Container Store Stock Gains, Q2 Sales Helped by Closets Business

Shares of The Container Store (TCS) were up 1% to $5.04 in early-afternoon trading on Thursday after the company posted better-than-expected earnings for the 2016 fiscal second quarter after yesterday's market close and issued upbeat guidance.

Earnings beat on reduced expenses, while the specialty retailer's closets business helped sales, according to Jefferies. The firm said the company's closets segment is now a significant contributor to comparable-store sales, but its underlying core business remains weak. But Jefferies noted that volatile sales are becoming less negative.

"Overall TCS has been more disciplined on promotion against an industry backdrop that remains highly promotional. With high absolute GM% and negative comp store sales, we suspect management may have to be more aggressive on traffic driving promotions at some point," Jefferies wrote in an analyst note.

Comparable-store sales fell 4.2% during the most recent period, while Wall Street was forecasting a decline of 3.5%, according to FactSet. The closets line drove 200 basis points of comparable-store sales growth during the quarter.

The Container Store pointed to an improvement late in the second quarter and into the third quarter. In a tough retail environment, this combined with the quarterly results should be "good enough" for the stock to move up from this level, Credit Suisse said.

"We are encouraged by that improvement, along with continued growth of TCS closets (including an increase in transactions/store), the evolution of the model toward more service oriented categories, and effective expense management that is supporting EBIT margin improvement," the firm wrote in a note. 

Credit Suisse also mentioned that while there is high differentiation in the company's product and service offering, it is concerned that pricing in that unit will remain competitive for the foreseeable future.

"TCS's margins are expected to be flat in 2H, and we wonder if there is a need to be more promotional as we have argued for others in this group," the firm noted.

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