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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended July 1, 2023

or

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

For the transition period from                      to                     

Commission File Number: 001-36161

THE CONTAINER STORE GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware

26-0565401

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

500 Freeport Parkway, Coppell, TX

75019

(Address of principal executive offices)

(Zip Code)

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

(Former name, former address and former fiscal year, if changed since last report)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.01 per share

TCS

New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No

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

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No

The registrant had 51,392,282 shares of its common stock outstanding as of July 28, 2023.

TABLE OF CONTENTS

PART I.

FINANCIAL INFORMATION

Item 1.

Financial statements

Unaudited consolidated balance sheets as of July 1, 2023, April 1, 2023, and July 2, 2022

3

Unaudited consolidated statements of operations for the thirteen weeks ended July 1, 2023 and July 2, 2022

5

Unaudited consolidated statements of comprehensive (loss) income for the thirteen weeks ended July 1, 2023 and July 2, 2022

6

Unaudited consolidated statements of cash flows for the thirteen weeks ended July 1, 2023 and July 2, 2022

7

Unaudited consolidated statements of shareholders’ equity for the thirteen weeks ended July 1, 2023 and July 2, 2022

8

Notes to the unaudited consolidated financial statements

9

Item 2.

Management’s discussion and analysis of financial condition and results of operations

17

Item 3.

Quantitative and qualitative disclosures about market risk

30

Item 4.

Controls and procedures

30

PART II.

OTHER INFORMATION

Item 1.

Legal proceedings

31

Item 1A.

Risk factors

31

Item 2.

Unregistered sales of equity securities, use of proceeds, and issuer purchases of equity securities

31

Item 3.

Default upon senior securities

31

Item 4.

Mine safety disclosures

31

Item 5.

Other information

31

Item 6.

Exhibits

32

2

PART I.

FINANCIAL INFORMATION

Item 1.

Financial statements

The Container Store Group, Inc.

Consolidated balance sheets

July 1,

April 1,

July 2,

(In thousands)

    

2023

    

2023

    

2022

    

Assets

(unaudited)

(unaudited)

Current assets:

Cash

$

12,155

$

6,958

$

23,206

Accounts receivable, net

 

21,870

 

25,870

 

30,466

Inventory

 

170,512

 

170,637

 

190,752

Prepaid expenses

 

14,624

 

14,989

 

14,612

Income taxes receivable

964

858

808

Other current assets

 

9,985

 

10,914

 

9,826

Total current assets

 

230,110

 

230,226

 

269,670

Noncurrent assets:

Property and equipment, net

 

157,747

 

158,702

 

144,175

Noncurrent operating lease right-of-use assets

353,402

347,959

365,053

Goodwill

 

23,447

 

23,447

 

221,159

Trade names

 

219,894

 

221,278

 

221,633

Deferred financing costs, net

 

137

 

150

 

190

Noncurrent deferred tax assets, net

 

517

 

568

 

636

Other assets

 

2,702

 

2,844

 

1,923

Total noncurrent assets

 

757,846

 

754,948

 

954,769

Total assets

$

987,956

$

985,174

$

1,224,439

See accompanying notes.

3

The Container Store Group, Inc.

Consolidated balance sheets (continued)

    

July 1,

    

April 1,

    

July 2,

    

(In thousands, except share and per share amounts)

    

2023

    

2023

    

2022

    

Liabilities and shareholders’ equity

(unaudited)

(unaudited)

Current liabilities:

Accounts payable

$

53,305

$

52,637

$

68,920

Accrued liabilities

 

68,218

 

74,673

 

81,743

Current borrowings on revolving lines of credit

 

 

2,423

 

11,541

Current portion of long-term debt

 

2,055

 

2,063

 

2,072

Current operating lease liabilities

59,996

57,201

54,605

Income taxes payable

 

670

 

1,318

 

10,464

Total current liabilities

 

184,244

 

190,315

 

229,345

Noncurrent liabilities:

Long-term debt

 

183,333

 

163,385

 

173,502

Noncurrent operating lease liabilities

320,845

314,100

332,800

Noncurrent deferred tax liabilities, net

 

45,062

 

49,338

 

48,309

Other long-term liabilities

 

5,394

 

5,851

 

6,876

Total noncurrent liabilities

 

554,634

 

532,674

 

561,487

Total liabilities

 

738,878

 

722,989

 

790,832

Commitments and contingencies (Note 6)

Shareholders’ equity:

Common stock, $0.01 par value, 250,000,000 shares authorized; 49,390,882 shares issued at July 1, 2023; 49,181,562 shares issued at April 1, 2023; 49,941,336 shares issued at July 2, 2022

 

494

 

492

 

499

Additional paid-in capital

 

872,536

 

872,204

 

875,016

Accumulated other comprehensive loss

 

(34,113)

 

(32,509)

 

(33,241)

Retained deficit

 

(589,839)

 

(578,002)

 

(408,667)

Total shareholders’ equity

 

249,078

 

262,185

 

433,607

Total liabilities and shareholders’ equity

$

987,956

$

985,174

$

1,224,439

See accompanying notes.

4

The Container Store Group, Inc.

Consolidated statements of operations

Thirteen Weeks Ended

 

July 1,

July 2,

 

(In thousands, except share and per share amounts) (unaudited)

    

2023

    

2022

    

    

Net sales

$

207,112

$

262,634

Cost of sales (excluding depreciation and amortization)

 

92,563

 

112,546

Gross profit

 

114,549

 

150,088

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

 

111,380

 

121,909

Stock-based compensation

 

474

 

1,201

Pre-opening costs

 

185

 

36

Depreciation and amortization

 

10,512

 

9,006

Other expenses

 

2,453

 

Loss on disposal of assets

 

1

 

1

(Loss) income from operations

 

(10,456)

 

17,935

Interest expense, net

 

4,967

 

3,223

(Loss) income before taxes

(15,423)

 

14,712

(Benefit) provision for income taxes

 

(3,586)

 

4,233

Net (loss) income

$

(11,837)

$

10,479

Net (loss) income per common share — basic

$

(0.24)

$

0.21

Net (loss) income per common share — diluted

$

(0.24)

$

0.21

Weighted-average common shares — basic

49,252,869

49,719,559

Weighted-average common shares — diluted

 

49,252,869

 

50,312,855

See accompanying notes.

5

The Container Store Group, Inc.

Consolidated statements of comprehensive (loss) income

Thirteen Weeks Ended

July 1,

July 2,

(In thousands) (unaudited)

    

2023

    

2022

    

    

Net (loss) income

$

(11,837)

$

10,479

Unrealized (loss) on financial instruments, net of tax benefit of ($39)

 

 

(113)

Pension liability adjustment

 

59

 

214

Foreign currency translation adjustment

 

(1,663)

 

(5,898)

Comprehensive (loss) income

$

(13,441)

$

4,682

See accompanying notes.

6

The Container Store Group, Inc.

Consolidated statements of cash flows

Thirteen Weeks Ended

July 1,

July 2,

(In thousands) (unaudited)

    

2023

    

2022

    

    

Operating activities

Net (loss) income

$

(11,837)

$

10,479

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

Depreciation and amortization

10,512

 

9,006

Stock-based compensation

474

 

1,201

Loss on disposal of assets

1

 

1

Deferred tax benefit

(3,975)

 

(1,325)

Non-cash interest

471

 

471

Other

193

 

81

Changes in operating assets and liabilities:

Accounts receivable

5,894

 

(2,101)

Inventory

(234)

 

(59)

Prepaid expenses and other assets

1,173

 

(2,415)

Accounts payable and accrued liabilities

(8,707)

 

(17,280)

Net change in lease assets and liabilities

4,101

7

Income taxes

(739)

 

5,271

Other noncurrent liabilities

(315)

 

(165)

Net cash (used in) provided by operating activities

(2,988)

3,172

Investing activities

Additions to property and equipment

(8,898)

 

(17,620)

Investments in non-qualified plan trust

(128)

(767)

Proceeds from non-qualified plan trust redemptions

83

60

Proceeds from sale of property and equipment

1

 

Net cash used in investing activities

(8,942)

 

(18,327)

Financing activities

Borrowings on revolving lines of credit

12,799

 

23,834

Payments on revolving lines of credit

(15,180)

 

(13,528)

Borrowings on long-term debt

20,000

 

15,000

Payments on long-term debt

(518)

(530)

Payment of taxes with shares withheld upon restricted stock vesting

(140)

(712)

Proceeds from the exercise of stock options

 

340

Net cash provided by financing activities

16,961

 

24,404

Effect of exchange rate changes on cash

166

 

(295)

Net increase in cash

5,197

 

8,954

Cash at beginning of fiscal period

6,958

 

14,252

Cash at end of fiscal period

$

12,155

$

23,206

Purchases of property and equipment (included in accounts payable)

$

4,678

$

6,486

Cash paid for amounts included in the measurement of operating lease liabilities

$

23,474

$

22,254

Additions to right-of-use assets in exchange for operating lease liabilities

$

19,429

$

30,321

See accompanying notes.

7

The Container Store Group, Inc.

Consolidated statements of shareholders’ equity

Accumulated

Additional

other

Total

(In thousands, except share amounts)

Common stock

paid-in

comprehensive

Retained

shareholders’

(unaudited)

    

Shares

    

Amount

    

capital

    

(loss) income

    

deficit

    

equity

Balance at April 1, 2023

49,181,562

$

492

$

872,204

$

(32,509)

$

(578,002)

$

262,185

Net loss

 

 

 

 

 

(11,837)

 

 

(11,837)

Stock-based compensation

 

 

 

474

 

 

 

 

474

Vesting of restricted stock awards

209,320

2

(2)

Taxes related to net share settlement of restricted stock awards

(140)

(140)

Foreign currency translation adjustment

 

 

 

 

(1,663)

 

 

 

(1,663)

Pension liability adjustment

 

 

 

 

59

 

 

 

59

Balance at July 1, 2023

49,390,882

$

494

 

$

872,536

$

(34,113)

$

(589,839)

 

$

249,078

Accumulated

Additional

other

Total

(In thousands, except share amounts)

Common stock

paid-in

comprehensive

Retained

shareholders’

(unaudited)

    

Shares

    

Amount

    

capital

    

loss

    

deficit

    

equity

Balance at April 2, 2022

49,635,447

$

496

$

874,190

$

(27,444)

$

(419,146)

$

428,096

Net income

 

 

 

 

 

10,479

10,479

Stock-based compensation

 

 

 

1,201

 

 

 

 

1,201

Stock options exercised

73,594

1

339

340

Vesting of restricted stock awards

232,295

2

(2)

Taxes related to net share settlement of restricted stock awards

(712)

(712)

Foreign currency translation adjustment

 

 

 

 

(5,898)

 

 

 

(5,898)

Unrealized loss on financial instruments, net of $39 tax benefit

 

 

 

 

(113)

 

 

 

(113)

Pension liability adjustment

 

 

 

 

214

 

 

 

214

Balance at July 2, 2022

49,941,336

499

875,016

(33,241)

408,667

433,607

See accompanying notes.

8

The Container Store Group, Inc.

Notes to consolidated financial statements (unaudited)

(In thousands, except share amounts and unless otherwise stated)

July 1, 2023

1. Description of business and basis of presentation

These financial statements should be read in conjunction with the financial statement disclosures in our Annual Report on Form 10-K for the fiscal year ended April 1, 2023, filed with the Securities and Exchange Commission (“SEC”) on May 26, 2023 (the “2022 Annual Report on Form 10-K”). The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). We use the same accounting policies in preparing quarterly and annual financial statements. All adjustments necessary for a fair presentation of quarterly operating results are reflected herein and are of a normal, recurring nature. Certain items in these consolidated financial statements have been reclassified to conform to the current period presentation.

All references herein to “fiscal 2023” refer to the 52-week fiscal year ending March 30, 2024, and “fiscal 2022” refer to the 52-week fiscal year ended April 1, 2023.

Description of business

Our operations consist of two reportable segments:

The Container Store, Inc. (“TCS”): 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 to accomplish their projects 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 (the “IPO”), of its common stock at which time LGP held a controlling interest in the Company as the majority shareholder. During fiscal 2020, LGP sold some of the common stock of the Company, reducing their ownership to less than 50% of the Company’s outstanding common stock. Although LGP is no longer the majority shareholder, LGP continues to have significant influence over the Company.

Today, TCS includes The Container Store Custom Spaces (“Custom Spaces”) consisting of our elfa® Classic, elfa® Décor, Avera® and PrestonTM systems, which are wholly-owned and manufactured by TCS. Custom Spaces includes metal-based and wood-based custom space products and in-home installation services. Our vision is to deepen our relationship with our customers, expand our reach and strengthen our capabilities, all while transforming lives through the power of organization.

The Container Store, Inc. consists of our retail stores, website and call center (which includes business sales), as well as our in-home services business. As of July 1, 2023, we operated 97 stores with an average size of approximately 24,000 square feet (18,000 selling square feet) in 34 states and the District of Columbia. The Container Store, Inc. also offers all of its products directly to its customers, through its website, responsive mobile site and app, call center, in-home design specialists and in-home design organizers. We operate the C Studio manufacturing facility in Elmhurst, Illinois, which designs and manufactures the Company’s premium wood-based custom space product offering, and is included in the TCS reportable segment.

Elfa: The Container Store, Inc.’s wholly-owned Swedish subsidiary, Elfa International AB (“Elfa”), designs and manufactures component-based shelving and drawer systems and made-to-measure sliding doors 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 on a wholesale basis in approximately 30 countries around the world, with a concentration in the Nordic region of Europe.

9

Seasonality

Our unique offering of organizing solutions, custom spaces, and in-home services makes us less susceptible to holiday season shopping patterns than many retailers. Our quarterly results fluctuate, depending upon a variety of factors, including our product offerings, promotional events, store openings, the weather, remodeling or relocations, shifts in the timing of holidays, timing of delivery of orders, competitive factors and general economic conditions, including economic downturns as a result of unforeseen events such as pandemics, inflation, and supply chain disruptions, among other things. Accordingly, our results of operations may fluctuate on a seasonal and quarterly basis, relative to corresponding periods in prior years. In addition, we may take certain pricing or marketing actions that could have a disproportionate effect on our business, financial condition and results of operations in a particular quarter or selling season.

2.  Detail of certain balance sheet accounts

July 1,

April 1,

July 2,

    

2023

    

2023

    

2022

Accounts receivable, net:

Trade receivables, net

$

12,727

$

16,911

$

17,992

Credit card receivables

 

7,351

 

7,523

 

10,541

Other receivables

 

1,792

 

1,436

 

1,933

$

21,870

$

25,870

$

30,466

Inventory:

Finished goods

$

160,198

$

160,108

$

182,523

Raw materials

 

9,024

 

9,289

 

6,902

Work in progress

 

1,290

 

1,240

 

1,327

$

170,512

$

170,637

$

190,752

Accrued liabilities:

Accrued payroll, benefits and bonuses

$

18,907

$

24,224

$

21,795

Unearned revenue

17,036

15,700

24,747

Accrued transaction and property tax

11,789

14,072

14,306

Gift cards and store credits outstanding

12,978

13,002

12,441

Accrued sales returns

2,999

3,366

4,170

Accrued interest

245

189

188

Other accrued liabilities

4,264

4,120

4,096

$

68,218

$

74,673

$

81,743

Contract balances as a result of transactions with customers primarily consist of trade receivables included in accounts receivable, net, unearned revenue, and gift cards and store credits outstanding included in accrued liabilities in the Company’s consolidated balance sheets. Unearned revenue was $15,700 as of April 1, 2023, and $11,928 was subsequently recognized into revenue for the thirteen weeks ended July 1, 2023. Gift cards and store credits outstanding was $13,002 as of April 1, 2023, and $1,764 was subsequently recognized into revenue for the thirteen weeks ended July 1, 2023. See Note 9 for disaggregated revenue disclosures.

10

3. Leases

We conduct all of our U.S. operations from leased facilities that include our support center, distribution centers, manufacturing facilities, and 97 store locations. The support center, distribution centers, manufacturing facilities, and stores are leased under operating leases that generally expire over the next 1 to 15 years. We also lease computer hardware under operating leases that generally 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. The Company also has finance leases at our Elfa segment which are immaterial.

Lease expense on operating leases 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 and is recorded in selling, general and administrative expenses (“SG&A”).

We consider lease payments that cannot be predicted with reasonable certainty upon lease commencement to be variable lease payments, which are recorded as incurred each period and are excluded from our calculation of lease liabilities. Our variable lease payments include lease payments that are based on a percentage of sales.

 

Upon lease commencement, we recognize the lease liability measured at the present value of the fixed future minimum lease payments. We have elected the practical expedient to not separate lease and non-lease components. Therefore, lease payments included in the measurement of the lease liability include all fixed payments in the lease arrangement. We record a right-of-use asset for an amount equal to the lease liability, increased for any prepaid lease costs and initial direct costs and reduced by any lease incentives. We remeasure the lease liability and right-of-use asset when a change to our future minimum lease payments occurs. Key assumptions and judgments included in the determination of the lease liability include the discount rate applied to present value of the future lease payments and the exercise of renewal options.

Many of our leases contain renewal options. The option periods are generally not included in the lease term used to measure our lease liabilities and right-of-use assets upon commencement as exercise of the options is not reasonably certain. We remeasure the lease liability and right-of-use asset when we are reasonably certain to exercise a renewal option.

Discount Rate

Our leases do not provide information about the rate implicit in the lease. Therefore, we utilize an incremental borrowing rate to calculate the present value of our future lease obligations. The incremental borrowing rate represents the rate of interest we would have to pay on a collateralized borrowing, for an amount equal to the lease payments, over a similar term and in a similar economic environment.

The components of lease costs for the thirteen weeks ended July 1, 2023 and July 2, 2022 were as follows:

Thirteen Weeks Ended

July 1, 2023

July 2, 2022

Operating lease costs

$

23,284

$

22,304

Variable lease costs

 

163

 

369

Total lease costs

$

23,447

$

22,673

We do not have sublease income and do not recognize lease assets or liabilities for short-term leases, defined as operating leases with initial terms of less than 12 months. Our short-term lease costs were not material for the thirteen weeks ended July 1, 2023 and July 2, 2022.

11

Weighted average remaining operating lease term and incremental borrowing rate as of July 1, 2023 and July 2, 2022 were as follows:

Thirteen Weeks Ended

July 1, 2023

July 2, 2022

Weighted average remaining lease term (years)

6.5

6.9

Weighted average incremental borrowing rate

10.2

%

10.7

%

As of July 1, 2023, future minimum lease payments under our operating lease liabilities were as follows:

    

Operating leases (1)

Within 1 year (remaining)

$

71,509

2 years

 

89,827

3 years

 

81,722

4 years

 

71,587

5 years

 

59,737

Thereafter

 

147,301

Total lease payments

$

521,683

Less amount representing interest

140,842

Total lease liability

$

380,841

Less current lease liability

59,996

Total noncurrent lease liability

$

320,845

(1) Operating lease payments exclude approximately $49,719 of legally binding minimum lease payments for six leases signed but not yet commenced.

4. Net (loss) income per common share

Basic net (loss) income per common share is computed as net (loss) income divided by the weighted-average number of common shares for the period. Net (loss) income per common share - diluted is computed as net (loss) income divided by the weighted-average number of common shares 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. Potentially dilutive securities are excluded from the computation of net (loss) income per common share - diluted if their effect is anti-dilutive.

The following is a reconciliation of net (loss) income and the number of shares used in the basic and diluted net (loss) income per common share calculations:

Thirteen Weeks Ended

 

July 1,

July 2,

 

    

2023

    

2022

    

    

Numerator:

Net (loss) income

$

(11,837)

$

10,479

Denominator:

Weighted-average common shares — basic

 

49,252,869

 

49,719,559

Nonvested restricted stock awards and other dilutive securities

593,296

Weighted-average common shares — diluted

49,252,869

50,312,855

Net (loss) income per common share — basic

$

(0.24)

$

0.21

Net (loss) income per common share — diluted

$

(0.24)

$

0.21

Antidilutive securities not included:

Stock options outstanding

1,711,246

 

1,541,235

Nonvested restricted stock awards

613,394

252,582

12

5.  Income taxes

The benefit for income taxes in the thirteen weeks ended July 1, 2023 was $3,586 as compared to a provision for income taxes of $4,233 in the thirteen weeks ended July 2, 2022. The effective tax rate for the thirteen weeks ended July 1, 2023 was 23.3%, as compared to 28.8% in the thirteen weeks ended July 2, 2022. During the thirteen weeks ended July 1, 2023 and July 2, 2022, the effective tax rate rose above the U.S. statutory rate of 21%, primarily due to U.S. state income taxes, and the impact of the global intangible low-taxed income provision.

6.  Commitments and contingencies

In connection with insurance policies and other contracts, the Company has outstanding standby letters of credit totaling $3,905 as of July 1, 2023.

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.

7.  Accumulated other comprehensive loss

Accumulated other comprehensive loss (“AOCL”) consists of changes in our foreign currency forward contracts, pension liability adjustment, and foreign currency translation. The components of AOCL, net of tax, are shown below for the thirteen weeks ended July 1, 2023:

Pension

Foreign

liability

currency

    

adjustment

    

translation

    

Total

Balance at April 1, 2023

$

(1,117)

$

(31,392)

$

(32,509)

Other comprehensive income (loss) before reclassifications, net of tax

59

(1,663)

(1,604)

Amounts reclassified to earnings, net of tax

Net current period other comprehensive income (loss)

 

59

 

(1,663)

 

(1,604)

Balance at July 1, 2023

$

(1,058)

$

(33,055)

$

(34,113)

13

8.  Fair value measurements

Under GAAP, the Company is required to a) measure certain assets and liabilities at fair value and 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 1—Valuation inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

Level 2—Valuation 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 3—Valuation 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 July 1, 2023, April 1, 2023 and July 2, 2022, the Company held certain items that are required to be measured at fair value on a recurring basis. These items are included in the non-qualified retirement plan, which consists of investments purchased by employee contributions to retirement savings accounts. The fair value amount of the non-qualified retirement plan is measured using the net asset value per share practical expedient, and therefore, is not classified in the fair value hierarchy. 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.

The following items are measured at fair value on a recurring basis, subject to the requirements of ASC 820, Fair Value Measurements:

July 1,

April 1,

July 2,

Description

    

    

Balance Sheet Location

    

2023

    

2023

    

2022

    

Assets

Nonqualified retirement plan

 

N/A

 

Other current assets

$

4,012

$

3,743

$

3,847

Total assets

$

4,012

$

3,743

$

3,847

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 July 1, 2023, April 1, 2023 and July 2, 2022, the estimated fair value of the Company’s long-term debt, including current maturities, was as follows:

July 1,

April 1,

July 2,

    

2023

    

2023

    

2022

    

Senior secured term loan facility

$

152,625

$

153,915

$

153,640

2019 Elfa revolving facilities

2,423

11,541

Obligations under finance leases

117

136

135

Revolving credit facility

 

25,000

 

5,000

 

15,000

Total fair value of debt

$

177,742

$

161,474

$

180,316

14

9.  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 in-home services. We operate the C Studio manufacturing facility in Elmhurst, Illinois, which designs and manufactures the Company’s premium wood-based custom space product offering. We determined that TCS and C Studio have similar economic characteristics and meet the aggregation criteria set forth in ASC 280, Segment Reporting. Therefore, we have combined these two operating segments into the TCS reportable segment.

The Elfa segment includes the manufacturing business that produces 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.

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 to make resource allocation decisions and evaluate segment performance.

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 (loss) 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.

Thirteen Weeks Ended July 1, 2023

    

TCS

    

Elfa

    

Eliminations

    

Total

Net sales to third parties

$

195,127

$

11,985

$

$

207,112

Intersegment sales

 

 

12,552

 

(12,552)

 

Adjusted EBITDA

 

774

 

1,953

 

192

 

2,919

Interest expense, net

4,885

82

4,967

Assets (1)

899,462

96,987

(8,493)

987,956

Thirteen Weeks Ended July 2, 2022

    

TCS

    

Elfa

    

Eliminations

    

Total

Net sales to third parties

$

246,771

$

15,863

$

$

262,634

Intersegment sales

11,720

(11,720)

Adjusted EBITDA

25,097

3,251

(160)

28,188

Interest expense, net

3,135

88

3,223

Assets (1)

1,126,112

102,138

(3,811)

1,224,439

(1)Tangible assets in the Elfa column are located outside of the United States.

15

A reconciliation of income before taxes to Adjusted EBITDA is set forth below:

Thirteen Weeks Ended

    

July 1,

    

July 2,

    

2023

2022

(Loss) income before taxes

$

(15,423)

$

14,712

Add:

 

Depreciation and amortization

 

10,512

 

9,006

Interest expense, net

 

4,967

 

3,223

Pre-opening costs (a)

 

185

 

36

Non-cash lease expense (b)

 

(174)

 

34

Stock-based compensation (c)

 

474

 

1,201

Foreign exchange gains (d)

 

(75)

 

(24)

Severance charges (e)

2,453

Adjusted EBITDA

$

2,919

$

28,188

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

(b)Reflects the extent to which our annual GAAP operating lease expense has been above or below our cash operating lease payments. The amount varies depending on the average age of our lease portfolio (weighted for size), as our GAAP operating lease expense on younger leases typically exceeds our cash operating lease payments, while our GAAP operating lease expense on older leases is typically less than our cash operating lease payments.

(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)TCS segment severance charges associated with the elimination of certain positions recorded in other expenses in the first quarter of fiscal 2023, which we do not consider in our evaluation of ongoing performance.

10. Stock-based compensation

On June 1, 2023, the Company granted time-based and performance-based restricted stock awards under the Company’s Amended and Restated 2013 Incentive Award Plan to certain officers and employees of the Company. The total number of restricted shares granted was 1,586,596 with a grant-date fair value of $2.48 per share. The time-based restricted stock awards will vest over 3 years. The performance-based restricted stock awards vest based on achievement of fiscal 2023 performance targets and are also subject to time-based vesting requirements over