbusiness;makeloans,advancesorguarantees;engageintransactionswithaffiliates;andmakeinvestments.Inaddition,thefinancingagreementscontaincertaincross-defaultprovisions.Wearerequiredtomaintainaconsolidatedfixed-chargecoverageratioof1.0to1.0ifexcessavailabilityislessthan$10,000atanytime.AsofMarch31,2018,wewereincompliancewithallRevolvingCreditFacilitycovenantsandnoEventofDefault(assuchtermisdefinedintheRevolvingCreditFacility)hadoccurred.
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
4.Long-termdebtandrevolvinglinesofcredit(Continued)
UndertheRevolvingCreditFacility,providednoeventofdefaulthasoccurredandiscontinuing,TheContainerStore,Inc.ispermittedtopaydividendstoTheContainerStoreGroup,Inc.,inanamountnottoexceedthesumof$10,000plusifaftergivingeffecttosuchdividendonaproformabasis,theConsolidatedFixedChargeCoverageRatio(asdefinedintheRevolvingCreditFacility)isnotlessthan1.25to1.0,theAvailableAmount(asdefinedintheRevolvingCreditFacility)duringthetermoftheRevolvingCreditFacility,andpursuanttocertainotherlimitedexceptions.
Therewas$65,625availableundertheRevolvingCreditFacilityasofMarch31,2018,basedonthefactorsdescribedabove.Maximumborrowings,includinglettersofcreditissuedundertheRevolvingCreditFacilityduringtheperiodendedMarch31,2018,were$38,490.
2014ElfaSeniorSecuredCreditFacilities
OnApril1,2014,ElfaenteredintoamastercreditagreementwithNordeaBankAB("Nordea"),whichconsistsofaSEK60.0million(approximately$7,175asofMarch31,2018)termloanfacility(the"2014ElfaTermLoanFacility")andaSEK140.0million(approximately$16,743asofMarch31,2018)revolvingcreditfacility(the"2014ElfaRevolvingCreditFacility,"andtogetherwiththe2014ElfaTermLoanFacility,the"2014ElfaSeniorSecuredCreditFacilities").The2014ElfaSeniorSecuredCreditFacilitiestermbeganonAugust29,2014andmaturesonAugust29,2019.Theremainingbalanceofthe2014ElfaTermLoanFacilitywaspaidonFebruary18,2018,whichwaspriortothematuritydate.Elfawasrequiredtomakequarterlyprincipalpaymentsunderthe2014ElfaTermLoanFacilityintheamountofSEK3.0million(approximately$359asofMarch31,2018).The2014ElfaRevolvingCreditFacilitybearsinterestatNordea'sbaserate+1.4%.Inthefourthquarteroffiscal2016,ElfaandNordeaagreedthatthestatedrateswouldapplythroughmaturity.AsofMarch31,2018,theCompanyhad$16,743ofadditionalavailabilityunderthe2014ElfaRevolvingCreditFacility.
Underthe2014ElfaSeniorSecuredCreditFacilities,Elfa'sabilitytopaydividendstoitsparententity,TheContainerStore,Inc.,isbasedonitsfuturenetincomeandonhistoricalintercompanypracticesasbetweenElfaandTheContainerStore,Inc.The2014ElfaSeniorSecuredCreditFacilitiesaresecuredbythemajorityofassetsofElfa.The2014ElfaSeniorSecuredCreditFacilitiescontainsanumberofcovenantsthat,amongotherthings,restrictElfa'sability,subjecttospecifiedexceptions,toincuradditionalliens,sellordisposeofassets,mergewithothercompanies,engageinbusinessesthatarenotinarelatedlineofbusinessandmakeguarantees.Inaddition,Elfaisrequiredtomaintain(i)aconsolidatedequityratio(asdefinedinthe2014ElfaSeniorSecuredCreditFacilities)ofnotlessthan30%inyearoneandnotlessthan32.5%thereafterand(ii)aconsolidatedratioofnetdebttoEBITDA(asdefinedinthe2014ElfaSeniorSecuredCreditFacilities)oflessthan3.2,theconsolidatedequityratiotestedattheendofeachcalendarquarterandtheratioofnetdebttoEBITDAtestedasoftheendofeachfiscalquarter.AsofMarch31,2018,ElfawasincompliancewithallcovenantsandnoEventofDefault(asdefinedinthe2014ElfaSeniorSecuredCreditFacilities)hadoccurred.
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
4.Long-termdebtandrevolvinglinesofcredit(Continued)
Deferredfinancingcosts
TheCompanycapitalizescertaincostsassociatedwithissuanceofvariousdebtinstruments.Thesedeferredfinancingcostsareamortizedtointerestexpenseonastraight-linemethod,whichismateriallyconsistentwiththeeffectiveinterestmethod,overthetermsoftherelateddebtagreements.Infiscal2017,theCompanycapitalized$9,640offeesassociatedwiththeTermLoanAmendmentthatwillbeamortizedthroughAugust18,2021and$57offeesassociatedwiththeRevolvingAmendmentthatwillbeamortizedthroughAugust18,2022.
Amortizationexpenseofdeferredfinancingcostswas$2,664,$1,921,$1,940,and$160infiscal2017,fiscal2016,fiscal2015,andthefiveweeksendedApril2,2016,respectively.Thefollowingisascheduleofamortizationexpenseofdeferredfinancingcosts:
5.Incometaxes
Componentsofthe(benefit)provisionforincometaxesareasfollows:
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SeniorSecuredTermLoanFacility
RevolvingCreditFacility Total
Within1year $ 2,966 $ 71 $ 3,0372years 2,966 71 3,0373years 2,966 71 3,0374years 990 71 1,0615years — 28 28Thereafter — — —
$ 9,888 $ 312 $ 10,200
FiscalYearEnded
FiveWeeksEndedApril2,2016
March31,
2018 April1,2017
February27,2016
Incomebeforeincometaxes: U.S. $ 3,001 $ 19,307 $ 4,830 $ 1,059Foreign 3,704 5,048 3,221 (367)
$ 6,705 $ 24,355 $ 8,051 $ 692Current Federal $ 10,685 $ 6,039 $ (385) $ 235State 792 1,374 585 63Foreign 1,345 2,085 1,850 (778)Totalcurrentprovision(benefit) 12,822 9,498 2,050 (480)
Deferred Federal (25,418) 553 1,881 122State 158 22 57 (46)Foreign (285) (671) (1,079) 742Totaldeferred(benefit)provision (25,545) (96) 859 818
Total(benefit)provisionforincometaxes $ (12,723) $ 9,402 $ 2,909 $ 338
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
5.Incometaxes(Continued)
TheTaxCutsandJobsAct(the"TaxAct")wasenactedonDecember22,2017.TheTaxActmadenumerouschangestofederalcorporatetaxlaw,including,butnotlimitedto,thefollowing:
• reducingtheU.S.federalcorporatetaxratefrom35%to21%,
• requiringcompaniestopayaone-timetransitiontaxonearningsofcertainforeignsubsidiariesthatwerepreviouslytaxdeferred,
• imposinglimitationsonthedeductibilityofnetinterestexpenseandcertainexecutivecompensationarrangementsunderSection162(m)oftheInternalRevenueCode,
• allowingfortheimmediateexpensingofqualifiedpropertypurchases,and
• creationofanewtaxonglobalintangiblelow-taxedincome("GILTI").
SECStaffAccountingBulletin("SAB")118allowstheCompanytorecordprovisionalamountsfortheimpactoftheTaxActduringameasurementperiodnottoextendbeyondoneyearfromtheenactmentdatetocompletetheaccountingunderASC740,Income Taxes .AsofMarch31,2018,theCompanyhadnotcompletedtheaccountingforthetaxeffectsoftheenactmentoftheTaxAct,however,itwasabletomakereasonableestimatesoftheeffectsand,therefore,recordedprovisionalestimatesfortheseitems.TheCompanywillcontinuetoanalyzethefulleffectsoftheTaxActonthefinancialstatements.AstheCompanypreparesnecessarydataandcontinuestointerprettheTaxActandanyadditionalguidance,theCompanymaymakeadjustmentstotheprovisionalamountsduringthemeasurementperiod,aspermittedbySAB118.TheimpactoftheTaxActmaydifferfromthecurrentestimate,possiblymaterially,duetochangesininterpretationsandassumptionstheCompanyhasmadeandfutureguidancethatmaybeissued.TheCompanyanticipatescompletingtheaccountingforthetaxeffectsoftheTaxActinasubsequentreportingperiod,priortotheendofthemeasurementperiodonDecember22,2018.
Thenetprovisionaltaxbenefitrecordedinfiscal2017relatedtotheTaxActwas$15,689.ProvisionalamountsforthefollowingincometaxeffectsoftheTaxActhavebeenrecordedasofMarch31,2018andaresubjecttochangeduringfiscal2018.
Deferred tax effects
Deferredtaxbalanceswereremeasuredinfiscal2017basedontheratesatwhichtheyareexpectedtoreverseinthefuture,generally21%pursuanttotheTaxAct.TheCompanyrecordedaprovisionalbenefitof$24,210infiscal2017relatedtotheremeasurementoftheCompany'sdeferredtaxbalances,whichisincludedasacomponentof(benefit)provisionforincometaxesontheconsolidatedstatementofoperations.
TheCompanybelievestheremeasurementofitsdeferredtaxbalancesiscomplete,exceptforchangesinestimatesthatcanresultfromfinalizingthefilingofits2017U.S.incometaxreturnandchangesthatmaybeadirectimpactofotherprovisionalamountsduetotheenactmentoftheTaxAct.Inaddition,theestimatemaybeimpactedastheCompanyfurtheranalyzesstatetaxconformitytothefederaltaxchangesandguidanceissuedbyregulatorybodiesthatprovideinterpretiveguidanceoftheTaxAct.Anyadjustmentstotheprovisionalamountswillberecognizedasacomponentofthe
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
5.Incometaxes(Continued)
provisionforincometaxesintheperiodinwhichsuchadjustmentsaredeterminedwithintheannualperiodfollowingtheenactmentoftheTaxAct.
TheCompanyhasnotrecordedanyprovisionalamountswithrespecttotheGILTIprovisionoftheTaxActastheCompanyhasnotyetelectedanaccountingpolicytodeterminewhetheritwillrecognizeGILTIasaperiodcostwhenincurredortorecognizedeferredtaxesforbasisdifferencesexpectedtoreverse.
One-time transition tax on earnings of foreign subsidiaries
Theone-timetransitiontaxisbasedonaccumulatedearningsandprofits("E&P")fromour1999acquisitionofElfaforwhichU.S.incometaxeswerepreviouslydeferred.Duringfiscal2017,aprovisionalexpenseof$8,521wasrecordedrelatedtotheone-timetransitiontaxonforeignearnings,whichisnetofforeigntaxcreditutilizationof$4,178.Additionally,asaresultoftheTaxAct,futureforeigntaxcreditsof$5,184weregenerated.Wedonotexpecttoutilizethesecreditstooffsetfuturetaxableincome,andhaverecordedafullvaluationallowancerelatedtothesecredits,theeffectofwhichisincludedwithinthenettransitiontaxliability.Whilewewereabletomakeareasonableestimateofthetransitiontaxbasedontheguidanceissuedasofthedateofthesefinancialstatements,theCompanyiscontinuingtogatheradditionalinformationtobeabletomorepreciselycomputethefinalamount.
Effective income tax rate reconciliation
SincetheCompanyhasafiscalyearthatdoesnotfollowthecalendaryear,itissubjecttoablendedU.S.corporateincometaxrateof31.5%forfiscalyear2017.Thedifferencesbetweentheactualprovisionforincometaxesandtheamountscomputedbyapplyingthestatutoryfederaltaxratetoincomebeforetaxesareasfollows:
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FiscalYearEnded
FiveWeeksEndedApril2,2016
March31,
2018 April1,2017
February27,2016
Provisioncomputedatfederalstatutoryrate $ 2,114 $ 8,525 $ 2,818 $ 242Permanentdifferences 566 536 192 10One-timetransitiontax,net 8,521 — — —Changeinvaluationallowance 211 178 248 37Stateincometaxes,netoffederalbenefit 455 855 402 11Effectofforeignincometaxes (351) (619) (384) 53Remeasurementofdeferredtaxbalances (24,210) — — —Economiczonecredits — — (292) —Other,net (29) (73) (75) (15)
$ (12,723) $ 9,402 $ 2,909 $ 338
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
5.Incometaxes(Continued)
Deferred taxes
Deferredincometaxesreflectthenettaxeffectsoftemporarydifferencesbetweenthecarryingamountsofassetsandliabilitiesforfinancialreportingpurposesandtheamountsusedforincometaxpurposes.ComponentsofdeferredtaxassetsandliabilitiesasofMarch31,2018andApril1,2017,areasfollows:
TheCompanyhasrecordeddeferredtaxassetsandliabilitiesbaseduponestimatesoftheirrealizablevaluewithsuchestimatesbaseduponlikelyfuturetaxconsequences.Inassessingtheneedforavaluationallowance,theCompanyconsidersbothpositiveandnegativeevidencerelatedtothelikelihoodofrealizationofthedeferredtaxassets.If,basedontheweightofavailableevidence,itismore-likely-than-notthatadeferredtaxassetwillnotberealized,theCompanyrecordsavaluationallowance.
Foreignanddomestictaxcredits,netofvaluationallowances,totaledapproximately$1,545atMarch31,2018andapproximately$1,490atApril1,2017.ThevariouscreditsavailableatMarch31,2018expireinthe2026taxyear.
TheCompanyhaddeferredtaxassetsforforeignandstatenetoperatinglosscarryoversof$2,434atMarch31,2018,andapproximately$1,955atApril1,2017.Valuationallowancesof$2,201and$1,753wererecordedagainstthenetoperatinglossdeferredtaxassetsatMarch31,2018andApril1,2017,respectively.
TheCompanyfilesincometaxreturnsintheU.S.federaljurisdiction,variousstatesandforeignjurisdictions.TheCompanyiscurrentlysubjecttoU.S.federalincometaxexaminationsfortheyear
94
March31,
2018 April1,2017
Deferredtaxassets: Inventory $ 1,004 $ 1,763Lossandcreditcarryforwards 9,163 3,445Stockcompensation 4,995 7,220Accruedliabilities 3,728 4,439Capitalassets 454 352
19,344 17,219Valuationallowance (7,724) (2,015)
Totaldeferredtaxassets 11,620 15,204
Deferredtaxliabilities: Intangibles (58,568) (82,775)Capitalassets (4,104) (7,412)Other (1,383) (3,557)
Totaldeferredtaxliabilities (64,055) (93,744)Netdeferredtaxliabilities $ (52,435) $ (78,540)
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
5.Incometaxes(Continued)
endedFebruary28,2015andforward.WithrespecttostateandlocaljurisdictionsandcountriesoutsideoftheUnitedStates,theCompanyandsubsidiariesaretypicallysubjecttoexaminationforthreetosixyearsaftertheincometaxreturnshavebeenfiled.
TheCompanyaccountsfortherepatriationofforeignearningsinaccordancewithASC740-30.Assuch,theCompany'searningsarepartiallyreinvestedbasedontheguidanceprovidedinASC740-30.TheCompanyhashistoricallyassertedthatallundistributedearningswereindefinitelyreinvested.Therefore,noprovisionhasbeenmadefordeferredtaxesrelatedtoanyoutsidebasisdifferencesassociatedwithElfa,theCompany'sforeignsubsidiary.TheCompanycontinuestoassesstheimpactoftheTaxAct,whichcouldimpactitsassertionregardingindefinitereinvestmentandpotentialfuturerepatriation.Asdiscussedabove,oncetheaccountingfortheone-timetransitiontaxonforeignearningsiscomplete,theCompanywillprovideupdateddisclosuresrelatedtoanypotentialchangestoitsassertionsasappropriate.
TheCompanydoesnothaveanyuncertaintaxpositions,accordingtoASC740-10,asofMarch31,2018andApril1,2017.
6.Employeebenefitplans
401(k)Plan
AlldomesticemployeesoftheCompanywhocomplete11monthsofserviceareeligibletoparticipateintheCompany's401(k)Plan.Participantsmaycontributeupto80%ofannualcompensation,limitedtoeighteenthousandannually(twenty-fourthousandforparticipantsaged50yearsandover)asofJanuary1,2017.Duringfiscal2015,theCompanymatched100%ofemployeecontributionsupto4%ofcompensation.EffectiveApril15,2016,theCompanytemporarilyceased401(k)matchingcontributions.TheamountchargedtoexpensefortheCompany'smatchingcontributionwas$0,$58,$3,165,and$309,forfiscal2017,fiscal2016,fiscal2015,andthefiveweeksendedApril2,2016,respectively.
Nonqualifiedretirementplan
TheCompanyhasanonqualifiedretirementplanwherebycertainemployeescanelecttodeferaportionoftheircompensationintoretirementsavingsaccounts.Undertheplan,thereisnorequirementthattheCompanymatchcontributions,althoughtheCompanymaycontributematchingpaymentsatitssolediscretion.Nomatchingcontributionsweremadetotheplanduringanyoftheperiodspresented.Thetotalfairvalueoftheplanassetrecordedinothercurrentassetswas$5,848and$5,092asofMarch31,2018andApril1,2017,respectively.Thetotalcarryingvalueoftheplanliabilityrecordedinaccruedliabilitieswas$5,854and$5,086asofMarch31,2018andApril1,2017,respectively.
Pensionplan
TheCompanyprovidespensionbenefitstotheemployeesofElfaundercollectivelybargainedpensionplansinSweden,whicharerecordedinotherlong-termliabilities.Thedefinedbenefitplan
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
6.Employeebenefitplans(Continued)
providesbenefitsforparticipatingemployeesbasedonyearsofserviceandfinalsalarylevelsatretirement.CertainemployeesalsoparticipateindefinedcontributionplansforwhichCompanycontributionsaredeterminedasapercentageofparticipantcompensation.Thedefinedbenefitplansareunfundedandapproximately3%ofElfaemployeesareparticipantsinthedefinedbenefitpensionplan.
Thefollowingisareconciliationofthechangesinthedefinedbenefitobligations,astatementoffundedstatus,andtherelatedweighted-averageassumptions:
Thefollowingtableprovidesthecomponentsofnetperiodicbenefitcostforfiscalyears2017,2016,2015,andthefiveweeksendedApril2,2016:
7.Stock-basedcompensation
OnOctober16,2013,theBoardapprovedthe2013IncentiveAwardPlan("2013EquityPlan").The2013EquityPlanprovidesforgrantsofnonqualifiedstockoptions,incentivestockoptions,
96
March31,
2018 April1,2017
Changeinbenefitobligation: Projectedbenefitobligation,beginningofyear $ 4,138 $ 3,691Servicecost 37 67Interestcost 143 117Benefitspaid (83) (77)Actuarialloss 382 710Exchangerateloss(gain) 283 (370)Projectedbenefitobligation,endofyear 4,900 4,138Fairvalueofplanassets,endofyear — —Underfundedstatus,endofyear $ (4,900) $ (4,138)Discountrate 3.1% 3.3%Rateofpayincreases 3.0% 3.0%
FiscalYearEnded
FiveWeeksEndedApril2,2016
March31,
2018 April1,2017
February27,2016
Componentsofnetperiodicbenefitcost: Definedbenefitplans: Servicecost $ 37 $ 67 $ 86 $ 6Interestcost 143 117 103 10Amortizationofunrecognizednetloss 63 37 45 —Netperiodicbenefitcostfordefinedbenefitplan 243 221 234 16Definedcontributionplans 2,237 1,904 2,246 129Totalnetperiodicbenefitcost $ 2,480 $ 2,125 $ 2,480 $ 145
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
7.Stock-basedcompensation(Continued)
restrictedstock,restrictedstockunits,deferredstockawards,deferredstockunits,stockappreciationrights,dividendsequivalents,performanceawards,andstockpayments.
OnSeptember12,2017,theCompany'sshareholdersapprovedTheContainerStoreGroupInc.AmendedandRestated2013IncentiveAwardPlan(the"AmendedandRestatedPlan").TheAmendedandRestatedPlan(i)increasedthenumberofsharesofcommonstockavailableforissuanceundersuchplanfrom3,616,570sharesto11,116,570shares;(ii)wasintendedtoallowawardsundertheAmendedandRestatedPlantocontinuetoqualifyastax-deductibleperformance-basedcompensationunderSection162(m)oftheInternalRevenueCodeof1986,asamended,subjecttoanticipatedchangesresultingfromtheTaxActasdescribedbelow;and(iii)madecertainminortechnicalchangestothetermsoftheAmendedandRestatedPlan.
PursuanttotheTaxAct,theexceptionforperformance-basedcompensationhasbeenrepealed,effectivefortaxyearsbeginningafterDecember31,2017,and,therefore,compensationpreviouslyintendedtobeperformance-basedmaynotbedeductibleunlessitqualifiesforlimitedtransitionreliefapplicabletocertainamountspayablepursuanttoawrittenbindingcontractthatwasineffectonNovember2,2017.
AsofMarch31,2018,thereare11,116,570sharesauthorizedand7,884,679sharesavailableforgrantundertheAmendedandRestatedPlan.Awardsthataresurrenderedorterminatedwithoutissuanceofsharesareavailableforfuturegrants.
StockOptions
TheCompanygrantsnonqualifiedstockoptionsundertheAmendedandRestatedPlanannuallytonon-employeedirectorsoftheCompany.Thestockoptionsgrantedvestinequalannualinstallmentsover3years.ThestockoptionsgrantedwereapprovedbytheBoardandconsistedofnonqualifiedstockoptionsasdefinedbytheIRSforcorporateandindividualtaxreportingpurposes.ThefollowingtablesummarizestheCompany'sannualstockoptiongrantsduringfiscal2017,2016,and2015:
Inconnectionwithourstock-basedcompensationplans,theBoardconsiderstheestimatedfairvalueoftheCompany'sstockwhensettingthestockoptionexercisepriceasofthedateofeachgrant.TheBoarddeterminestheexercisepriceofstockoptionsbasedontheclosingpriceoftheCompany'scommonstockasreportedonTheNewYorkStockExchangeonthegrantdate.Stock-basedcompensationcostismeasuredatthegrantdatefairvalueandisrecognizedasanexpenseintheconsolidatedstatementsofoperations,onastraight-linebasis,overtheemployee'srequisiteserviceperiod(generallythevestingperiodoftheequitygrant).TheCompanyestimatesforfeituresforoptiongrantsthatarenotexpectedtovest.TheCompanyissuesnewsharesofcommonstockuponstockoptionexercise.
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GrantDate NumberofStockOptionsGranted
August3,2015 94,568August1,2016 276,075September12,2017 343,352
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
7.Stock-basedcompensation(Continued)
Stock-basedcompensationcostrelatedtostockoptionswas$1,520,$1,526,$1,556,and$147duringfiscalyear2017,2016,2015,andthefiveweeksendedApril2,2016,respectively.AsofMarch31,2018,therewasaremainingunrecognizedcompensationcostof$2,956(netofestimatedforfeitures)thattheCompanyexpectstoberecognizedonastraight-linebasisoveraweighted-averageremainingserviceperiodofapproximately1.3years.Theintrinsicvalueofsharesexercisedwas$0,$0,and$2duringfiscal2017,2016,and2015,respectively.Thefairvalueofsharesvestedwas$1,613,$1,464,and$1,367duringfiscal2017,2016,and2015,respectively.
ThefollowingtablesummarizestheCompany'sstockoptionactivityduringfiscal2017,2016,and2015:
ThefairvalueofstockoptionsisestimatedonthedateofthegrantusingtheBlack-Scholesoptionpricingmodelwiththefollowingweighted-averageassumptions:
• ExpectedTerm—Theexpectedtermoftheoptionsrepresentstheperiodoftimebetweenthegrantdateoftheoptionsandthedatetheoptionsareeitherexercisedorcanceled,includinganestimateofoptionsstilloutstanding.TheCompanyutilizedthesimplifiedmethodforcalculatingtheexpectedtermforstockoptionsaswedonothavesufficienthistoricaldatatocalculatebasedonactualexerciseandforfeitureactivity.
• ExpectedVolatility—Theexpectedvolatilityincorporateshistoricalandimpliedvolatilityofcomparablepubliccompaniesforaperiodapproximatingtheexpectedterm.
• ExpectedDividendYield—TheexpecteddividendyieldisbasedontheCompany'sexpectationofnotpayingdividendsonitscommonstockfortheforeseeablefuture.
• Risk-FreeInterestRate—Therisk-freeinterestrateisbasedontheU.S.Treasuryyieldcurveineffectatthetimeofgrantandwithamaturitythatapproximatestheexpectedterm.
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FiscalYear 2017 2016(1) 2015
Shares
Weighted-averageexerciseprice
(pershare)
Weighted-average
contractualterm
remaining(years)
Aggregateintrinsicvalue
(thousands) Shares
Weighted-averageexerciseprice
(pershare)
Weighted-average
contractualterm
remaining(years)
Aggregateintrinsicvalue
(thousands) Shares
Weighted-averageexerciseprice
(pershare)
Weighted-average
contractualterm
remaining(years)
Aggregateintrinsicvalue
(thousands) Beginningbalance 2,946,028 $ 16.81 2,890,476 $ 18.02 2,856,005 $ 18.04
Granted 343,352 $ 4.10 276,075 $ 5.35 94,568 $ 17.28 Exercised — $ — — $ — (3,315) $ 17.71 Forfeited (90,881)$ 15.13 (98,815) $ 18.63 (41,791) $ 18.00 Expired (158,293)$ 17.31 (121,708) $ 17.95 (14,991) $ 17.80 Endingbalance 3,040,206 $ 15.40 6.23 $ 482 2,946,028 $ 16.81 6.83 $ — 2,890,476 $ 18.02 7.66 $ —
Vestedandexercisableatendofyear 2,241,283 $ 17.53 5.65 $ 7 2,156,537 $ 17.98 6.51 $ — 2,110,661 $ 17.95 7.55 $ —
(1) Fiscal2016includes6,690optionsforfeitedand576optionsexpiredduringthefive-weeksendedApril2,2016.Therewerenooptionsgrantedorexercisedduringthefive-weeksendedApril2,2016.
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
7.Stock-basedcompensation(Continued)
Stockoptionsgrantedduringfiscalyear2017,2016,and2015weregrantedataweighted-averagegrantdatefairvalueof$2.33,$3.26,and$8.46,respectively.SuchamountswereestimatedusingtheBlackScholesoptionpricingmodelwiththefollowingweighted-averageassumptions:
RestrictedStockAwards
TheCompanyperiodicallygrantstime-basedandperformance-basedrestrictedstockawardsundertheCompany'sAmendedandRestatedPlantokeyexecutivesandofficersoftheCompany.ThefollowingtablesummarizestheCompany'srestrictedstockawardgrantsduringfiscal2017and2016:
Stock-basedcompensationcostrelatedtorestrictedstockawardswas$506and$463forfiscalyear2017and2016,respectively.UnrecognizedcompensationexpenserelatedtooutstandingrestrictedstockawardstoemployeesasofMarch31,2018isexpectedtobe$490(netofestimatedforfeitures)toberecognizedonastraight-linebasisoveraweightedaverageperiodof1.3years.
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FiscalYear 2017 2016 2015Expectedterm 6.0years 6.0years 6.0yearsExpectedvolatility 60.6% 67.9% 50.3%Risk-freeinterestrate 1.9% 1.2% 1.7%Dividendyield 0% 0% 0%
GrantDate
TotalNumberofAwardsGranted
GrantDateFairValue
NumberofTime-BasedAwardsGranted
Time-BasedVestingPeriod
NumberofPerformance-
BasedAwardsGranted
Performance-BasedVestingPeriod
NumberofPerformance-
BasedAwardsthatMet
PerformanceCondition
July1,2016 372,842 $ 5.42 76,089 2.75years 296,753(1) 3.75years 104,320August2,2016 248,937 $ 5.29 50,802 2.67years 198,135(1) 3.67years 61,552December12,2017 22,191 $ 5.52 4,528 3years 17,663(2) 3years 9,011
(1) Theseperformance-basedrestrictedstockawardsvestbasedonachievementoffiscal2016performancetargetsandarealsosubjecttotime-basedvestingrequirements.
(2) Theseperformance-basedrestrictedstockawardsvestbasedonachievementoffiscal2017performancetargetsandarealsosubjecttotime-basedvestingrequirements.
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
7.Stock-basedcompensation(Continued)
ThefollowingtablesummarizestheCompany'srestrictedstockawardsactivityduringfiscal2016andfiscal2017:
8.Shareholders'equity
Commonstock
Duringfiscal2017andfiscal2016,theCompanyissued27,073and26,923sharesofcommonstockinexchangeforconsultationservicesreceivedfromathird-partyataweighted-averagepriceof$4.99and$5.01pershare,respectively.
AsofMarch31,2018,theCompanyhad250,000,000sharesofcommonstockauthorized,withaparvalueof$0.01,ofwhich48,072,187wereissued.
Theholdersofcommonstockareentitledtoonevotepercommonshare.Theholdershavenopreemptiveorothersubscriptionrightsandtherearenoredemptionsorsinkingfundprovisionswithrespecttosuchshares.CommonstockissubordinatetoanypreferredstockoutstandingwithrespecttorightsuponliquidationanddissolutionoftheCompany.
Preferredstock
AsofMarch31,2018,theCompanyhad5,000,000sharesofpreferredstockauthorized,withaparvalueof$0.01,ofwhichnoshareswereissuedoroutstanding.
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RestrictedStockAwards
WeightedAverage
GrantDateFairValue
NonvestedatApril2,2016 — $ —Granted 621,779 5.37Vested (31,216) 5.37Forfeited (334,923) 5.36Withheldrelatedtonetsettlement (9,106) 5.37NonvestedatApril1,2017 246,534 $ 5.37Granted 22,191 5.52Forfeited (25,490) 5.38NonvestedatMarch31,2018 243,235 $ 5.39
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
9.Accumulatedothercomprehensiveincome
Accumulatedothercomprehensiveincome("AOCI")consistsofchangesinourforeigncurrencyhedgecontracts,pensionliabilityadjustment,andforeigncurrencytranslation.ThecomponentsofAOCI,netoftax,wereasfollows:
TheunrecognizednetactuariallossincludedinaccumulatedothercomprehensiveincomeasofMarch31,2018andApril1,2017was$1,793and$1,444,respectively.AmountsreclassifiedfromAOCItoearningsforthepensionliabilityadjustmentcategoryaregenerallyincludedincostofsalesandselling,generalandadministrativeexpensesintheCompany'sconsolidatedstatementsofoperations.ForadescriptionoftheCompany'semployeebenefitplans,refertoNote6.AmountsreclassifiedfromAOCItoearningsfortheforeigncurrencyhedgeinstrumentscategoryaregenerallyincludedincostofsalesintheCompany'sconsolidatedstatementsofoperations.ForadescriptionoftheCompany'suseofforeigncurrencyforwardcontracts,refertoNote10.
10.Foreigncurrencyforwardcontracts
TheCompany'sinternationaloperationsandpurchasesofitssignificantproductlinesfromforeignsuppliersaresubjecttocertainopportunitiesandrisks,includingforeigncurrencyfluctuations.IntheTCSsegment,weutilizeforeigncurrencyforwardcontractsinSwedishkronatostabilizeourretailgrossmarginsandtoprotectourdomesticoperationsfromdownwardcurrencyexposurebyhedgingpurchasesofinventoryfromourwhollyownedsubsidiary,Elfa.ForwardcontractsintheTCSsegmentaredesignatedascashflowhedges,asdefinedbyASC815.IntheElfasegment,weutilizeforeign
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Foreigncurrencyhedge
instruments
Pensionliability
adjustment
Foreigncurrencytranslation Total
BalanceatFebruary27,2016 $ (29) $ (992) $ (18,814) $ (19,835)Othercomprehensive(loss)incomebeforereclassifications,netoftax — (66) 4,053 3,987Amountsreclassifiedtoearnings,netoftax 12 — — 12Netcurrentperiodothercomprehensiveincome(loss) 12 (66) 4,053 3,999BalanceatApril2,2016 $ (17) $ (1,058) $ (14,761) $ (15,836)Othercomprehensivelossbeforereclassifications,netoftax (543) (413) (6,283) (7,239)Amountsreclassifiedtoearnings,netoftax 405 27 — 432Netcurrentperiodothercomprehensiveloss (138) (386) (6,283) (6,807)BalanceatApril1,2017 $ (155) $ (1,444) $ (21,044) $ (22,643)Othercomprehensivelossbeforereclassifications,netoftax 1,203 (398) 5,623 6,428Amountsreclassifiedtoearnings,netoftax (1,150) 49 — (1,101)Netcurrentperiodothercomprehensiveloss 53 (349) 5,623 5,327BalanceatMarch31,2018 $ (102) $ (1,793) $ (15,421) $ (17,316)
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
10.Foreigncurrencyforwardcontracts(Continued)
currencyforwardcontractstohedgepurchases,primarilyofrawmaterials,thataretransactedincurrenciesotherthanSwedishkrona,whichisthefunctionalcurrencyofElfa.ForwardcontractsintheElfasegmentareeconomichedges,andarenotdesignatedascashflowhedgesasdefinedbyASC815.
Infiscal2017,fiscal2016,andfiscal2015,theTCSsegmentusedforwardcontractsfor80%,78%,and54%ofinventorypurchasesinSwedishkronaeachyear,respectively.Infiscal2017,fiscal2016,andfiscal2015,theElfasegmentusedforwardcontractstopurchaseU.S.dollarsintheamountof$1,648,$3,905,and$5,495,whichrepresented21%,56%,and67%oftheElfasegment'sU.S.dollarpurchaseseachyear,respectively.Inthefive-weeksendedApril2,2016,theTCSsegmentusedforwardcontractsfor0%ofinventorypurchasesinSwedishkronaandtheElfasegmentusedforwardcontractstopurchaseU.S.dollarsintheamountof$155,whichrepresented23%oftheElfasegment'sU.S.dollarpurchases.
Generally,theCompany'sforeigncurrencyforwardcontractshavetermsfrom1to12monthsandrequiretheCompanytoexchangecurrenciesatagreed-uponratesatsettlement.
Thecounterpartiestothecontractsconsistofalimitednumberofmajordomesticandinternationalfinancialinstitutions.TheCompanydoesnotholdorenterintofinancialinstrumentsfortradingorspeculativepurposes.TheCompanyrecordsitsforeigncurrencyforwardcontractsonagrossbasisandgenerallydoesnotrequirecollateralfromthesecounterpartiesbecauseitdoesnotexpectanylossesfromcreditexposure.
TheCompanyrecordsallforeigncurrencyforwardcontractsonitsconsolidatedbalancesheetatfairvalue.TheCompanyaccountsforitsforeigncurrencyhedgeinstrumentsintheTCSsegmentascashflowhedges,asdefined.Changesinthefairvalueoftheforeigncurrencyhedgeinstrumentsthatareconsideredtobeeffective,asdefined,arerecordedinothercomprehensiveincome(loss)untilthehedgeditem(inventory)issoldtothecustomer,atwhichtimethedeferredgainorlossisrecognizedthroughcostofsales.Anyportionofachangeintheforeigncurrencyhedgeinstrument'sfairvaluethatisconsideredtobeineffective,asdefined,orthattheCompanyhaselectedtoexcludefromitsmeasurementofeffectiveness,isimmediatelyrecordedinearningsascostofsales.TheCompanyassessedtheeffectivenessoftheforeigncurrencyhedgeinstrumentsanddeterminedtheforeigncurrencyhedgeinstrumentswerehighlyeffectiveduringthefiscalyearsendedMarch31,2018,April1,2017,andFebruary27,2016.ForwardcontractsnotdesignatedashedgesintheElfasegmentareadjustedtofairvalueasselling,general,andadministrativeexpensesontheconsolidatedstatementsofoperations.Duringfiscal2017,theCompanyrecognizedanetunrealizedlossof$184associatedwiththechangeinfairvalueofforwardcontractsnotdesignatedashedgeinstruments.
TheCompanyhad$102inaccumulatedothercomprehensivelossrelatedtoforeigncurrencyhedgeinstrumentsatMarch31,2018.SettledforeigncurrencyhedgeinstrumentsrelatedtoinventoryonhandasofMarch31,2018represents$372ofaccumulatedunrealizedgain.TheCompanyexpectstheunrealizedgainof$372,netoftaxes,tobereclassifiedintoearningsoverthenext12monthsastheunderlyinginventoryissoldtotheendcustomer.
ThechangeinfairvalueoftheCompany'sforeigncurrencyhedgeinstrumentsthatqualifyascashflowhedgesandareincludedinaccumulatedothercomprehensiveincome(loss),netoftaxes,arepresentedinNote9ofthesefinancialstatements.
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
11.Leases
TheCompanyconductsallofitsU.S.operationsfromleasedfacilitiesthatincludeacorporateheadquarters/warehousefacilityand90storelocations.Thecorporateheadquarters/warehouseandstoresareunderoperatingleasesthatwillexpireoverthenext1to20years.TheCompanyalsoleasescomputerhardwareunderoperatingleasesthatexpireoverthenextfewyears.Inmostcases,managementexpectsthatinthenormalcourseofbusiness,leaseswillberenewedorreplacedbyotherleases.
Mostoftheoperatingleasesforthestorescontainarenewaloptionatpredeterminedrentalpaymentsforperiodsof5to20years.ThisoptionenablestheCompanytoretainuseoffacilitiesindesirableoperatingareas.Therentalpaymentsundercertainstoreleasesarebasedonaminimumrentalplusapercentageofthesalesinexcessofastipulatedamount.Thesepaymentsareaccountedforascontingentrentandexpensedwhenincurred.
Thefollowingisascheduleoffutureminimumleasepaymentsdueundernoncancelableoperatingandcapitalleases:
Rentexpenseforfiscalyears2017,2016,2015,andthefiveweeksendedApril2,2016was$86,070,$80,647,$75,834,and$6,495,respectively.Includedinrentexpenseispercentage-of-salesrentexpenseof$354,$416,$450,and$32forfiscalyears2017,2016,2015,andthefiveweeksendedApril2,2016,respectively.
12.Commitmentsandcontingencies
Inconnectionwithinsurancepoliciesandothercontracts,theCompanyhasoutstandingstandbylettersofcredittotaling$3,901asofMarch31,2018.
TheCompanyissubjecttoordinarylitigationandroutinereviewsbyregulatorybodiesthatareincidentaltoitsbusiness,noneofwhichisexpectedtohaveamaterialadverseeffectontheCompany'sconsolidatedfinancialstatementsonanindividualbasisorintheaggregate.
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Operatingleases
Capitalleases
Within1year $ 87,525 $ 2542years 83,717 2613years 77,998 1654years 63,208 —5years 55,533 —Thereafter 184,523 —Totalminimumleasepayments $ 552,504 $ 680Lessamountrepresentinginterest (18)Presentvalueofminimumleasepayments $ 662
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
13.Fairvaluemeasurements
Undergenerallyacceptedaccountingprinciples,theCompanyisrequiredtoa)measurecertainassetsandliabilitiesatfairvalueorb)disclosethefairvaluesofcertainassetsandliabilitiesrecordedatcost.Accountingstandardsdefinefairvalueasthepricethatwouldbereceiveduponsaleofanassetorpaidupontransferofaliabilityinanorderlytransactionbetweenmarketparticipantsatthemeasurementdate.Fairvalueiscalculatedassumingthetransactionoccursintheprincipalormostadvantageousmarketfortheassetorliabilityandincludesconsiderationofnon-performanceriskandcreditriskofbothparties.Accountingstandardspertainingtofairvalueestablishathree-tierfairvaluehierarchythatprioritizestheinputsusedinmeasuringfairvalue.Thesetiersinclude:
• Level1—Valuationinputsarebaseduponunadjustedquotedpricesforidenticalinstrumentstradedinactivemarkets.
• Level2—Valuationinputsarebaseduponquotedpricesforsimilarinstrumentsinactivemarkets,quotedpricesforidenticalorsimilarinstrumentsinmarketsthatarenotactive,andmodel-basedvaluationtechniquesforwhichallsignificantassumptionsareobservableinthemarketorcanbecorroboratedbyobservablemarketdataforsubstantiallythefulltermoftheassetsorliabilities.
• Level3—Valuationinputsareunobservableandtypicallyreflectmanagement'sestimatesofassumptionsthatmarketparticipantswoulduseinpricingtheassetorliability.Thefairvaluesaredeterminedusingmodel-basedtechniquesthatincludeoptionpricingmodels,discountedcashflowmodelsandsimilartechniques.
AsofMarch31,2018andApril1,2017,theCompanyheldcertainitemsthatarerequiredtobemeasuredatfairvalueonarecurringbasis.Theseincludedthenonqualifiedretirementplanandforeigncurrencyforwardcontracts.Thenonqualifiedretirementplanconsistsofinvestmentspurchasedbyemployeecontributionstoretirementsavingsaccounts.TheCompany'sinternationaloperationsandpurchasesofitssignificantproductlinesfromforeignsuppliersaresubjecttocertainopportunitiesandrisks,includingforeigncurrencyfluctuations.TheCompanyutilizesforeigncurrencyforwardexchangecontractstostabilizeitsretailgrossmarginsandtoprotectitsoperationsfromdownwardcurrencyexposure.ForeigncurrencyhedgeinstrumentsarerelatedtotheCompany'sattemptstohedgeforeigncurrencyfluctuationonpurchasesofinventoryinSwedishkrona.TheCompany'sforeigncurrencyhedgeinstrumentsconsistofover-the-counter(OTC)contracts,whicharenottradedonapublicexchange.SeeNote10forfurtherinformationontheCompany'shedgingactivities.
Thefairvalueoftheforeigncurrencyforwardcontractsisdeterminedbasedonthemarketapproachwhichutilizesinputsthatarereadilyavailableinpublicmarketsorcanbederivedfrominformationavailableinpubliclyquotedmarketsforcomparableassets.Therefore,theCompanyhascategorizedthisitemasLevel2.TheCompanyalsoconsiderscounterpartycreditriskanditsowncreditriskinitsdeterminationofallestimatedfairvalues.TheCompanyhasconsistentlyappliedthesevaluationtechniquesinallperiodspresentedandbelievesithasobtainedthemostaccurateinformationavailableforthetypesofcontractsitholds.
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
13.Fairvaluemeasurements(Continued)
Thefollowingitemsaremeasuredatfairvalueonarecurringbasis,subjecttothedisclosurerequirementsofASC820,Fair Value Measurements, atMarch31,2018andApril1,2017:
Thefairvalueoflong-termdebtwasestimatedusingquotedpricesaswellasrecenttransactionsforsimilartypesofborrowingarrangements(level2valuations).AsofMarch31,2018andApril1,2017,theestimatedfairvalueoftheCompany'slong-termdebt,includingcurrentmaturities,was$295,605and$295,005,respectively.
14.Segmentreporting
TheCompany'sreportablesegmentsweredeterminedonthesamebasisashowmanagementevaluatesperformanceinternallybytheChiefOperatingDecisionMaker("CODM").TheCompanyhasdeterminedthattheChiefExecutiveOfficeristheCODMandtheCompany'stworeportablesegmentsconsistofTCSandElfa.TheTCSsegmentincludestheCompany'sretailstores,websiteandcallcenter,aswellastheinstallationandorganizationservicesbusiness.
TheElfasegmentincludesthemanufacturingbusinessthatproducestheelfa®brandproductsthataresolddomesticallyexclusivelythroughtheTCSsegment,aswellasonawholesalebasisinapproximately30countriesaroundtheworldwithaconcentrationintheNordicregionofEurope.TheintersegmentsalesintheElfacolumnrepresentelfa®productsalestotheTCSsegment.ThesesalesandtherelatedgrossmarginonmerchandiserecordedinTCSinventorybalancesattheendoftheperiodareeliminatedforconsolidationpurposesintheEliminationscolumn.ThenetsalestothirdpartiesintheElfacolumnrepresentsalestocustomersoutsideoftheUnitedStates.
TheCompanyhasdeterminedthatadjustedearningsbeforeinterest,tax,depreciation,andamortization("AdjustedEBITDA")istheprofitorlossmeasurethattheCODMusestomakeresourceallocationdecisionsandevaluatesegmentperformance.AdjustedEBITDAassistsmanagementincomparingourperformanceonaconsistentbasisforpurposesofbusinessdecision-makingbyremovingtheimpactofcertainitemsthatmanagementbelievesdonotdirectlyreflectourcoreoperationsand,therefore,arenotincludedinmeasuringsegmentperformance.AdjustedEBITDAiscalculatedinaccordancewiththeSeniorSecuredTermLoanFacilityandtheRevolvingCreditFacilityandwedefineAdjustedEBITDAasnetincomebeforeinterest,taxes,depreciationandamortization,certainnon-cash
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Description BalanceSheetLocation March31,
2018 April1,2017
Assets Nonqualifiedretirementplan(1) N/A Othercurrentassets $ 5,848 $ 5,092Foreigncurrencyforwardcontracts Level2 Othercurrentassets — 841
Totalassets $ 5,848 $ 5,933
(1) Thefairvalueamountofthenonqualifiedretirementplanismeasuredatfairvalueusingthenetassetvaluepersharepracticalexpedient,andtherefore,isnotclassifiedinthefairvaluehierarchy.
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
14.Segmentreporting(Continued)
items,andotheradjustmentsthatwedonotconsiderinourevaluationofongoingoperatingperformancefromperiodtoperiod.
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FiscalyearendedMarch31,2018 TCS Elfa Eliminations Total Netsalestothirdparties $ 787,375 $ 69,853 $ — $ 857,228Intersegmentsales — 54,939 (54,939) —AdjustedEBITDA 77,274 13,233 (904) 89,603Depreciationandamortization 32,504 5,418 — 37,922Interestexpense,net 24,740 273 — 25,013Capitalexpenditures(1) 25,678 1,968 — 27,646Goodwill 202,815 — — 202,815Tradenames(1) 187,048 42,353 — 229,401Assets(1) 635,529 117,592 (3,752) 749,369
FiscalyearendedApril1,2017 TCS Elfa Eliminations Total Netsalestothirdparties $ 752,675 $ 67,255 $ — $ 819,930Intersegmentsales — 47,898 (47,898) —AdjustedEBITDA(2) 75,268 11,186 105 86,559Depreciationandamortization 31,572 5,552 — 37,124Interestexpense,net 16,403 284 — 16,687Capitalexpenditures(1) 25,901 2,614 — 28,515Goodwill 202,815 — — 202,815Tradenames(1) 187,048 39,637 — 226,685Assets(1) 656,884 107,998 (3,048) 761,834
FiscalyearendedFebruary27,2016 TCS Elfa Eliminations Total Netsalestothirdparties $ 724,079 $ 70,551 $ — $ 794,630Intersegmentsales — 47,010 (47,010) —AdjustedEBITDA 58,827 9,157 175 68,159Depreciationandamortization 28,767 5,463 — 34,230Interestexpense,net 16,484 326 — 16,810Capitalexpenditures(1) 42,412 4,019 — 46,431Goodwill 202,815 — — 202,815Tradenames(1) 187,048 41,320 — 228,368Assets(1) 654,611 107,136 (3,628) 758,119
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
14.Segmentreporting(Continued)
107
FiveweeksendedApril2,2016 TCS Elfa Eliminations Total Netsalestothirdparties $ 64,331 $ 4,887 $ — $ 69,218Intersegmentsales — 1,990 (1,990) —AdjustedEBITDA 5,271 (471) 639 5,439Depreciationandamortization 2,543 466 — 3,009Interestexpense,net 1,532 18 — 1,550Capitalexpenditures(1) 1,640 795 — 2,435
(1) TangibleassetsandtradenamesintheElfacolumnarelocatedoutsideoftheUnitedStates.
(2) TheTCSsegmentincludesanetbenefitof$3.9millionrelatedtoamendedandrestatedemploymentagreementsenteredintowithkeyexecutivesduringthefirstquarter,leadingtoareversalofaccrueddeferredcompensationassociatedwiththeoriginalemploymentagreements.
AreconciliationofAdjustedEBITDAbysegmenttoincomebeforetaxesissetforthbelow:
FiscalYearEnded
FiveWeeksEndedApril2,2016
March31,
2018 April1,2017
February27,2016
Incomebeforetaxes $ 6,705 $ 24,355 $ 8,051 $ 692Add: Depreciationandamortization 37,922 37,124 34,230 3,009Interestexpense,net 25,013 16,687 16,810 1,550Pre-openingcosts(a) 5,293 6,852 9,033 191Non-cashrent(b) (1,915) (1,365) (1,844) (200)Stock-basedcompensation(c) 2,026 1,989 1,556 147Lossonextinguishmentofdebt(d) 2,369 — — —Foreignexchange(gains)losses(e) (596) (342) 241 60OptimizationPlanimplementationcharges(f) 11,479 — — —Elfamanufacturingfacilityclosure(g) 803 — — —Otheradjustments(h) 504 1,259 82 (10)
TotalAdjustedEBITDA 89,603 86,559 68,159 5,439
(a) Non-capitalexpendituresassociatedwithopeningnewstoresandrelocatingstores,includingrent,marketingexpenses,travelandrelocationcosts,andtrainingcosts.Weadjustforthesecoststofacilitatecomparisonsofourperformancefromperiodtoperiod.
(b) ReflectstheextenttowhichourannualGAAPrentexpensehasbeenaboveorbelowourcashrentpaymentduetoleaseaccountingadjustments.Theadjustmentvariesdependingontheaverageageofourleaseportfolio(weightedforsize),asourGAAPrentexpenseonyoungerleasestypicallyexceedsourcashcost,whileourGAAPrentexpenseonolderleasesistypicallylessthanourcashcost.
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
14.Segmentreporting(Continued)
Thefollowingtableshowssalesbymerchandisecategoryasapercentageoftotalnetsalesforfiscalyears2017,2016,and2015:
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(c) Non-cashchargesrelatedtostock-basedcompensationprograms,whichvaryfromperiodtoperioddependingonvolumeandvestingtimingofawards.Weadjustforthesechargestofacilitatecomparisonsfromperiodtoperiod.
(d) LossrecordedasaresultoftheamendmentsmadetotheSeniorSecuredTermLoanFacilityandtheRevolvingCreditFacilityinAugust2017,whichwedonotconsiderinourevaluationofourongoingoperations.
(e) Realizedforeignexchangetransactionalgains/lossesourmanagementdoesnotconsiderinourevaluationofourongoingoperations.
(f) ChargesincurredtoimplementourOptimizationPlan,whichincludecertainconsultingcostsrecordedinselling,generalandadministrativeexpenses,cashseverancepaymentsassociatedwiththeeliminationofcertainfull-timepositionsattheTCSsegmentrecordedinotherexpenses,andcashseverancepaymentsassociatedwithorganizationalrealignmentattheElfasegmentrecordedinotherexpenses,whichwedonotconsiderinourevaluationofongoingperformance.
(g) ChargesrelatedtotheclosureofanElfamanufacturingfacilityinLahti,FinlandinDecember2017,recordedinotherexpenses,whichwedonotconsiderinourevaluationofourongoingperformance.
(h) Otheradjustmentsincludeamountsourmanagementdoesnotconsiderinourevaluationofourongoingoperations,includingcertainseveranceandothercharges.
Fiscalyearended
March31,
2018 April1,2017
February27,2016
CustomClosets(1) 48% 48% 46%Storage,Long-TermStorage,Shelving 14% 14% 14%KitchenandTrash 13% 13% 13%Office,Collections,Hooks 8% 8% 9%Bath,Travel,Laundry 8% 8% 9%GiftPackaging,Seasonal,Impulse 7% 8% 8%Other 2% 1% 1%Total 100% 100% 100%
(1) Includeselfa®andTCSClosets®productsandinstallationservicesaswellasclosetcompletionproductssoldbytheTCSsegmentandElfasegmentsalestothirdparties.
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
15.Netincomepercommonshare
Basicnetincomepercommonshareiscomputedasnetincomedividedbytheweighted-averagenumberofcommonsharesoutstandingfortheperiod.Dilutednetincomepershareiscomputedasnetincomedividedbytheweighted-averagenumberofcommonsharesoutstandingfortheperiodpluscommonstockequivalentsconsistingofsharessubjecttostock-basedawardswithexercisepriceslessthanorequaltotheaveragemarketpriceoftheCompany'scommonstockfortheperiod,totheextenttheirinclusionwouldbedilutive.Potentialdilutivesecuritiesareexcludedfromthecomputationofdilutednetincomepershareiftheireffectisanti-dilutive.
Thefollowingisareconciliationofnetincomeandthenumberofsharesusedinthebasicanddilutednetincomepersharecalculations:
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FiscalYearEnded
FiveWeeksEndedApril2,2016
March31,
2018 April1,2017
February27,2016
Numerator: Netincome $ 19,428 $ 14,953 $ 5,142 $ 354
Denominator: Weighted-averagecommonshares—basic 48,061,527 47,996,746 47,985,717 47,986,975Optionsandotherdilutivesecurities 86,198 19,264 — —Weighted-averagecommonshares—diluted 48,147,725 48,016,010 47,985,717 47,986,975
Netincomepercommonshare—basicanddiluted $ 0.40 $ 0.31 $ 0.11 $ 0.01
Antidilutivesecuritiesnotincluded: Stockoptionsoutstanding 3,006,604 2,954,114 2,875,900 2,886,138Nonvestedrestrictedstockawards 41,907 131,957 — —
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
16.Quarterlyresultsofoperations(unaudited)
Duetotheseasonalnatureofourbusiness,fourthquarteroperatingresultshistoricallyrepresentalargershareofannualnetsalesandoperatingincomeprimarilyduetoOurAnnualelfa®Sale.Wefollowthesameaccountingpoliciesforpreparingquarterlyandannualfinancialdata.Thetablebelowsummarizesquarterlyresultsforfiscal2017and2016:
17.TransitionPeriodFinancialInformation
OnMarch30,2016,theBoardofDirectorsapprovedachangeintheCompany'sfiscalyearendfromtheSaturdayclosesttoFebruary28totheSaturdayclosesttoMarch31ofeachyear.Accordingly,theCompanyispresentingauditedfinancialstatementsforthefive-weektransitionperiodfromFebruary28,2016toApril2,2016.Thefollowingtableprovidescertainunauditedcomparative
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FiscalYearEndedMarch31,2018
FourthQuarterEnded
March31,2018
ThirdQuarterEnded
December30,2017
SecondQuarterEnded
September30,2017
FirstQuarterEndedJuly1,2017
Netsales $ 232,764 $ 222,986 $ 218,410 $ 183,068Grossprofit 136,516 130,561 126,374 103,610Income(loss)fromoperations 20,341 13,899 7,884 (8,037)Net(loss)income (399) 28,379 (875) (7,677)Weighted-averagesharesusedincomputingbasicnet(loss)incomepershare 48,072,187 48,067,754 48,058,231 48,047,937
Weighted-averagesharesusedincomputingdilutednet(loss)incomepershare 48,072,187 48,167,882 48,058,231 48,047,937
Basicanddilutednet(loss)incomepercommonshare $ (0.01) $ 0.59 $ (0.02) $ (0.16)
FiscalYearEndedApril1,2017
FourthQuarterEndedApril1,2017
ThirdQuarterEnded
December31,2016
SecondQuarterEnded
October1,2016
FirstQuarterEndedJuly2,2016
Netsales $ 221,042 $ 216,380 $ 205,060 $ 177,448Grossprofit 127,318 125,702 118,355 104,695Income(loss)fromoperations 17,181 12,561 10,272 1,028Netincome(loss) 8,377 5,092 3,541 (2,057)Weighted-averagesharesusedincomputingbasicnetincome(loss)pershare 48,009,029 47,999,535 47,991,445 47,986,975
Weighted-averagesharesusedincomputingdilutednetincome(loss)pershare 48,073,420 48,022,499 48,001,112 47,986,975
Basicanddilutednetincome(loss)percommonshare $ 0.17 $ 0.11 $ 0.07 $ (0.04)
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
17.TransitionPeriodFinancialInformation(Continued)
financialinformationofthesameperiodoftheprioryear.Theperiodsbelowbothrepresent35dayperiods.
18.OptimizationPlan
OnMay23,2017,theCompanyannouncedafour-partplandesignedtooptimizeitsconsolidatedbusinessanddriveimprovedsalesandprofitability(the"OptimizationPlan"),whichincludedsalesinitiatives,certainfull-timepositioneliminationsatTCS,organizationalrealignmentatElfaandongoingsavingsandefficiencyefforts.
Infiscal2017,theCompanyincurredthefollowingchargesrelatedtotheimplementationoftheOptimizationPlan:
111
FiveWeeksEnded
(Inthousands,exceptshareandpershareamounts) April2,2016
April4,2015
(unaudited) Consolidatedstatementofoperationsdata: Netsales $ 69,218 $ 66,761Grossprofit 40,195 39,254Selling,general,andadministrativeexpenses 34,504 33,728Incomefromoperations 2,242 2,565Incomebeforetaxes 692 978Provisionforincometaxes 338 340Netincome 354 638
Netincomepercommonshare: Basicanddiluted $ 0.01 $ 0.01Weighted-averagecommonshares—basicanddiluted 47,986,975 47,983,681
IncomeStatementLocation
Fifty-TwoWeeksEndedMarch31,
2018 Consultingfeesandothercosts Selling,general&administrative $ 6,916Severance—full-timepositioneliminationsatTCS Otherexpenses 1,836Severance—organizationalrealignmentatElfa Otherexpenses 2,727
TotalOptimizationPlancharges $ 11,479
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TableofContents
TheContainerStoreGroup,Inc.
Notestoconsolidatedfinancialstatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
18.OptimizationPlan(Continued)
CertainaspectsoftheOptimizationPlanmeetthedefinitionofexitordisposalcostsasdefinedintheAccountingStandardsCodification("ASC")Topic420,Exit or Disposal Cost Obligations .Thefollowingtablesummarizestheexitordisposalactivitiesduringfiscal2017:
Thebalanceof$48asofMarch31,2018isrecordedintheAccruedliabilitieslineitemintheConsolidatedBalanceSheets.TheCompanydoesnotexpectfutureseverancecoststobeincurredrelatedtofull-timepositioneliminationsatTCSastheactionswerecompletedduringthefirstquarteroffiscal2017.
112
TCSPosition
Eliminations Severance LiabilityBalanceasofApril1,2017 $ —CostsIncurred 1,836Payments (1,788)LiabilityBalanceasofMarch31,2018 $ 48
Asof Totalcostsincurredtodate $ 1,836Totalcostsexpectedtobeincurred $ 1,836
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ScheduleI—CondensedFinancialInformationofregistrant—
TheContainerStoreGroup,Inc.(parentcompanyonly)
Condensedbalancesheets
Seeaccompanyingnotes.
113
(inthousands) March31,
2018 April1,2017
Assets Currentassets: Accountsreceivablefromsubsidiaries $ 1,120 $ 985
Totalcurrentassets 1,120 985Noncurrentassets: Investmentinsubsidiaries 247,587 220,805
Totalnoncurrentassets 247,587 220,805Totalassets $ 248,707 $ 221,790Liabilitiesandshareholders'equity Currentliabilities: Accountspayabletosubsidiaries $ — $ —
Totalcurrentliabilities — —Noncurrentliabilities — —Totalliabilities — —Shareholders'equity: Commonstock 481 480Additionalpaid-incapital 861,263 859,102Retaineddeficit (613,037) (637,792)
Totalshareholders'equity 248,707 221,790Totalliabilitiesandshareholders'equity $ 248,707 $ 221,790
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TableofContents
ScheduleI—TheContainerStoreGroup,Inc.
(parentcompanyonly)
Condensedstatementsofoperations
Seeaccompanyingnotes.
114
FiscalYearEnded
(inthousands) March31,
2018 April1,2017
February27,2016
FiveWeeksEnded
April2,2016 Netsales — — — —Costofsales(excludingdepreciationandamortization) — — — —Grossprofit — — — —Selling,general,andadministrativeexpenses(excludingdepreciationandamortization) — — — —
Stock-basedcompensation — — — —Pre-openingcosts — — — —Depreciationandamortization — — — —Restructuringcharges — — — —Otherexpenses — — — —Loss(gain)ondisposalofassets — — — —Incomefromoperations — — — —Interestexpense — — — —Incomebeforetaxesandequityinnetincomeofsubsidiaries — — — —Provisionforincometaxes — — — —Incomebeforeequityinnetincomeofsubsidiaries — — — —Netincomeofsubsidiaries 19,428 14,953 5,142 354Netincome $ 19,428 $ 14,953 $ 5,142 $ 354
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TableofContents
ScheduleI—TheContainerStoreGroup,Inc.
(parentcompanyonly)
Condensedstatementsofcomprehensiveincome
Seeaccompanyingnotes.
115
Fiscalyearended
FiveWeeksEndedApril2,2016
(Inthousands) March31,
2018 April1,2017
February27,2016
Netincome $ 19,428 $ 14,953 $ 5,142 $ 354Unrealizedgain(loss)onfinancialinstruments,netoftaxprovision(benefit)of$30,$(85),$606,and$7 53 (138) 853 12
Pensionliabilityadjustment,netoftaxprovisionof$98,$142,$39,and$0 (349) (386) 175 (66)
Foreigncurrencytranslationadjustment 5,623 (6,283) (2,521) 4,053Comprehensiveincome $ 24,755 $ 8,146 $ 3,649 $ 4,353
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TableofContents
ScheduleI—TheContainerStoreGroup,Inc.
(parentcompanyonly)
NotestoCondensedFinancialStatements
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
Note1:Basisofpresentation
Intheparent-company-onlyfinancialstatements,TheContainerStoreGroup,Inc.'sinvestmentinsubsidiariesisstatedatcostplusequityinundistributedearningsofsubsidiariessincethedateofacquisition.Theparent-company-onlyfinancialstatementsshouldbereadinconjunctionwiththeCompany'sconsolidatedfinancialstatements.AcondensedstatementofcashflowswasnotpresentedbecauseTheContainerStoreGroup,Inc.hadnocashflowactivitiesduringfiscal2017,fiscal2016,fiscal2015,orthefive-weeksendedApril2,2016.
Note2:Guaranteesandrestrictions
TheContainerStore,Inc.,asubsidiaryoftheCompany,has$294,375oflong-termdebtoutstandingundertheSeniorSecuredTermLoanFacility,asofMarch31,2018.UnderthetermsoftheSeniorSecuredTermLoanFacility,TheContainerStoreGroup,Inc.andthedomesticsubsidiariesofTheContainerStore,Inc.haveguaranteedthepaymentofallprincipalandinterest.IntheeventofadefaultundertheSeniorSecuredTermLoanFacility,TheContainerStoreGroup,Inc.andthedomesticsubsidiariesofTheContainerStore,Inc.willbedirectlyliabletothedebtholders.
OnAugust18,2017,TheContainerStore,Inc.enteredintoafourthamendment(the"TermLoanAmendment")totheSeniorSecuredTermLoanFacilitydatedasofApril6,2012.ThefourthamendmentamendedtheSeniorSecuredTermLoanFacilityto,amongotherthings,(i)extendthematuritydateoftheloansundertheSeniorSecuredTermLoanFacilitytoAugust18,2021,(ii)addamaximumleveragecovenantof5.0:1.0whichstepsdownby0.25xonJune30ofeachyearcommencingonJune30,2018,(iii)increasetheapplicableinterestratemarginto7.00%forLIBORloansand6.00%forbaserateloans,(iv)reducetheaggregateprincipalamountoftheSeniorSecuredTermLoanFacilityto$300,000,(v)increaseprincipalamortizationto2.5%perannum,(vi)requirea3.0%upfrontfeeontheaggregateprincipalamountoftheSeniorSecuredTermLoanFacility,and(vii)imposea1%premiumifavoluntaryprepaymentismadefromtheproceedsofarepricingtransactionwithin12monthsafterAugust18,2017.
TheSeniorSecuredTermLoanFacilityalsoincludesrestrictionsontheabilityofTheContainerStoreGroup,Inc.anditssubsidiariestoincuradditionalliensandindebtedness,makeinvestmentsanddispositions,paydividendsormakeotherdistributions,makeloans,prepaycertainindebtednessandenterintosaleandleasebacktransactions,amongotherrestrictions.UndertheSeniorSecuredTermLoanFacility,providednoeventofdefaulthasoccurredandiscontinuing,TheContainerStore,Inc.ispermittedtopaydividendstoTheContainerStoreGroup,Inc.inanamountnottoexceedthesumof$10,000plusifaftergivingeffecttosuchdividendonaproformabasis,theConsolidatedLeverageRatio(asdefinedintheSeniorSecuredTermLoanFacility)doesnotexceed2.0to1.0,theAvailableAmount(asdefinedintheSeniorSecuredTermLoanFacility)duringthetermoftheSeniorSecuredTermLoanFacility,andpursuanttocertainotherlimitedexceptions.TherestrictednetassetsoftheCompany'sconsolidatedsubsidiarieswas$236,207asofMarch31,2018.
AsofMarch31,2018,TheContainerStore,Inc.alsohas$65,625ofavailablecreditontheRevolvingCreditFacilitythatprovidescommitmentsofupto$100,000forrevolvingloansandlettersofcredit.TheContainerStoreGroup,Inc.andthedomesticsubsidiariesofTheContainerStore,Inc.
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TableofContents
ScheduleI—TheContainerStoreGroup,Inc.
(parentcompanyonly)
NotestoCondensedFinancialStatements(Continued)
(Inthousands,exceptshareamountsandunlessotherwisestated)
March31,2018
Note2:Guaranteesandrestrictions(Continued)
haveguaranteedallobligationsundertheRevolvingCreditFacility.IntheeventofdefaultundertheRevolvingCreditFacility,TheContainerStoreGroup,Inc.andthedomesticsubsidiariesofTheContainerStore,Inc.willbedirectlyliabletothedebtholders.TheRevolvingCreditFacilityincludesrestrictionsontheabilityofTheContainerStoreGroup,Inc.anditssubsidiariestoincuradditionalliensandindebtedness,makeinvestmentsanddispositions,paydividendsormakeothertransactions,amongotherrestrictions.
OnOctober8,2015,TheContainerStore,Inc.executedanamendmenttotheRevolvingCreditFacility("AmendmentNo.2").UnderthetermsofAmendmentNo.2,amongotheritems,thematuritydateoftheloanwasextendedfromApril6,2017totheearlierof(x)October8,2020and(y)January6,2019,ifanyofTheContainerStore,Inc.'sobligationsunderitstermloancreditfacilityremainoutstandingonsuchdateandhavenotbeenrefinancedwithdebtthathasafinalmaturitydatethatisnoearlierthanApril6,2019orsubordinateddebt.UndertheRevolvingCreditFacility,providednoeventofdefaulthasoccurredandiscontinuing,TheContainerStore,Inc.ispermittedtopaydividendstoTheContainerStoreGroup,Inc.,inanamountnottoexceedthesumof$10,000plusifaftergivingeffecttosuchdividendonaproformabasis,theConsolidatedFixedChargeCoverageRatio(asdefinedintheRevolvingCreditFacility)isnotlessthan1.25to1.0,theAvailableAmount(asdefinedintheRevolvingCreditFacility)duringthetermoftheRevolvingCreditFacility,andpursuanttocertainotherlimitedexceptions.
OnAugust18,2017,TheContainerStore,Inc.alsoenteredintoafourthamendment(the"RevolvingAmendment")totheRevolvingCreditFacilitydatedasofApril6,2012,which,amongotherthings,extendedthematuritydateoftheloansundertheRevolvingCreditFacilitytotheearlierof(i)August18,2022and(ii)May18,2021ifanyportionoftheSeniorSecuredTermLoanFacilityremainsoutstandingonsuchdateandthematuritydateoftheSeniorSecuredTermLoanFacilityisnotextended.
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TableofContents
ITEM9.CHANGESINANDDISAGREEMENTSWITHACCOUNTANTSONACCOUNTINGANDFINANCIALDISCLOSURE
None.
ITEM9A.CONTROLSANDPROCEDURES
LimitationsonEffectivenessofControlsandProcedures
Indesigningandevaluatingourdisclosurecontrolsandprocedures,managementrecognizesthatanycontrolsandprocedures,nomatterhowwelldesignedandoperated,canprovideonlyreasonableassuranceofachievingthedesiredcontrolobjectives.Inaddition,thedesignofdisclosurecontrolsandproceduresmustreflectthefactthatthereareresourceconstraintsandthatmanagementisrequiredtoapplyjudgmentinevaluatingthebenefitsofpossiblecontrolsandproceduresrelativetotheircosts.
EvaluationofDisclosureControlsandProcedures
Ourmanagement,withtheparticipationofourChiefExecutiveOfficerandChiefFinancialOfficer,evaluated,asoftheendoftheperiodcoveredbythisAnnualReportonForm10-K,theeffectivenessofourdisclosurecontrolsandprocedures(asdefinedinRules13a-15(e)and15d-15(e)undertheSecuritiesExchangeActof1934,asamended).Basedonthatevaluation,ourChiefExecutiveOfficerandChiefFinancialOfficerconcludedthatourdisclosurecontrolsandprocedureswereeffectiveatthereasonableassurancelevelasofMarch31,2018.
ChangesinInternalControl
TherewerenochangesinourinternalcontroloverfinancialreportingduringthequarterendedMarch31,2018identifiedinmanagement'sevaluationpursuanttoRules13a-15(d)or15d-15(d)oftheExchangeActthatmateriallyaffected,orarereasonablylikelytomateriallyaffect,ourinternalcontroloverfinancialreporting.
Management'sReportonInternalControloverFinancialReporting
Managementisresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancialreporting,assuchtermisdefinedinRule13a-15(f)undertheSecuritiesExchangeActof1934,asamended.
Ourmanagementconductedanassessmentoftheeffectivenessofourinternalcontroloverfinancialreportingbasedonthecriteriasetforthin"InternalControl—IntegratedFramework(2013)"issuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission.Basedonthisassessment,managementconcludedthat,asofMarch31,2018,ourinternalcontroloverfinancialreportingwaseffective.
ThisannualreportdoesnotincludeanattestationreportofourindependentregisteredpublicaccountingfirmoninternalcontroloverfinancialreportingduetoanexemptionestablishedbytheJOBSActfor"emerginggrowthcompanies".
ITEM9B.OTHERINFORMATION
None.
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PARTIII
ITEM10.DIRECTORS,EXECUTIVEOFFICERSANDCORPORATEGOVERNANCE
Wehaveadoptedawrittencodeofconductandethics,whichappliestoallofourdirectors,officersandemployees,includingourprincipalexecutiveofficerandourprincipalfinancialandaccountingofficer.OurCodeofConductandEthicsisavailableonourwebsitewww.containerstore.com undertheheading"CorporateGovernance."Inaddition,weintendtopostonourwebsitealldisclosuresthatarerequiredbylaworNewYorkStockExchangelistingrulesconcerninganyamendmentsto,orwaiversfrom,anyprovisionofourCodeofConductandEthics.TheinformationcontainedonourwebsiteisnotincorporatedbyreferenceintothisAnnualReportonForm10-K.
TheinformationregardingtheCompany'sexecutiveofficersislocatedattheendofPartIofthisAnnualReportonForm10-K.AllotherinformationrequiredbythisItemisincorporatedhereinbyreferencefromourdefinitiveProxyStatementforthe2018AnnualMeetingofStockholdersundertheheadings"Proposal1—ElectionofDirectors,""Section16(a)BeneficialOwnershipReportingCompliance,"and"CommitteesoftheBoard".
ITEM11.EXECUTIVECOMPENSATION
TheinformationrequiredbythisItemisincorporatedhereinbyreferencefromourdefinitiveProxyStatementforthe2018AnnualMeetingofStockholdersundertheheadings"ExecutiveandDirectorCompensation"and"CompensationCommitteeInterlocksandInsiderParticipation".
ITEM12.SECURITYOWNERSHIPOFCERTAINBENEFICIALOWNERSANDMANAGEMENTANDRELATEDSTOCKHOLDERMATTERS
TheinformationrequiredbythisItemisincorporatedhereinbyreferencefromourdefinitiveProxyStatementforthe2018AnnualMeetingofStockholdersundertheheadings"SecurityOwnershipofBeneficialOwnersandManagement"and"ExecutiveandDirectorCompensation—EquityCompensationPlanInformation".
ITEM13.CERTAINRELATIONSHIPSANDRELATEDTRANSACTIONS,ANDDIRECTORINDEPENDENCE
TheinformationrequiredbythisItemisincorporatedhereinbyreferencefromourdefinitiveProxyStatementforthe2018AnnualMeetingofStockholdersundertheheadings"CorporateGovernance,""CommitteesoftheBoard"and"CertainRelationshipsandRelatedPersonTransactions".
ITEM14.PRINCIPALACCOUNTINGFEESANDSERVICES
TheinformationrequiredbythisItemisincorporatedhereinbyreferencefromourdefinitiveProxyStatementforthe2018AnnualMeetingofStockholdersundertheheading"IndependentRegisteredPublicAccountingFirmFeesandOtherMatters".
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PARTIV
ITEM15.EXHIBITS,FINANCIALSTATEMENTSCHEDULES
1.FinancialStatements
ThefollowingconsolidatedfinancialstatementsoftheCompanyareincludedinPartII,Item8:
2.FinancialStatementsSchedules
ThefollowingfinancialstatementsscheduleisincludedinPartII,Item8:
AllotherscheduleshavenotbeenincludedeitherbecausetheyarenotapplicableorbecausetheinformationisincludedelsewhereinthisReport.
3.Exhibits
120
ReportsofIndependentRegisteredPublicAccountingFirm 67ConsolidatedBalanceSheetsasofMarch31,2018andApril1,2017 68ConsolidatedStatementsofOperationsfortheFiscalYearsEndedMarch31,2018,April1,2017,February27,2016,andtheFiveWeeksEndedApril2,2016 70
ConsolidatedStatementsofComprehensiveIncomefortheFiscalYearsEndedMarch31,2018,April1,2017,February27,2016,andtheFiveWeeksEndedApril2,2016 71
ConsolidatedStatementsofShareholders'EquityfortheFiscalYearsEndedMarch31,2018,April1,2017,February27,2016,andtheFiveWeeksEndedApril2,2016 72
ConsolidatedStatementsofCashFlowsfortheFiscalYearsEndedMarch31,2018,April1,2017,February27,2016,andtheFiveWeeksEndedApril2,2016 73
NotestoConsolidatedFinancialStatements 74
ScheduleI—CondensedFinancialStatementInformationofRegistrant
IncorporatedbyReference
ExhibitNumber ExhibitDescription Form FileNo. Exhibit
FilingDate
Filed/FurnishedHerewith
3.1 AmendedandRestatedCertificateofIncorporationofTheContainerStoreGroup,Inc.
10-Q 001-36161 3.1 1/10/2014
3.2 AmendedandRestatedBy-lawsofTheContainer
StoreGroup,Inc. 10-Q 001-36161 3.2 1/10/2014
4.1 SpecimenStockCertificateevidencingthesharesof
commonstock S-1/A 333-191465 4.1 10/21/2013
4.2 AmendedandRestatedStockholdersAgreement,dated
asofNovember6,2013 10-Q 001-36161 4.1 1/10/2014
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121
IncorporatedbyReference
ExhibitNumber ExhibitDescription Form FileNo. Exhibit
FilingDate
Filed/FurnishedHerewith
10.1† ThirdAmendedandRestatedEmploymentAgreementdatedMay6,2016betweenKipTindellandTheContainerStoreGroup,Inc.
8-K 001-36161 10.1 5/9/2016
10.2† ThirdAmendedandRestatedEmploymentAgreement
datedMay6,2016betweenSharonTindellandTheContainerStoreGroup,Inc.
8-K 001-36161 10.3 5/9/2016
10.3† ThirdAmendedandRestatedEmploymentAgreement
datedMay6,2016betweenMelissaReiffandTheContainerStoreGroup,Inc.
8-K 001-36161 10.2 5/9/2016
10.4† EmploymentAgreement,datedMay6,2016,between
JodiTaylorandTheContainerStoreGroup,Inc. 8-K 001-36161 10.4 5/9/2016
10.5† TheContainerStoreGroup,Inc.2012StockOption
Plan S-8 333-193255 4.3 1/10/2014
10.6† FormofNon-QualifiedStockOptionAgreementunder
2012StockOptionPlan S-1 333-191465 10.2 9/30/2013
10.7† TheContainerStoreGroup,Inc.2013IncentiveAward
Plan 10-Q 001-36161 10.4 1/10/2014
10.8† TheContainerStoreGroup,Inc.Amendedand
Restated2013IncentiveAwardPlan 8-K 001-36161 10.1 9/18/2017
10.9† FormofStockOptionAgreementunder2013
IncentiveAwardPlan S-1/A 333-191465 10.21 10/21/2013
10.10† TheContainerStoreGroup,Inc.SeniorExecutive
BonusPlan 10-Q 001-36161 10.6 1/10/2014
10.11† TheContainerStoreGroup,Inc.Non-Qualified
RetirementPlan,datedasofMarch28,2011 S-1 333-191465 10.3 9/30/2013
10.12 IntercreditorAgreement,datedasofApril6,2012,by
andbetweenJPMorganChaseBank,N.A.asABLAgent,andJPMorganChaseBank,N.A.asTermAgent
S-1 333-191465 10.11 9/30/2013
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122
IncorporatedbyReference
ExhibitNumber ExhibitDescription Form FileNo. Exhibit
FilingDate
Filed/FurnishedHerewith
10.13 AmendmentNo.1toIntercreditorAgreement,datedasofApril8,2013,byandbetweenJPMorganChaseBank,N.A.,asABLAgentandJPMorganChaseBank,N.A.,asTermAgent
10-K 001-36161 10.13 5/28/2014
10.14 CreditAgreement,datedasofApril6,2012,among
TheContainerStore,Inc.,asBorrower,theGuarantorspartythereto,JPMorganChaseBank,N.A.,asAdministrativeAgentandCollateralAgentandWellsFargoBank,N.A.asSyndicationAgent("ABLCreditAgreement")
S-1 333-191465 10.12 9/30/2013
10.15 AmendmentNo.1toABLCreditAgreement,datedas
ofApril8,2013 S-1 333-191465 10.13 9/30/2013
10.16 AmendmentNo.2toABLCreditAgreement,datedas
ofOctober8,2015 8-K 001-36161 10.1 10/09/2015
10.17 AmendmentNo.3toABLCreditAgreement,datedas
ofMay20,2016 10-Q 001-36161 10.6 8/10/2016
10.18 AmendmentNo.4toABLCreditAgreement,datedas
ofAugust18,2017amongTheContainerStore,Inc.,theguarantorspartythereto,JPMorganChaseBank,N.A.,asadministrativeagentandcollateralagentandthelendersfromtimetotimepartythereto
8-K 001-36161 10.2 8/21/2017
10.19 ABLFacilityPledgeAgreement,datedasofApril6,
2012,byandbetweenTheContainerStore,Inc.,thePledgorspartytheretoandJPMorganChaseBank,N.A.,asCollateralAgent
S-1 333-191465 10.14 9/30/2013
10.20 ABLFacilitySecurityAgreement,datedasofApril6,
2012,byandamongTheContainerStore,Inc.,theGuarantorspartythereto,theGrantorspartytheretoandJPMorganChaseBank,N.A.,asCollateralAgent
S-1 333-191465 10.15 9/30/2013
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123
IncorporatedbyReference
ExhibitNumber ExhibitDescription Form FileNo. Exhibit
FilingDate
Filed/FurnishedHerewith
10.21 CreditAgreement,datedasofApril6,2012(asamendedthroughNovember27,2013),amongTheContainerStore,Inc.,asBorrower,theGuarantorspartytheretoandJPMorganChaseBank,N.A.,asAdministrativeAgentandCollateralAgentandWellsFargoBank,N.A.asSyndicationAgent,attachedasExhibitAtoAmendmentNo.2toCreditAgreement("TermFacilityCreditAgreement")
8-K 001-36161 10.1 11/27/2013
10.22 AmendmentNo.3toTermFacilityCreditAgreement,
datedasofMay20,2016 10-Q 001-36161 10.5 8/10/2016
10.23 AmendmentNo.4toTermFacilityCreditAgreement,
datedasofAugust18,2017amongTheContainerStore,Inc.,theguarantorspartythereto,JPMorganChaseBank,N.A.,asadministrativeagentandcollateralagentandthelendersfromtimetotimepartythereto
8-K 001-36161 10.1 8/21/2017
10.24 TermFacilityPledgeAgreement,datedasofApril6,
2012,byandbetweenTheContainerStore,Inc.asBorrower,thePledgorspartythereto,andJPMorganChaseBank,N.A.,asCollateralAgent
S-1 333-191465 10.9 9/30/2013
10.25 TermFacilitySecurityAgreement,datedasofApril6,
2012,byandamongTheContainerStore,Inc.,theGuarantorspartythereto,theGrantorspartythereto,andJPMorganChaseBank,N.A.,asCollateralAgent
S-1 333-191465 10.10 9/30/2013
10.26 CreditAgreement,datedApril27,2009,amongElfa
InternationalAB,asBorrower,andTjustbygdensSparbankAB,asBank,astransferredtoSwedbankABonJanuary27,2012
S-1 333-191465 10.16 9/30/2013
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TableofContents
124
IncorporatedbyReference
ExhibitNumber ExhibitDescription Form FileNo. Exhibit
FilingDate
Filed/FurnishedHerewith
10.27† FormofIndemnificationAgreementbyandbetweenTheContainerStoreGroup,Inc.andcertaindirectorsandofficers
S-1 333-191465 10.17 9/30/2013
10.28 Office,WarehouseandDistributionCenterLease
Agreement,asofOctober8,2002,byandbetweenTexasDuganLimitedPartnership,aslandlord,andTheContainerStore,Inc.,astenant,asamendedthroughAugust24,2011
S-1 333-191465 10.18 9/30/2013
10.29† IndemnificationandHoldHarmlessAgreement,dated
asofJune13,2012,byandbetweenTheContainerStoreGroup,Inc.(formerlyknownasTCSHoldings,Inc.)andWilliamA.Tindell,III
S-1 333-191465 10.20 9/30/2013
10.30 AssumptionAgreement,datedasofApril2,2014,by
andbetweenTheContainerStoreGroup,Inc.andWilliamA.Tindell,IIIandRufusTindellLLC
10-K 001-36161 10.23 5/28/2014
10.31 MasterCreditAgreement,datedApril1,2014,
betweenElfaInternationalAB,asBorrower,andNordeaBankAB(publ),asBank
10-Q 001-36161 10.1 7/11/2014
10.32† Non-EmployeeDirectorCompensationPolicyofThe
ContainerStoreGroup,Inc.,amendedandrestatedasofMarch28,2018
*
10.33† FormofRestrictedStockAwardAgreementandGrant
Notice(time-vesting) 10-Q 001-36161 10.7 8/10/2016
10.34† FormofRestrictedStockAwardAgreementandGrant
Notice(performance-vesting) 10-Q 001-36161 10.8 8/10/2016
21.1 SubsidiaryList * 23.1 ConsentofErnst&YoungLLP * 31.1 CertificationofChiefExecutiveOfficerpursuantto
ExchangeActRule13a-14(a) *
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TableofContents
ITEM16.FORM10-KSUMMARY.
None.
125
IncorporatedbyReference
ExhibitNumber ExhibitDescription Form FileNo. Exhibit
FilingDate
Filed/FurnishedHerewith
31.2 CertificationofChiefFinancialOfficerpursuanttoExchangeActRule13a-14(a)
*
32.1 CertificationoftheChiefExecutiveOfficerPursuant
to18U.S.C.Section1350 **
32.2 CertificationoftheChiefFinancialOfficerPursuantto
18U.S.C.Section1350 **
101.INS XBRLInstanceDocument * 101.SCH XBRLTaxonomyExtensionSchemaDocument * 101.CAL XBRLTaxonomyCalculationLinkbaseDocument * 101.DEF XBRLTaxonomyExtensionDefinitionLinkbase
Document *
101.LAB XBRLTaxonomyExtensionLabelLinkbase
Document *
101.PRE XBRLTaxonomyExtensionPresentation *
* Filedherewith.
** Furnishedherewith.
† Managementcontractorcompensatoryplanorarrangement.
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TableofContents
SIGNATURES
PursuanttotherequirementsofSection13or15(d)oftheSecuritiesExchangeActof1934,theregistranthasdulycausedthisreporttobesignedonitsbehalfbytheundersigned,thereuntodulyauthorized.
PursuanttotherequirementsoftheSecuritiesExchangeActof1934,thisreporthasbeensignedbelowbythefollowingpersonsonbehalfoftheregistrantandinthecapacitiesandonthedatesindicated.
126
TheContainerStoreGroup,Inc. (Registrant)
Date:May31,2018 /s/JODIL.TAYLOR
JodiL.Taylor
Chief Financial Officer, Chief Administrative Officer andSecretary (duly authorized officer and Principal Financial
Officer)
Signature Title Date
/s/MELISSAREIFF
MelissaReiff ChiefExecutiveOfficerandDirector(principal
executiveofficer) May31,2018
/s/JODIL.TAYLOR
JodiL.Taylor
ChiefFinancialOfficer,ChiefAdministrativeOfficerandSecretary(principalfinancialofficer)
May31,2018
/s/JEFFREYA.MILLER
JeffreyA.Miller VicePresidentandChiefAccountingOfficer
(principalaccountingofficer) May31,2018
/s/SHARONTINDELL
SharonTindell President,ChiefMerchandisingOfficerand
Director May31,2018
/s/WILLIAMA.“KIP”TINDELL,III
WilliamA."Kip"Tindell,III ChairmanoftheBoardofDirectors May31,2018
/s/JONATHANSOKOLOFF
JonathanSokoloff Director May31,2018
/s/TIMOTHYFLYNN
TimothyFlynn Director May31,2018
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127
Signature Title Date
/s/J.KRISTOFERGALASHAN
J.KristoferGalashan Director May31,2018
/s/ROBERTE.JORDAN
RobertE.Jordan Director May31,2018
/s/WALTERROBB
WalterRobb Director May31,2018
/s/RAJENDRASISODIA
RajendraSisodia Director May31,2018
/s/CARYLSTERN
CarylStern Director May31,2018
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Exhibit10.32
THECONTAINERSTOREGROUP,INC.
AMENDEDANDRESTATEDNON-EMPLOYEEDIRECTORCOMPENSATIONPOLICY
Non-employeemembersoftheboardofdirectors(the"Board")ofTheContainerStoreGroup,Inc.(the"Company")shallbeeligibletoreceivecashandequitycompensationassetforthinthisNon-EmployeeDirectorCompensationPolicy(this"Policy").ThecashandequitycompensationdescribedinthisPolicyshallbepaidorbemade,asapplicable,automaticallyandwithoutfurtheractionoftheBoard,toeachmemberoftheBoardwhoisnotanemployeeoftheCompanyoranyparentorsubsidiaryoftheCompany(each,a"Non-EmployeeDirector")whomaybeeligibletoreceivesuchcashorequitycompensation,unlesssuchNon-EmployeeDirectordeclinesthereceiptofsuchcashorequitycompensationbywrittennoticetotheCompany.ThisPolicyshallremainineffectuntilitisrevisedorrescindedbyfurtheractionoftheBoard.ThisPolicymaybeamended,modifiedorterminatedbytheBoardatanytimeinitssolediscretion.ThetermsandconditionsofthisPolicyshallsupersedeanypriorcashand/orequitycompensationarrangementsforserviceasamemberoftheBoardbetweentheCompanyandanyofitsNon-EmployeeDirectors.NoNon-EmployeeDirectorshallhaveanyrightshereunder,exceptwithrespecttoequityawardsgrantedpursuanttothePolicy.ThisPolicyshallbecomeeffectiveonOctober27,2014(the"EffectiveDate")andshallsupersedeanyandallpriordirectorcompensationpoliciesoftheCompany.
1. Cash Compensation.
(a) Annual Retainers. EachNon-EmployeeDirectorshallreceiveanannualretainerof$80,000forserviceontheBoard.
(b) Additional Annual Retainers. Inaddition,aNon-EmployeeDirectorshallreceivethefollowingannualretainers:
(i) Lead Director. ANon-EmployeeDirectorservingasLeadDirectorshallreceiveanadditionalannualretainerof$10,000forsuchservice.
(ii) Audit Committee. ANon-EmployeeDirectorservingasChairpersonoftheAuditCommitteeshallreceiveanadditionalannualretainerof$10,000forsuchservice.
(iii) Culture and Compensation Committee. ANon-EmployeeDirectorservingasChairpersonoftheCompensationCommitteeshallreceiveanadditionalannualretainerof$10,000forsuchservice.
(iv) Nominating and Corporate Governance Committee. ANon-EmployeeDirectorservingasChairpersonoftheNominatingandCorporateGovernanceCommitteeshallreceiveanadditionalannualretainerof$10,000forsuchservice.
(v) Payment of Retainers. TheannualretainersdescribedinSections1(a)and1(b)shallbeearnedonaquarterlybasisbasedonacalendarquarterandshallbepayablebytheCompanyinadvanceeachcalendarquarter.Intheeventthat,followingtheEffectiveDate,aNon-EmployeeDirectorisinitiallyelectedorappointedtotheBoard(thedateofsuchinitialelectionorappointment,suchNon-EmployeeDirector's"StartDate")onanydateotherthanthefirstdayofacalendarquarter,suchNon-EmployeeDirectorshallreceive,onorassoonaspracticablefollowingsuchNon-EmployeeDirector'sStartDate,aproratedportionoftheretainer(s)otherwisepayabletosuchNon-EmployeeDirectorforsuchquarterpursuanttoSection1(b),withsuchproratedportiondeterminedbymultiplyingsuchotherwisepayableretainer(s)byafraction,thenumeratorofwhichisthenumberofdaysremainingfromsuchNon-EmployeeDirector'sStartDateuntiltheendoftheapplicablecalendarquarterandthedenominatorofwhichisthenumberofdaysintheapplicablecalendarquarter.
2. Equity Compensation. Non-EmployeeDirectorsshallbegrantedtheequityawardsdescribedbelow.Theawardsdescribedbelowshallbegrantedunderandshallbesubjecttothetermsand
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provisionsoftheCompany'sAmendedandRestated2013IncentiveAwardPlanoranyotherapplicableCompanyequityincentiveplanthen-maintainedbytheCompany(the"EquityPlan")andshallbegrantedsubjecttotheexecutionanddeliveryofawardagreements,includingattachedexhibits,insubstantiallytheformspreviouslyapprovedbytheBoard.AllapplicabletermsoftheEquityPlanapplytothisPolicyasiffullysetforthherein,andallgrantsofequityawardsherebyaresubjectinallrespectstothetermsoftheEquityPlan.
(a) Annual Awards. ANon-EmployeeDirectorwho(i)servesontheBoardasofthedateofanyannualmeetingoftheCompany'sstockholders(an"AnnualMeeting")aftertheEffectiveDateand(ii)willcontinuetoserveasaNon-EmployeeDirectorimmediatelyfollowingsuchAnnualMeetingshallbeautomaticallygrantedanequityawardwithrespecttosharesofCompanycommonstockintheformofstockoptions,restrictedsharesorrestrictedstockunits,asdeterminedbytheBoard,thathasavalueonthedateofgrantof$100,000(withthenumberofsharessubjecttosuchawardsubjecttoadjustmentasprovidedintheEquityPlan)onthedateofsuchAnnualMeeting.TheawardsdescribedinthisSection2(a)shallbereferredtoas"AnnualAwards."Fortheavoidanceofdoubt,aNon-EmployeeDirectorelectedforthefirsttimetotheBoardatanAnnualMeetingshallonlyreceiveanAnnualAwardinconnectionwithsuchelection,andshallnotreceiveanyInitialAwardonthedateofsuchAnnualMeetingaswell.ForpurposesofthisSection2(a)andSection2(b),thevalueofstockoptionsshallbeequaltotheBlack-ScholesvalueandthevalueofrestrictedsharesandrestrictedstockunitsshallbeequaltotheaggregateFairMarketValue(asdefinedintheEquityPlan)ofthesharessubjecttosuchawardsonthedatesuchawardsaregranted.
(b) Initial Awards. ExceptasotherwisedeterminedbytheBoard,eachNon-EmployeeDirectorwhoisinitiallyelectedorappointedtotheBoardaftertheEffectiveDateandonadateotherthanthedateofanAnnualMeetingshallbeautomaticallygranted,onsuchNon-EmployeeDirector'sStartDate,anequityawardwithrespecttosharesofCompanycommonstockintheformofstockoptions,restrictedsharesorrestrictedstockunits,asdeterminedbytheBoard,thathasavalueonsuchNon-EmployeeDirector'sStartDateequaltotheproductof(i)$100,000and(ii)afraction,thenumeratorofwhichis(x)365minus(y)thenumberofdaysintheperiodbeginningonthedateoftheAnnualMeetingimmediatelyprecedingsuchNon-EmployeeDirector'sStartDateandendingonsuchNon-EmployeeDirector'sStartDateandthedenominatorofwhichis365(withthenumberofsharessubjecttosuchawardsubjecttoadjustmentasprovidedintheEquityPlan).TheawardsdescribedinthisSection2(b)shallbereferredtoas"InitialAwards."NoNon-EmployeeDirectorshallbegrantedmorethanoneInitialAward.
(c) Termination of Service of Employee Directors. EachmemberoftheBoardwhoisanemployeeoftheCompanyoranyparentorsubsidiaryoftheCompanywhoseemploymentwiththeCompanyandanyparentorsubsidiaryoftheCompanyisterminatedbutwhoremainsontheBoard(andbecomesaNon-EmployeeDirector)followingsuchterminationofemploymentwillreceiveanInitialAwardpursuanttoSection2(b)aboveonthedateofhisorherterminationofemployment(whichshallbeconsideredsuchNon-EmployeeDirector'sStartDateforpurposesofsuchInitialAward)and,totheextentthatheorsheisotherwiseeligible,willreceive,aftersuchterminationofemployment,AnnualAwardsasdescribedinSection2(a)above.
(d) Terms of Awards Granted to Non-Employee Directors
(i) Purchase Price. IftheInitialAwardorAnnualAwardisgrantedintheformofstockoptions,thepershareexercisepriceofeachsuchoptiongrantedtoaNon-EmployeeDirectorshallequaltheFairMarketValueofashareofCompanycommonstockonthedatetheoptionisgranted.
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(ii) Vesting. EachAnnualAwardandeachInitialAwardshallvest(and,inthecaseofoptions,becomeexercisable)insubstantiallyequalinstallmentsasfollows,ineachcasesubjecttotheNon-EmployeeDirectorcontinuinginservicethroughtheapplicablevestingdate:
(A)ThefirstinstallmentofeachAnnualAwardandeachInitialAwardshallvest(and,inthecaseofoptions,becomeexercisable)ontheearlierof(x)thedayimmediatelyprecedingthedateofthefirstAnnualMeetingfollowingthedateofgrantand(y)thefirstanniversaryofthedateofgrant.
(B)ThesecondinstallmentofeachAnnualAwardandeachInitialAwardshallvest(and,inthecaseofoptions,becomeexercisable)ontheearlierof(x)thedayimmediatelyprecedingthedateofthesecondAnnualMeetingfollowingthedateofgrantand(y)thesecondanniversaryofthedateofgrant.
(C)ThethirdinstallmentofeachAnnualAwardandeachInitialAwardshallvest(and,inthecaseofoptions,becomeexercisable)ontheearlierof(x)thedayimmediatelyprecedingthedateofthethirdAnnualMeetingfollowingthedateofgrantand(y)thethirdanniversaryofthedateofgrant.
NoportionofanAnnualAwardorInitialAwardthatisunvestedorunexercisableatthetimeofaNon-EmployeeDirector'sTerminationofService(asdefinedintheEquityPlan)shallbecomevestedandexercisable,respectively,thereafter.AllofaNon-EmployeeDirector'sAnnualAwardsandInitialAwardsshallvest(and,inthecaseofoptions,becomeexercisable)infullimmediatelypriortotheoccurrenceofaChangeinControl(asdefinedintheEquityPlan),totheextentoutstandingatsuchtime.
(iii) Term. ThetermofeachstockoptiongrantedtoaNon-EmployeeDirectorshallbeten(10)yearsfromthedatetheoptionisgranted.
*****
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Exhibit10.32
THECONTAINERSTOREGROUP,INC.AMENDEDANDRESTATEDNON-EMPLOYEEDIRECTORCOMPENSATIONPOLICY
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Exhibit21.1
TheContainerStoreGroup,Inc.
Entity Jurisdictionoforganization
TheContainerStore,Inc TexasTCSGiftCardServices,LLC VirginiaElfaInternationalAB SwedenElfaKirenaOY FinlandElfaDeutschlandGmbH GermanyElfaSwedenAB SwedenElfaDoorsAB SwedenElfaLumiAB SwedenElfaLumiA/S DenmarkElfaNorgeA/S NorwayElfaFranceSA FranceElfaManufacturingPolandSp.Zo.o Poland
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Exhibit21.1
TheContainerStoreGroup,Inc.
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Exhibit23.1
ConsentofIndependentRegisteredPublicAccountingFirm
WeconsenttotheincorporationbyreferenceinthefollowingRegistrationStatements:
(1) RegistrationStatement(FormS-8No.333-192067)pertainingtoTheContainerStoreGroup,Inc.2013IncentiveAwardPlanand
(2) RegistrationStatement(FormS-8No.333-193255)pertainingtoTheContainerStoreGroup,Inc.2012StockOptionPlan
ofourreportdatedMay31,2018,withrespecttotheconsolidatedbalancesheetsofTheContainerStoreGroup,Inc.(theCompany)asofMarch31,2018andApril1,2017,andtherelatedconsolidatedstatementsofoperations,comprehensiveincome,shareholders'equityandcashflowsforeachofthetwoyearsendedMarch31,2018,fortheyearendedFebruary27,2016,therelatedconsolidatedstatementsofoperations,comprehensiveincomeandcashflowsforthefiveweektransitionperiodendedApril2,2016andscheduleofTheContainerStoreGroup,Inc.includedinthisAnnualReport(Form10-K)ofTheContainerStoreGroup,Inc.fortheyearendedMarch31,2018.
/s/ErnstandYoungLLP
Dallas,TexasMay31,2018
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Exhibit23.1
ConsentofIndependentRegisteredPublicAccountingFirm
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Exhibit31.1
CERTIFICATIONS
I,MelissaReiff,certifythat:
1. IhavereviewedthisAnnualReportonForm10-KofTheContainerStoreGroup,Inc.;
2. Basedonmyknowledge,thisreportdoesnotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessarytomakethestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleadingwithrespecttotheperiodcoveredbythisreport;
3. Basedonmyknowledge,thefinancialstatements,andotherfinancialinformationincludedinthisreport,fairlypresentinallmaterialrespectsthefinancialcondition,resultsofoperationsandcashflowsoftheregistrantasof,andfor,theperiodspresentedinthisreport;
4. Theregistrant'sothercertifyingofficerandIareresponsibleforestablishingandmaintainingdisclosurecontrolsandprocedures(asdefinedinExchangeActRules13a-15(e)and15d-15(e))fortheregistrantandhave:
a) Designedsuchdisclosurecontrolsandprocedures,orcausedsuchdisclosurecontrolsandprocedurestobedesignedunderoursupervision,toensurethatmaterialinformationrelatingtotheregistrant,includingitsconsolidatedsubsidiaries,ismadeknowntousbyotherswithinthoseentities,particularlyduringtheperiodinwhichthisreportisbeingprepared;
b) [omitted];
c) Evaluatedtheeffectivenessoftheregistrant'sdisclosurecontrolsandproceduresandpresentedinthisreportourconclusionsabouttheeffectivenessofthedisclosurecontrolsandprocedures,asoftheendoftheperiodcoveredbythisreportbasedonsuchevaluation;and
d) Disclosedinthisreportanychangeintheregistrant'sinternalcontroloverfinancialreportingthatoccurredduringtheregistrant'smostrecentfiscalquarter(theregistrant'sfourthfiscalquarterinthecaseofanannualreport)thathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,theregistrant'sinternalcontroloverfinancialreporting;and
5. Theregistrant'sothercertifyingofficerandIhavedisclosed,basedonourmostrecentevaluationofinternalcontroloverfinancialreporting,totheregistrant'sauditorsandtheauditcommitteeoftheregistrant'sboardofdirectors(orpersonsperformingtheequivalentfunctions):
a) Allsignificantdeficienciesandmaterialweaknessesinthedesignoroperationofinternalcontroloverfinancialreportingwhicharereasonablylikelytoadverselyaffecttheregistrant'sabilitytorecord,process,summarizeandreportfinancialinformation;and
b) Anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantroleintheregistrant'sinternalcontroloverfinancialreporting.
Date:May31,2018 /s/MELISSAREIFF
MelissaReiffChief Executive Officer
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Exhibit31.1
CERTIFICATIONS
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Exhibit31.2
CERTIFICATIONS
I,JodiTaylor,certifythat:
1. IhavereviewedthisAnnualReportonForm10-KofTheContainerStoreGroup,Inc.;
2. Basedonmyknowledge,thisreportdoesnotcontainanyuntruestatementofamaterialfactoromittostateamaterialfactnecessarytomakethestatementsmade,inlightofthecircumstancesunderwhichsuchstatementsweremade,notmisleadingwithrespecttotheperiodcoveredbythisreport;
3. Basedonmyknowledge,thefinancialstatements,andotherfinancialinformationincludedinthisreport,fairlypresentinallmaterialrespectsthefinancialcondition,resultsofoperationsandcashflowsoftheregistrantasof,andfor,theperiodspresentedinthisreport;
4. Theregistrant'sothercertifyingofficerandIareresponsibleforestablishingandmaintainingdisclosurecontrolsandprocedures(asdefinedinExchangeActRules13a-15(e)and15d-15(e))fortheregistrantandhave:
a) Designedsuchdisclosurecontrolsandprocedures,orcausedsuchdisclosurecontrolsandprocedurestobedesignedunderoursupervision,toensurethatmaterialinformationrelatingtotheregistrant,includingitsconsolidatedsubsidiaries,ismadeknowntousbyotherswithinthoseentities,particularlyduringtheperiodinwhichthisreportisbeingprepared;
b) [omitted];
c) Evaluatedtheeffectivenessoftheregistrant'sdisclosurecontrolsandproceduresandpresentedinthisreportourconclusionsabouttheeffectivenessofthedisclosurecontrolsandprocedures,asoftheendoftheperiodcoveredbythisreportbasedonsuchevaluation;and
d) Disclosedinthisreportanychangeintheregistrant'sinternalcontroloverfinancialreportingthatoccurredduringtheregistrant'smostrecentfiscalquarter(theregistrant'sfourthfiscalquarterinthecaseofanannualreport)thathasmateriallyaffected,orisreasonablylikelytomateriallyaffect,theregistrant'sinternalcontroloverfinancialreporting;and
5. Theregistrant'sothercertifyingofficerandIhavedisclosed,basedonourmostrecentevaluationofinternalcontroloverfinancialreporting,totheregistrant'sauditorsandtheauditcommitteeoftheregistrant'sboardofdirectors(orpersonsperformingtheequivalentfunctions):
a) Allsignificantdeficienciesandmaterialweaknessesinthedesignoroperationofinternalcontroloverfinancialreportingwhicharereasonablylikelytoadverselyaffecttheregistrant'sabilitytorecord,process,summarizeandreportfinancialinformation;and
b) Anyfraud,whetherornotmaterial,thatinvolvesmanagementorotheremployeeswhohaveasignificantroleintheregistrant'sinternalcontroloverfinancialreporting.
Date:May31,2018 /s/JODIL.TAYLOR
JodiL.TaylorChief Financial Officer and Chief Administrative Officer
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Exhibit31.2
CERTIFICATIONS
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Exhibit32.1
CERTIFICATIONPURSUANTTO18U.S.C.SECTION1350,
ASADOPTEDPURSUANTTOSECTION906OFTHESARBANES-OXLEYACTOF2002
I,MelissaReiff,ChiefExecutiveOfficerofTheContainerStoreGroup,Inc.(the"Company"),herebycertify,pursuantto18U.S.C.§1350,asadoptedpursuantto§906oftheSarbanes-OxleyActof2002,that,tothebestofmyknowledge:
(1) TheAnnualReportonForm10-KoftheCompanyfortheperiodendedMarch31,2018(the"Report")fullycomplieswiththerequirementsofSection13(a)or15(d)oftheSecuritiesExchangeActof1934,asamended;and
(2) TheinformationcontainedintheReportfairlypresents,inallmaterialrespects,thefinancialconditionandresultsofoperationsoftheCompany.
May31,2018 /s/MELISSAREIFF
MelissaReiffChief Executive Officer
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Exhibit32.1
CERTIFICATIONPURSUANTTO18U.S.C.SECTION1350,ASADOPTEDPURSUANTTOSECTION906OFTHESARBANES-OXLEYACTOF2002
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Exhibit32.2
CERTIFICATIONPURSUANTTO18U.S.C.SECTION1350,
ASADOPTEDPURSUANTTOSECTION906OFTHESARBANES-OXLEYACTOF2002
I,JodiTaylor,ChiefFinancialOfficerofTheContainerStoreGroup,Inc.(the"Company"),herebycertify,pursuantto18U.S.C.§1350,asadoptedpursuantto§906oftheSarbanes-OxleyActof2002,that,tothebestofmyknowledge:
(1) TheAnnualReportonForm10-KoftheCompanyfortheperiodendedMarch31,2018(the"Report")fullycomplieswiththerequirementsofSection13(a)or15(d)oftheSecuritiesExchangeActof1934,asamended;and
(2) TheinformationcontainedintheReportfairlypresents,inallmaterialrespects,thefinancialconditionandresultsofoperationsoftheCompany.
May31,2018 /s/JODIL.TAYLOR
JodiL.TaylorChief Financial Officer and Chief Administrative Officer
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Exhibit32.2
CERTIFICATIONPURSUANTTO18U.S.C.SECTION1350,ASADOPTEDPURSUANTTOSECTION906OFTHESARBANES-OXLEYACTOF2002