ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated
financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and
analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties.
You should review the "Cautionary Note Regarding Forward-Looking Statements" and "Risk Factors" sections of this report for a discussion of important factors that could cause actual results to differ
materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
The Container Store® is the original and leading specialty retailer of storage and organization products and solutions in the United
States and the only national retailer solely devoted to the category. We provide a collection of creative, multifunctional and customizable storage and organization solutions that are sold in our
stores and online through a high-service, differentiated shopping experience. Our vision is to be a beloved brand and the first choice for personalized organization solutions and services. Our
customers are predominantly female, highly educated and very busyfrom college students to empty nesters. We service them with storage and organization solutions that save them space and
time and ultimately improve the quality of their lives. We believe an organized life is a happy life.
Our
operations consist of two operating segments:
-
-
The Container Store
("
TCS"),
which consists of
our retail stores, website and call center, as well as our installation and organizational services business. As of April 1 2017, we operated 86 stores with an average size of approximately
25,000 square feet (19,000 selling square feet) in 31 states and the District of Columbia. We also offer all of our products directly to customers through our website, responsive mobile site, and call
center. Our stores receive all products directly from our distribution center co-located with our corporate headquarters and call center in Coppell, Texas.
43
Table of Contents
-
-
Elfa,
The Container Store, Inc.'s wholly owned Swedish subsidiary, Elfa International AB
("Elfa"), which designs and manufactures component-based shelving and drawer systems and made-to-measure sliding doors. Elfa was founded in 1948 and is headquartered in Malmö, Sweden.
Elfa's shelving and drawer systems are customizable for any area of the home, including closets, kitchens, offices and garages. Elfa operates four manufacturing facilities with two located in Sweden,
one in Finland and one in Poland. The Container Store began selling elfa® products in 1978 and acquired Elfa in 1999. Today our TCS segment is the exclusive distributor of
elfa® products in the U.S. Elfa also sells its products on a wholesale basis to various retailers in approximately 30 countries around the world, with a concentration in the Nordic region
of Europe.
Management Transition
Effective July 1, 2016, Melissa Reiff, former President and Chief Operating Officer, became the retailer's Chief Executive Officer,
succeeding William A. ("Kip") Tindell, III. Sharon Tindell added President to her Chief Merchandising Officer title and Kip Tindell, former Chairman and Chief Executive Officer, retained his role as
Chairman of the Company's Board of Directors. In addition, Jodi Taylor, Chief Financial Officer and Secretary, added Chief Administrative Officer to her title.
How we assess the performance of our business
We consider a variety of financial and operating measures in assessing the performance of our business. The key measures we use to determine how
our business is performing are net sales, gross profit, gross margin, and selling, general and administrative expenses. In addition, we also review other important operating metrics such as comparable
store sales and non-GAAP measures such as EBITDA, Adjusted EBITDA, and adjusted net income.
Optimization Plan
On May 23, 2017, the Company announced the implementation of a four-part optimization plan to drive improved sales and profitability (the
"Optimization Plan"). This plan includes sales initiatives, certain full-time position eliminations at TCS, organizational realignment at Elfa and ongoing savings and efficiency efforts. In fiscal
2016, the Company's savings program was focused within selling, general and administrative expenses. However, as part of the Optimization Plan, the Company also intends to focus on savings and
efficiency efforts within cost of sales, in addition to selling, general and administrative expenses.
Net sales
Net sales reflect our sales of merchandise plus other services provided, such as installation, shipping, delivery, and organization services,
less returns and discounts. Net sales also include wholesale sales by Elfa. Revenue from our TCS segment is recognized upon receipt of the product by our customers or upon completion of the service to
our customers. Elfa segment revenue is recorded upon shipment to customers.
The
retail and wholesale businesses in which we operate are cyclical, and consequently our sales are affected by general economic conditions. Purchases of our products are sensitive to
trends in the levels of consumer spending, which are affected by a number of factors such as consumer disposable income, housing market conditions, stock market performance, consumer debt, interest
rates, tax rates and overall consumer confidence.
Our
net sales are moderately seasonal. As a result, our revenues fluctuate from quarter to quarter, which often affects the comparability of our interim results. Net sales are
historically higher in the fourth quarter due primarily to the impact of Our Annual elfa® Sale, which traditionally begins on or
44
Table of Contents
about
December 24
th
and runs into February. However, due to the change in our fiscal year end from the Saturday closest to February 28 to the Saturday closest to
March 31, the Company expects to realize more sales in the fiscal third quarter going forward than it did in prior years. The fiscal year change became effective beginning with the Company's
2016 fiscal year, which began on April 3, 2016 and ended on April 1, 2017.
Gross profit and gross margin
Gross profit is equal to our net sales less cost of sales. Gross profit as a percentage of net sales is referred to as gross margin. Cost of
sales in our TCS segment includes the purchase cost of inventory less vendor rebates, in-bound freight, as well as inventory shrinkage. Direct
installation and organization costs, as well as costs incurred to ship or deliver merchandise to customers, are also included in cost of sales in our TCS segment. Elfa segment cost of sales from
manufacturing operations includes costs associated with production, primarily material, wages, freight and other variable costs, and applicable manufacturing overhead. The components of our cost of
sales may not be comparable to the components of cost of sales or similar measures by other retailers. As a result, data in this report regarding our gross profit and gross margin may not be
comparable to similar data made available by other retailers.
Our
gross profit is variable in nature and generally follows changes in net sales. Our gross margin can be impacted by changes in the mix of products and services sold. For example,
sales from our TCS segment typically provide a higher gross margin than sales to third parties from our Elfa segment. Additionally, sales of products typically provide a higher gross margin than sales
of services. Gross margin for our TCS segment is also susceptible to foreign currency risk as purchases of elfa® products from our Elfa segment are in Swedish krona, while sales of these
products are in U.S. dollars. We mitigate this risk through the use of forward contracts, whereby we hedge purchases of inventory by locking in foreign currency exchange rates in advance. Similarly,
gross margin for our Elfa segment is susceptible to foreign currency risk as certain purchases of raw materials are transacted in currencies other than Swedish krona, which is the functional currency
of Elfa.
Selling, general and administrative expenses
Selling, general and administrative expenses include all operating costs not included in cost of sales, stock-based compensation, and
pre-opening costs. For our TCS segment, these include payroll and payroll-related expenses, marketing expenses, occupancy expenses (which include rent, real estate taxes, common area maintenance,
utilities, telephone, property insurance, and repairs and maintenance), costs to ship product from the distribution center to our stores, and supplies expenses. We also incur costs for our
distribution and corporate office operations. For our Elfa segment, these include sales and marketing expenses, product development costs, and all expenses related to operations at headquarters.
Depreciation and amortization are excluded from both gross profit and selling, general and administrative expenses.
Selling,
general and administrative expenses include both fixed and variable components and, therefore, is not directly correlated with net sales. The components of our selling, general
and administrative expenses may not be comparable to the components of similar measures of other retailers. We expect that our selling, general and administrative expenses will increase in future
periods with expected future store growth.
Pre-opening costs
Non-capital expenditures associated with opening new stores and relocating stores, including rent, marketing expenses, travel and relocation
costs, training costs, and certain corporate overhead costs, are expensed as incurred and are included in pre-opening costs in the consolidated statement of operations.
45
Table of Contents
Comparable store sales
A store is included in the comparable store sales calculation on the first day of the sixteenth full fiscal month following the store's opening.
Comparable store sales are net of discounts and returns. When a store is relocated, we continue to consider sales from that store to be comparable store sales. Net sales from our website and call
center are also included in calculations of comparable store sales. Prior to fiscal 2015, the comparable store sales growth operating measure does not include net sales from services.
In
the first quarter of fiscal 2016, we changed our comparable store sales operating measure to reflect the point at which merchandise and service orders are fulfilled and delivered to
customers, excluding shipping and delivery. Prior to the first quarter of fiscal 2016, our comparable store sales operating measure in a given period was based on merchandise and service orders placed
in that period, excluding shipping and delivery, which did not always reflect the point at which merchandise and services were received by the customer and, therefore, recognized in our financial
statements as net sales. We believe that changing the comparable store sales operating metric to better align with net sales presented in our financial statements will assist investors in evaluating
our financial performance.
Comparable
store sales allow us to evaluate how our retail store base is performing by measuring the change in period-over-period net sales in stores that have been open for fifteen
months or more. The comparable store sales growth metric is an operating measure intended only as supplemental information and is not a substitute for net sales presented in accordance with generally
accepted accounting principles. Various factors affect comparable store sales, including:
-
-
national and regional economic trends in the United States;
-
-
changes in our merchandise mix;
-
-
changes in pricing;
-
-
changes in timing of promotional events or holidays; and
-
-
weather.
Opening
new stores is part of our growth strategy. As we continue to pursue our growth strategy, we anticipate that a portion of our net sales will come from stores not included in our
comparable store sales calculation. Accordingly, comparable store sales is only one measure we use to assess the success of our growth strategy.
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are key metrics used by management, our board of directors and LGP to assess our financial performance. In addition,
we use Adjusted EBITDA in connection with covenant compliance, executive performance evaluations, and to supplement GAAP measures of performance to evaluate the effectiveness of our business
strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We believe it is useful for investors to see the measures that
management uses to evaluate
the Company, its executives and our covenant compliance, as applicable. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in
our industry.
We
define EBITDA as net income (loss) before interest, taxes, depreciation, and amortization. Adjusted EBITDA is calculated in accordance with the Senior Secured Term Loan Facility and
the Revolving Credit Facility and is one of the components for performance evaluation under our executive compensation programs. Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the
impact of certain items, including certain non-cash and other items, that we do not consider
46
Table of Contents
representative
of our ongoing operating performance. For reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, refer to "
Item 6: Selected
Financial and Operating Data.
"
Adjusted net income and adjusted net income per common sharediluted
We use adjusted net income and adjusted net income per common sharediluted to supplement GAAP measures of performance to evaluate
the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. We present adjusted net income and
adjusted net income per common sharediluted because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that we
do not believe are indicative of our core operating performance and because we believe it is useful for investors to see the measures that management uses to evaluate the Company. Adjusted net income
is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP.
We
define adjusted net income as net income (loss) available to common shareholders before distributions accumulated to preferred shareholders, stock-based compensation and other costs
in connection with our IPO, restructuring charges, losses on extinguishment of debt, certain gains on disposal of assets and the tax impact of these adjustments and unusual or infrequent tax items. We
define adjusted net income per common sharediluted as adjusted net income divided by the diluted weighted average common shares outstanding; however for fiscal 2013 adjusted diluted
weighted common shares outstanding are calculated based on the assumption that the number of shares outstanding as of March 1, 2014 was outstanding at the beginning of the fiscal year. For a
reconciliation
of adjusted net income to the most directly comparable GAAP measure, refer to "
Item 6: Selected Financial and Operating Data.
"
Adjustment for currency exchange rate fluctuations
Additionally, this Management's Discussion and Analysis also refers to Elfa third party net sales after the conversion of Elfa's net sales from
Swedish krona to U.S. dollars using the prior year's conversion rate. The Company believes the disclosure of Elfa third party net sales without the effects of currency exchange rate fluctuations helps
investors understand the Company's underlying performance.
Note on Dollar Amounts
All dollar amounts in this Management's Discussion and Analysis of Financial Condition and Results of Operations are in thousands, except per
share amounts, unless otherwise stated.
Results of Operations
The following data represents the amounts shown in our audited consolidated statements of operations for the fiscal years ended April 1,
2017, February 27, 2016, February 28, 2015 and the five-weeks ended April 2, 2016 along with comparable unaudited data for the recast fiscal year ended April 2, 2016 and
five-weeks ended April 4, 2015 expressed in dollars and as a percentage of net sales and certain operating data and non-GAAP financial information (categories that are only applicable to our
TCS segment are noted with (*) and to our Elfa segment with (+)). For segment data, see Note 14
47
Table of Contents
to
our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended
|
|
Five Weeks Ended
|
|
Fiscal year ended
|
|
|
|
April 1,
2017
|
|
April 2,
2016
|
|
April 2,
2016
|
|
April 4,
2015
|
|
February 27,
2016
|
|
February 28,
2015
|
|
|
|
|
|
(unaudited)
|
|
|
|
(unaudited)
|
|
|
|
|
|
Net sales
|
|
$
|
819,930
|
|
$
|
797,087
|
|
$
|
69,218
|
|
$
|
66,761
|
|
$
|
794,630
|
|
$
|
781,866
|
|
Cost of sales (excluding depreciation and amortization)
|
|
|
343,860
|
|
|
332,594
|
|
|
29,023
|
|
|
27,507
|
|
|
331,079
|
|
|
323,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
476,070
|
|
|
464,493
|
|
|
40,195
|
|
|
39,254
|
|
|
463,551
|
|
|
458,066
|
|
Selling, general, and administrative expenses (excluding depreciation and amortization)
|
|
|
387,948
|
|
|
394,585
|
|
|
34,504
|
|
|
33,728
|
|
|
393,810
|
|
|
372,867
|
|
Stock-based compensation*
|
|
|
1,989
|
|
|
1,575
|
|
|
147
|
|
|
129
|
|
|
1,556
|
|
|
1,289
|
|
Pre-opening costs*
|
|
|
6,852
|
|
|
9,004
|
|
|
191
|
|
|
220
|
|
|
9,033
|
|
|
8,283
|
|
Depreciation and amortization
|
|
|
37,124
|
|
|
34,628
|
|
|
3,009
|
|
|
2,612
|
|
|
34,230
|
|
|
31,011
|
|
Other expenses
|
|
|
1,058
|
|
|
102
|
|
|
102
|
|
|
|
|
|
|
|
|
1,132
|
|
Loss (gain) on disposal of assets
|
|
|
57
|
|
|
62
|
|
|
|
|
|
|
|
|
61
|
|
|
(3,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
41,042
|
|
|
24,537
|
|
|
2,242
|
|
|
2,565
|
|
|
24,861
|
|
|
46,971
|
|
Interest expense
|
|
|
16,687
|
|
|
16,772
|
|
|
1,550
|
|
|
1,587
|
|
|
16,810
|
|
|
17,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
24,355
|
|
|
7,765
|
|
|
692
|
|
|
978
|
|
|
8,051
|
|
|
29,866
|
|
Provision for income taxes
|
|
|
9,402
|
|
|
2,907
|
|
|
338
|
|
|
340
|
|
|
2,909
|
|
|
7,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14,953
|
|
$
|
4,858
|
|
$
|
354
|
|
$
|
638
|
|
$
|
5,142
|
|
$
|
22,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended
|
|
Five Weeks Ended(3)
|
|
Fiscal year ended
|
|
|
|
April 1,
2017
|
|
April 2,
2016
|
|
April 2,
2016
|
|
April 4,
2015
|
|
February 27,
2016
|
|
February 28,
2015
|
|
|
|
|
|
(unaudited)
|
|
|
|
(unaudited)
|
|
|
|
|
|
Percentage of net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Cost of sales (excluding depreciation and amortization)
|
|
|
41.9
|
%
|
|
41.7
|
%
|
|
41.9
|
%
|
|
41.2
|
%
|
|
41.7
|
%
|
|
41.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
58.1
|
%
|
|
58.3
|
%
|
|
58.1
|
%
|
|
58.8
|
%
|
|
58.3
|
%
|
|
58.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative expenses (excluding depreciation and amortization)
|
|
|
47.3
|
%
|
|
49.5
|
%
|
|
49.8
|
%
|
|
50.5
|
%
|
|
49.6
|
%
|
|
47.7
|
%
|
Stock-based compensation*
|
|
|
0.2
|
%
|
|
0.2
|
%
|
|
0.2
|
%
|
|
0.2
|
%
|
|
0.2
|
%
|
|
0.2
|
%
|
Pre-opening costs*
|
|
|
0.8
|
%
|
|
1.1
|
%
|
|
0.3
|
%
|
|
0.3
|
%
|
|
1.1
|
%
|
|
1.1
|
%
|
Depreciation and amortization
|
|
|
4.5
|
%
|
|
4.3
|
%
|
|
4.3
|
%
|
|
3.9
|
%
|
|
4.3
|
%
|
|
4.0
|
%
|
Other expenses
|
|
|
0.1
|
%
|
|
0.0
|
%
|
|
0.1
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.1
|
%
|
Loss (gain) on disposal of assets
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
(0.4
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
5.0
|
%
|
|
3.1
|
%
|
|
3.2
|
%
|
|
3.8
|
%
|
|
3.1
|
%
|
|
6.0
|
%
|
Interest expense
|
|
|
2.0
|
%
|
|
2.1
|
%
|
|
2.2
|
%
|
|
2.4
|
%
|
|
2.1
|
%
|
|
2.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
3.0
|
%
|
|
1.0
|
%
|
|
1.0
|
%
|
|
1.5
|
%
|
|
1.0
|
%
|
|
3.8
|
%
|
Provision for income taxes
|
|
|
1.1
|
%
|
|
0.4
|
%
|
|
0.5
|
%
|
|
0.5
|
%
|
|
0.4
|
%
|
|
0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
1.8
|
%
|
|
0.6
|
%
|
|
0.5
|
%
|
|
1.0
|
%
|
|
0.6
|
%
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable store sales growth for the period(1)*
|
|
|
(2.4
|
%)
|
|
(0.8
|
%)
|
|
|
|
|
|
|
|
0.0
|
%
|
|
(1.4
|
%)
|
Number of stores open at end of period*
|
|
|
86
|
|
|
79
|
|
|
|
|
|
|
|
|
79
|
|
|
70
|
|
Non-GAAP measures(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(2)
|
|
$
|
86,559
|
|
$
|
68,362
|
|
|
|
|
|
|
|
$
|
68,159
|
|
$
|
88,230
|
|
Adjusted net income(2)
|
|
$
|
14,953
|
|
$
|
4,858
|
|
|
|
|
|
|
|
$
|
5,142
|
|
$
|
16,501
|
|
Adjusted net income per common sharediluted(2)
|
|
$
|
0.31
|
|
$
|
0.10
|
|
|
|
|
|
|
|
$
|
0.11
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
A
store is included in the comparable store sales calculation on the first day of the sixteenth full fiscal month following the store's opening. Comparable store
sales are net of discounts and returns. When a store is relocated, we
48
Table of Contents
continue
to consider sales from that store to be comparable store sales. Net sales from our website and call center are also included in calculations of comparable store sales. Prior to fiscal 2015,
the comparable store sales growth operating measure does not include net sales from services.
In the first quarter of fiscal 2016, we changed our comparable store sales operating measure to reflect the point at which merchandise and service orders are
fulfilled and delivered to customers, excluding shipping and delivery. Prior to the first quarter of fiscal 2016, our comparable store sales operating measure in a given period was based on
merchandise and service orders placed in that period, excluding shipping and delivery, which did not always reflect the point at which merchandise and services were received by the customer and,
therefore, recognized in our financial statements as net sales. We believe that changing the comparable store sales operating metric to better align with net sales presented in our financial
statements will assist investors in evaluating our financial performance. The comparable store sales growth metric is an operating measure intended only as supplemental information and is not a
substitute for net sales presented in accordance with generally accepted accounting principles ("GAAP").
-
(2)
-
We
have presented EBITDA, Adjusted EBITDA, adjusted net income, and adjusted net income per common sharediluted as supplemental measures of financial
performance that are not required by, or presented in accordance with, GAAP. These non-GAAP measures should not be considered as alternatives to net income (loss) as a measure of financial performance
or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will
be unaffected by unusual or non-recurring items. These non-GAAP measures are key metrics used by management, our board of directors, and LGP to assess our financial performance. We present these
non-GAAP measures because we believe they assist investors in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our
core operating performance and because we believe it is useful for investors to see the measures that management uses to evaluate the Company. These non-GAAP measures are also frequently used by
analysts, investors and other interested parties to evaluate companies in our industry. In evaluating these non-GAAP measures, you should be aware that in the future we will incur expenses that are
the same as or similar to some of the adjustments in this presentation. Our presentation of these non-GAAP measures should not be construed to imply that our future results will be unaffected by any
such adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using non-GAAP measures supplementally. Our non-GAAP measures are not necessarily
comparable to other similarly titled captions of other companies due to different methods of calculation. For more information regarding our use of EBITDA and Adjusted EBITDA and a reconciliation of
EBITDA and Adjusted EBITDA to the GAAP financial measure of net income (loss) see "How we assess the performance of our business" above and "
Item 6: Selected Financial
and Operating Data.
" For more information regarding our use of adjusted net income and adjusted net income per common sharediluted, and a reconciliation of adjusted
net income and adjusted net income per common sharediluted to the GAAP financial measures of net income (loss) available to common shareholders and diluted net income (loss) per common
share, see "How we assess the performance of our business" above and "
Item 6: Selected Financial and Operating Data
."
-
(3)
-
We
have not presented operating data or non-GAAP measures for the five week periods ended April 2, 2016 and April 4, 2015.
Year Ended April 1, 2017 compared to Year Ended April 2, 2016
Net sales
The following table summarizes our net sales for each of the fiscal years ended April 1, 2017 and April 2, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1, 2017
|
|
% total
|
|
April 2, 2016
|
|
% total
|
|
TCS net sales
|
|
$
|
752,675
|
|
|
91.8
|
%
|
$
|
727,659
|
|
|
91.3
|
%
|
Elfa third party net sales
|
|
|
67,255
|
|
|
8.2
|
%
|
|
69,428
|
|
|
8.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
819,930
|
|
|
100.0
|
%
|
$
|
797,087
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
Table of Contents
Net sales in the fiscal year ended April 1, 2017 increased by $22,843, or 2.9%, compared to the fiscal year ended April 2, 2016. This increase is
comprised of the following components:
|
|
|
|
|
|
|
Net sales
|
|
Net sales for the fiscal year ended April 2, 2016
|
|
$
|
797,087
|
|
Incremental net sales increase (decrease) due to:
|
|
|
|
|
New stores
|
|
|
41,715
|
|
Comparable stores (including a $2,607, or 4.4%, decrease in online sales)
|
|
|
(17,234
|
)
|
Elfa third party net sales (excluding impact of foreign currency translation)
|
|
|
(490
|
)
|
Impact of foreign currency translation on Elfa third party net sales
|
|
|
(1,683
|
)
|
Shipping and delivery
|
|
|
535
|
|
|
|
|
|
|
Net sales for the fiscal year ended April 1, 2017
|
|
$
|
819,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
the fifty-two weeks ended April 1, 2017, seventeen new stores generated $41,715 of incremental net sales, ten of which were opened prior to April 2, 2016 and seven of
which were opened in fiscal 2016. The increase in net sales generated by new stores was partially offset by a $17,234, or 2.4%, decrease in sales from comparable stores. Elfa third party net sales
decreased $2,173 during fiscal 2016. After converting Elfa's third party net sales from Swedish krona to U.S. dollars using the prior year's
conversion rate for fiscal 2016 and fiscal 2015, Elfa third party net sales decreased $490 primarily due to lower net sales in Russia.
Gross profit and gross margin
Gross profit in the fiscal year ended April 1, 2017 increased by $11,577, or 2.5%, compared to the fiscal year ended April 2,
2016. The increase in gross profit was primarily the result of increased sales, partially offset by lower gross margins. The following table summarizes the gross margin for the fiscal year ended
April 1, 2017 and the fiscal year ended April 2, 2016 by segment and total. The segment margins include the impact of inter-segment sales from the Elfa segment to the TCS segment:
|
|
|
|
|
|
|
|
|
|
April 1, 2017
|
|
April 2, 2016
|
|
TCS gross margin
|
|
|
57.1
|
%
|
|
57.7
|
%
|
Elfa gross margin
|
|
|
39.9
|
%
|
|
38.7
|
%
|
Total gross margin
|
|
|
58.1
|
%
|
|
58.3
|
%
|
TCS
gross margin decreased 60 basis points during fiscal 2016, primarily due to an increased mix of lower-margin product and service sales, combined with increased sales associated with
promotional activities and partially offset by the impact of a stronger U.S. dollar. Elfa segment gross margin increased 120 basis points, primarily due to improved production efficiencies. On a
consolidated basis, gross margin declined 20 basis points, as the improvement in Elfa gross margin was more than offset by the decline in TCS gross margin, due to a larger percentage of consolidated
net sales coming from the TCS segment.
Selling, general and administrative expenses
Selling, general and administrative expenses in the fiscal year ended April 1, 2017 decreased by $6,637, or 1.7%, compared to the fiscal
year ended April 2, 2016. As a percentage of consolidated net sales, selling, general and administrative expenses decreased by 220 basis points. The following table
50
Table of Contents
summarizes
selling, general and administrative expenses as a percentage of consolidated net sales for the fiscal year ended April 1, 2017 and the fiscal year ended April 2, 2016:
|
|
|
|
|
|
|
|
|
|
April 1, 2017
% of net sales
|
|
April 2, 2016
% of net sales
|
|
TCS selling, general and administrative
|
|
|
43.1
|
%
|
|
44.9
|
%
|
Elfa selling, general and administrative
|
|
|
4.2
|
%
|
|
4.6
|
%
|
|
|
|
|
|
|
|
|
Total selling, general and administrative
|
|
|
47.3
|
%
|
|
49.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCS
selling, general and administrative expenses decreased by 180 basis points as a percentage of consolidated net sales. The decrease was primarily a result of the Company's SG&A
savings program which contributed to decreased spending, including on 401(k) costs, store payroll, and certain major initiatives. Additionally, we experienced lower healthcare costs during fiscal
2016. Also, the impact of amended and restated employment agreements entered into with key executives during the first quarter of fiscal 2016 contributed to the decrease of selling, general and
administrative expenses due to the reversal of accrued deferred compensation associated with the original employment agreements, net of costs incurred to execute the agreements, of $3,910, or 50 basis
points. The positive impact of these items was partially offset by deleveraging of occupancy costs associated with negative comparable store sales growth. Elfa selling, general and administrative
expenses decreased by 40 basis points as a percentage of consolidated net sales primarily due to a positive impact from foreign currency exchange rates and a smaller percentage of consolidated net
sales coming from the Elfa segment.
Pre-opening costs
Pre-opening costs decreased by $2,152, or 23.9% in the fiscal year ended April 1, 2017 to $6,852, as compared to $9,004 in the fiscal
year ended April 2, 2016. The decrease was the result of opening seven new stores in fiscal 2016, as compared to opening of nine new stores and relocating one store in fiscal 2015.
Depreciation and amortization
Depreciation and amortization increased by $2,496, or 7.2%, in the fiscal year ended April 1, 2017 to $37,124, as compared to $34,628 in
the fiscal year ended April 2, 2016. The increase in depreciation and amortization is primarily related to an increase in the number of stores.
Other expenses
In the fiscal year ended April 1, 2017, we recorded $1,058 of other expenses, which were primarily related to management transition
costs.
Taxes
The provision for income taxes in the fiscal year ended April 1, 2017 was $9,402 as compared to $2,907 in the fiscal year ended
April 2, 2016. The effective tax rate for the year ended April 1, 2017 was 38.6%, as compared to 37.4% in the year ended April 2, 2016. The increase in the effective tax rate is
primarily due to changes in the mix of domestic and foreign earnings, combined with the expensing of certain deferred tax assets due to the expiration of certain stock based compensation awards.
51
Table of Contents
Five-week audited transition period ended April 2, 2016 compared to five-week unaudited period
ended April 4, 2015
Net sales in the five-week transition period ended April 2, 2016 increased by $2,457, or 3.7%, compared to the five-week period ended
April 4, 2015. The increase was primarily due to incremental sales from ten new stores, partially offset by a decrease in Elfa third-party sales and a decrease in shipping and delivery sales
due to the introduction of free shipping on orders over $75 in April 2015. Gross profit increased by $941, or 2.4%, compared to the prior year comparable period, primarily due to the increase in net
sales and partially offset by a 70 basis points decline in gross margin. The decline in gross margin is primarily due to a shift in timing of Our Annual elfa® Sale extension, which
resulted in decreased sales of elfa® product in the five-weeks ended April 2,2016 as compared to the prior year comparable period. Selling, general and administrative expenses
increased by $776, or 2.3%, compared to the prior year comparable period, primarily due to the increase in sales. As a percent of net sales, selling, general and administrative expenses declined 70
basis points, primarily due to improved leverage on store payroll during the
month. Basic and diluted earnings per share remained consistent at $0.01 in the five-week transition period ended April 2, 2016 as compared to the five-week period ended April 4, 2015.
Fiscal 2015 compared to fiscal 2014
Net sales
The following table summarizes our net sales for fiscal 2015 and fiscal 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2015
|
|
% total
|
|
Fiscal 2014
|
|
% total
|
|
TCS net sales
|
|
$
|
724,079
|
|
|
91.1
|
%
|
$
|
697,699
|
|
|
89.2
|
%
|
Elfa third party net sales
|
|
|
70,551
|
|
|
8.9
|
%
|
|
84,167
|
|
|
10.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
794,630
|
|
|
100.0
|
%
|
$
|
781,866
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales in fiscal 2015 increased by $12,764, or 1.6%, compared to fiscal 2014. This increase is comprised of the following components:
|
|
|
|
|
|
|
Net sales
|
|
Net sales for fiscal 2014
|
|
$
|
781,866
|
|
Incremental net sales increase (decrease) due to:
|
|
|
|
|
New stores
|
|
|
35,005
|
|
Other stores (including a $20,341, or 56.4%, increase in online sales)
|
|
|
(9,359
|
)
|
Elfa third party net sales (excluding impact of foreign currency translation)
|
|
|
(513
|
)
|
Impact of foreign currency translation on Elfa third party net sales
|
|
|
(13,103
|
)
|
Services and other
|
|
|
734
|
|
|
|
|
|
|
Net sales for fiscal 2015
|
|
$
|
794,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
increase in net sales was driven by new stores, with sixteen stores generating $35,005 of incremental sales, nine of which were opened in fiscal 2015 and seven of which were opened
in fiscal 2014. The increase in sales generated by new stores was partially offset by a $9,359 decrease in sales from other stores, primarily due to increased promotional activities in fiscal 2015.
Elfa third party net sales were negatively impacted by foreign currency translation of $13,103 during fiscal 2015. After
converting Elfa's third party net sales from Swedish krona to U.S. dollars using the fiscal 2014 conversion rate for both fiscal 2015 and fiscal 2014, Elfa third party net sales declined slightly as a
result of lower sales in Russia and Norway. This decline was almost completely offset by improved sales in Sweden.
52
Table of Contents
Gross profit and gross margin
Gross profit in fiscal 2015 increased by $5,485, or 1.2%, compared to fiscal 2014. The increase in gross profit was primarily the result of
increased sales, partially offset by lower gross margins. The following table summarizes the gross margin for fiscal 2015 and fiscal 2014 by segment and total. The segment margins include the impact
of inter-segment sales from the Elfa segment to the TCS segment:
|
|
|
|
|
|
|
|
|
|
Fiscal 2015
|
|
Fiscal 2014
|
|
TCS gross margin
|
|
|
57.7
|
%
|
|
58.3
|
%
|
Elfa gross margin
|
|
|
39.0
|
%
|
|
37.9
|
%
|
Total gross margin
|
|
|
58.3
|
%
|
|
58.6
|
%
|
TCS
gross margin decreased 60 basis points during fiscal 2015, largely due to increased promotional activities, the April 2015 introduction of everyday free shipping on orders over $75,
and a growing mix of lower-margin service sales in fiscal 2015 as compared to fiscal 2014. This was partially offset by the impact of the stronger U.S. dollar. While the introduction of everyday free
shipping on orders over $75 has reduced the gross margin rate, increased sales volumes associated with the strategy more than offset the related costs. Elfa segment gross margin increased 110 basis
points primarily due to improved production efficiencies and stabilization of freight costs, partially offset by increased direct materials costs. On a consolidated basis, gross margin declined 30
basis points, as the decline in TCS gross margin more than offset the improvement in Elfa gross margin due to a larger percentage of net sales coming from the TCS segment.
Selling, general and administrative expenses
Selling, general and administrative expenses in fiscal 2015 increased by $20,943, or 5.6%, compared to fiscal 2014. As a percentage of
consolidated net sales, selling, general and administrative expenses increased by 190 basis points. The following table summarizes selling, general and administrative expenses as a percentage of
consolidated net sales for fiscal 2015 and fiscal 2014:
|
|
|
|
|
|
|
|
|
|
Fiscal 2015% of net sales
|
|
Fiscal 2014% of net sales
|
|
TCS selling, general and administrative
|
|
|
44.9
|
%
|
|
42.7
|
%
|
Elfa selling, general and administrative
|
|
|
4.7
|
%
|
|
5.0
|
%
|
|
|
|
|
|
|
|
|
Total selling, general and administrative
|
|
|
49.6
|
%
|
|
47.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCS
selling, general and administrative expenses increased by 220 basis points as a percentage of total net sales, primarily due to a larger percentage of total net sales coming from the
TCS segment, costs incurred related to major initiatives, increased investment in store payroll for enhanced sales floor coverage and distribution center payroll due to fulfillment of an increased
number of orders shipped directly to customers, and an increase in healthcare costs. Fiscal 2015 served as an investment year for the Company to support our strategic initiatives. Elfa selling,
general and administrative expenses decreased by 30 basis points as a percentage of total net sales, primarily due to a smaller percentage of total net sales coming from the Elfa segment.
Pre-opening costs
Pre-opening costs increased by $750, or 9.1% in fiscal 2015 to $9,033, as compared to $8,283 in fiscal 2014. The increase was the result of the
opening of nine new stores and relocation of one store in fiscal 2015, as compared to the opening of seven new stores and relocation of one store in fiscal 2014.
53
Table of Contents
Depreciation and amortization
Depreciation and amortization increased by $3,219, or 10.4%, in fiscal 2015 to $34,230, as compared to $31,011 in fiscal 2014. The increase in
depreciation and amortization is primarily related to an increase in the number of stores.
Loss (gain) on disposal of assets
In fiscal 2015, we recorded a net loss of $61 on the disposal of assets, as compared to a net gain on the disposal of assets of $3,487 in fiscal
2014. On October 3, 2014, the Company completed the sale of a Norwegian subsidiary, whose primary asset was a manufacturing facility that was shut down and consolidated into a like facility in
Sweden as part of Elfa's restructuring efforts in fiscal 2012. The Company received net proceeds of $3,846 and recorded a gain in connection with the sale of this subsidiary of $3,138 in fiscal 2014.
Additionally, on October 31, 2014, the Company completed the sale of a building at Elfa. The Company received net proceeds of $912 and recorded a gain in connection with the sale of the
building of $543 in fiscal 2014.
Taxes
The provision for income taxes in fiscal 2015 was $2,909 as compared to $7,193 in fiscal 2014. The effective tax rate for fiscal 2015 was 36.1%,
as compared to 24.1% in fiscal 2014. The increase in the effective tax rate is primarily due to a $1.8 million reduction in tax expense recorded in the second quarter of fiscal 2014 related to
a refund of tax paid in a prior period, as well as a shift in the mix of domestic and foreign earnings.
Seasonality
Our storage and organization product offering makes us less susceptible to holiday shopping patterns than many retailers. Historically, our
business has realized a higher portion of net sales, operating income and cash flows from operations in the fourth fiscal quarter, attributable primarily to the impact of Our Annual elfa®
Sale, which traditionally starts on or about December 24th and runs into February. Over half of our adjusted net income was derived in the fiscal fourth quarter in fiscal years 2016,
2015, and 2014.
Liquidity and Capital Resources
We rely on cash flows from operations, a $100,000 asset-based revolving credit agreement (the "Revolving Credit Facility" as further discussed
under "Revolving Credit Facility" below), and the SEK 140.0 million (approximately $15,669 as of April 1, 2017) 2014 Elfa revolving credit facility (the "2014 Elfa Revolving
Credit Facility" as further discussed under "Elfa Senior Secured Credit Facilities and 2014 Elfa Senior Secured Credit Facilities" below) as our primary sources of liquidity. Our primary cash needs
are for merchandise inventories, direct materials, payroll, store rent, capital expenditures associated with opening new stores and updating existing stores, as well as information technology and
infrastructure, including distribution center and Elfa manufacturing facility enhancements. The most significant components of our operating assets and liabilities are merchandise inventories,
accounts receivable, prepaid expenses and other assets, accounts payable, other current and non-current liabilities, taxes receivable and taxes payable. Our liquidity fluctuates as a result of our
building inventory for key selling periods, and as a result, our borrowings are generally higher during these periods when compared to the rest of our fiscal year. Our borrowings generally increase in
our second and third fiscal quarters as we prepare for our Annual Shelving Sale, the holiday season, and Our Annual elfa® Sale. We believe that cash expected to be generated from
operations and the availability of borrowings under the Revolving Credit Facility and the 2014 Elfa Revolving Credit Facility will be
54
Table of Contents
sufficient
to meet liquidity requirements, anticipated capital expenditures and payments due under our existing credit facilities for at least the next 12 months.
At
April 1, 2017, we had $10,736 of cash and $73,189 of additional availability under the Revolving Credit Facility and approximately $15,669 of additional availability under the
2014 Elfa Revolving Credit Facility. There were $4,143 in letters of credit outstanding under the Revolving Credit Facility and other contracts at that date.
Cash flow analysis
A summary of our operating, investing and financing activities are shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
Five
Weeks
Ended
|
|
|
|
April 1,
2017
|
|
February 27,
2016
|
|
February 28,
2015
|
|
April 2,
2016
|
|
Net cash provided by (used in) operating activities
|
|
$
|
44,639
|
|
$
|
42,307
|
|
$
|
64,625
|
|
$
|
(9,540
|
)
|
Net cash used in investing activities
|
|
|
(28,508
|
)
|
|
(45,750
|
)
|
|
(43,944
|
)
|
|
(2,434
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(13,981
|
)
|
|
(7,516
|
)
|
|
(12,527
|
)
|
|
6,942
|
|
Effect of exchange rate changes on cash
|
|
|
(223
|
)
|
|
(426
|
)
|
|
(1,206
|
)
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
$
|
1,927
|
|
$
|
(11,385
|
)
|
$
|
6,948
|
|
$
|
(4,800
|
)
|
Net cash provided by operating activities
Cash from operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, deferred
taxes and the effect of changes in operating assets and liabilities.
Net
cash provided by operating activities was $44,639 for the fiscal year ended April 1, 2017, as non-cash items (primarily depreciation and amortization as well as stock-based
compensation charges) of $40,966 were combined with $14,953 of net income and partially offset by an increase in working capital of $11,280. The increase in working capital during fiscal 2016 was
primarily due to an increase in inventory and accounts receivable, partially offset by increases in accounts payable and accrued liabilities and income taxes payable. The increase in inventory, as
well as the increase in accounts payable and accrued liabilities, is primarily due to a change in promotional campaign cadency, combined with an increase in the number of stores. The increase in
accounts receivable is primarily related to an increase in trade receivables for business sales, as well as a shift in timing of receipt of rebate and landlord receivables during the fiscal year. The
increase in income taxes payable was primarily related to a shift in the timing of tax payments during the fiscal year.
Net
cash provided by operating activities was $42,307 for the fiscal year ended February 27, 2016, as non-cash items (primarily depreciation and amortization as well as
stock-based compensation charges) of $39,047 were combined with $5,142 of net income and partially offset by an increase in working capital of $1,882. The increase in working capital during fiscal
2015 was primarily due to an increase in accounts receivable and inventory, partially offset by an increase in accounts payable and accrued liabilities. The increase in accounts receivable, as well as
the increase in accounts payable and accrued liabilities, was primarily related to a shift in timing of the end of Our Annual elfa® Sale in fiscal 2015. The increase in inventory was
primarily related to the addition of nine new stores during the fiscal year.
Net
cash provided by operating activities was $64,625 for the fiscal year ended February 28, 2015, as non-cash items (primarily depreciation and amortization as well as
stock-based compensation charges) of $31,692 were combined with $22,673 of net income and a decrease in working capital of
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$10,260.
The decrease in working capital during fiscal 2014 was primarily due to increased collections on credit card receivables in fiscal 2014 due to the extension of the fiscal 2013 Annual
elfa® Sale as well as increased collections from landlords for tenant improvement allowances during fiscal 2014.
Net
cash used in operating activities was $9,540 for the five-weeks ended April 2, 2016, as an increase in working capital of $14,073 was partially offset by non-cash items
(primarily depreciation and amortization as well as stock-based compensation charges) of $4,179, combined with $354 of net income. The increase in working capital during the five weeks ended
April 2, 2016 was primarily due to a decrease in accounts payable and accrued liabilities, which was primarily related to delivery of customer orders related to the end of Our Annual
elfa® Sale in fiscal 2015, interest payments on long-term debt, and a shift in timing of other payments during the five weeks ended April 2, 2016.
Net cash used in investing activities
Investing activities consist primarily of capital expenditures for new store openings, existing store remodels, infrastructure, information
systems, and our distribution center.
Our
total capital expenditures for the fiscal year ended April 1, 2017 were $28,515 with new store openings and existing store remodels accounting for $16,001. The remaining
capital expenditures of $12,514 were primarily for investments in information systems and distribution center equipment, as well as Elfa manufacturing facility enhancements.
Our
total capital expenditures for the fiscal year ended February 27, 2016 were $46,431 with new store openings and existing store remodels accounting for $19,226. The remaining
capital expenditures of $27,205 were primarily for strategic initiatives and distribution center automation, as well as investments in infrastructure to support growth and Elfa manufacturing facility
enhancements.
Our
total capital expenditures for the fiscal year ended February 28, 2015 were $48,740 with new store openings and existing store remodels accounting for the majority of spending
at $30,299. The remaining capital expenditures of $18,441 were primarily for investments in infrastructure to support growth and strategic initiatives, as well as Elfa manufacturing facility
enhancements. Additionally, the Company received net proceeds of $4,796 during fiscal 2014, of which $3,846 related to the sale of a Norwegian subsidiary, whose primary asset was a manufacturing
facility that was shut down and consolidated into a like facility in Sweden as part of Elfa's restructuring efforts in fiscal 2012, and $912 related to the sale of a building at Elfa.
Our
total capital expenditures for the five-weeks ended April 2, 2016 were $2,435 with new store openings and existing store remodels accounting for $790. The remaining capital
expenditures of $1,645 were primarily for investments in information systems and Elfa manufacturing facility enhancements, as well as distribution center equipment.
Net cash used in financing activities
Financing activities consist primarily of borrowings and payments under the Senior Secured Term Loan Facility, the Revolving Credit Facility,
the Elfa Senior Secured Credit Facilities, and the 2014 Elfa Senior Secured Credit Facilities.
Net
cash used in financing activities was $13,981 for the fiscal year ended April 1, 2017, which was mainly attributable to payments of $5,496 primarily on indebtedness
outstanding under the Senior Secured Term Loan Facility and the 2014 Elfa Senior Secured Term Loan Facility. In addition, the Company made net payments of $5,000 on the Revolving Credit Facility
during fiscal 2016, and made net payments of $3,485 on the 2014 Elfa Revolving Credit Facility.
Net
cash used in financing activities was $7,516 for the fiscal year ended February 27, 2016, which was mainly attributable to payments of $5,246 on indebtedness outstanding under
the Senior Secured
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Term
Loan Facility and the 2014 Elfa Senior Secured Term Loan Facility. The Company borrowed and repaid $33,000 on the Revolving Credit Facility during fiscal 2015, and made net payments of $2,063 on
the 2014 Elfa Revolving Credit Facility (as further discussed and defined under "Elfa Senior Secured
Credit Facilities and 2014 Elfa Senior Secured Credit Facilities" below). The Company also paid $266 in debt issuance costs related to Amendment No. 2 to the Revolving Credit Facility (as
further discussed and defined under "Revolving Credit Facility" below). In addition, the Company received proceeds of $59 from the exercise of stock options.
Net
cash used in financing activities was $12,527 for the fiscal year ended February 28, 2015, which was mainly attributable to net payments of $11,063 on the Elfa Revolving
Credit Facility, 2014 Elfa Revolving Credit Facility, and the Short Term Credit Facility (as further discussed and defined under "Elfa Senior Secured Credit Facilities and 2014 Elfa Senior Secured
Credit Facilities" below). The Company made payments of $36,591 on indebtedness outstanding under the Elfa Term Loan Facility, the 2014 Elfa Term Loan Facility, the Senior Secured Term Loan Facility,
and the Revolving Credit Facility, which were partially offset by borrowings of $26,000 on the Revolving Credit Facility and borrowings of $8,389 related to the new 2014 Elfa Term Loan Facility. In
addition, the Company received proceeds of $742 from the exercise of stock options.
Net
cash used in financing activities was $6,942 for the five-weeks ended April 2, 2016, which was mainly attributable to borrowings of $5,000 on the Revolving Credit Facility and
net borrowings of $2,886 on the 2014 Elfa Revolving Credit Facility. The Company also made payments of $944 primarily on indebtedness outstanding under the Senior Secured Term Loan Facility during the
period.
As
of April 1, 2017, we had a total of $73,189 of unused borrowing availability under the Revolving Credit Facility, and $3,590 in letters of credit issued under the Revolving
Credit Facility. There were no borrowings outstanding under the Revolving Credit Facility as of April 1, 2017.
As
of April 1, 2017, Elfa had a total of $15,669 of unused borrowing availability under the 2014 Elfa Revolving Credit Facility and no borrowings outstanding under the 2014 Elfa
Revolving Credit Facility.
Senior Secured Term Loan Facility
On April 6, 2012, The Container Store Group, Inc., The Container Store, Inc. and certain of its domestic subsidiaries
entered into a credit agreement with JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and the lenders party thereto (as amended, the "Senior Secured Term Loan Facility"). Under
the Senior Secured Term Loan Facility, we had $316,760 in outstanding borrowings as of April 1, 2017 and the interest rate on such borrowings is LIBOR + 3.25%, subject to a LIBOR
floor of 1.00%. The Senior Secured Term Loan Facility provides that we are required to make quarterly principal repayments of $906 through December 31, 2018, with a balloon payment for the
remaining balance due on April 6, 2019.
The
Senior Secured Term Loan Facility is secured by (a) a first priority security interest in substantially all of our assets (excluding stock in foreign subsidiaries in excess of
65%, assets of non-guarantors and subject to certain other exceptions) (other than the collateral that secures the Revolving Credit Facility described below on a first-priority basis) and (b) a
second priority security interest in the assets securing the Revolving Credit Facility described below on a first-priority basis. Obligations under the Senior Secured Term Loan Facility are guaranteed
by The Container Store Group, Inc. and each of The Container Store, Inc.'s U.S. subsidiaries. The Senior Secured Term Loan Facility contains a number of covenants that, among other
things, restrict our ability, subject to specified exceptions, to incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other
companies; liquidate or dissolve ourselves, engage in businesses that are not in a related line of business; make loans, advances or guarantees; engage in transactions with affiliates; and make
investments. In addition, the financing agreements contain certain
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cross-default
provisions. As of April 1, 2017, we were in compliance with all covenants and no Event of Default (as such term is defined in the Senior Secured Term Loan Facility) had occurred.
Revolving Credit Facility
On April 6, 2012, The Container Store Group, Inc., The Container Store, Inc. and certain of its domestic subsidiaries
entered into an asset-based revolving credit agreement with the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and Wells Fargo Bank, National
Association, as Syndication Agent (as amended, the "Revolving Credit Facility"). The aggregate principal amount of the facility is $100,000. Borrowings under the Revolving Credit Facility accrue
interest at LIBOR+1.25% and the maturity date is the earlier of (x) October 8, 2020 and (y) January 6, 2019, if any of The Container Store, Inc.'s obligations under
its term loan credit facility remain outstanding on such date and have not been refinanced with debt that has a final maturity date that is no earlier than April 6, 2019 or subordinated debt.
In addition, the Revolving Credit Facility includes an uncommitted incremental revolving facility in the amount of $50,000, which is subject to receipt of lender commitments and satisfaction of
specified conditions.
The
Revolving Credit Facility provides that proceeds are to be used for working capital and other general corporate purposes, and allows for swing line advances of up to $15,000 and the
issuance of letters of credit of up to $40,000.
The
availability of credit at any given time under the Revolving Credit Facility is limited by reference to a borrowing base formula based upon numerous factors, including the value of
eligible inventory, eligible accounts receivable, and reserves established by the administrative agent. As a result of the borrowing base formula, the actual borrowing availability under the Revolving
Credit Facility could be less than the stated amount of the Revolving Credit Facility (as reduced by the actual borrowings and outstanding letters of credit under the Revolving Credit Facility).
The
Revolving Credit Facility is secured by (a) a first-priority security interest in substantially all of our personal property, consisting of inventory, accounts receivable,
cash, deposit accounts, and other general intangibles, and (b) a second-priority security interest in the collateral that secures the Senior Secured Term Loan Facility on a first-priority
basis, as described above (excluding stock in foreign subsidiaries in excess of 65%, and assets of non-guarantor subsidiaries and subject to certain other exceptions). Obligations under the Revolving
Credit Facility are guaranteed by The Container Store Group, Inc. and each of The Container Store, Inc.'s U.S. subsidiaries.
The
Revolving Credit Facility contains a number of covenants that, among other things, restrict our ability, subject to specified exceptions, to incur additional debt; incur additional
liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves, engage in businesses that are not in a related line of business;
make loans, advances or guarantees; engage in transactions with affiliates; and make investments. In addition, the financing agreements contain certain cross-default provisions. We are required to
maintain a consolidated fixed-charge coverage ratio of 1.0 to 1.0 if excess availability is less than $10,000 at any time. As of April 1, 2017, we were in compliance with all covenants and no
Event of Default (as such term is defined in the Revolving Credit Facility) had occurred.
Elfa Senior Secured Credit Facilities and 2014 Elfa Senior Secured Credit Facilities
On April 27, 2009, Elfa entered into the Elfa Senior Secured Credit Facilities with Tjustbygdens Sparbank AB, which we refer to as
Sparbank, which consisted of a SEK 137.5 million term loan facility, which we refer to as the Elfa Term Loan Facility, and the Elfa Revolving Credit Facility and, together with the Elfa Term
Loan Facility, the Elfa Senior Secured Credit Facilities. On January 27, 2012, Sparbank transferred all of its commitments, rights and obligations under the Elfa Senior Secured Credit
Facilities to Swedbank AB. Borrowings under the Elfa Senior Secured Credit Facilities accrued
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interest
at a rate of STIBOR+1.775%. Elfa was required to make quarterly principal repayments under the Elfa Term Loan Facility of SEK 6.25 million through maturity. The Elfa Senior Secured
Credit Facilities were secured by first priority security interests in substantially all of Elfa's assets. The Elfa Term Loan Facility and the Elfa Revolving Credit Facility matured on
August 30, 2014 and were replaced with the 2014 Elfa Senior Secured Credit Facilities as discussed below.
On
April 1, 2014, Elfa entered into a master credit agreement with Nordea Bank AB ("Nordea"), which consists of a SEK 60.0 million (approximately $6,715 as of
April 1, 2017) term loan facility (the "2014 Elfa Term Loan Facility") and a SEK 140.0 million (approximately $15,669 as of April 1, 2017) revolving credit facility (the "2014
Elfa Revolving Credit Facility," and together with the 2014 Elfa Term Loan Facility, the "2014 Elfa Senior Secured Credit Facilities"). The 2014 Elfa Senior Secured Credit Facilities term began on
August 29, 2014 and matures on August 29, 2019. Elfa is required to make quarterly principal payments under the 2014 Elfa Term Loan Facility in the amount of SEK 3.0 million
(approximately $336 as of April 1, 2017) through maturity. The 2014 Elfa Term Loan Facility bears interest at STIBOR + 1.7% and the 2014 Elfa Revolving Credit Facility bears
interest at Nordea's base rate + 1.4%. In the fourth quarter of fiscal 2016, Elfa and Nordea agreed that the stated rates would apply through maturity.
The
2014 Elfa Senior Secured Credit Facilities contains a number of covenants that, among other things, restrict Elfa's ability, subject to specified exceptions, to incur additional
liens, sell or dispose of assets, merge with other companies, engage in businesses that are not in a related line of business and make guarantees. In addition, Elfa is required to maintain
(i) a consolidated equity ratio (as defined in the 2014 Elfa Senior Secured Credit Facilities) of not less than 30% in year one and not less than 32.5% thereafter and (ii) a consolidated
ratio of net debt to EBITDA (as defined in the 2014 Elfa Senior Secured Credit Facilities) of less than 3.2, the consolidated equity ratio tested at the end of each calendar quarter and the ratio of
net debt to EBITDA tested as of the end of each fiscal quarter. As of April 1, 2017, Elfa was in compliance with all covenants and no Event of Default (as defined in the 2014 Elfa Senior
Secured Credit Facilities) had occurred.
On
May 13, 2014, Elfa entered into a credit facility with Nordea for SEK 15.0 million (the "Short Term Credit Facility"). The Short Term Credit Facility accrued interest at
2.53% and matured on August 28, 2014, at which time all borrowings under the agreement were paid in full to Nordea (approximately $2,152 as of August 28, 2014). The total amount of
borrowings available under the Short Term Credit Facility was used to pay a mortgage owed on the Poland manufacturing facility in full in the first quarter of fiscal 2014.
Critical accounting policies and estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to
make estimates and assumptions about future events that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and
liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates, and judgments on an on-going basis. Management bases its estimates and judgments on
historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions.
Management
evaluated the development and selection of its critical accounting policies and estimates and believes that the following involve a higher degree of judgment or complexity and
are most significant to reporting our results of operations and financial position, and are therefore discussed as critical. The following critical accounting policies reflect the significant
estimates and judgments used in the preparation of our consolidated financial statements. With respect to critical accounting policies, even a relatively minor variance between actual and expected
experience can
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potentially
have a materially favorable or unfavorable impact on subsequent results of operations. More information on all of our significant accounting policies can be found in
Note 1
Nature of Business and Summary of Significant Accounting Policies
to our audited consolidated financial statements included
elsewhere in this Annual Report on Form 10-K.
Revenue recognition
We recognize revenues and the related cost of goods sold for our TCS segment when merchandise is received by our customers, which reflects an
estimate of shipments that have not yet been received by the customer. This estimate is based on shipping terms and historical delivery times. We recognize revenues and the related cost of goods sold
for our Elfa segment upon shipment.
We
recognize shipping and handling fees as revenue when the merchandise is shipped to the customer. Costs of shipping and handling are included in cost of goods sold. We recognize fees
for installation and other services as revenue upon completion of the service to the customer. Costs of installation and other services are included in cost of goods sold.
Sales
tax collected is not recognized as revenue as it is ultimately remitted to governmental authorities.
We
reserve for projected merchandise returns based on historical experience and various other assumptions that we believe to be reasonable. The reserve reduces sales and cost of sales,
accordingly. Merchandise exchanges of similar product and price are not considered merchandise returns and, therefore, are excluded when calculating the sales returns reserve.
Inventories
Inventories at retail stores are comprised of finished goods and are valued at the lower of cost or estimated net realizable value, with cost
determined on a weighted-average cost method including associated freight costs. Manufacturing inventories are comprised of raw materials, work in process, and finished goods and are valued on a
first-in, first out basis using full absorption accounting which includes material, labor, other variable costs, and other applicable manufacturing overhead. To determine if the value of inventory is
recoverable at cost, we consider current and anticipated demand, customer preference and the merchandise age. The significant estimates used in inventory valuation are obsolescence (including excess
and slow-moving inventory) and estimates of inventory shrinkage. We adjust our inventory for obsolescence based on historical trends, aging reports, specific identification and our estimates of future
retail sales prices.
Reserves
for shrinkage are estimated and recorded throughout the period as a percentage of cost of sales based on historical shrinkage results and current inventory levels. Actual
shrinkage is recorded throughout the year based upon periodic cycle counts. Actual inventory shrinkage can vary from estimates due to factors including the mix of our inventory and execution against
loss prevention initiatives in our stores and distribution center.
Due
to these factors, our obsolescence and shrinkage reserves contain uncertainties. Both estimates have calculations that require management to make assumptions and to apply judgments
regarding a number of factors, including market conditions, the selling environment, historical results and current inventory trends. If actual obsolescence or shrinkage estimates change from our
original estimates, we will adjust our inventory reserves accordingly throughout the period. Management does not believe that changes in the assumptions used in these estimates would have a
significant effect on our inventory balances. We have not made any material changes to our assumptions included in the calculations of the obsolescence and shrinkage reserves during the periods
presented.
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Income taxes
We account for income taxes utilizing FASB ASC 740,
Income Taxes
("ASC 740"). ASC 740 requires
an asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. Valuation allowances are established against deferred tax assets when it is more-likely-than-not that the realization of those deferred tax assets will not
occur. Valuation allowances are released as positive evidence of future taxable income sufficient to realize the underlying deferred tax assets becomes available (e.g., three-year cumulative
financial income).
Deferred
tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse. The effect on deferred taxes
from a change in the tax rate is recognized through continuing operations in the period that includes the enactment of the
change. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future.
We
operate in certain jurisdictions outside the United States. ASC 740-30 provides that the undistributed earnings of a foreign subsidiary be accounted for as a temporary difference
under the presumption that all undistributed earnings will be distributed to the parent company as a dividend. Sufficient evidence of the intent to permanently reinvest the earnings in the
jurisdiction where earned precludes a company from recording the temporary difference. For purposes of ASC 740-30, we are partially reinvested in our Swedish subsidiary Elfa and thus do not record a
temporary difference. We are partially reinvested since we have permanently reinvested our past earnings at Elfa; however, we do not assert that all future earnings will be reinvested into Elfa.
Leases
Rent expense on operating leases, including rent holidays and scheduled rent increases, is recorded on a straight-line basis over the term of
the lease, commencing on the date we take possession of the leased property. Rent expense is recorded in selling, general and administrative expenses. Pre-opening rent expense is recorded in
pre-opening costs in the consolidated statement of operations. The net excess of rent expense over the actual cash paid has been recorded as deferred rent in the accompanying consolidated balance
sheets. Tenant improvement allowances are also included in the accompanying consolidated balance sheets as deferred rent liabilities and are amortized as a reduction of rent expense over the term of
the lease from the possession date. Contingent rental payments, typically based on a percentage of sales, are recognized in rent expense when payment of the contingent rent is probable.
Stock-based compensation
The Company accounts for stock-based compensation in accordance with FASB ASC 718,
Compensation-Stock
Compensation
("ASC 718"), which requires the fair value of stock-based payments to be recognized in the consolidated financial statements as compensation expense over the
requisite service period. For time-based awards, compensation expense is recognized on a straight line basis, net of forfeitures, over the requisite service period for awards that actually vest. For
performance-based awards, compensation expense is estimated based on achievement of the performance condition and is recognized using the accelerated attribution method over the requisite service
period for awards that actually vest. Stock-based compensation expense is recorded in the stock-based compensation line in the consolidated statements of operations.
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Stock Options
The Company estimates the fair value of each stock option grant on the date of grant based upon the Black-Scholes option-pricing model. This
model requires various significant judgmental assumptions in order to derive a final fair value determination for each type of award including:
-
-
Expected TermThe expected term of the options represents the period of time between the grant date of the options and the date the
options are either exercised or canceled, including an estimate of options still outstanding.
-
-
Expected VolatilityThe expected volatility incorporates historical and implied volatility of comparable public companies for a
period approximating the expected term.
-
-
Expected Dividend YieldThe expected dividend yield is based on the Company's expectation of not paying dividends on its common
stock for the foreseeable future.
-
-
Risk-Free Interest RateThe risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and
with a maturity that approximates the expected term.
Restricted Stock Awards
The fair value of each restricted stock award is determined based on the closing price of the Company's common stock as reported on The New York
Stock Exchange on the grant date.
Intangibles and long-lived assets
Goodwill
We evaluate goodwill annually to determine whether it is impaired. Goodwill is also tested between annual impairment tests if an event occurs or
circumstances change that would indicate that the fair value of a reporting unit is less than its carrying amount. Conditions that may indicate impairment include, but are not limited to, a
significant adverse change in customer demand or business climate that could affect the value of an asset. If an impairment indicator exists, we test goodwill for recoverability. We have identified
two reporting units and we have selected the first day of the fourth fiscal quarter to perform our annual goodwill impairment testing.
Prior
to testing goodwill for impairment, we perform a qualitative assessment to determine whether it is more likely than not that goodwill is impaired for each reporting unit. If the
results of the qualitative assessment indicate that the likelihood of impairment is greater than 50%, then we perform a two-step impairment test on goodwill. In the first step, we compare the fair
value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired and
we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second
step of the impairment test in order to determine the implied fair value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then we
would record an impairment loss equal to the difference.
The
fair value of each reporting unit is determined by using a discounted cash flow analysis using the income approach, as well as a market approach to compare the estimated fair value
to comparable companies. The determination of fair value requires assumptions and estimates of many critical factors, including among others, our nature and our history, financial and economic
conditions affecting us, our industry and the general economy, past results, our current operations and future prospects, sales of similar businesses or capital stock of publicly held similar
businesses, as well as prices, terms and conditions affecting past sales of similar businesses. Forecasts of future operations are based, in part, on operating results and management's expectations as
to future market conditions. These types of
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analyses
contain uncertainties because they require management to make assumptions and to apply judgments to estimate industry economic factors and the profitability of future business strategies. If
actual results are not consistent with our estimates and assumptions, we may be exposed to future impairment losses that could be material.
Trade names
We annually evaluate whether the trade names continue to have an indefinite life. Trade names are reviewed for impairment annually in the fourth
quarter and may be reviewed more frequently if indicators of impairment are present. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer
demand or business climate that could affect the value of an asset, a product recall or an adverse action or assessment by a regulator.
The
impairment review is performed by comparing the carrying value to the estimated fair value, determined using a discounted cash flow methodology. If the recorded carrying value of the
trade name exceeds its estimated fair value, an impairment charge is recorded to write the trade name down to its estimated fair value. Factors used in the valuation of intangible assets with
indefinite lives include, but are not limited to, future revenue growth assumptions, estimated market royalty rates that could be derived from the licensing of our trade names to third parties, and a
rate used to discount the estimated royalty cash flow projections to their present value (or estimated fair value).
The
valuation of trade names requires assumptions and estimates of many critical factors, which are consistent with the factors discussed under "Goodwill" above. Forecasts of future
operations are based, in part, on operating results and management's expectations as to future market conditions. These types of analyses contain uncertainties because they require management to make
assumptions and to apply judgments to estimate industry economic factors and the profitability of future business strategies.
If actual results are not consistent with our estimates and assumptions, we may be exposed to future impairment losses that could be material.
Long-lived assets
Long-lived assets, such as property and equipment and intangible assets subject to amortization, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in
customer demand or business climate that could affect the value of an asset, a product recall or an adverse action or assessment by a regulator. If the sum of the estimated undiscounted future cash
flows related to the asset are less than the carrying value, we recognize a loss equal to the difference between the carrying value and the fair value, usually determined by the estimated discounted
cash flow analysis of the asset.
For
our TCS segment, we generally evaluate long-lived tangible assets at the store level, which is the lowest level at which independent cash flows can be identified. We evaluate
corporate assets or other long-lived assets that are not store-specific at the consolidated level. For our Elfa segment, we evaluate long-lived tangible assets at the segment level.
Since
there is typically no active market for our long-lived tangible assets, we estimate fair values based on the expected future cash flows. We estimate future cash flows based on
store-level historical results, current trends, and operating and cash flow projections. Our estimates are subject to uncertainty and may be affected by a number of factors outside our control,
including general economic conditions and the competitive environment. While we believe our estimates and judgments about future cash flows are reasonable, future impairment charges may be required if
the expected cash flow estimates, as projected, do not occur or if events change requiring us to revise our estimates.
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Contractual obligations
We enter into long-term obligations and commitments in the normal course of business, primarily debt obligations and non-cancelable operating
leases. As of April 1, 2017, our contractual cash obligations over the next several periods were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
Total
|
|
Within
1 Year
|
|
1 - 3 Years
|
|
3 - 5 Years
|
|
After 5 Years
|
|
Recorded contractual obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term loans
|
|
$
|
320,118
|
|
$
|
4,966
|
|
$
|
315,152
|
|
$
|
|
|
$
|
|
|
Revolving loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
901
|
|
|
379
|
|
|
522
|
|
|
|
|
|
|
|
Other long-term obligations
|
|
|
119
|
|
|
100
|
|
|
19
|
|
|
|
|
|
|
|
Unrecorded contractual obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated interest(1)
|
|
|
30,091
|
|
|
15,443
|
|
|
14,648
|
|
|
|
|
|
|
|
Operating leases(2)
|
|
|
558,324
|
|
|
81,680
|
|
|
147,652
|
|
|
111,876
|
|
|
217,116
|
|
Letters of credit
|
|
|
4,143
|
|
|
4,143
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations(3)
|
|
|
33,600
|
|
|
27,812
|
|
|
5,579
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(4)
|
|
$
|
947,296
|
|
$
|
134,523
|
|
$
|
483,572
|
|
$
|
112,085
|
|
$
|
217,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
For
purposes of this table, interest has been estimated based on interest rates in effect for our indebtedness as of April 1, 2017, and estimated borrowing
levels in the future. Actual borrowing levels and interest costs may differ.
-
(2)
-
We
enter into operating leases during the normal course of business. Most lease arrangements provide us with the option to renew the leases at defined terms. The
future operating lease obligations would change if we were to exercise these options, or if we were to enter into additional operating leases.
-
(3)
-
Purchase
obligations include legally binding contracts such as firm commitments for inventory, equipment purchases, marketing-related contracts, software
acquisition/license commitments, as well as commitments to make capital expenditures, and legally binding service contracts. Purchase orders for other services are not included in the table above.
Purchase orders represent authorizations to purchase rather than binding agreements. For the purposes of this table, contractual obligations for the purchase of goods or services are defined as
agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the
approximate timing of the transaction.
-
(4)
-
The
table above excludes deferred lease incentives and defined benefit pension plan obligations which were included in "Deferred rent and other long-term
liabilities" in the consolidated balance sheet as of April 1, 2017. Deferred lease incentives were excluded from the table above as such amounts do not represent known contractual obligations
for future cash payments. Defined benefit pension plan obligations were excluded from the table as the timing of the forthcoming cash payments is uncertain.
Off Balance Sheet Arrangements
We are not party to any off balance sheet arrangements.
Recent Accounting Pronouncements
Please refer to Note 1
Nature of Business and Summary of Significant Accounting
Policies
to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a summary of recent accounting pronouncements.
64
Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders of
The Container Store Group, Inc.
We
have audited the accompanying consolidated balance sheets of The Container Store Group, Inc. (the Company) as of April 1, 2017 and February 27, 2016, and the
related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for the year ended April 1, 2017, each of the years in the two-year period ended
February 27, 2016, and the related consolidated statements of operations, comprehensive income and cash flows for the five week transition period ended April 2, 2016. Our audits also
included the financial statement schedule listed in the Index at Item 15(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Container Store Group, Inc. at
April 1, 2017 and February 27, 2016, and the consolidated results of its operations and its cash flows for the year ended April 1, 2017, each of the years in the two-year period
ended February 27, 2016, and the five week transition period ended April 2, 2016 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/
Ernst and Young LLP
Dallas, Texas
June 1, 2017
66
Table of Contents
The Container Store Group, Inc.
Consolidated balance sheets
|
|
|
|
|
|
|
|
(In thousands)
|
|
April 1,
2017
|
|
February 27,
2016
|
|
Assets
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
10,736
|
|
$
|
13,609
|
|
Accounts receivable, net
|
|
|
27,476
|
|
|
28,843
|
|
Inventory
|
|
|
103,120
|
|
|
86,435
|
|
Prepaid expenses
|
|
|
10,550
|
|
|
8,692
|
|
Income taxes receivable
|
|
|
16
|
|
|
157
|
|
Other current assets
|
|
|
10,787
|
|
|
8,695
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
162,685
|
|
|
146,431
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
165,498
|
|
|
176,117
|
|
Goodwill
|
|
|
202,815
|
|
|
202,815
|
|
Trade names
|
|
|
226,685
|
|
|
228,368
|
|
Deferred financing costs, net
|
|
|
320
|
|
|
419
|
|
Noncurrent deferred tax assets, net
|
|
|
2,139
|
|
|
2,090
|
|
Other assets
|
|
|
1,692
|
|
|
1,879
|
|
|
|
|
|
|
|
|
|
Total noncurrent assets
|
|
|
599,149
|
|
|
611,688
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
761,834
|
|
$
|
758,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share and per share amounts)
|
|
April 1,
2017
|
|
February 27,
2016
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
44,762
|
|
$
|
40,274
|
|
Accrued liabilities
|
|
|
60,107
|
|
|
69,635
|
|
Revolving lines of credit
|
|
|
|
|
|
721
|
|
Current portion of long-term debt
|
|
|
5,445
|
|
|
5,373
|
|
Income taxes payable
|
|
|
2,738
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
113,052
|
|
|
116,003
|
|
Noncurrent liabilities:
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
312,026
|
|
|
316,135
|
|
Noncurrent deferred tax liabilities, net
|
|
|
80,679
|
|
|
80,720
|
|
Deferred rent and other long-term liabilities
|
|
|
34,287
|
|
|
38,193
|
|
|
|
|
|
|
|
|
|
Total noncurrent liabilities
|
|
|
426,992
|
|
|
435,048
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
540,044
|
|
|
551,051
|
|
Commitments and contingencies
(Note 12)
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 250,000,000 shares authorized; 48,045,114 shares issued at April 1, 2017, 47,986,975 shares issued at February 27,
2016
|
|
|
480
|
|
|
480
|
|
Additional paid-in capital
|
|
|
859,102
|
|
|
856,879
|
|
Accumulated other comprehensive loss
|
|
|
(22,643
|
)
|
|
(19,835
|
)
|
Retained deficit
|
|
|
(615,149
|
)
|
|
(630,456
|
)
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
221,790
|
|
|
207,068
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
761,834
|
|
$
|
758,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
67
Table of Contents
The Container Store Group, Inc.
Consolidated statements of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
Five Weeks
Ended
April 2,
2016
|
|
(In thousands, except share and per share amounts)
|
|
April 1,
2017
|
|
February 27,
2016
|
|
February 28,
2015
|
|
Net sales
|
|
$
|
819,930
|
|
$
|
794,630
|
|
$
|
781,866
|
|
$
|
69,218
|
|
Cost of sales (excluding depreciation and amortization)
|
|
|
343,860
|
|
|
331,079
|
|
|
323,800
|
|
|
29,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
476,070
|
|
|
463,551
|
|
|
458,066
|
|
|
40,195
|
|
Selling, general, and administrative expenses (excluding depreciation and amortization)
|
|
|
387,948
|
|
|
393,810
|
|
|
372,867
|
|
|
34,504
|
|
Stock-based compensation
|
|
|
1,989
|
|
|
1,556
|
|
|
1,289
|
|
|
147
|
|
Pre-opening costs
|
|
|
6,852
|
|
|
9,033
|
|
|
8,283
|
|
|
191
|
|
Depreciation and amortization
|
|
|
37,124
|
|
|
34,230
|
|
|
31,011
|
|
|
3,009
|
|
Other expenses
|
|
|
1,058
|
|
|
|
|
|
1,132
|
|
|
102
|
|
Loss (gain) on disposal of assets
|
|
|
57
|
|
|
61
|
|
|
(3,487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
41,042
|
|
|
24,861
|
|
|
46,971
|
|
|
2,242
|
|
Interest expense
|
|
|
16,687
|
|
|
16,810
|
|
|
17,105
|
|
|
1,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
|
24,355
|
|
|
8,051
|
|
|
29,866
|
|
|
692
|
|
Provision for income taxes
|
|
|
9,402
|
|
|
2,909
|
|
|
7,193
|
|
|
338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14,953
|
|
$
|
5,142
|
|
$
|
22,673
|
|
$
|
354
|
|
Net income per common sharebasic and diluted
|
|
$
|
0.31
|
|
$
|
0.11
|
|
$
|
0.47
|
|
$
|
0.01
|
|
Weighted-average common sharesbasic
|
|
|
47,996,746
|
|
|
47,985,717
|
|
|
47,971,243
|
|
|
47,986,975
|
|
Weighted-average common sharesdiluted
|
|
|
48,016,010
|
|
|
47,985,717
|
|
|
48,520,865
|
|
|
47,986,975
|
|
See accompanying notes.
68
Table of Contents
The Container Store Group, Inc.
Consolidated statements of comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended
|
|
|
|
|
|
Five Weeks
Ended
April 2,
2016
|
|
(In thousands)
|
|
April 1,
2017
|
|
February 27,
2016
|
|
February 28,
2015
|
|
Net income
|
|
$
|
14,953
|
|
$
|
5,142
|
|
$
|
22,673
|
|
$
|
354
|
|
Unrealized (loss) gain on financial instruments, net of tax (benefit) provision of $(85), $606, $(604) and $7
|
|
|
(138
|
)
|
|
853
|
|
|
(935
|
)
|
|
12
|
|
Pension liability adjustment, net of tax provision (benefit) of $142, $39, $(4) and $0
|
|
|
(386
|
)
|
|
175
|
|
|
(14
|
)
|
|
(66
|
)
|
Foreign currency translation adjustment
|
|
|
(6,283
|
)
|
|
(2,521
|
)
|
|
(19,076
|
)
|
|
4,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
8,146
|
|
$
|
3,649
|
|
$
|
2,648
|
|
$
|
4,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
69
Table of Contents
The Container Store Group, Inc.
Consolidated statements of shareholders' equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
|
Accumulated
other
comprehensive
income (loss)
|
|
|
|
|
|
|
|
|
|
Additional
paid-in
capital
|
|
Retained
deficit
|
|
Total
shareholders'
equity
|
|
(In thousands, except share amounts)
|
|
Par value
|
|
Shares
|
|
Amount
|
|
Balance at March 1, 2014
|
|
$
|
0.01
|
|
|
47,941,180
|
|
$
|
479
|
|
$
|
853,295
|
|
$
|
1,683
|
|
$
|
(658,271
|
)
|
$
|
197,186
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,673
|
|
|
22,673
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
1,289
|
|
|
|
|
|
|
|
|
1,289
|
|
Excess tax provision from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
(4
|
)
|
Stock option exercises
|
|
|
|
|
|
42,480
|
|
|
1
|
|
|
742
|
|
|
|
|
|
|
|
|
743
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,076
|
)
|
|
|
|
|
(19,076
|
)
|
Unrealized loss on financial instruments, net of $604 tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(935
|
)
|
|
|
|
|
(935
|
)
|
Pension liability adjustment, net of $4 tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2015
|
|
|
|
|
|
47,983,660
|
|
|
480
|
|
|
855,322
|
|
|
(18,342
|
)
|
|
(635,598
|
)
|
|
201,862
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,142
|
|
|
5,142
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
1,556
|
|
|
|
|
|
|
|
|
1,556
|
|
Excess tax provision from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
(58
|
)
|
|
|
|
|
|
|
|
(58
|
)
|
Stock option exercises
|
|
|
|
|
|
3,315
|
|
|
|
|
|
59
|
|
|
|
|
|
|
|
|
59
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,521
|
)
|
|
|
|
|
(2,521
|
)
|
Unrealized gain on financial instruments, net of $606 tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
853
|
|
|
|
|
|
853
|
|
Pension liability adjustment, net of $39 tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175
|
|
|
|
|
|
175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 27, 2016
|
|
|
|
|
|
47,986,975
|
|
|
480
|
|
|
856,879
|
|
|
(19,835
|
)
|
|
(630,456
|
)
|
|
207,068
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
354
|
|
|
354
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
|
147
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,053
|
|
|
|
|
|
4,053
|
|
Unrealized gain on financial instruments, net of $7 tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
12
|
|
Pension liability adjustment, net of $0 tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(66
|
)
|
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 2, 2016
|
|
|
|
|
|
47,986,975
|
|
|
480
|
|
|
857,026
|
|
|
(15,836
|
)
|
|
(630,102
|
)
|
|
211,568
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,953
|
|
|
14,953
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
1,989
|
|
|
|
|
|
|
|
|
1,989
|
|
Vesting of restricted stock awards
|
|
|
|
|
|
31,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes related to net share settlement of restricted stock awards
|
|
|
|
|
|
|
|
|
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
(39
|
)
|
Common stock granted to non-employees
|
|
|
|
|
|
26,923
|
|
|
|
|
|
135
|
|
|
|
|
|
|
|
|
135
|
|
Excess tax provision from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
(9
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,283
|
)
|
|
|
|
|
(6,283
|
)
|
Unrealized loss on financial instruments, net of $85 tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(138
|
)
|
|
|
|
|
(138
|
)
|
Pension liability adjustment, net of $142 tax provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(386
|
)
|
|
|
|
|
(386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 1, 2017
|
|
$
|
0.01
|
|
|
48,045,114
|
|
$
|
480
|
|
$
|
859,102
|
|
$
|
(22,643
|
)
|
$
|
(615,149
|
)
|
$
|
221,790
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
70
Table of Contents
The Container Store Group, Inc.
Consolidated statements of cash flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
Five Weeks
Ended
April 2,
2016
|
|
(In thousands)
|
|
April 1,
2017
|
|
February 27,
2016
|
|
February 28,
2015
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14,953
|
|
$
|
5,142
|
|
$
|
22,673
|
|
$
|
354
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
37,124
|
|
|
34,230
|
|
|
31,011
|
|
|
3,009
|
|
Stock-based compensation
|
|
|
1,989
|
|
|
1,556
|
|
|
1,289
|
|
|
147
|
|
Loss (gain) on disposal of assets
|
|
|
57
|
|
|
61
|
|
|
(3,487
|
)
|
|
|
|
Deferred tax expense
|
|
|
(96
|
)
|
|
859
|
|
|
1,423
|
|
|
818
|
|
Noncash interest
|
|
|
1,921
|
|
|
1,940
|
|
|
1,956
|
|
|
160
|
|
Other
|
|
|
(29
|
)
|
|
401
|
|
|
(500
|
)
|
|
45
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(5,861
|
)
|
|
(5,338
|
)
|
|
4,137
|
|
|
6,958
|
|
Inventory
|
|
|
(19,598
|
)
|
|
(1,929
|
)
|
|
(2,668
|
)
|
|
1,516
|
|
Prepaid expenses and other assets
|
|
|
4,028
|
|
|
487
|
|
|
4,705
|
|
|
(7,371
|
)
|
Accounts payable and accrued liabilities
|
|
|
10,965
|
|
|
5,840
|
|
|
5,562
|
|
|
(14,258
|
)
|
Income taxes
|
|
|
3,527
|
|
|
(1,330
|
)
|
|
(2,582
|
)
|
|
(719
|
)
|
Other noncurrent liabilities
|
|
|
(4,341
|
)
|
|
388
|
|
|
1,106
|
|
|
(199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
44,639
|
|
|
42,307
|
|
|
64,625
|
|
|
(9,540
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to property and equipment
|
|
|
(28,515
|
)
|
|
(46,431
|
)
|
|
(48,740
|
)
|
|
(2,435
|
)
|
Proceeds from investment grant
|
|
|
|
|
|
479
|
|
|
|
|
|
|
|
Proceeds from sale of subsidiary, net
|
|
|
|
|
|
|
|
|
3,846
|
|
|
|
|
Proceeds from sale of property and equipment
|
|
|
7
|
|
|
202
|
|
|
950
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(28,508
|
)
|
|
(45,750
|
)
|
|
(43,944
|
)
|
|
(2,434
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on revolving lines of credit
|
|
|
42,731
|
|
|
55,872
|
|
|
74,411
|
|
|
4,958
|
|
Payments on revolving lines of credit
|
|
|
(46,216
|
)
|
|
(57,935
|
)
|
|
(85,474
|
)
|
|
(2,072
|
)
|
Borrowings on long-term debt
|
|
|
30,000
|
|
|
33,000
|
|
|
34,389
|
|
|
5,000
|
|
Payments on long-term debt and capital leases
|
|
|
(40,496
|
)
|
|
(38,246
|
)
|
|
(36,591
|
)
|
|
(944
|
)
|
Payment of debt issuance costs
|
|
|
|
|
|
(266
|
)
|
|
|
|
|
|
|
Proceeds from the exercise of stock options
|
|
|
|
|
|
59
|
|
|
738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(13,981
|
)
|
|
(7,516
|
)
|
|
(12,527
|
)
|
|
6,942
|
|
Effect of exchange rate changes on cash
|
|
|
(223
|
)
|
|
(426
|
)
|
|
(1,206
|
)
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
1,927
|
|
|
(11,385
|
)
|
|
6,948
|
|
|
(4,800
|
)
|
Cash at beginning of fiscal year
|
|
|
8,809
|
|
|
24,994
|
|
|
18,046
|
|
|
13,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of fiscal year
|
|
$
|
10,736
|
|
$
|
13,609
|
|
$
|
24,994
|
|
$
|
8,809
|
|
Supplemental information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
14,656
|
|
$
|
14,850
|
|
$
|
15,255
|
|
$
|
3,552
|
|
Taxes
|
|
$
|
7,651
|
|
$
|
891
|
|
$
|
7,192
|
|
$
|
236
|
|
Supplemental information for non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment (included in accounts payable)
|
|
$
|
138
|
|
$
|
1,386
|
|
$
|
4,918
|
|
$
|
1,114
|
|
Capital lease obligation incurred
|
|
$
|
691
|
|
$
|
541
|
|
$
|
513
|
|
$
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
71
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
1. Nature of business and summary of significant accounting policies
Description of business
The Container Store, Inc. was founded in 1978 in Dallas, Texas, as a retailer with a mission to provide customers with storage and
organization solutions through an assortment of innovative products and unparalleled customer service. In 2007, The Container Store, Inc. was sold to The Container Store Group, Inc. (the
"Company"), a holding company, of which a majority stake was purchased by Leonard Green and Partners, L.P. ("LGP"), with the remainder held by certain employees of The Container
Store, Inc. On November 6, 2013, the Company completed the initial public offering of its common stock (the "IPO"). As the majority shareholder, LGP retains controlling interest in the
Company.
The
Container Store, Inc. consists of our retail stores, website and call center, as well as our installation and organizational services business. As of April 1, 2017, The
Container Store, Inc. operated 86 stores with an average size of approximately 25,000 square feet (19,000 selling square feet) in 31 states and the District of Columbia. The Container
Store, Inc. also offers all of its products directly to its customers through its website and call center. The Container Store, Inc.'s wholly owned Swedish subsidiary, Elfa International
AB ("Elfa"), designs and manufactures component-based shelving and drawer systems that are customizable for any area of the home. elfa® branded products are sold exclusively in the United
States in The Container Store® retail stores, website, and call center and Elfa sells to various retailers and distributors primarily in the Nordic region and throughout Europe on a
wholesale basis.
Basis of presentation
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United
States of America (U.S. GAAP).
Basis of consolidation
The consolidated financial statements include our accounts and those of the Company's wholly owned subsidiaries. The Company eliminates all
significant intercompany balances and transactions, including intercompany profits, in consolidation.
Fiscal year
The Company follows a 4-4-5 fiscal calendar, whereby each fiscal quarter consists of thirteen weeks grouped into two four-week "months" and one
five-week "month", and its fiscal year ends on the Saturday closest to March 31
st
. Elfa's fiscal year ends on the last day of the calendar month of March. Prior to fiscal year
2016, the Company's fiscal year ended on the Saturday closest to February 28
th
.
All
references herein to "fiscal 2016" represent the results of the 52-week fiscal year ended April 1, 2017, and references to "fiscal 2015" represent the results of the 52-week
fiscal year ended February 27, 2016. In addition, all references herein to "fiscal 2014" represent the 52-week fiscal year ended February 28, 2015.
72
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
1. Nature of business and summary of significant accounting policies (Continued)
Management estimates
The preparation of the Company's consolidated financial statements in accordance with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates. Significant accounting judgments and estimates include fair value estimates for indefinite-lived intangible assets, inventory
loss reserve, assessments of long-lived asset impairments, gift card breakage, and assessment of valuation allowances on deferred tax assets.
Revenue recognition
Revenue from sales related to retail operations is recognized when the merchandise is delivered to the customer at the point of sale. Revenue
from sales that are shipped or delivered directly to customers is recognized upon estimated delivery to the customer and includes applicable shipping or delivery revenue. Revenue from sales that are
installed is recognized upon completion of the installation service to the customer and includes applicable installation revenue. Revenue from sales of other services is recognized upon the completion
of the service. Revenue from sales related to manufacturing operations is recorded upon shipment. Sales are recorded net of sales taxes collected from customers. A sales return allowance is recorded
for estimated returns of merchandise subsequent to the balance sheet date that relate to sales prior to the balance sheet date. The returns allowance is based on historical return patterns and reduces
sales and cost of sales, accordingly. Merchandise exchanges of similar product and price are not considered merchandise returns and, therefore, are excluded when calculating the sales returns
allowance.
Gift cards and merchandise credits
Gift cards are sold to customers in retail stores, through the call center and website, and through certain third parties. We issue merchandise
credits in our stores and through our call center. Revenue from sales of gift cards and issuances of merchandise credits is recognized when the gift card is redeemed by the customer, or the likelihood
of the gift card being redeemed by the customer is remote (gift card breakage). The gift card breakage rate is determined based upon historical redemption patterns. An estimate of the rate of gift
card breakage is applied over the period of estimated performance (48 months as of the end of fiscal 2016) and the breakage amounts are included in net sales in the consolidated statement of
operations. The Company recorded $1,072, $948,
$978, and $73 of gift card breakage in fiscal years 2016, 2015, 2014, and the five weeks ended April 2, 2016, respectively.
Cost of sales
Cost of sales related to retail operations includes the purchase cost of inventory sold (net of vendor rebates), in-bound freight, as well as
inventory loss reserves. Costs incurred to ship or deliver merchandise to customers, as well as direct installation and organization services costs, are also
73
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
1. Nature of business and summary of significant accounting policies (Continued)
included
in cost of sales. Cost of sales from manufacturing operations includes costs associated with production, including materials, wages, other variable production costs, and other applicable
manufacturing overhead.
Leases
Rent expense on operating leases, including rent holidays and scheduled rent increases, is recorded on a straight-line basis over the term of
the lease, commencing on the date the Company takes possession of the leased property. Rent expense is recorded in selling, general, and administrative expenses. Pre-opening rent expense is recorded
in pre-opening costs in the consolidated income statement. The net excess of rent expense over the actual cash paid has been recorded as deferred rent in the accompanying consolidated balance sheets.
Tenant improvement allowances are also included in the accompanying consolidated balance sheets as deferred rent liabilities and are amortized as a reduction of rent expense over the term of the lease
from the possession date. Contingent rental payments, typically based on a percentage of sales, are recognized in rent expense when payment of the contingent rent is probable.
Advertising
All advertising costs of the Company are expensed when incurred, or upon the release of the initial advertisement, except for production costs
related to catalogs and direct mailings to customers, which are initially capitalized. Production costs related to catalogs and direct mailings consist primarily of printing and postage and are
expensed when mailed to the customer, except for direct mailings related to promotional campaigns, which are expensed over the period during which the promotional sales are expected to occur.
Advertising costs are recorded in selling, general, and administrative expenses. Pre-opening advertising costs are recorded in pre-opening costs.
Catalog
and direct mailings costs capitalized at April 1, 2017 and February 27, 2016, amounted to $605 and $938 respectively, and are recorded in prepaid expenses on the
accompanying consolidated balance sheets. Total advertising expense incurred for fiscal years 2016, 2015, 2014, and the five-weeks ended April 2, 2016 was $31,525, $32,343, $35,388, and $2,164,
respectively.
Pre-opening costs
Non-capital expenditures associated with opening new stores, including rent, marketing expenses, travel and relocation costs, and training
costs, are expensed as incurred and are included in pre-opening costs in the consolidated statement of operations.
Income taxes
We account for income taxes utilizing Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 740,
Income Taxes
. ASC 740 requires an asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and
74
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
1. Nature of business and summary of significant accounting policies (Continued)
liabilities.
We recognize interest and penalties related to unrecognized tax benefits in income tax expense. There were no uncertain tax positions requiring accrual as of April 1, 2017 and
February 27, 2016. Valuation allowances are established against deferred tax assets when it is more-likely-than-not that the realization of those deferred tax assets will not occur. Valuation
allowances are released as positive evidence of future taxable income sufficient to realize the underlying deferred tax assets becomes available.
Deferred
tax assets and liabilities are measured using the enacted tax rates in effect in the years when those temporary differences are expected to reverse. The effect on deferred taxes
from a change in the tax rate is recognized through continuing operations in the period that includes the enactment of the change. Changes in tax laws and rates could affect recorded deferred tax
assets and liabilities in the future.
We
operate in certain jurisdictions outside the United States. ASC 740-30 provides that the undistributed earnings of a foreign subsidiary be accounted for as a temporary difference
under the presumption that all undistributed earnings will be distributed to the parent company as a dividend. Sufficient evidence of the intent to permanently reinvest the earnings in the
jurisdiction where earned precludes a company from recording the temporary difference. For purposes of ASC 740-30, we are partially reinvested in our Swedish subsidiary Elfa and thus do not record a
temporary difference. We are partially reinvested since we have permanently reinvested our past earnings at Elfa; however, we do not assert that all future earnings will be reinvested into Elfa.
Stock-based compensation
The Company accounts for stock-based compensation in accordance ASC 718,
Compensation-Stock
Compensation
, which requires the fair value of stock-based payments to be recognized in the consolidated financial statements as compensation expense over the requisite service
period. For time-based awards, compensation expense is recognized on a straight line basis, net of forfeitures, over the requisite service period for awards that actually vest. For performance-based
awards, compensation expense is estimated based on achievement of the performance condition and is recognized using the accelerated attribution method over the requisite service period for awards that
actually vest. Stock-based compensation expense is recorded in the stock-based compensation line in the consolidated statements of operations.
Stock Options
The Board determines the exercise price of stock options based on the closing price of the Company's common stock as reported on The New York
Stock Exchange on the grant date. The Company estimates the fair value of each stock option grant on the date of grant based upon the
75
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
1. Nature of business and summary of significant accounting policies (Continued)
Black-Scholes
option-pricing model. This model requires various significant judgmental assumptions in order to derive a final fair value determination for each type of award
including:
-
-
Expected TermThe expected term of the options represents the period of time between the grant date of the options and the date the
options are either exercised or canceled, including an estimate of options still outstanding.
-
-
Expected VolatilityThe expected volatility incorporates historical and implied volatility of comparable public companies for a
period approximating the expected term.
-
-
Expected Dividend YieldThe expected dividend yield is based on the Company's expectation of not paying dividends on its common
stock for the foreseeable future.
-
-
Risk-Free Interest RateThe risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and
with a maturity that approximates the expected term.
Restricted Stock Awards
The fair value of each restricted stock award is determined based on the closing price of the Company's common stock as reported on The New York
Stock Exchange on the grant date.
Accounts receivable
Accounts receivable consist primarily of trade receivables, receivables from The Container Store, Inc.'s credit card processors for sales
transactions, and tenant improvement allowances from The Container Store, Inc.'s landlords in connection with new leases. An allowance for doubtful accounts is established on trade receivables,
if necessary, for estimated losses resulting from the inability of customers to make required payments. Factors such as payment terms, historical loss experience, and economic conditions are generally
considered in determining the allowance for doubtful accounts. Accounts receivable are presented net of allowances for doubtful accounts of $305 and $128 at April 1, 2017 and
February 27, 2016, respectively.
Inventories
Inventories at retail stores are comprised of finished goods and are valued at the lower of cost or estimated net realizable value, with cost
determined on a weighted-average cost method including associated freight costs. Manufacturing inventories are comprised of raw materials, work in process, and finished goods and are valued on a
first-in, first out basis using full absorption accounting which includes material, labor, other variable costs, and other applicable manufacturing overhead. To determine if the value of inventory is
recoverable at cost, we consider current and anticipated demand, customer preference and the merchandise age. The significant estimates used in inventory valuation are obsolescence (including excess
and slow-moving inventory) and estimates of inventory shrinkage. We adjust our inventory for obsolescence based on historical trends, aging reports, specific identification and our estimates of future
retail sales prices.
76
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
1. Nature of business and summary of significant accounting policies (Continued)
Reserves
for shrinkage are estimated and recorded throughout the period as a percentage of cost of sales based on historical shrinkage results and current inventory levels. Actual
shrinkage is recorded throughout the year based upon periodic cycle counts. Actual inventory shrinkage can vary from estimates due to factors including the mix of our inventory and execution against
loss prevention initiatives in our stores and distribution center.
Property and equipment
Property and equipment are recorded at cost less accumulated depreciation. Significant additions and improvements are capitalized, and
expenditures for maintenance and repairs are expensed. Gains and losses on the disposition of property and equipment are recognized in the period incurred.
Depreciation,
including amortization of assets recorded under capital lease obligations, is provided using the straight-line method over the estimated useful lives of depreciable assets
as follows:
|
|
|
Buildings
|
|
30 years
|
Furniture, fixtures, and equipment
|
|
3 to 10 years
|
Computer software
|
|
2 to 5 years
|
Leasehold improvements
|
|
Shorter of useful life or lease term
|
Capital leases
|
|
Shorter of useful life or lease term
|
Costs
of developing or obtaining software for internal use or developing the Company's website, such as external direct costs of materials or services and internal payroll costs directly
related to the software development projects are capitalized. For the fiscal years ended April 1, 2017, February 27, 2016, and February 28, 2015, the Company capitalized $4,392,
$3,272, and $5,017, respectively, and amortized $3,498, $3,258, and $2,992, respectively, of costs in connection with the development of internally used software. For the five-week period ended
April 2, 2016, the Company capitalized $299 and amortized $296 of costs in connection with the development of internally used software.
Long-lived assets
Long-lived assets, such as property and equipment and intangible assets subject to amortization, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in
customer demand or business climate that could affect the value of an asset, a product recall or an adverse action or assessment by a regulator. If the sum of the estimated undiscounted future cash
flows related to the asset is less than the carrying value, we recognize a loss equal to the difference between the carrying value and the fair value, usually determined by the estimated discounted
cash flow analysis of the asset.
For
our TCS segment, we generally evaluate long-lived tangible assets at a store level, or at the lowest level at which independent cash flows can be identified. We evaluate corporate
assets or other long-lived assets that are not store-specific at the consolidated level. For our Elfa segment, we evaluate long-lived tangible assets at the segment level.
77
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
1. Nature of business and summary of significant accounting policies (Continued)
Since
there is typically no active market for our long-lived tangible assets, we estimate fair values based on the expected future cash flows. We estimate future cash flows based on
store-level historical results, current trends, and operating and cash flow projections. Our estimates are subject to uncertainty and
may be affected by a number of factors outside our control, including general economic conditions and the competitive environment. While we believe our estimates and judgments about future cash flows
are reasonable, future impairment charges may be required if the expected cash flow estimates, as projected, do not occur or if events change requiring us to revise our estimates.
Foreign currency forward contracts
We account for foreign currency forward contracts in accordance with ASC 815,
Derivatives and
Hedging
. In the TCS segment, we may utilize foreign currency forward contracts in Swedish krona to stabilize our retail gross margins and to protect our domestic operations
from downward currency exposure by hedging purchases of inventory from our wholly owned subsidiary, Elfa. In the Elfa segment, we may utilize foreign currency forward contracts to hedge purchases of
raw materials that are transacted in currencies other than Swedish krona, which is the functional currency of Elfa.
Generally,
the Company's foreign currency forward contracts have terms from 1 to 12 months and require the Company to exchange currencies at agreed-upon rates at settlement. The
Company does not hold or enter into financial instruments for trading or speculative purposes. The Company records all foreign currency forward contracts on its consolidated balance sheet at fair
value. The Company records its foreign currency forward contracts on a gross basis. Forward contracts not designated as hedges are adjusted to fair value through income as selling, general and
administrative expenses. The Company accounts for its foreign currency hedge instruments as cash flow hedges, as defined. Changes in the fair value of the foreign currency hedge instruments that are
considered to be effective, as defined, are recorded in other comprehensive income (loss) until the hedged item (inventory) is sold to the customer, at which time the deferred gain or loss is
recognized through cost of sales. Any portion of a change in the foreign currency hedge instrument's fair value that is considered to be ineffective, as defined, or that the Company has elected to
exclude from its measurement of effectiveness, is immediately recorded in earnings as cost of sales.
Self-insured liabilities
We are primarily self-insured for workers' compensation, employee health benefits and general liability claims. We record self-insurance
liabilities based on claims filed, including the development of those claims, and an estimate of claims incurred but not yet reported. Factors affecting these estimates include future inflation rates,
changes in severity, benefit level changes, medical costs and claim settlement patterns. Should a different amount of claims occur compared to what was estimated, or costs of the claims increase or
decrease beyond what was anticipated, reserves may need to be adjusted accordingly. We determine our workers' compensation liability and general liability
claims reserves based on an analysis of historical claims data. Self-insurance reserves for employee health benefits, workers' compensation and general liability claims are recorded in the accrued
liabilities line item of
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Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
1. Nature of business and summary of significant accounting policies (Continued)
the
consolidated balance sheet and were $3,016 and $3,471 as of April 1, 2017 and February 27, 2016, respectively.
Goodwill
We evaluate goodwill annually to determine whether it is impaired. Goodwill is also tested between annual impairment tests if an event occurs or
circumstances change that would indicate that the fair value of a reporting unit is less than its carrying amount. Conditions that may indicate impairment include, but are not limited to, a
significant adverse change in customer demand or business climate that could affect the value of an asset. If an impairment indicator exists, we test goodwill for recoverability. We have identified
two reporting units and we have selected the first day of the fourth fiscal quarter to perform our annual goodwill impairment testing.
Prior
to testing goodwill for impairment, we perform a qualitative assessment to determine whether it is more likely than not that goodwill is impaired for each reporting unit. If the
results of the qualitative assessment indicate that the likelihood of impairment is greater than 50%, then we perform a two-step impairment test on goodwill. In the first step, we compare the fair
value of the reporting unit to its carrying value. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is considered not impaired and
we are not required to perform further testing. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second
step of the impairment test in order to determine the implied fair value of the reporting unit's goodwill. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, then we
would record an impairment loss equal to the difference.
The
fair value of each reporting unit is determined by using a discounted cash flow analysis using the income approach. We also use a market approach to compare the estimated fair value
to comparable companies. The determination of fair value requires assumptions and estimates of many critical factors, including among others, our nature and our history, financial and economic
conditions affecting us, our industry and the general economy, past results, our current operations and future prospects, sales of similar businesses or capital stock of publicly held similar
businesses, as well as prices, terms and conditions affecting past sales of similar businesses. Forecasts of future operations are based, in part,
on operating results and management's expectations as to future market conditions. These types of analyses contain uncertainties because they require management to make assumptions and to apply
judgments to estimate industry economic factors and the profitability of future business strategies. If actual results are not consistent with our estimates and assumptions, we may be exposed to
future impairment losses that could be material.
Trade names
We annually evaluate whether the trade names continue to have an indefinite life. Trade names are reviewed for impairment annually on the first
day of the fourth fiscal quarter and may be reviewed more frequently if indicators of impairment are present. Conditions that may indicate impairment
79
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
1. Nature of business and summary of significant accounting policies (Continued)
include,
but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset, a product recall or an adverse action or assessment by a
regulator.
The
impairment review is performed by comparing the carrying value to the estimated fair value, determined using a discounted cash flow methodology. If the recorded carrying value of the
trade name exceeds its estimated fair value, an impairment charge is recorded to write the trade name down to its estimated fair value. Factors used in the valuation of intangible assets with
indefinite lives include, but are not limited to, future revenue growth assumptions, estimated market royalty rates that could be derived from the licensing of our trade names to third parties, and a
rate used to discount the estimated royalty cash flow projections.
The
valuation of trade names requires assumptions and estimates of many critical factors, which are consistent with the factors discussed under "Goodwill" above. Forecasts of future
operations are based, in part, on operating results and management's expectations as to future market conditions. These types of analyses contain uncertainties because they require management to make
assumptions and to apply judgments to estimate industry economic factors and the profitability of future business strategies. If actual results are not consistent with our estimates and assumptions,
we may be exposed to future impairment losses that could be material.
Foreign currency translation
The Company operates foreign subsidiaries in the following countries: Sweden, Norway, Finland, Denmark, Germany, Poland, and France. The
functional currency of the Company's foreign operations is the applicable country's currency. All assets and liabilities of foreign subsidiaries and affiliates are translated at year-end rates of
exchange. Revenues and expenses of foreign subsidiaries and affiliates are translated at average rates of exchange for the year. Unrealized gains and losses on translation are reported as cumulative
translation adjustments through other comprehensive income (loss).
The
functional currency for the Company's wholly owned subsidiary, Elfa, is the Swedish krona. During fiscal 2016, the rate of exchange from U.S. dollar to Swedish krona increased from
8.6 to 8.9. The carrying amount of assets related to Elfa and subject to currency fluctuation was $108,707 and $109,548 as of April 1, 2017 and February 27, 2016, respectively. Foreign
currency realized gains of $342, realized losses of $241, realized gains of $171, and realized gains of $60 are included in selling, general, and administrative expenses in the consolidated statements
of operations in fiscal 2016, fiscal 2015, fiscal 2014, and the five-weeks ended April 2, 2016, respectively.
Recent accounting pronouncements
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, to revise lease accounting
guidance. The update requires most leases to be recorded on the balance sheet as a lease liability, with a corresponding right-of-use asset, whereas these leases currently have an off-balance sheet
classification. ASU 2016-02 must be applied on a modified retrospective basis and is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with
early adoption
80
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
1. Nature of business and summary of significant accounting policies (Continued)
permitted.
The Company currently intends to adopt this standard in the first quarter of fiscal 2019. The Company is still evaluating the impact of implementation of this standard on its financial
statements, but expects that adoption will have a material impact to the Company's total assets and liabilities given the Company has a significant number of operating leases not currently recognized
on its balance sheet.
In
May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
, an updated standard on revenue recognition. ASU 2014-09
provides enhancements to the quality and consistency of how revenue is reported while also improving comparability in the financial statements of companies reporting using IFRS and GAAP. The core
principle of the new standard is for companies to recognize revenue to depict the transfer of goods or services to customers in amounts that reflect the consideration (that is, payment) to which the
Company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about revenue, provide guidance for transactions that were not
previously addressed comprehensively (for example, service revenue and contract modifications) and improve guidance for multiple-element arrangements. In July 2015, the FASB deferred the effective
date of ASU 2014-09. Accordingly, this standard is effective for reporting periods beginning after December 15, 2017, including interim periods within that fiscal year, with early adoption
permitted for interim and annual periods beginning after December 15, 2016. The Company currently intends to adopt this standard in the first quarter of fiscal 2018. This guidance can be
applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption, but the Company has not yet selected a transition method. The Company has
identified certain impacts to our accounting for gift cards given away for promotional or marketing purposes. Under current GAAP, the value of promotional gift cards are recorded as selling, general,
and administrative expense. The new standard requires these types of gift cards to be accounted for as a reduction of revenue (i.e. a discount). The Company does not expect the adoption of ASU
2014-09 to have a material impact on the financial statements.
In
March 2016, the FASB issued ASU 2016-09,
CompensationStock Compensation (Topic 718): Improvements to Employee Share-Based Payment
Accounting
, which outlines new provisions intended to simplify various aspects related to accounting for share-based payments, including income tax consequences, forfeitures,
and classification in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those years, with early adoption
permitted. The Company does not expect this standard to have a material impact on its financial statements and currently intends to adopt this standard in the first quarter of fiscal 2017.
In
October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
, which
requires entities to recognize the income tax effects of intercompany sales and transfers of assets, other than inventory, in the period in which the transfer occurs. This is a change from current
GAAP, which requires entities to defer the income tax effects of intercompany transfers of assets until the asset has been sold to an outside party or otherwise recognized (i.e. depreciated,
amortized, impaired). The income tax effects of intercompany sales and transfers of inventory will continue to be deferred until the inventory is sold to an outside party. This ASU is effective for
fiscal years beginning after December 15, 2017, and interim periods within those years,
81
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
1. Nature of business and summary of significant accounting policies (Continued)
with
early adoption permitted. The Company does not expect this standard to have a material impact on its financial statements.
In
January 2017, the FASB issued ASU 2017-04,
IntangiblesGoodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment
, which provides guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test under ASC Topic 350. Under
the new guidance, an entity should perform goodwill impairment testing by comparing the fair value of a reporting unit with its carrying amount. If the a reporting unit's carrying amount exceeds its
fair value, an entity should recognize an impairment charge based on that difference, limited to the total amount of goodwill allocated to that reporting unit. This ASU will be applied prospectively
and is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing
dates after January 1, 2017. The Company does not expect this standard to have a material impact on its financial statements.
In
March 2017, the FASB issued ASU 2017-07,
CompensationRetirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and
Net Periodic Postretirement Benefit Cost
, which provides guidance that requires an employer to present the service cost component separate from the other components of net
periodic benefit cost. The update requires that employers present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation
costs arising from services rendered by participating employees during the period. The other components of the net periodic benefit cost are required to be presented separately from the line item that
includes service cost and outside of the subtotal of income from operations. If a separate line item is not used, the line item used in the income statement must be disclosed. In addition, only the
service cost component is eligible for capitalization in assets. This ASU will be applied retrospectively and is effective for fiscal years beginning after December 15, 2017, and interim
periods within those years, with early adoption permitted. The Company does not expect this standard to have a material impact on its financial statements.
In
July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
, which changes the measurement
principle for inventory from the lower of cost or market to the lower of cost and net realizable value. ASU 2015-11 defines net realizable value as estimated selling prices in the ordinary course of
business, less reasonably predictable costs of completion, disposal, and transportation. ASU 2015-11 was effective for and adopted by the Company in the first quarter of fiscal 2016 on a prospective
basis. The adoption of this standard did not result in a material impact to the Company's financial statements.
In
May 2015, the FASB issued ASU 2015-07,
Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per
Share (or its Equivalent)
, which is intended to eliminate the diversity in practice surrounding how investments measured at net asset value ("NAV") with redemption dates in the
future are categorized in the fair value hierarchy. Under the new guidance, investments measured at fair value using the NAV per share practical expedient should no longer be categorized in the fair
value hierarchy. ASU 2015-07 was effective for and adopted by the
82
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
1. Nature of business and summary of significant accounting policies (Continued)
Company
in the first quarter of fiscal 2016 on a retrospective basis. As a result, the nonqualified retirement plan, which is measured at NAV per share using the practical expedient, is no longer
categorized in the fair value hierarchy.
In
April 2015, the FASB issued ASU 2015-05,
IntangiblesGoodwill and OtherInternal-Use Software (Subtopic 350 -
40)
:
Customer's Accounting for Fees Paid in a Cloud Computing Arrangement
. The amendments in ASU 2015-05 provide guidance to
customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license
element of the arrangement consistent with other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service
contract. ASU 2015-05 was effective for and adopted by the Company in the first quarter of fiscal 2016 on a prospective basis. The adoption of this standard did not result in a material impact to the
Company's financial statements.
In
April 2015, the FASB issued ASU 2015-03
, InterestImputation of Interest: Simplifying the Presentation of Debt Issuance
Costs
. The update requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the
related debt liability rather than being presented as an asset. The update requires retrospective application and represents a change in accounting principle. In addition, in August 2015, ASU 2015-15,
InterestImputation
of Interest
, was released which added SEC paragraphs pursuant to the SEC Staff Announcement at the June 18, 2015
Emerging Issues Task Force (EITF) meeting about the presentation and subsequent measurement of debt issuance costs associated with line-of-credit arrangements. Given the absence of authoritative
guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, ASU 2015-15 states the SEC staff would not object to an entity deferring and presenting debt issuance costs
as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the
line-of-credit arrangement. The amendments in ASU 2015-03 and ASU 2015-15 were effective for and adopted by the Company in the first quarter of fiscal 2016 on a retrospective basis. The impact of ASU
2015-03 and ASU 2015-15 on our consolidated financial statements included a reclassification of net deferred financing costs related to our Senior Secured Term Loan Facility to be presented in the
balance sheet as a reduction of long-term debt, net of deferred financing costs, while net deferred financing costs related to our Revolving Credit Facility remain an asset in the deferred financing
costs line item. The Company had $3,667 and $5,649 of net deferred financing costs as of April 1, 2017 and February 27, 2016, respectively, related to our Senior Secured Term Loan
Facility.
2. Goodwill and trade names
During the quarter ended October 1, 2016, the Company voluntarily changed the date of its annual goodwill and indefinite-lived intangible assets impairment testing from the last
day of fiscal December (which is also the last day of the third fiscal quarter) to the first day of the fourth fiscal quarter. This voluntary change is preferable under the circumstances as it
provides the Company with sufficient time to complete its annual goodwill and indefinite-lived intangible asset impairment testing in advance of its
83
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
2. Goodwill and trade names (Continued)
year-end
reporting and results in better alignment with the Company's annual planning and forecasting process. In connection with the change in the date of the annual goodwill and indefinite-lived
intangible impairment tests, the Company performed goodwill and indefinite-lived intangible impairment tests as of the last day of the 2016 fiscal third quarter and as of the first day of the 2016
fiscal fourth quarter, and no impairment was identified on either date. The voluntary change in accounting principle related to the annual testing date will not delay, accelerate or avoid an
impairment charge. The Company has determined that it is impracticable to objectively determine projected cash flows and related valuation estimates that would have been used as of the first day of
the fiscal fourth quarter for periods prior to fiscal 2016 without the use of hindsight. As such, the Company will prospectively apply the change in the annual goodwill and indefinite-lived intangible
assets impairment assessment as of the first day of the fourth fiscal quarter of 2016.
The
estimated goodwill and trade name fair values are computed using estimates as of the measurement date, which is defined as the first day of the fiscal fourth quarter. The Company
makes estimates and assumptions about sales, gross margins, profit margins, and discount rates based on budgets and forecasts, business plans, economic projections, anticipated future cash flows, and
marketplace data. Assumptions are also made for varying perpetual growth rates for periods beyond the long-term business plan period. There are inherent uncertainties related to these factors and
management's judgment in applying these factors. Another estimate using different, but still reasonable,
assumptions could produce different results. As there are numerous assumptions and estimations utilized to derive the estimated enterprise fair value of each reporting unit, it is possible that actual
results may differ from estimated results requiring future impairment charges.
The
Company recorded no impairments during fiscal 2016, fiscal 2015, and fiscal 2014 as a result of the goodwill and trade names impairment tests performed.
84
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
2. Goodwill and trade names (Continued)
The changes in the carrying amount of goodwill and trade names were as follows in fiscal 2016, the five weeks ended April 2, 2016, and fiscal 2015:
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
Trade names
|
|
Balance at February 28, 2015
|
|
|
|
|
|
|
|
Gross balance
|
|
|
410,467
|
|
|
260,967
|
|
Accumulated impairment charges
|
|
|
(207,652
|
)
|
|
(31,534
|
)
|
|
|
|
|
|
|
|
|
Total, net
|
|
$
|
202,815
|
|
$
|
229,433
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
(1,065
|
)
|
Balance at February 27, 2016
|
|
|
|
|
|
|
|
Gross balance
|
|
|
410,467
|
|
|
259,902
|
|
Accumulated impairment charges
|
|
|
(207,652
|
)
|
|
(31,534
|
)
|
|
|
|
|
|
|
|
|
Total, net
|
|
$
|
202,815
|
|
$
|
228,368
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
2,423
|
|
Balance at April 2, 2016
|
|
|
|
|
|
|
|
Gross balance
|
|
|
410,467
|
|
|
262,325
|
|
Accumulated impairment charges
|
|
|
(207,652
|
)
|
|
(31,534
|
)
|
|
|
|
|
|
|
|
|
Total, net
|
|
$
|
202,815
|
|
$
|
230,791
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
(4,106
|
)
|
Balance at April 1, 2017
|
|
|
|
|
|
|
|
Gross balance
|
|
|
410,467
|
|
|
258,219
|
|
Accumulated impairment charges
|
|
|
(207,652
|
)
|
|
(31,534
|
)
|
|
|
|
|
|
|
|
|
Total, net
|
|
$
|
202,815
|
|
$
|
226,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
3. Detail of certain balance sheet accounts
|
|
|
|
|
|
|
|
|
|
April 1,
2017
|
|
February 27,
2016
|
|
Accounts receivable, net:
|
|
|
|
|
|
|
|
Trade receivables, net
|
|
$
|
15,873
|
|
$
|
14,748
|
|
Credit card receivables
|
|
|
6,531
|
|
|
10,630
|
|
Tenant allowances
|
|
|
2,353
|
|
|
1,721
|
|
Other receivables
|
|
|
2,719
|
|
|
1,744
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,476
|
|
$
|
28,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory:
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
98,438
|
|
$
|
81,496
|
|
Raw materials
|
|
|
4,183
|
|
|
3,363
|
|
Work in progress
|
|
|
499
|
|
|
1,576
|
|
|
|
|
|
|
|
|
|
|
|
$
|
103,120
|
|
$
|
86,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
Land and buildings
|
|
$
|
20,758
|
|
$
|
20,699
|
|
Furniture and fixtures
|
|
|
68,837
|
|
|
63,375
|
|
Machinery and equipment
|
|
|
83,523
|
|
|
73,218
|
|
Computer software and equipment
|
|
|
81,380
|
|
|
72,619
|
|
Leasehold improvements
|
|
|
152,630
|
|
|
147,347
|
|
Construction in progress
|
|
|
13,188
|
|
|
19,377
|
|
Leased vehicles and other
|
|
|
917
|
|
|
776
|
|
|
|
|
|
|
|
|
|
|
|
|
421,233
|
|
|
397,411
|
|
Less accumulated depreciation and amortization
|
|
|
(255,735
|
)
|
|
(221,294
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
165,498
|
|
$
|
176,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Liabilities:
|
|
|
|
|
|
|
|
Accrued payroll, benefits and bonuses
|
|
$
|
20,897
|
|
$
|
22,483
|
|
Unearned revenue
|
|
|
7,708
|
|
|
16,034
|
|
Accrued transaction and property tax
|
|
|
11,086
|
|
|
9,655
|
|
Gift cards and store credits outstanding
|
|
|
9,229
|
|
|
8,564
|
|
Accrued lease liabilities
|
|
|
4,767
|
|
|
4,384
|
|
Accrued interest
|
|
|
143
|
|
|
2,270
|
|
Other accrued liabilities
|
|
|
6,277
|
|
|
6,245
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60,107
|
|
$
|
69,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
4. Long-term debt and revolving lines of credit
Long-term debt and revolving lines of credit consist of the following:
|
|
|
|
|
|
|
|
|
|
April 1,
2017
|
|
February 27,
2016
|
|
Senior secured term loan facility
|
|
$
|
316,760
|
|
$
|
321,288
|
|
2014 Elfa term loan facility
|
|
|
3,358
|
|
|
4,900
|
|
2014 Elfa revolving credit facility
|
|
|
|
|
|
721
|
|
Obligations under capital leases
|
|
|
901
|
|
|
745
|
|
Other loans
|
|
|
119
|
|
|
224
|
|
Revolving credit facility
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
321,138
|
|
|
327,878
|
|
Less current portion
|
|
|
(5,445
|
)
|
|
(6,094
|
)
|
Less deferred financing costs(1)
|
|
|
(3,667
|
)
|
|
(5,649
|
)
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
$
|
312,026
|
|
$
|
316,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Represents
deferred financing costs related to our Senior Secured Term Loan Facility, which are presented net of long-term debt in the consolidated balance sheet.
Scheduled
total revolving lines of credit and debt maturities for the fiscal years subsequent to April 1, 2017, are as follows:
|
|
|
|
|
Within 1 year
|
|
$
|
5,445
|
|
2 years
|
|
|
4,365
|
|
3 years
|
|
|
311,328
|
|
4 years
|
|
|
|
|
5 years
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
321,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan Facility
On April 6, 2012, The Container Store Group, Inc., The Container Store, Inc. and certain of its domestic subsidiaries
entered into a credit agreement with JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and the lenders party thereto (as amended, the "Senior Secured Term Loan Facility"). Under
the Senior Secured Term Loan Facility, we had $316,760 in outstanding borrowings as of April 1, 2017 and the interest rate on such borrowings is LIBOR + 3.25%, subject to a LIBOR
floor of 1.00%. The Senior Secured Term Loan Facility provides that we are required to make quarterly principal repayments of $906 through December 31, 2018, with a balloon payment for the
remaining balance due on April 6, 2019.
87
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
4. Long-term debt and revolving lines of credit (Continued)
The
Senior Secured Term Loan Facility is secured by (a) a first priority security interest in substantially all of our assets (excluding stock in foreign subsidiaries in excess of
65%, assets of non-guarantors and subject to certain other exceptions) (other than the collateral that secures the Revolving Credit Facility described below on a first-priority basis) and (b) a
second priority security interest in the assets securing the Revolving Credit Facility described below on a first-priority basis. Obligations under the Senior Secured Term Loan Facility are guaranteed
by The Container Store Group, Inc. and each of The Container Store, Inc.'s U.S. subsidiaries. Under the Senior Secured Term Loan Facility, the Company is required to make quarterly
principal repayments of $906 through December 31, 2018, with a balloon payment for the remaining balance of $310,420 due on April 6, 2019.
The
Senior Secured Term Loan Facility includes restrictions on the ability of the Company's subsidiaries to incur additional liens and indebtedness, make investments and dispositions,
pay dividends or make other distributions, make loans, prepay certain indebtedness and enter into sale and lease back transactions, among other restrictions. Under the Senior Secured Term Loan
Facility, provided no event of default has occurred and is continuing, The Container Store, Inc. is permitted to pay dividends to The Container Store Group, Inc. in an amount not to
exceed the sum of $10,000 plus if after giving effect to such dividend on a pro forma basis, the Consolidated Leverage Ratio (as defined in the Senior Secured Term Loan Facility) does not exceed 2.0
to 1.0, the Available Amount (as defined in the Senior Secured Term Loan Facility) during the term of the Senior Secured Term Loan Facility, and pursuant to certain other limited exceptions. The
restricted net assets of the Company's consolidated subsidiaries was $209,290 as of April 1, 2017. As of April 1, 2017, we were in compliance with all Senior Secured Term Loan Facility
covenants and no Event of Default (as such term is defined in the Senior Secured Term Loan Facility) had occurred.
Revolving Credit Facility
On April 6, 2012, The Container Store Group, Inc., The Container Store, Inc. and certain of its domestic subsidiaries
entered into an asset-based revolving credit agreement with the lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and Wells Fargo Bank, National
Association, as Syndication Agent (as amended, the "Revolving Credit Facility"). The aggregate principal amount of the facility is $100,000. Borrowings under the Revolving Credit Facility accrue
interest at LIBOR+1.25% and the maturity date is the earlier of (x) October 8, 2020 and (y) January 6, 2019, if any of The Container Store, Inc.'s obligations under
its term loan credit facility remain outstanding on such date and have not been refinanced with debt that has a final maturity date that is no earlier than April 6, 2019 or subordinated debt.
In addition, the Revolving Credit Facility includes an uncommitted incremental revolving facility in the amount of $50,000, which is subject to receipt of lender commitments and satisfaction of
specified conditions.
The
Revolving Credit Facility provides that proceeds are to be used for working capital and other general corporate purposes, and allows for swing line advances of up to $15,000 and the
issuance of letters of credit of up to $40,000.
88
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
4. Long-term debt and revolving lines of credit (Continued)
The
availability of credit at any given time under the Revolving Credit Facility is limited by reference to a borrowing base formula, which is the sum of (i) 90% of eligible
credit card receivables and (ii) 90% of the appraised value of eligible inventory; minus (iii) certain availability reserves and (iv) outstanding credit extensions including
letters of credit and existing revolving loans.
The
Revolving Credit Facility is secured by (a) a first-priority security interest in substantially all of our personal property, consisting of inventory, accounts receivable,
cash, deposit accounts, and other general intangibles, and (b) a second-priority security interest in the collateral that secures the Senior Secured Term Loan Facility on a first-priority
basis, as described above (excluding stock in foreign subsidiaries in excess of 65%, and assets of non-guarantor subsidiaries and subject to certain other exceptions). Obligations under the Revolving
Credit Facility are guaranteed by The Container Store Group, Inc. and each of The Container Store, Inc.'s U.S. subsidiaries.
The
Revolving Credit Facility contains a number of covenants that, among other things, restrict our ability, subject to specified exceptions, to incur additional debt; incur additional
liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve
ourselves, engage in businesses that are not in a related line of business; make loans, advances or guarantees; engage in transactions with affiliates; and make investments. In addition, the financing
agreements contain certain cross-default provisions. We are required to maintain a consolidated fixed-charge coverage ratio of 1.0 to 1.0 if excess availability is less than $10,000 at any time. As of
April 1, 2017, we were in compliance with all Revolving Credit Facility covenants and no Event of Default (as such term is defined in the Revolving Credit Facility) had occurred.
Under
the Revolving Credit Facility, provided no event of default has occurred and is continuing, The Container Store, Inc. is permitted to pay dividends to The Container Store
Group, Inc., in an amount not to exceed the sum of $10,000 plus if after giving effect to such dividend on a pro forma basis, the Consolidated Fixed Charge Coverage Ratio (as defined in the
Revolving Credit Facility) is not less than 1.25 to 1.0, the Available Amount (as defined in the Revolving Credit Facility) during the term of the Revolving Credit Facility, and pursuant to certain
other limited exceptions.
There
was $73,189 available under the Revolving Credit Facility as of April 1, 2017, based on the factors described above. Maximum borrowings, including letters of credit issued
under the Revolving Credit Facility during the period ended April 1, 2017, were $33,590.
Elfa Senior Secured Credit Facilities and 2014 Elfa Senior Secured Credit Facilities
On April 27, 2009, Elfa entered into the Elfa Senior Secured Credit Facilities with Tjustbygdens Sparbank AB, which we refer to as
Sparbank, which consisted of a SEK 137.5 million term loan facility, which we refer to as the Elfa Term Loan Facility, and the SEK 175.0 million Elfa Revolving Credit Facility and,
together with the Elfa Term Loan Facility, the Elfa Senior Secured Credit Facilities. On January 27, 2012, Sparbank transferred all of its commitments, rights and obligations under the Elfa
Senior Secured Credit Facilities to Swedbank AB. Borrowings under the Elfa Senior Secured Credit Facilities accrued interest at a rate of STIBOR+1.775%. Elfa was required to make quarterly principal
repayments under the Elfa Term Loan Facility of SEK 6.25 million through maturity. The Elfa Senior
89
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
4. Long-term debt and revolving lines of credit (Continued)
Secured
Credit Facilities were secured by first priority security interests in substantially all of Elfa's assets. The Elfa Term Loan Facility and the Elfa Revolving Credit Facility matured on
August 30, 2014 and were replaced with the 2014 Elfa Senior Secured Credit Facilities as discussed below.
On
April 1, 2014, Elfa entered into a master credit agreement with Nordea Bank AB ("Nordea"), which consists of a SEK 60.0 million (approximately $6,715 as of
April 1, 2017) term loan facility (the "2014 Elfa Term Loan Facility") and a SEK 140.0 million (approximately $15,669 as of April 1, 2017) revolving credit facility (the "2014
Elfa Revolving Credit Facility," and together with the 2014 Elfa Term Loan Facility, the "2014 Elfa Senior Secured Credit Facilities"). The 2014 Elfa Senior Secured Credit Facilities term began on
August 29, 2014 and matures on August 29, 2019. Elfa is required to make quarterly principal payments under the 2014 Elfa Term Loan Facility in the amount of
SEK 3.0 million (approximately $336 as of April 1, 2017) through maturity. The 2014 Elfa Term Loan Facility bears interest at STIBOR + 1.7% and the 2014 Elfa
Revolving Credit Facility bears interest at Nordea's base rate + 1.4%. In the fourth quarter of fiscal 2016, Elfa and Nordea agreed that the stated rates would apply through maturity. As
of April 1, 2017, the Company had $15,669 of additional availability under the 2014 Elfa Revolving Credit Facility.
Under
the 2014 Elfa Senior Secured Credit Facilities, Elfa's ability to pay dividends to its parent entity, The Container Store, Inc., is based on its future net income and on
historical intercompany practices as between Elfa and The Container Store, Inc. The 2014 Elfa Senior Secured Credit Facilities are secured by the majority of assets of Elfa. The 2014 Elfa
Senior Secured Credit Facilities contains a number of covenants that, among other things, restrict Elfa's ability, subject to specified exceptions, to incur additional liens, sell or dispose of
assets, merge with other companies, engage in businesses that are not in a related line of business and make guarantees. In addition, Elfa is required to maintain (i) a consolidated equity
ratio (as defined in the 2014 Elfa Senior Secured Credit Facilities) of not less than 30% in year one and not less than 32.5% thereafter and (ii) a consolidated ratio of net debt to EBITDA (as
defined in the 2014 Elfa Senior Secured Credit Facilities) of less than 3.2, the consolidated equity ratio tested at the end of each calendar quarter and the ratio of net debt to EBITDA tested as of
the end of each fiscal quarter. As of April 1, 2017, Elfa was in compliance with all covenants and no Event of Default (as defined in the 2014 Elfa Senior Secured Credit Facilities) had
occurred.
On
May 13, 2014, Elfa entered into a credit facility with Nordea for SEK 15.0 million (the "Short Term Credit Facility"). The Short Term Credit Facility accrued interest at
2.53% and matured on August 28, 2014, at which time all borrowings under the agreement were paid in full to Nordea (approximately $2,152 as of August 28, 2014). The total amount of
borrowings available under the Short Term Credit Facility was used to pay a mortgage owed on the Poland manufacturing facility in full in the first quarter of fiscal 2014.
Deferred financing costs
The Company capitalizes certain costs associated with issuance of various debt instruments. In the first quarter of fiscal 2016, the Company
adopted ASU 2015-03 and ASU 2015-15 on a retrospective
90
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
4. Long-term debt and revolving lines of credit (Continued)
basis.
As a result, the Company reclassified net deferred financing costs related to our Senior Secured Term Loan Facility to be presented in the balance sheet as a reduction of long-term debt, net of
deferred financing costs, while net deferred financing costs related to our Revolving Credit Facility remain an asset in the deferred financing costs line item.
These
deferred financing costs are amortized to interest expense on a straight-line method, which is materially consistent with the effective interest method, over the terms of the
related debt agreements. Amortization expense of deferred financing costs was $1,921, $1,940, $1,956, and $160 in fiscal 2016, fiscal 2015, fiscal 2014, and the five weeks ended April 2, 2016,
respectively. The following is a schedule of amortization expense of deferred financing costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Secured
Term Loan
Facility
|
|
Revolving
Credit Facility
|
|
Total
|
|
Within 1 year
|
|
$
|
1,833
|
|
$
|
92
|
|
$
|
1,925
|
|
2 years
|
|
|
1,834
|
|
|
92
|
|
|
1,926
|
|
3 years
|
|
|
|
|
|
92
|
|
|
92
|
|
4 years
|
|
|
|
|
|
44
|
|
|
44
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,667
|
|
$
|
320
|
|
$
|
3,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
5. Income taxes
Components of the provision for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
Ended
|
|
|
|
|
|
Five Weeks
Ended
April 2,
2016
|
|
|
|
April 1,
2017
|
|
February 27,
2016
|
|
February 28,
2015
|
|
Income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
19,307
|
|
$
|
4,830
|
|
$
|
20,597
|
|
$
|
1,059
|
|
Foreign
|
|
|
5,048
|
|
|
3,221
|
|
|
9,269
|
|
|
(367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,355
|
|
$
|
8,051
|
|
$
|
29,866
|
|
$
|
692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
6,039
|
|
$
|
(385
|
)
|
$
|
3,438
|
|
$
|
235
|
|
State
|
|
|
1,374
|
|
|
585
|
|
|
1,483
|
|
|
63
|
|
Foreign
|
|
|
2,085
|
|
|
1,850
|
|
|
849
|
|
|
(778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
9,498
|
|
|
2,050
|
|
|
5,770
|
|
|
(480
|
)
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
553
|
|
|
1,881
|
|
|
1,263
|
|
|
122
|
|
State
|
|
|
22
|
|
|
57
|
|
|
646
|
|
|
(46
|
)
|
Foreign
|
|
|
(671
|
)
|
|
(1,079
|
)
|
|
(486
|
)
|
|
742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision (benefit)
|
|
|
(96
|
)
|
|
859
|
|
|
1,423
|
|
|
818
|
|
Total provision for income taxes
|
|
$
|
9,402
|
|
$
|
2,909
|
|
$
|
7,193
|
|
$
|
338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
5. Income taxes (Continued)
The differences between the actual provision for income taxes and the amounts computed by applying the statutory federal tax rate to income before taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
Five Weeks
Ended
April 2,
2016
|
|
|
|
April 1,
2017
|
|
February 27,
2016
|
|
February 28,
2015
|
|
Provision computed at federal statutory rate
|
|
$
|
8,525
|
|
$
|
2,818
|
|
$
|
10,453
|
|
$
|
242
|
|
Permanent differences
|
|
|
536
|
|
|
192
|
|
|
163
|
|
|
10
|
|
Change in valuation allowance
|
|
|
178
|
|
|
248
|
|
|
(815
|
)
|
|
37
|
|
State income taxes, net of federal benefit
|
|
|
855
|
|
|
402
|
|
|
1,296
|
|
|
11
|
|
Effect of foreign income taxes
|
|
|
(619
|
)
|
|
(384
|
)
|
|
(1,131
|
)
|
|
53
|
|
Prior period error
|
|
|
|
|
|
|
|
|
(1,839
|
)
|
|
|
|
Non-taxable gain on sale of Norwegian subsidiary
|
|
|
|
|
|
|
|
|
(690
|
)
|
|
|
|
Economic zone credits
|
|
|
|
|
|
(292
|
)
|
|
(255
|
)
|
|
|
|
Other, net
|
|
|
(73
|
)
|
|
(75
|
)
|
|
11
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,402
|
|
$
|
2,909
|
|
$
|
7,193
|
|
$
|
338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Components of deferred tax assets and liabilities as of April 1, 2017 and February 27, 2016, are as follows:
|
|
|
|
|
|
|
|
|
|
April 1,
2017
|
|
February 27,
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
1,763
|
|
$
|
1,745
|
|
Loss and credit carryforwards
|
|
|
3,445
|
|
|
4,334
|
|
Stock compensation
|
|
|
7,220
|
|
|
6,878
|
|
Accrued liabilities
|
|
|
4,439
|
|
|
5,363
|
|
Capital assets
|
|
|
352
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
17,219
|
|
|
18,446
|
|
Valuation allowance
|
|
|
(2,015
|
)
|
|
(1,880
|
)
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
15,204
|
|
|
16,566
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Intangibles
|
|
|
(82,775
|
)
|
|
(83,200
|
)
|
Capital assets
|
|
|
(7,412
|
)
|
|
(8,046
|
)
|
Other
|
|
|
(3,557
|
)
|
|
(3,950
|
)
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(93,744
|
)
|
|
(95,196
|
)
|
Net deferred tax liabilities
|
|
$
|
(78,540
|
)
|
$
|
(78,630
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
5. Income taxes (Continued)
The
Company has recorded deferred tax assets and liabilities based upon estimates of their realizable value with such estimates based upon likely future tax consequences. In assessing
the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets. If, based on the weight of available
evidence, it is more-likely-than-not that a deferred tax asset will not be realized, the Company records a valuation allowance.
Prior
to the fourth quarter of 2016, the Company maintained a valuation allowance against French deferred tax assets. During fiscal 2016, significant positive evidence provided assurance
that the French deferred tax assets will more-likely-than-not be realized. Accordingly, in the fourth quarter of fiscal 2016, the Company released all valuation allowances it had previously maintained
against French deferred tax assets. The release resulted in a $100 benefit to the Company's provision for income taxes.
Foreign
and domestic tax credits, net of valuation allowances, totaled approximately $1,490 at April 1, 2017 and approximately $1,661 at February 27, 2016. The various
credits available at April 1, 2017 expire in the 2026 tax year.
The
Company had deferred tax assets for foreign and state net operating loss carryovers of $1,955 at April 1, 2017, and approximately $1,888 at February 27, 2016. Valuation
allowances of $1,753 and $1,687 were recorded against the net operating loss deferred tax assets at April 1, 2017 and February 27, 2016, respectively.
The
Company is subject to U.S. federal income tax examinations for the year ended March 1, 2014 and forward. The Company is currently under an Internal Revenue Service audit for
the tax year ended March 1, 2014.
The
Company accounts for the repatriation of foreign earnings in accordance with ASC 740-30. As such, the Company is partially reinvested based on the guidance provided in ASC 740-30.
Undistributed
earnings of approximately $33,237 at April 1, 2017 and approximately $33,149 at February 27, 2016, which represents all of the Company's undistributed earnings, have been indefinitely
reinvested; therefore, no provision has been made for taxes due upon remittance of those earnings. The increase in undistributed earnings from fiscal 2015 to fiscal 2016 was primarily related to the
translation of foreign earnings from Swedish krona to U.S. dollar. Determination of the unrecognized deferred tax liability related to these undistributed earnings is not practicable because of the
complexities associated with its hypothetical calculation.
The
Company does not have any uncertain tax positions, according to ASC 740-10, as of April 1, 2017 and February 27, 2016.
6. Employee benefit plans
401(k) Plan
All domestic employees of the Company who complete 11 months of service are eligible to participate in the Company's 401(k) Plan.
Participants may contribute up to 80% of annual
94
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
6. Employee benefit plans (Continued)
compensation,
limited to eighteen thousand annually (twenty-four thousand for participants aged 50 years and over) as of January 1, 2016. During fiscal 2015 and fiscal 2014, the Company
matched 100% of employee contributions up to 4% of compensation. Effective April 15, 2016, the Company temporarily ceased 401(k) matching contributions. The amount charged to expense for the
Company's matching contribution was $58, $3,165, $2,737, and $309 for fiscal 2016, fiscal 2015, fiscal 2014, and the five weeks ended April 2, 2016, respectively.
Nonqualified retirement plan
The Company has a nonqualified retirement plan whereby certain employees can elect to defer a portion of their compensation into retirement
savings accounts. Under the plan, there is no requirement that the Company match contributions, although the Company may contribute matching payments at its sole discretion. No matching contributions
were made to the plan during any of the periods presented. The total fair value of the plan asset recorded in other current assets was $5,092 and $3,947 as of April 1, 2017 and
February 27, 2016, respectively. The total carrying value of the plan liability recorded in accrued liabilities was $5,086 and $3,962 as of April 1, 2017 and February 27, 2016,
respectively.
Pension plan
The Company provides pension benefits to the employees of Elfa under collectively bargained pension plans in Sweden, which are recorded in other
long-term liabilities. The defined benefit plan provides benefits for participating employees based on years of service and final salary levels at retirement. Certain employees also participate in
defined contribution plans for which Company contributions are determined as a percentage of participant compensation. The defined benefit plans are unfunded and approximately 3% of Elfa employees are
participants in the defined benefit pension plan.
95
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
6. Employee benefit plans (Continued)
The
following is a reconciliation of the changes in the defined benefit obligations, a statement of funded status, and the related weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
April 1,
2017
|
|
February 27,
2016
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
Projected benefit obligation, beginning of year
|
|
$
|
3,691
|
|
$
|
3,610
|
|
Service cost
|
|
|
67
|
|
|
86
|
|
Interest cost
|
|
|
117
|
|
|
103
|
|
Benefits paid
|
|
|
(77
|
)
|
|
(90
|
)
|
Actuarial loss (gain)
|
|
|
710
|
|
|
(133
|
)
|
Exchange rate gain
|
|
|
(370
|
)
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
Projected benefit obligation, end of year
|
|
|
4,138
|
|
|
3,486
|
|
Fair value of plan assets, end of year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underfunded status, end of year
|
|
$
|
(4,138
|
)
|
$
|
(3,486
|
)
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
3.3
|
%
|
|
3.4
|
%
|
Rate of pay increases
|
|
|
3.0
|
%
|
|
3.0
|
%
|
|
|
|
|
|
|
|
|
The
following table provides the components of net periodic benefit cost for fiscal years 2016, 2015, 2014 and the five weeks ended April 2, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
Five Weeks
Ended
April 2,
2016
|
|
|
|
April 1,
2017
|
|
February 27,
2016
|
|
February 28,
2015
|
|
Components of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
67
|
|
$
|
86
|
|
$
|
62
|
|
$
|
6
|
|
Interest cost
|
|
|
117
|
|
|
103
|
|
|
131
|
|
|
10
|
|
Amortization of unrecognized net loss
|
|
|
37
|
|
|
45
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost for defined benefit plan
|
|
|
221
|
|
|
234
|
|
|
231
|
|
|
16
|
|
Defined contribution plans
|
|
|
1,904
|
|
|
2,246
|
|
|
2,292
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net periodic benefit cost
|
|
$
|
2,125
|
|
$
|
2,480
|
|
$
|
2,523
|
|
$
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Stock-based compensation
On October 16, 2013, the Board approved the 2013 Incentive Award Plan ("2013 Equity Plan"). The 2013 Equity Plan provides for grants of nonqualified stock options, incentive stock
options, restricted stock, restricted stock units, deferred stock awards, deferred stock units, stock appreciation rights, dividends equivalents, performance awards, and stock payments. As of
April 1, 2017, there are
96
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
7. Stock-based compensation (Continued)
3,616,570
shares authorized and 522,004 shares available for grant under the 2013 Equity Plan. Awards that are surrendered or terminated without issuance of shares are available for future grants.
Stock Options
On September 1, 2014, the Company granted 24,649 nonqualified stock options under the 2013 Equity Plan to certain employees. The stock
options granted vest in equal annual installments over 7 years. The stock options granted were approved by the Board and consisted of nonqualified stock options as defined by the IRS for
corporate and individual tax reporting purposes.
On
October 27, 2014, the Company granted 80,200 nonqualified stock options under the 2013 Equity Plan to non-employee directors of the Company. The stock options granted vest in
equal annual
installments over 3 years. The stock options granted were approved by the Board and consisted of nonqualified stock options as defined by the IRS for corporate and individual tax reporting
purposes.
On
August 3, 2015, the Company granted 94,568 nonqualified stock options under the 2013 Equity Plan to non-employee directors of the Company. The stock options granted vest in
equal annual installments over 3 years. The stock options granted were approved by the Board and consisted of nonqualified stock options as defined by the IRS for corporate and individual tax
reporting purposes.
On
August 1, 2016, the Company granted 276,075 nonqualified stock options under the 2013 Equity Plan to non-employee directors of the Company. The stock options granted vest in
equal annual installments over 3 years. The stock options granted were approved by the Board and consisted of nonqualified stock options as defined by the IRS for corporate and individual tax
reporting purposes.
In
connection with our stock-based compensation plans, the Board considers the estimated fair value of the Company's stock when setting the stock option exercise price as of the date of
each grant. The Board determines the exercise price of stock options based on the closing price of the Company's common stock as reported on The New York Stock Exchange on the grant date. Stock-based
compensation cost is measured at the grant date fair value and is recognized as an expense in the consolidated statements of operations, on a straight-line basis, over the employee's requisite service
period (generally the vesting period of the equity grant). The Company estimates forfeitures for option grants that are not expected to vest. The Company issues new shares of common stock upon stock
option exercise.
Stock-based
compensation cost related to stock options was $1,526, $1,556, $1,289, and $147 during the fiscal year 2016, 2015, 2014, and the five weeks ended April 2, 2016,
respectively. As of April 1, 2017, there was a remaining unrecognized compensation cost of $4,257 (net of estimated forfeitures) that the Company expects to be recognized on a straight-line
basis over a weighted-average remaining service period of approximately 1.7 years. The intrinsic value of shares exercised was $0, $2, and $369 during fiscal 2016, 2015, and 2014, respectively.
The fair value of shares vested was $1,464, $1,367 , and $1,205 during fiscal 2016, 2015, and 2014, respectively.
97
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
7. Stock-based compensation (Continued)
The
following table summarizes the Company's stock option activity during fiscal 2016, 2015, and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2016(1)
|
|
2015
|
|
2014
|
|
|
|
Shares
|
|
Weighted-
average
exercise
price
(per share)
|
|
Weighted-
average
contractual
term
remaining
(years)
|
|
Aggregate
intrinsic
value
(thousands)
|
|
Shares
|
|
Weighted-
average
exercise
price
(per share)
|
|
Weighted-
average
contractual
term
remaining
(years)
|
|
Aggregate
intrinsic
value
(thousands)
|
|
Shares
|
|
Weighted-
average
exercise
price
(per share)
|
|
Weighted-
average
contractual
term
remaining
(years)
|
|
Aggregate
intrinsic
value
(thousands)
|
|
Beginning balance
|
|
|
2,890,476
|
|
$
|
18.02
|
|
|
|
|
|
|
|
|
2,856,005
|
|
$
|
18.04
|
|
|
|
|
|
|
|
|
2,827,492
|
|
$
|
17.92
|
|
|
|
|
|
|
|
Granted
|
|
|
276,075
|
|
$
|
5.35
|
|
|
|
|
|
|
|
|
94,568
|
|
$
|
17.28
|
|
|
|
|
|
|
|
|
104,849
|
|
$
|
21.02
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
(3,315
|
)
|
$
|
17.71
|
|
|
|
|
|
|
|
|
(42,480
|
)
|
$
|
17.47
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(98,815
|
)
|
$
|
18.63
|
|
|
|
|
|
|
|
|
(41,791
|
)
|
$
|
18.00
|
|
|
|
|
|
|
|
|
(32,202
|
)
|
$
|
18.00
|
|
|
|
|
|
|
|
Expired
|
|
|
(121,708
|
)
|
$
|
17.95
|
|
|
|
|
|
|
|
|
(14,991
|
)
|
$
|
17.80
|
|
|
|
|
|
|
|
|
(1,654
|
)
|
$
|
17.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
|
2,946,028
|
|
$
|
16.81
|
|
|
6.83
|
|
$
|
|
|
|
2,890,476
|
|
$
|
18.02
|
|
|
7.66
|
|
$
|
|
|
|
2,856,005
|
|
$
|
18.04
|
|
|
8.60
|
|
$
|
1,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at end of year
|
|
|
2,156,537
|
|
$
|
17.98
|
|
|
6.51
|
|
$
|
|
|
|
2,110,661
|
|
$
|
17.95
|
|
|
7.55
|
|
$
|
|
|
|
1,975,068
|
|
$
|
17.90
|
|
|
8.53
|
|
$
|
1,036
|
|
-
(1)
-
Fiscal
2016 includes 6,690 options forfeited and 576 options expired during the five-weeks ended April 2, 2016. There were no options granted or exercised
during the five-weeks ended April 2, 2016.
The
fair value of stock options is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average
assumptions:
-
-
Expected TermThe expected term of the options represents the period of time between the grant date of the options and the date the
options are either exercised or canceled, including an estimate of options still outstanding. The Company utilized the simplified method for calculating the expected term for stock options as we do
not have sufficient historical data to calculate based on actual exercise and forfeiture activity.
-
-
Expected VolatilityThe expected volatility incorporates historical and implied volatility of comparable public companies for a
period approximating the expected term.
-
-
Expected Dividend YieldThe expected dividend yield is based on the Company's expectation of not paying dividends on its common
stock for the foreseeable future.
-
-
Risk-Free Interest RateThe risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and
with a maturity that approximates the expected term.
Stock
options granted during fiscal year 2016, 2015, and 2014 were granted at a weighted-average grant date fair value of $3.26, $8.46, and $8.14, respectively. Such amounts were
estimated using the Black Scholes option pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2016
|
|
2015
|
|
2014
|
Expected term
|
|
6.0 years
|
|
6.0 years
|
|
6.1 years
|
Expected volatility
|
|
67.9%
|
|
50.3%
|
|
50.4%
|
Risk-free interest rate
|
|
1.2%
|
|
1.7%
|
|
1.8%
|
Dividend yield
|
|
0%
|
|
0%
|
|
0%
|
98
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
7. Stock-based compensation (Continued)
Restricted Stock Awards
On July 1, 2016, the Company granted time-based and performance-based restricted stock awards under the Company's 2013 Incentive Award
Plan to certain key executives in accordance with employment agreements executed on May 6, 2016. The total number of restricted shares granted was 372,842 with a grant-date fair value of $5.42.
The time-based restricted shares vest over 2.75 years. The performance-based restricted shares vest based on achievement of fiscal 2016 performance targets and are also subject to time-based
vesting requirements over 3.75 years. On April 1, 2017, 104,320 performance-based restricted shares met the fiscal 2016 performance condition and are subject to subsequent time-based
vesting requirements.
On
August 2, 2016, the Company granted time-based and performance-based restricted stock awards under the Company's 2013 Incentive Award Plan to certain officers of the Company.
The total number of restricted shares granted was 248,937 with a grant-date fair value of $5.29. The time-based restricted stock awards vest over 2.67 years. The performance-based restricted
stock awards vest based on achievement of fiscal 2016 performance targets and are also subject to time-based vesting requirements over 3.67 years. On April 1, 2017, 61,552
performance-based restricted shares met the fiscal 2016 performance condition and are subject to subsequent time-based vesting requirements.
Stock-based
compensation cost related to restricted stock awards was $463 for fiscal year 2016. Unrecognized compensation expense related to outstanding restricted stock awards to
employees as of April 1, 2017 is expected to be $1,009 (net of estimated forfeitures) to be recognized on a straight-line basis over a weighted average period of 1.9 years.
The
following table summarizes the Company's restricted stock awards activity during fiscal 2016:
|
|
|
|
|
|
|
|
|
|
Restricted Stock
Awards
|
|
Weighted Average
Grant Date Fair Value
|
|
Nonvested at February 27, 2016
|
|
|
|
|
|
|
|
Granted
|
|
|
621,779
|
|
$
|
5.37
|
|
Vested
|
|
|
(31,216
|
)
|
|
5.37
|
|
Forfeited
|
|
|
(334,923
|
)
|
|
5.36
|
|
Withheld related to net settlement
|
|
|
(9,106
|
)
|
|
5.37
|
|
|
|
|
|
|
|
|
|
Nonvested at April 1, 2017
|
|
|
246,534
|
|
$
|
5.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Shareholders' equity
Common stock
During fiscal 2016, the Company issued 26,923 shares of common stock in exchange for consultation services received from a third-party at a
weighted-average price of $5.01 per share.
99
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
8. Shareholders' equity (Continued)
As
of April 1, 2017, the Company had 250,000,000 shares of common stock authorized, with a par value of $0.01, of which 48,045,114 were issued.
The
holders of common stock are entitled to one vote per common share. The holders have no preemptive or other subscription rights and there are no redemptions or sinking fund provisions
with respect to such shares. Common stock is subordinate to any preferred stock outstanding with respect to rights upon liquidation and dissolution of the Company.
Preferred stock
As of April 1, 2017, the Company had 5,000,000 shares of preferred stock authorized, with a par value of $0.01, of which no shares were
issued or outstanding.
9. Accumulated other comprehensive income
Accumulated other comprehensive income ("AOCI") consists of changes in our foreign currency hedge contracts, pension liability adjustment, and foreign currency translation. The
components of AOCI, net of tax, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency
hedge
instruments
|
|
Pension
liability
adjustment
|
|
Foreign
currency
translation
|
|
Total
|
|
Balance at February 28, 2015
|
|
$
|
(882
|
)
|
$
|
(1,167
|
)
|
$
|
(16,293
|
)
|
$
|
(18,342
|
)
|
Other comprehensive (loss) income before reclassifications, net of tax
|
|
|
(47
|
)
|
|
138
|
|
|
(2,521
|
)
|
|
(2,430
|
)
|
Amounts reclassified to earnings, net of tax
|
|
|
900
|
|
|
37
|
|
|
|
|
|
937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss)
|
|
|
853
|
|
|
175
|
|
|
(2,521
|
)
|
|
(1,493
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 27, 2016
|
|
$
|
(29
|
)
|
$
|
(992
|
)
|
$
|
(18,814
|
)
|
$
|
(19,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income before reclassifications, net of tax
|
|
|
|
|
|
(66
|
)
|
|
4,053
|
|
|
3,987
|
|
Amounts reclassified to earnings, net of tax
|
|
|
12
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive income (loss)
|
|
|
12
|
|
|
(66
|
)
|
|
4,053
|
|
|
3,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 2, 2016
|
|
$
|
(17
|
)
|
$
|
(1,058
|
)
|
$
|
(14,761
|
)
|
$
|
(15,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss before reclassifications, net of tax
|
|
|
(543
|
)
|
|
(413
|
)
|
|
(6,283
|
)
|
|
(7,239
|
)
|
Amounts reclassified to earnings, net of tax
|
|
|
405
|
|
|
27
|
|
|
|
|
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net current period other comprehensive loss
|
|
|
(138
|
)
|
|
(386
|
)
|
|
(6,283
|
)
|
|
(6,807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 1, 2017
|
|
$
|
(155
|
)
|
$
|
(1,444
|
)
|
$
|
(21,044
|
)
|
$
|
(22,643
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
9. Accumulated other comprehensive income (Continued)
The
unrecognized net actuarial loss included in accumulated other comprehensive income as of April 1, 2017 and February 27, 2016 was $1,444 and $992, respectively. Amounts
reclassified from AOCI to earnings for the pension liability adjustment category are generally included in cost of sales and selling, general and administrative expenses in the Company's consolidated
statements of operations. For a description of the Company's employee benefit plans, refer to Note 6. Amounts reclassified from AOCI
to earnings for the foreign currency hedge instruments category are generally included in cost of sales in the Company's consolidated statements of operations. For a description of the Company's use
of foreign currency forward contracts, refer to Note 10.
10. Foreign currency forward contracts
The Company's international operations and purchases of its significant product lines from foreign suppliers are subject to certain opportunities and risks, including foreign currency
fluctuations. In the TCS segment, we utilize foreign currency forward contracts in Swedish krona to stabilize our retail gross margins and to protect our domestic operations from downward currency
exposure by hedging purchases of inventory from our wholly owned subsidiary, Elfa. Forward contracts in the TCS segment are designated as cash flow hedges, as defined by ASC 815. In the Elfa segment,
we utilize foreign currency forward contracts to hedge purchases, primarily of raw materials, that are transacted in currencies other than Swedish krona, which is the functional currency of Elfa.
Forward contracts in the Elfa segment are economic hedges, and are not designated as cash flow hedges as defined by ASC 815.
In
fiscal 2016, fiscal 2015, and fiscal 2014, the TCS segment used forward contracts for 78%, 54%, and 54% of inventory purchases in Swedish krona each year, respectively. In fiscal
2016, fiscal 2015, and fiscal 2014, the Elfa segment used forward contracts to purchase U.S. dollars in the amount of $3,905, $5,495, and $4,300, which represented 56%, 67%, and 64% of the Elfa
segment's U.S. dollar purchases each year, respectively. In the five-weeks ended April 2, 2016, the TCS segment used forward contracts for 0% of inventory purchases in Swedish krona and the
Elfa segment used forward contracts to purchase U.S. dollars in the amount of $155, which represented 23% of the Elfa segment's U.S. dollar purchases.
Generally,
the Company's foreign currency forward contracts have terms from 1 to 12 months and require the Company to exchange currencies at agreed-upon rates at settlement.
The
counterparties to the contracts consist of a limited number of major domestic and international financial institutions. The Company does not hold or enter into financial instruments
for trading or speculative purposes. The Company records its foreign currency forward contracts on a gross basis and generally does not require collateral from these counterparties because it does not
expect any losses from credit exposure.
The
Company records all foreign currency forward contracts on its consolidated balance sheet at fair value. The Company accounts for its foreign currency hedge instruments in the TCS
segment as cash flow hedges, as defined. Changes in the fair value of the foreign currency hedge instruments that are considered to be effective, as defined, are recorded in other comprehensive income
(loss) until the hedged item (inventory) is sold to the customer, at which time the deferred gain or loss is recognized
101
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
10. Foreign currency forward contracts (Continued)
through
cost of sales. Any portion of a change in the foreign currency hedge instrument's fair value that is considered to be ineffective, as defined, or that the Company has elected to exclude from
its measurement of effectiveness, is immediately recorded in earnings as cost of sales. The Company assessed the effectiveness of the foreign currency hedge instruments and determined the foreign
currency hedge instruments were highly effective during the fiscal years ended April 1, 2017, February 27, 2016, and February 28, 2015. Forward contracts not designated as hedges
in the Elfa segment are adjusted to fair value as selling, general, and administrative expenses on the consolidated statements of operations. During fiscal 2016, the Company recognized a net
unrealized gain of $120 associated with the change in fair value of forward contracts not designated as hedge instruments.
The
Company had $155 in accumulated other comprehensive loss related to foreign currency hedge instruments at April 1, 2017. Settled foreign currency hedge instruments related to
inventory on hand as of April 1, 2017 represents $562 of the accumulated unrealized loss. The Company expects the unrealized loss of $562, net of taxes, to be reclassified into earnings over
the next 12 months as the underlying inventory is sold to the end customer.
The
change in fair value of the Company's foreign currency hedge instruments that qualify as cash flow hedges and are included in accumulated other comprehensive income (loss), net of
taxes, are presented in Note 9 of these financial statements.
11. Leases
The Company conducts all of its U.S. operations from leased facilities that include a corporate headquarters/warehouse facility and 86 store locations. The corporate
headquarters/warehouse and stores are under operating leases that will expire over the next 1 to 20 years. The Company also leases computer hardware under operating leases that expire over the
next few years. In most cases, management expects that in the normal course of business, leases will be renewed or replaced by other leases.
Most
of the operating leases for the stores contain a renewal option at predetermined rental payments for periods of 5 to 20 years. This option enables the Company to retain use
of facilities in desirable operating areas. The rental payments under certain store leases are based on a minimum rental plus a percentage of the sales in excess of a stipulated amount. These payments
are accounted for as contingent rent and expensed when incurred.
102
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
11. Leases (Continued)
The
following is a schedule of future minimum lease payments due under noncancelable operating and capital leases:
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
Capital leases
|
|
Within 1 year
|
|
$
|
81,680
|
|
$
|
393
|
|
2 years
|
|
|
79,427
|
|
|
293
|
|
3 years
|
|
|
68,225
|
|
|
237
|
|
4 years
|
|
|
63,496
|
|
|
|
|
5 years
|
|
|
48,380
|
|
|
|
|
Thereafter
|
|
|
217,116
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
558,324
|
|
$
|
923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less amount representing interest
|
|
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
|
|
$
|
901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent
expense for fiscal years 2016, 2015, 2014, and the five weeks ended April 2, 2016 was $80,647, $75,834, $72,643, and $6,495, respectively. Included in rent expense is
percentage-of-sales rent expense of $416, $450, $633, and $32 for fiscal years 2016, 2015, 2014, and the five weeks ended April 2, 2016, respectively.
12. Commitments and contingencies
In connection with insurance policies and other contracts, the Company has outstanding standby letters of credit totaling $4,143 as of April 1, 2017.
The
Company is subject to ordinary litigation and routine reviews by regulatory bodies that are incidental to its business, none of which is expected to have a material adverse effect on
the Company's consolidated financial statements on an individual basis or in the aggregate.
13. Fair value measurements
Under generally accepted accounting principles, the Company is required to a) measure certain assets and liabilities at fair value or b) disclose the fair values of certain
assets and liabilities recorded at cost. Accounting standards define fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction
between market participants at the measurement date. Fair value is calculated assuming the transaction occurs in the principal or most advantageous market for the asset or liability and includes
consideration of non-performance risk and credit risk of both parties. Accounting standards pertaining to fair value establish a three-tier fair value hierarchy that prioritizes the inputs used in
measuring fair value. These tiers include:
-
-
Level 1Valuation inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
103
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
13. Fair value measurements (Continued)
-
-
Level 2Valuation inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical
or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
-
-
Level 3Valuation inputs are unobservable and typically reflect management's estimates of assumptions that market
participants would use in pricing the asset or liability. The fair values are determined using model-based techniques that include option pricing models, discounted cash flow models and similar
techniques.
As
of April 1, 2017 and February 27, 2016, the Company held certain items that are required to be measured at fair value on a recurring basis. These included the
nonqualified retirement plan and foreign currency forward contracts. The nonqualified retirement plan consists of investments purchased by employee contributions to retirement savings accounts. The
Company's international operations and purchases of its significant product lines from foreign suppliers are subject to certain opportunities and risks, including foreign currency fluctuations. The
Company utilizes foreign currency forward exchange contracts to stabilize its retail gross margins and to protect its operations from downward currency exposure. Foreign currency hedge instruments are
related to the Company's attempts to hedge foreign currency fluctuation on purchases of inventory in Swedish krona. The Company's foreign currency hedge instruments consist of over-the-counter (OTC)
contracts, which are not traded on a public exchange. See Note 10 for further information on the Company's hedging activities.
The
fair value of the foreign currency forward contracts is determined based on the market approach which utilizes inputs that are readily available in public markets or can be derived
from information available in publicly quoted markets for comparable assets. Therefore, the Company has categorized this item as Level 2. The Company also considers counterparty credit risk and
its own credit risk in its determination of all estimated fair values. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most
accurate information available for the types of contracts it holds.
104
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
13. Fair value measurements (Continued)
The
following items are measured at fair value on a recurring basis, subject to the disclosure requirements of ASC 820,
Fair Value
Measurements,
at April 1, 2017 and February 27, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
|
|
Balance Sheet Location
|
|
April 1,
2017
|
|
February 27,
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified retirement plan(1)
|
|
N/A
|
|
Other current assets
|
|
$
|
5,092
|
|
$
|
3,947
|
|
Foreign currency forward contracts
|
|
Level 2
|
|
Other current assets
|
|
|
841
|
|
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
$
|
5,933
|
|
$
|
4,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
The
fair value amount of the nonqualified retirement plan is measured at fair value using the net asset value per share practical expedient, and therefore, is not
classified in the fair value hierarchy.
The
fair value of long-term debt was estimated using quoted prices as well as recent transactions for similar types of borrowing arrangements (level 2 valuations). As of
April 1, 2017 and February 27, 2016, the estimated fair value of the Company's long-term debt, including current maturities, was $295,005 and $221,534, respectively.
14. Segment reporting
The Company's reportable segments were determined on the same basis as how management evaluates performance internally by the Chief Operating Decision Maker ("CODM"). The Company has
determined that the Chief Executive Officer is the CODM and the Company's two reportable segments consist of TCS and Elfa.
The
TCS segment includes the Company's retail stores, website and call center, as well as the installation and organization services business. The Elfa segment includes the manufacturing
business that produces the elfa® brand products that are sold domestically exclusively through the TCS segment, as well as on a wholesale basis in approximately 30 countries around the
world with a concentration in the Nordic region of Europe. The intersegment sales in the Elfa column represent elfa® product sales to the TCS segment. These sales and the related gross
margin on merchandise recorded in TCS inventory balances at the end of the period are eliminated for consolidation purposes in the Eliminations column. The net sales to third parties in the Elfa
column represent sales to customers outside of the United States.
On
July 1, 2016, Melissa Reiff, former President and Chief Operating Officer, became the Company's Chief Executive Officer ("CEO"), succeeding William A. ("Kip") Tindell, III.
Upon transition to CEO, Ms. Reiff assumed the role of CODM and during the second quarter of fiscal 2016, the Company re-evaluated its measure used to evaluate segment performance. Previously,
the profit or loss measure used to make resource allocation decisions and evaluate segment performance was income or loss before taxes. The Company has determined that adjusted earnings before
interest, tax, depreciation, and amortization ("Adjusted EBITDA") is the profit or loss measure that the CODM uses
105
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
14. Segment reporting (Continued)
to
make resource allocation decisions and evaluate segment performance. The shift to focus on Adjusted EBITDA more closely aligns with management's assessment of segment performance under
Ms. Reiff's leadership. As such, all current and prior period segment information has been presented comparably.
Adjusted
EBITDA assists management in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that management
believes do not directly reflect our core operations and, therefore, are not included in measuring segment performance. Adjusted EBITDA is calculated in accordance with the Senior Secured Term Loan
Facility and the Revolving Credit Facility and we define Adjusted EBITDA as net income before interest, taxes, depreciation and amortization, certain non cash items, and other adjustments that we do
not consider in our evaluation of ongoing operating performance from period to period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended April 1, 2017
|
|
TCS
|
|
Elfa
|
|
Eliminations
|
|
Total
|
|
Net sales to third parties
|
|
$
|
752,675
|
|
$
|
67,255
|
|
$
|
|
|
$
|
819,930
|
|
Intersegment sales
|
|
|
|
|
|
47,898
|
|
|
(47,898
|
)
|
|
|
|
Adjusted EBITDA(2)
|
|
|
75,268
|
|
|
11,186
|
|
|
105
|
|
|
86,559
|
|
Depreciation and amortization
|
|
|
31,572
|
|
|
5,552
|
|
|
|
|
|
37,124
|
|
Interest expense, net
|
|
|
16,403
|
|
|
284
|
|
|
|
|
|
16,687
|
|
Capital expenditures(1)
|
|
|
25,901
|
|
|
2,614
|
|
|
|
|
|
28,515
|
|
Goodwill
|
|
|
202,815
|
|
|
|
|
|
|
|
|
202,815
|
|
Trade names(1)
|
|
|
187,048
|
|
|
39,637
|
|
|
|
|
|
226,685
|
|
Assets(1)
|
|
|
656,884
|
|
|
107,998
|
|
|
(3,048
|
)
|
|
761,834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended February 27, 2016
|
|
TCS
|
|
Elfa
|
|
Eliminations
|
|
Total
|
|
Net sales to third parties
|
|
$
|
724,079
|
|
$
|
70,551
|
|
$
|
|
|
$
|
794,630
|
|
Intersegment sales
|
|
|
|
|
|
47,010
|
|
|
(47,010
|
)
|
|
|
|
Adjusted EBITDA
|
|
|
58,827
|
|
|
9,157
|
|
|
175
|
|
|
68,159
|
|
Depreciation and amortization
|
|
|
28,767
|
|
|
5,463
|
|
|
|
|
|
34,230
|
|
Interest expense, net
|
|
|
16,484
|
|
|
326
|
|
|
|
|
|
16,810
|
|
Capital expenditures(1)
|
|
|
42,412
|
|
|
4,019
|
|
|
|
|
|
46,431
|
|
Goodwill
|
|
|
202,815
|
|
|
|
|
|
|
|
|
202,815
|
|
Trade names(1)
|
|
|
187,048
|
|
|
41,320
|
|
|
|
|
|
228,368
|
|
Assets(1)
|
|
|
654,611
|
|
|
107,136
|
|
|
(3,628
|
)
|
|
758,119
|
|
106
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
14. Segment reporting (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended February 28, 2015
|
|
TCS
|
|
Elfa
|
|
Eliminations
|
|
Total
|
|
Net sales to third parties
|
|
$
|
697,699
|
|
$
|
84,167
|
|
$
|
|
|
$
|
781,866
|
|
Intersegment sales
|
|
|
|
|
|
51,291
|
|
|
(51,291
|
)
|
|
|
|
Adjusted EBITDA
|
|
|
72,109
|
|
|
16,073
|
|
|
48
|
|
|
88,230
|
|
Depreciation and amortization
|
|
|
24,945
|
|
|
6,066
|
|
|
|
|
|
31,011
|
|
Interest expense, net
|
|
|
16,543
|
|
|
562
|
|
|
|
|
|
17,105
|
|
Capital expenditures(1)
|
|
|
40,785
|
|
|
7,955
|
|
|
|
|
|
48,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five weeks ended April 2, 2016
|
|
TCS
|
|
Elfa
|
|
Eliminations
|
|
Total
|
|
Net sales to third parties
|
|
$
|
64,331
|
|
$
|
4,887
|
|
$
|
|
|
$
|
69,218
|
|
Intersegment sales
|
|
|
|
|
|
1,990
|
|
|
(1,990
|
)
|
|
|
|
Adjusted EBITDA
|
|
|
5,271
|
|
|
(471
|
)
|
|
639
|
|
|
5,439
|
|
Depreciation and amortization
|
|
|
2,543
|
|
|
466
|
|
|
|
|
|
3,009
|
|
Interest expense, net
|
|
|
1,532
|
|
|
18
|
|
|
|
|
|
1,550
|
|
Capital expenditures(1)
|
|
|
1,640
|
|
|
795
|
|
|
|
|
|
2,435
|
|
-
(1)
-
Tangible
assets and trade names in the Elfa column are located outside of the United States.
-
(2)
-
The
TCS segment includes a net benefit of $3.9 million related to amended and restated employment agreements entered into with key executives during the first
quarter, leading to a reversal of accrued deferred compensation associated with the original employment agreements.
107
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
14. Segment reporting (Continued)
A
reconciliation of Adjusted EBITDA by segment to income before taxes is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
Five
Weeks
Ended
|
|
|
|
April 1,
2017
|
|
February 27,
2016
|
|
February 28,
2015
|
|
April 2,
2016
|
|
Adjusted EBITDA by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCS
|
|
$
|
75,268
|
|
$
|
58,827
|
|
$
|
72,109
|
|
$
|
5,271
|
|
Elfa
|
|
|
11,186
|
|
|
9,157
|
|
|
16,073
|
|
|
(471
|
)
|
Eliminations
|
|
|
105
|
|
|
175
|
|
|
48
|
|
|
639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Adjusted EBITDA
|
|
|
86,559
|
|
|
68,159
|
|
|
88,230
|
|
|
5,439
|
|
Depreciation and amortization
|
|
|
(37,124
|
)
|
|
(34,230
|
)
|
|
(31,011
|
)
|
|
(3,009
|
)
|
Interest expense, net
|
|
|
(16,687
|
)
|
|
(16,810
|
)
|
|
(17,105
|
)
|
|
(1,550
|
)
|
Pre-opening costs(a)
|
|
|
(6,852
|
)
|
|
(9,033
|
)
|
|
(8,283
|
)
|
|
(191
|
)
|
Noncash rent(b)
|
|
|
1,365
|
|
|
1,844
|
|
|
374
|
|
|
200
|
|
Stock-based compensation(c)
|
|
|
(1,989
|
)
|
|
(1,556
|
)
|
|
(1,289
|
)
|
|
(147
|
)
|
Foreign exchange gains (losses)(d)
|
|
|
342
|
|
|
(241
|
)
|
|
171
|
|
|
(60
|
)
|
Other adjustments(e)
|
|
|
(1,259
|
)
|
|
(82
|
)
|
|
(1,221
|
)
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes
|
|
$
|
24,355
|
|
$
|
8,051
|
|
$
|
29,866
|
|
$
|
692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(a)
-
Non-capital
expenditures associated with opening new stores and relocating stores, including rent, marketing expenses, travel and relocation costs, and training
costs. We adjust for these costs to facilitate comparisons of our performance from period to period.
-
(b)
-
Reflects
the extent to which our annual GAAP rent expense has been above or below our cash rent payment due to lease accounting adjustments. The adjustment varies
depending on the average age of our lease portfolio (weighted for size), as our GAAP rent expense on younger leases typically exceeds our cash cost, while our GAAP rent expense on older leases is
typically less than our cash cost.
-
(c)
-
Non-cash
charges related to stock-based compensation programs, which vary from period to period depending on volume and vesting timing of awards. We adjust for these
charges to facilitate comparisons from period to period.
-
(d)
-
Realized
foreign exchange transactional gains/losses our management does not consider in our evaluation of our ongoing operations.
-
(e)
-
Other
adjustments include amounts our management does not consider in our evaluation of our ongoing operations, including certain severance and other charges.
108
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
14. Segment reporting (Continued)
The
following table shows sales by merchandise category as a percentage of total net sales for fiscal years 2016, 2015, and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended
|
|
|
|
April 1,
2017
|
|
February 27,
2016
|
|
February 28,
2015
|
|
Custom Closets(1)
|
|
|
48
|
%
|
|
46
|
%
|
|
47
|
%
|
Storage, Box, Shelving
|
|
|
14
|
%
|
|
14
|
%
|
|
14
|
%
|
Kitchen and Trash
|
|
|
13
|
%
|
|
13
|
%
|
|
13
|
%
|
Office, Collections, & Hooks
|
|
|
8
|
%
|
|
9
|
%
|
|
9
|
%
|
Bath, Travel, Laundry
|
|
|
8
|
%
|
|
9
|
%
|
|
9
|
%
|
Containers, Gift Packaging, Seasonal, Impulse
|
|
|
8
|
%
|
|
8
|
%
|
|
8
|
%
|
Other
|
|
|
1
|
%
|
|
1
|
%
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Includes
elfa®, TCS Closets®, elfa® Sliding Doors products and installation as well as closet completion products sold by the TCS
segment and Elfa segment sales to third parties.
15. Net income per common share
Basic net income per common share is computed as net income divided by the weighted-average number of common shares outstanding for the period. Diluted net income per share is computed
as net income divided by the weighted-average number of common shares outstanding for the period plus common stock equivalents consisting of shares subject to stock-based awards with exercise prices
less than or equal to the average market price of the Company's common stock for the period, to the extent their inclusion would be dilutive. Potential dilutive securities are excluded from the
computation of diluted net income per share if their effect is anti-dilutive.
109
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
15. Net income per common share (Continued)
The
following is a reconciliation of net income and the number of shares used in the basic and diluted net income per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
|
|
April 2,
2017
|
|
February 27,
2016
|
|
February 28,
2015
|
|
Five Weeks
Ended
April 2, 2016
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14,953
|
|
$
|
5,142
|
|
$
|
22,673
|
|
$
|
354
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common sharesbasic
|
|
|
47,996,746
|
|
|
47,985,717
|
|
|
47,971,243
|
|
|
47,986,975
|
|
Options and other dilutive securities
|
|
|
19,264
|
|
|
|
|
|
549,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common sharesdiluted
|
|
|
48,016,010
|
|
|
47,985,717
|
|
|
48,520,865
|
|
|
47,986,975
|
|
Net income per common sharebasic and diluted
|
|
$
|
0.31
|
|
$
|
0.11
|
|
$
|
0.47
|
|
$
|
0.01
|
|
Antidilutive securities not included:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding
|
|
|
2,954,114
|
|
|
2,875,900
|
|
|
830,740
|
|
|
2,886,138
|
|
Nonvested restricted stock awards
|
|
|
131,957
|
|
|
|
|
|
|
|
|
|
|
16. Quarterly results of operations (unaudited)
Due to the seasonal nature of our business, fourth quarter operating results historically represent a larger share of annual net sales and operating income primarily due to Our Annual
elfa® Sale. We follow the same accounting policies for preparing quarterly and annual financial data. The table below summarizes quarterly results for the fiscal year ended April 1,
2017 and the recast fiscal year ended April 2, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended April 1, 2017
|
|
|
|
Fourth Quarter
Ended
April 1,
2017
|
|
Third Quarter
Ended
December 31,
2016
|
|
Second Quarter
Ended
October 1,
2016
|
|
First Quarter
Ended
July 2,
2016
|
|
Net sales
|
|
$
|
221,042
|
|
$
|
216,380
|
|
$
|
205,060
|
|
$
|
177,448
|
|
Gross profit
|
|
|
127,318
|
|
|
125,702
|
|
|
118,355
|
|
|
104,695
|
|
Income from operations
|
|
|
17,181
|
|
|
12,561
|
|
|
10,272
|
|
|
1,028
|
|
Net income (loss)
|
|
|
8,377
|
|
|
5,092
|
|
|
3,541
|
|
|
(2,057
|
)
|
Weighted-average shares used in computing basic net income (loss) per share
|
|
|
48,009,029
|
|
|
47,999,535
|
|
|
47,991,445
|
|
|
47,986,975
|
|
Weighted-average shares used in computing diluted net income (loss) per share
|
|
|
48,073,420
|
|
|
48,022,499
|
|
|
48,001,112
|
|
|
47,986,975
|
|
Basic and diluted net income (loss) per common share
|
|
$
|
0.17
|
|
$
|
0.11
|
|
$
|
0.07
|
|
$
|
(0.04
|
)
|
110
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
16. Quarterly results of operations (unaudited) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recast Fiscal Year Ended April 2, 2016
|
|
|
|
Fourth Quarter
Ended
April 2,
2016
|
|
Third Quarter
Ended
January 2,
2016
|
|
Second Quarter
Ended
October 3,
2015
|
|
First Quarter
Ended
July 4,
2015
|
|
Net sales
|
|
$
|
209,881
|
|
$
|
212,836
|
|
$
|
204,412
|
|
$
|
169,958
|
|
Gross profit
|
|
|
121,275
|
|
|
125,434
|
|
|
118,273
|
|
|
99,511
|
|
Income (loss) from operations
|
|
|
9,452
|
|
|
10,156
|
|
|
9,910
|
|
|
(4,981
|
)
|
Net income (loss)
|
|
|
3,380
|
|
|
3,924
|
|
|
3,342
|
|
|
(5,788
|
)
|
Weighted-average shares used in computing basic net income (loss) per share
|
|
|
47,986,975
|
|
|
47,986,975
|
|
|
47,986,401
|
|
|
47,983,785
|
|
Weighted-average shares used in computing diluted net income (loss) per share
|
|
|
47,986,975
|
|
|
47,986,975
|
|
|
47,986,972
|
|
|
47,983,785
|
|
Basic and diluted net income (loss) per common share
|
|
$
|
0.07
|
|
$
|
0.08
|
|
$
|
0.07
|
|
$
|
(0.12
|
)
|
17. Transition Period Financial Information
On March 30, 2016, the Board of Directors approved a change in the Company's fiscal year end from the Saturday closest to February 28 to the Saturday closest to
March 31 of each year. Accordingly, the Company is presenting audited financial statements for the five week transition period from February 28, 2016 to April 2, 2016. The
following table provides certain unaudited comparative financial information of the same period of the prior year. The periods below both represent 35 day periods.
|
|
|
|
|
|
|
|
|
|
Five Weeks Ended
|
|
(In thousands, except share and per share amounts)
|
|
April 2,
2016
|
|
April 4,
2015
(unaudited)
|
|
Consolidated statement of operations data:
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
69,218
|
|
$
|
66,761
|
|
Gross profit
|
|
|
40,195
|
|
|
39,254
|
|
Selling, general, and administrative expenses
|
|
|
34,504
|
|
|
33,728
|
|
Income from operations
|
|
|
2,242
|
|
|
2,565
|
|
Income before taxes
|
|
|
692
|
|
|
978
|
|
Provision for income taxes
|
|
|
338
|
|
|
340
|
|
Net income
|
|
|
354
|
|
|
638
|
|
Net income per common share:
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
0.01
|
|
$
|
0.01
|
|
Weighted-average common sharesbasic and diluted
|
|
|
47,986,975
|
|
|
47,983,681
|
|
111
Table of Contents
The Container Store Group, Inc.
Notes to consolidated financial statements (Continued)
(In thousands, except share amounts and unless
otherwise stated)
April 1, 2017
18. Subsequent Event
On May 23, 2017, the Company announced a four-part plan designed to optimize its consolidated business and drive improved sales and profitability (the "Optimization Plan"), which
included the elimination of certain full-time positions at the Company's stores, corporate office and distribution center. The Company expects to incur approximately $2,000 in severance expense in the
fiscal quarter ending July 1, 2017, in connection with the position eliminations.
112
Table of Contents
Schedule ICondensed Financial Information of registrant
The Container Store Group, Inc. (parent company only)
Condensed balance sheets
|
|
|
|
|
|
|
|
(in thousands)
|
|
April 1, 2017
|
|
February 27, 2016
|
|
Assets
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Accounts receivable from subsidiaries
|
|
$
|
985
|
|
$
|
850
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
985
|
|
|
850
|
|
Noncurrent assets:
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
220,805
|
|
|
206,218
|
|
|
|
|
|
|
|
|
|
Total noncurrent assets
|
|
|
220,805
|
|
|
206,218
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
221,790
|
|
$
|
207,068
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Accounts payable to subsidiaries
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
|
|
|
Noncurrent liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
|
Common stock
|
|
|
480
|
|
|
480
|
|
Additional paid-in capital
|
|
|
859,102
|
|
|
856,879
|
|
Retained deficit
|
|
|
(637,792
|
)
|
|
(650,291
|
)
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
221,790
|
|
|
207,068
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
|
$
|
221,790
|
|
$
|
207,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
113
Table of Contents
Schedule IThe Container Store Group, Inc.
(parent company only)
Condensed statements of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
Five Weeks
Ended
|
|
(in thousands)
|
|
April 1,
2017
|
|
February 27,
2016
|
|
February 28,
2015
|
|
April 2,
2016
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (excluding depreciation and amortization)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative expenses (excluding depreciation and amortization)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-opening costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on disposal of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes and equity in net income of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in net income of subsidiaries
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income of subsidiaries
|
|
|
14,953
|
|
|
5,142
|
|
|
22,673
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14,953
|
|
$
|
5,142
|
|
$
|
22,673
|
|
$
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Schedule IThe Container Store Group, Inc.
(parent company only)
Condensed statements of comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended
|
|
|
|
|
|
Five Weeks
Ended
April 2,
2016
|
|
(In thousands)
|
|
April 1,
2017
|
|
February 27,
2016
|
|
February 28,
2015
|
|
Net income
|
|
$
|
14,953
|
|
$
|
5,142
|
|
$
|
22,673
|
|
$
|
354
|
|
Unrealized (loss) gain on financial instruments, net of tax (benefit) provision of $(85), $606, $(604) and $7
|
|
|
(138
|
)
|
|
853
|
|
|
(935
|
)
|
|
12
|
|
Pension liability adjustment, net of tax provision (benefit) of $142, $39, $(4) and $0
|
|
|
(386
|
)
|
|
175
|
|
|
(14
|
)
|
|
(66
|
)
|
Foreign currency translation adjustment
|
|
|
(6,283
|
)
|
|
(2,521
|
)
|
|
(19,076
|
)
|
|
4,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
8,146
|
|
$
|
3,649
|
|
$
|
2,648
|
|
$
|
4,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
114
Table of Contents
Schedule IThe Container Store Group, Inc.
(parent company only)
Notes to Condensed Financial Statements
(In thousands, except share
amounts and unless otherwise stated)
April 1, 2017
Note 1: Basis of presentation
In the parent-company-only financial statements, The Container Store Group, Inc.'s investment in subsidiaries is stated at cost plus
equity in undistributed earnings of subsidiaries since the date of acquisition. The parent-company-only financial statements should be read in conjunction with the Company's consolidated financial
statements. A condensed statement of cash flows was not presented because The Container Store Group, Inc. had no cash flow activities during fiscal 2016, fiscal 2015, fiscal 2014, or the
five-weeks ended April 2, 2016.
Note 2: Guarantees and restrictions
The Container Store Inc., a subsidiary of the Company, has $316,760 of long-term debt outstanding under the Senior Secured Term Loan
Facility, as of April 1, 2017. Under the terms of the Senior Secured Term Loan Facility, The Container Store Group, Inc. and the domestic subsidiaries of The Container Store, Inc.
have guaranteed the payment of all principal and interest. In the event of a default under the Senior Secured Term Loan Facility, The Container Store Group, Inc. and the domestic subsidiaries
of The Container Store, Inc. will be directly liable to the debt holders. The Senior Secured Term Loan Facility matures on April 6, 2019. The Senior Secured Term Loan Facility also
includes restrictions on the ability of The Container Store Group, Inc. and its subsidiaries to incur additional liens and indebtedness, make investments and dispositions, pay dividends or make
other distributions, make loans, prepay certain indebtedness and enter into sale and lease back transactions, among other restrictions. Under the Senior Secured Term Loan Facility, provided no event
of default has occurred and is continuing, The Container Store, Inc. is permitted to pay dividends to The Container Store Group, Inc. in an amount not to exceed the sum of $10,000 plus
if after giving effect to such dividend on a pro forma basis, the Consolidated Leverage Ratio (as defined in the Senior Secured Term Loan Facility) does not exceed 2.0 to 1.0, the Available Amount (as
defined in the Senior Secured Term Loan Facility) during the term of the Senior Secured Term Loan Facility, and pursuant to certain other limited exceptions. The restricted net assets of the Company's
consolidated subsidiaries was $209,290 as of April 1, 2017.
As
of April 1, 2017, The Container Store, Inc. also has $73,189 of available credit on the Revolving Credit Facility that provides commitments of up to $100,000 for
revolving loans and letters of credit. The Container Store Group, Inc. and the domestic subsidiaries of The Container Store, Inc. have guaranteed all obligations under the Revolving
Credit Facility. In the event of default under the Revolving Credit Facility, The Container Store Group, Inc. and the domestic subsidiaries of The Container Store, Inc. will be directly
liable to the debt holders. The Revolving Credit Facility includes restrictions on the ability of The Container Store Group, Inc. and its subsidiaries to incur additional liens and
indebtedness, make investments and dispositions, pay dividends or make other transactions, among other restrictions. On October 8, 2015, The Container Store, Inc. executed an amendment
to the Revolving Credit Facility ("Amendment No. 2"). Under the terms of Amendment No. 2, among other
items, the maturity date of the loan was extended from April 6, 2017 to the earlier of (x) October 8, 2020 and (y) January 6, 2019, if any of The Container
Store, Inc.'s obligations under its term loan credit facility remain outstanding on such date and have not been refinanced with debt that has a final maturity date that is no earlier than
April 6, 2019 or subordinated debt. Under the Revolving Credit Facility, provided no event of default has occurred and is continuing, The Container
115
Table of Contents
Store, Inc.
is permitted to pay dividends to The Container Store Group, Inc., in an amount not to exceed the sum of $10,000 plus if after giving effect to such dividend on a pro forma
basis, the Consolidated Fixed Charge Coverage Ratio (as defined in the Revolving Credit Facility) is not less than 1.25 to 1.0, the Available Amount (as defined in the Revolving Credit Facility)
during the term of the Revolving Credit Facility, and pursuant to certain other limited exceptions.