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Table of Contents

y

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 December 26, 2020

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 50,488,622 shares of its common stock outstanding as of January 29, 2021.

Table of Contents

TABLE OF CONTENTS

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

Unaudited Consolidated Balance Sheets as of December 26, 2020, March 28, 2020, and December 28, 2019

3

Unaudited Consolidated Statements of Operations for the Thirteen and Thirty-Nine Weeks ended December 26, 2020 and December 28, 2019

5

Unaudited Consolidated Statements of Comprehensive Income for the Thirteen and Thirty-Nine Weeks ended December 26, 2020 and December 28, 2019

6

Unaudited Consolidated Statements of Cash Flows for the Thirty-Nine Weeks ended December 26, 2020 and December 28, 2019

7

Unaudited Consolidated Statements of Shareholders’ Equity for the Thirteen and Thirty-Nine Weeks ended December 26, 2020 and December 28, 2019

8

Notes to the Unaudited Consolidated Financial Statements

10

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

41

Item 4.

Controls and Procedures

41

PART II.

OTHER INFORMATION

Item 1.

Legal Proceedings

41

Item 1A.

Risk Factors

41

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

41

Item 3.

Default Upon Senior Securities

42

Item 4.

Mine Safety Disclosures

42

Item 5.

Other Information

42

Item 6.

Exhibits

43

2

Table of Contents

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

The Container Store Group, Inc.

Consolidated balance sheets

December 26,

March 28,

December 28,

(In thousands)

    

2020

    

2020

    

2019

Assets

(unaudited)

(unaudited)

Current assets:

Cash

$

27,895

$

67,755

$

13,971

Accounts receivable, net

 

31,799

 

24,721

 

29,438

Inventory

 

138,989

 

124,207

 

139,579

Prepaid expenses

 

10,143

 

8,852

 

10,435

Income taxes receivable

93

4,724

1,205

Other current assets

 

19,103

 

11,907

 

11,633

Total current assets

 

228,022

 

242,166

 

206,261

Noncurrent assets:

Property and equipment, net

 

134,746

 

147,540

 

153,515

Noncurrent operating lease assets

305,259

347,170

350,922

Goodwill

 

202,815

 

202,815

 

202,815

Trade names

 

230,187

 

222,769

 

224,956

Deferred financing costs, net

 

269

 

170

 

188

Noncurrent deferred tax assets, net

 

2,503

 

2,311

 

1,835

Other assets

 

4,381

 

1,873

 

1,790

Total noncurrent assets

 

880,160

 

924,648

 

936,021

Total assets

$

1,108,182

$

1,166,814

$

1,142,282

See accompanying notes.

3

Table of Contents

The Container Store Group, Inc.

Consolidated balance sheets (continued)

    

December 26,

    

March 28,

    

December 28,

(In thousands, except share and per share amounts)

    

2020

    

2020

    

2019

Liabilities and shareholders’ equity

(unaudited)

(unaudited)

Current liabilities:

Accounts payable

$

86,319

$

53,647

$

56,231

Accrued liabilities

 

88,080

 

66,046

 

67,658

Revolving lines of credit

 

 

9,050

 

Current portion of long-term debt

 

2,186

 

6,952

 

6,953

Current operating lease liabilities

54,719

62,476

63,163

Income taxes payable

 

8,859

 

 

2,504

Total current liabilities

 

240,163

 

198,171

 

196,509

Noncurrent liabilities:

Long-term debt

 

188,890

 

317,485

 

298,758

Noncurrent operating lease liabilities

291,710

317,284

320,536

Noncurrent deferred tax liabilities, net

 

51,465

 

50,178

 

48,363

Other long-term liabilities

 

13,415

 

11,988

 

9,947

Total noncurrent liabilities

 

545,480

 

696,935

 

677,604

Total liabilities

 

785,643

 

895,106

 

874,113

Commitments and contingencies (Note 7)

Shareholders’ equity:

Common stock, $0.01 par value, 250,000,000 shares authorized; 48,573,694 shares issued at December 26, 2020; 48,316,559 shares issued at March 28, 2020; 48,316,559 shares issued at December 28, 2019

 

486

 

483

 

483

Additional paid-in capital

 

870,739

 

866,667

 

866,132

Accumulated other comprehensive loss

 

(12,738)

 

(36,295)

 

(26,771)

Retained deficit

 

(535,948)

 

(559,147)

 

(571,675)

Total shareholders’ equity

 

322,539

 

271,708

 

268,169

Total liabilities and shareholders’ equity

$

1,108,182

$

1,166,814

$

1,142,282

See accompanying notes.

4

Table of Contents

The Container Store Group, Inc.

Consolidated statements of operations

Thirteen Weeks Ended

Thirty-Nine Weeks Ended

December 26,

December 28,

December 26,

December 28,

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

    

2020

    

2019

    

2020

    

2019

Net sales

$

275,478

$

228,657

$

675,405

$

674,609

Cost of sales (excluding depreciation and amortization)

 

115,991

 

94,292

 

291,621

 

283,633

Gross profit

 

159,487

 

134,365

 

383,784

 

390,976

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

 

115,870

 

111,972

 

303,328

 

334,281

Stock-based compensation

 

2,177

 

799

 

4,986

 

2,575

Pre-opening costs

 

95

 

2,482

 

111

 

5,988

Depreciation and amortization

 

8,498

 

9,689

 

26,270

 

28,137

Other (income) expenses

 

(13)

 

(1)

 

1,089

 

375

Loss (gain) on disposal of assets

 

18

 

(8)

 

12

 

(12)

Income from operations

 

32,842

 

9,432

 

47,988

 

19,632

Interest expense, net

 

4,099

 

5,134

 

13,540

 

16,245

Loss on extinguishment of debt

 

893

 

 

893

 

Income before taxes

27,850

 

4,298

33,555

 

3,387

Provision for income taxes

 

8,181

 

1,886

 

10,356

 

1,428

Net income

$

19,669

$

2,412

$

23,199

$

1,959

Net income per common share — basic

$

0.40

$

0.05

$

0.48

$

0.04

Net income per common share — diluted

$

0.40

$

0.05

$

0.47

$

0.04

Weighted-average common shares — basic

48,570,843

48,313,671

48,491,286

48,987,525

Weighted-average common shares — diluted

 

49,513,225

 

48,370,418

 

48,950,253

 

49,172,633

See accompanying notes.

5

Table of Contents

The Container Store Group, Inc.

Consolidated statements of comprehensive income

Thirteen Weeks Ended

Thirty-Nine Weeks Ended

December 26,

December 28,

December 26,

December 28,

(In thousands) (unaudited)

    

2020

    

2019

    

2020

    

2019

Net income

$

19,669

$

2,412

$

23,199

$

1,959

Unrealized gain (loss) on financial instruments, net of tax provision (benefit) of $2,267, $846, $4,407, and ($154)

 

5,919

 

2,414

 

11,800

 

(515)

Pension liability adjustment

 

(341)

 

(111)

 

(697)

 

12

Foreign currency translation adjustment

 

6,425

 

3,321

 

12,454

 

(136)

Comprehensive income

$

31,672

$

8,036

$

46,756

$

1,320

See accompanying notes.

6

Table of Contents

The Container Store Group, Inc.

Consolidated statements of cash flows

Thirty-Nine Weeks Ended

December 26,

December 28,

(In thousands) (unaudited)

    

2020

    

2019

Operating activities

Net income

$

23,199

$

1,959

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

Depreciation and amortization

26,270

 

28,137

Stock-based compensation

4,986

 

2,575

Gain on disposal of assets

12

 

(12)

Loss on extinguishment of debt

893

Deferred tax benefit

(6,203)

 

(5,023)

Non-cash interest

1,393

 

1,396

Other

48

 

187

Changes in operating assets and liabilities:

Accounts receivable

(2,962)

 

(4,149)

Inventory

(10,430)

 

(32,127)

Prepaid expenses and other assets

(823)

 

1,216

Accounts payable and accrued liabilities

55,596

 

3,630

Net change in lease assets and liabilities

8,311

245

Income taxes

13,353

 

(547)

Other noncurrent liabilities

3,046

 

1,377

Net cash provided by (used in) operating activities

116,689

(1,136)

Investing activities

Additions to property and equipment

(11,670)

 

(29,296)

Proceeds from sale of property and equipment

65

 

12

Net cash used in investing activities

(11,605)

 

(29,284)

Financing activities

Borrowings on revolving lines of credit

36,292

 

51,335

Payments on revolving lines of credit

(46,202)

 

(56,700)

Borrowings on long-term debt

200,000

 

65,000

Payments on long-term debt

(330,403)

(22,512)

Payment of debt issuance costs

(5,579)

 

Payment of taxes with shares withheld upon restricted stock vesting

(412)

(372)

Net cash (used in) provided by financing activities

(146,304)

 

36,751

Effect of exchange rate changes on cash

1,360

 

276

Net (decrease) increase in cash

(39,860)

 

6,607

Cash at beginning of fiscal period

67,755

 

7,364

Cash at end of fiscal period

$

27,895

$

13,971

Supplemental information for non-cash investing and financing activities:

Purchases of property and equipment (included in accounts payable)

$

732

$

970

See accompanying notes.

7

Table of Contents

The Container Store Group, Inc.

Consolidated statements of shareholders’ equity

Accumulated

Additional

other

Total

(In thousands, except share amounts)

Par

Common stock

paid-in

comprehensive

Retained

shareholders’

(unaudited)

    

value

    

Shares

    

Amount

    

capital

    

(loss) income

    

deficit

    

equity

Balance at March 28, 2020

$

0.01

 

48,316,559

$

483

 

$

866,667

$

(36,295)

$

(559,147)

 

$

271,708

Net loss

 

 

 

 

 

 

(16,670)

 

 

(16,670)

Stock-based compensation

 

 

 

 

832

 

 

 

 

832

Vesting of restricted stock awards

174,758

2

(2)

0

Taxes related to net share settlement of restricted stock awards

(165)

(165)

Foreign currency translation adjustment

 

 

 

 

 

3,583

 

 

 

3,583

Unrealized gain on financial instruments, net of $1,393 tax provision

 

 

 

 

 

3,961

 

 

 

3,961

Pension liability adjustment

 

 

 

 

 

(219)

 

 

 

(219)

Balance at June 27, 2020

$

0.01

 

48,491,317

485

 

 

867,332

 

(28,970)

 

(575,817)

 

 

263,030

Net income

20,200

20,200

Stock-based compensation

1,836

1,836

Vesting of restricted stock awards

78,963

1

(1)

(0)

Taxes related to net share settlement of restricted stock awards

Foreign currency translation adjustment

2,446

2,446

Unrealized gain on financial instruments, net of $747 tax provision

1,920

1,920

Pension liability adjustment

(137)

(137)

Balance at September 26, 2020

$

0.01

48,570,280

486

869,167

(24,741)

(555,617)

289,295

Net income

19,669

19,669

Stock-based compensation

1,583

1,583

Vesting of restricted stock awards

3,414

0

(0)

0

Taxes related to net share settlement of restricted stock awards

(11)

(11)

Foreign currency translation adjustment

6,425

6,425

Unrealized gain on financial instruments, net of $2,267 tax provision

5,919

5,919

Pension liability adjustment

(341)

(341)

Balance at December 26, 2020

$

0.01

48,573,694

$

486

$

870,739

$

(12,738)

$

(535,948)

$

322,539

See accompanying notes.

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The Container Store Group, Inc.

Consolidated statements of shareholders’ equity (continued)

Accumulated

Additional

other

Total

(In thousands, except share amounts)

Par

Common stock

paid-in

comprehensive

Retained

shareholders’

(unaudited)

    

value

    

Shares

    

Amount

    

capital

    

(loss) income

    

deficit

    

equity

Balance at March 30, 2019

$

0.01

 

48,142,319

$

481

 

$

863,978

$

(26,132)

$

(573,634)

 

$

264,693

Net loss

 

 

 

 

 

 

(4,099)

 

 

(4,099)

Stock-based compensation

 

 

 

 

811

 

 

 

 

811

Vesting of restricted stock awards

140,878

2

(56)

(54)

Taxes related to net share settlement of restricted stock awards

(347)

(347)

Foreign currency translation adjustment

 

 

 

 

 

333

 

 

 

333

Unrealized gain on financial instruments, net of $(18) tax benefit

 

 

 

 

 

(128)

 

 

 

(128)

Pension liability adjustment

 

 

 

 

 

(2)

 

 

(2)

Balance at June 29, 2019

$

0.01

 

48,283,197

483

 

864,386

(25,929)

(577,733)

 

261,207

Net income

 

 

3,646

 

3,646

Stock-based compensation

 

 

965

 

965

Vesting of restricted stock awards

23,215

4

4

Taxes related to net share settlement of restricted stock awards

(8)

(8)

Foreign currency translation adjustment

(3,790)

(3,790)

Unrealized gain on financial instruments, net of $(981) tax benefit

(2,801)

(2,801)

Pension liability adjustment

125

125

Balance at September 28, 2019

$

0.01

48,306,412

483

865,347

(32,395)

(574,087)

259,348

Net income

2,412

2,412

Stock-based compensation

799

799

Vesting of restricted stock awards

10,147

Taxes related to net share settlement of restricted stock awards

(14)

(14)

Foreign currency translation adjustment

3,321

3,321

Unrealized gain on financial instruments, net of $846 tax provision

2,414

2,414

Pension liability adjustment

(111)

(111)

Balance at December 28, 2019

$

0.01

48,316,559

$

483

$

866,132

$

(26,771)

$

(571,675)

$

268,169

See accompanying notes.

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The Container Store Group, Inc.

Notes to consolidated financial statements (unaudited)

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

December 26, 2020

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 March 28, 2020, filed with the Securities and Exchange Commission (“SEC”) on June 17, 2020 (the “2019 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 2020” refer to the 53-week fiscal year ending April 3, 2021, “fiscal 2019” refer to the 52-week fiscal year ended March 28, 2020, and “fiscal 2018” refer to the 52-week fiscal year ended March 30, 2019.

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”). On November 6, 2013, the Company completed its initial public offering (the “IPO”), at which time LGP held a controlling interest in the Company as the majority shareholder. During the third quarter of fiscal 2020, LGP sold 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. As of December 26, 2020, The Container Store, Inc. (“TCS”) operates 93 stores with an average size of approximately 25,000 square feet (19,000 selling square feet) in 33 states and the District of Columbia. The Container Store, Inc. also offers all of its products directly to its customers (including business 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 and made-to-measure sliding doors. 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.

Business Update Related to Coronavirus

The novel coronavirus (“COVID-19”) pandemic had a negative impact on the Company’s first quarter of fiscal 2020 operations and financial results. We experienced significant disruptions in store operations, including the temporary closure of all stores to in-store customer traffic, which adversely affected our business, results of operations and financial condition, and saw a significant increase in our curbside pick-up and online selling. Since the second quarter of fiscal 2020, all 93 stores were open with limited capacity. As a result, online sales somewhat moderated during the second and third quarters of fiscal 2020 as customers shifted to purchasing in-store, compared to the significant increase in online sales experienced while our stores were temporarily closed to in-store customer traffic in the first quarter of fiscal 2020. We will continue to review local, state, and federal mandates as we may need to temporarily adjust our operations to comply as COVID-19 and other uncertainties continue to unfold. The Company has taken actions to tightly manage costs, working capital and capital expenditures to preserve the Company’s financial health. As previously announced, the Company furloughed approximately 2,800 employees, primarily in its stores, as well as a portion of corporate employees, and reduced the base salaries of its executive officers and certain employees, due to COVID-19. As of the date of this filing, we have no furloughed employees and approximately 4,500 active employees and have returned temporarily reduced base salaries to pre-COVID-19 levels. We continue to prioritize the health and safety of our customers and employees by implementing strict health and safety protocols in our stores, including intensive and frequent cleaning procedures and limitations on the number of customers shopping in each store at any given time.

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Furthermore, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020 and the Company is implementing applicable benefits of the CARES Act. As such, we have deferred approximately $5,200 of employer payroll taxes as of December 26, 2020 and recorded an employee retention credit of approximately $1,000. We will continue to monitor guidance from the Centers for Disease Control and Prevention, local, state and federal guidance, and the impact of COVID-19 on the Company's business, results of operations, financial position and cash flows.

Seasonality

The Company’s business is moderately seasonal in nature and, therefore, the results of operations for the thirty-nine weeks ended December 26, 2020 are not necessarily indicative of the operating results for the full year. The Company has historically realized a higher portion of net sales, operating income, and cash flows from operations in the fourth fiscal quarter, attributable primarily to the timing and impact of Our Annual elfa® Sale, which traditionally starts in late December and runs into February.

Recent accounting pronouncements

In July 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Updates (“ASU”) 2016-13, Financial Instruments Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 changes how to recognize expected credit losses on financial assets. The standard requires a more timely recognition of credit losses on loans and other financial assets and also provides additional transparency about credit risk. The current credit loss standard generally requires that a loss actually be incurred before it is recognized, while the new standard will require recognition of full lifetime expected losses upon initial recognition of the financial instrument. Originally, ASU 2016-13 was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. An entity should apply the standard by recording a cumulative effect adjustment to retained earnings upon adoption. In November 2019, FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842). This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is planning to adopt this standard in the first quarter of fiscal 2023. The adoption of this standard is not expected to result in a material impact to the Company’s financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification (“ASC”) 350-40 to determine which implementation costs to capitalize as assets. A customer’s accounting for the costs of the hosting component of the arrangement are not affected by the new guidance. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of this standard in the first quarter of fiscal 2020 did not result in a material impact to the Company’s financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, with early adoption permitted. The Company is planning to adopt this standard in the first quarter of fiscal 2021. The adoption of this standard is not expected to result in a material impact to the Company’s financial statements.

In March 2020, the FASB issued, ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional guidance for a limited time to ease the potential burden in accounting for the effects of reference rate reform on financial reporting. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. ASU 2020-04 applies only to contracts and hedging relationships that

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reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The amendments in ASU 2020-04 are elective and are effective upon issuance for all entities. The adoption of this standard did not result in a material impact to the Company’s financial statements.

2.  Detail of certain balance sheet accounts

December 26,

March 28,

December 28,

    

2020

    

2020

    

2019

Accounts receivable, net:

Trade receivables, net

$

17,439

$

20,217

$

17,127

Credit card receivables

 

10,823

 

3,326

 

10,718

Other receivables

 

3,537

 

1,178

 

1,593

$

31,799

$

24,721

$

29,438

Inventory:

Finished goods

$

134,296

$

118,981

$

134,487

Raw materials

 

4,154

 

4,523

 

4,490

Work in progress

 

539

 

703

 

602

$

138,989

$

124,207

$

139,579

Accrued liabilities:

Accrued payroll, benefits and bonuses

$

29,451

$

19,112

$

22,528

Unearned revenue

17,913

12,976

13,579

Accrued transaction and property tax

14,673

12,509

12,348

Gift cards and store credits outstanding

11,815

9,208

10,180

Accrued lease liabilities

249

49

94

Accrued interest

1,151

1,483

1,540

Accrued sales returns

3,130

1,650

2,691

Other accrued liabilities

9,698

9,059

4,698

$

88,080

$

66,046

$

67,658

Contract balances as a result of transactions with customers primarily consist of trade receivables included in Accounts receivable, net, Unearned revenue included in Accrued liabilities, and Gift cards and store credits outstanding included in Accrued liabilities in the Company's Consolidated Balance Sheets provided above. Unearned revenue was $12,976 as of March 28, 2020, and $12,384 was subsequently recognized into revenue for the thirty-nine weeks ended December 26, 2020. Gift cards and store credits outstanding was $9,208 as of March 28, 2020, and $2,343 was subsequently recognized into revenue for the thirty-nine weeks ended December 26, 2020. See Note 11 for disaggregated revenue disclosures.

3. Long-term debt and revolving lines of credit

On April 6, 2012, The Container Store Group, Inc., The Container Store, Inc. and certain of our domestic subsidiaries entered into a credit agreement with JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and the lenders party thereto (the “Senior Secured Term Loan Facility”). On November 25, 2020, the Company entered into Amendment No. 7 (the “Seventh Amendment”) to the Senior Secured Term Loan Facility. In connection with the Seventh Amendment, the Company (a) paid down approximately $47,200 of the outstanding loans under the Senior Secured Term Loan Facility, which reduced the aggregate principal amount of the loans under the facility to $200,000 and (b) amended the Senior Secured Term Loan Facility to, among other things, extend the maturity date to January 31, 2026 and impose a 1.00% premium if a voluntary prepayment is made from the proceeds of a repricing transaction within the one year anniversary of the Seventh Amendment. Commencing on March 31, 2021, the Company will be required to make quarterly amortization payments of $500 on the term loan facility, with the balloon payment for the remaining balance due on January 31, 2026. Prior to the date of delivery of a compliance certificate for the fiscal quarter

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ended December 26, 2020, the applicable interest rate margin for LIBOR loans was 4.75%, subject to a LIBOR floor of 1.00%, and 3.75% for base rate loans and, thereafter, may step up to 5.00% for LIBOR Loans and 4.00% for base rate loans unless the consolidated leverage ratio achieved is less than or equal to 2.75 to 1.00. As of December 26, 2020, the aggregate principal amount in outstanding borrowings under the Senior Secured Term Loan Facility was $190,687, net of deferred financing costs. The Company recorded a loss on extinguishment of debt of $893 in the third quarter of fiscal 2020 in conjunction with the Seventh Amendment.

On April 6, 2012, The Container Store Group, Inc., The Container Store, Inc. and certain of our 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”). On November 25, 2020, the Company entered into Amendment No. 5 (the “Fifth Amendment”) to the Revolving Credit Facility. The Fifth Amendment amends the Revolving Credit Facility to extend the maturity date to the earlier of (a) November 25, 2025 and (b) October 31, 2025 if any portion of the Senior Secured Term Loan Facility remains outstanding on such date and the maturity date of the Senior Secured Term Loan Facility is not extended.

The Company capitalizes certain costs associated with issuance of various debt instruments. 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. In the thirty-nine weeks ended December 26, 2020, the Company capitalized $5,579 of fees associated with the Seventh Amendment which will be amortized through January 31, 2026.

Long-term debt and revolving lines of credit consist of the following:

December 26,

March 28,

December 28,

    

2020

    

2020

    

2019

Senior secured term loan facility

$

200,000

$

252,282

$

253,985

2019 Elfa term loan facility

9,050

2019 Elfa revolving credit facility

Obligations under finance leases

389

274

293

Revolving credit facility

 

 

78,000

 

58,000

Total debt

 

200,389

 

339,606

 

312,278

Less current portion

 

(2,186)

 

(16,002)

 

(6,953)

Less deferred financing costs (1)

(9,313)

(6,119)

(6,567)

Total long-term debt

$

188,890

$

317,485

$

298,758

(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.

4. Leases

We conduct all of our U.S. operations from leased facilities that include corporate headquarters, warehouse facilities, and 93 store locations. The corporate headquarters, warehouse facilities, and stores are under operating leases that generally expire over the next 1 to 20 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 that 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”).

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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 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.

During fiscal 2020, the Company renegotiated terms with landlords as a result of the COVID-19 pandemic, which resulted in the deferral of approximately $11,900 of certain cash lease payments, of which approximately $10,100 remains deferred as of December 26, 2020, and the modification of certain lease terms for a substantial portion of our leased properties. Under ASC 842, changes to lease payments that are not stipulated in the original lease contract are generally accounted for as lease modifications. In April 2020, the FASB issued guidance related to the relief for lease concessions offered as a result of the effects of the COVID-19 pandemic and does not require these concessions to be accounted for in accordance with the lease modification guidance in ASC 842. Under existing lease guidance, the Company would determine, on a lease by lease basis, if a lease concession was the result of a new arrangement with the tenant or if it was under the enforceable rights and obligations within the lease agreement. Under the relief guidance, a company can account for the concessions (i) as if no changes to the existing lease contract were made or (ii) as a variable lease adjustment. The Company did not apply the lease modification relief, and the remeasurement impact is included in the Company’s condensed consolidated financial statements as of and for the thirty-nine weeks ended December 26, 2020.

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 and thirty-nine weeks ended December 26, 2020 and December 28, 2019 were as follows:

Thirteen Weeks Ended

Thirty-Nine Weeks Ended

December 26, 2020

December 28, 2019

December 26, 2020

December 28, 2019

Operating lease costs

$

22,926

$

22,842

$

68,132

$

67,840

Variable lease costs

 

331

 

270

 

642

 

903

Total lease costs

$

23,257

$

23,112

$

68,774

$

68,743

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 and thirty-nine weeks ended December 26, 2020 and December 28, 2019.

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Supplemental cash flow information related to our leases for the thirty-nine weeks ended December 26, 2020 and December 28, 2019 were as follows:

Thirty-Nine Weeks Ended

December 26, 2020

December 28, 2019

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

$

60,044

$

67,321

Additions to right-of-use assets

$

44,785

$

41,976

Weighted average remaining operating lease term and incremental borrowing rate as of December 26, 2020 and December 28, 2019 were as follows:

Thirty-Nine Weeks Ended

December 26, 2020

December 28, 2019

Weighted average remaining lease term (years)

7.0

7.2

Weighted average incremental borrowing rate

13.9

%

8.8

%

As of December 26, 2020, future minimum lease payments under our operating lease liabilities were as follows:

    

Operating leases (1)

Within 1 year (remaining)

$

26,868

2 years

 

93,543

3 years

 

80,849

4 years

 

73,779

5 years

 

66,053

Thereafter

 

207,725

Total lease payments

$

548,817

Less amount representing interest

(202,388)

Total lease liability

$

346,429

Less current lease liability

(54,719)

Total noncurrent lease liability

$

291,710

(1)Operating lease payments exclude approximately $6,054 of legally binding minimum lease payments for leases signed but not yet commenced.

5. 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 for the period. Net income per common share – diluted is computed as net 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 income per common share – diluted if their effect is anti-dilutive.

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

Thirteen Weeks Ended

Thirty-Nine Weeks Ended

December 26,

December 28,

December 26,

December 28,

2020

    

2019

    

2020

    

2019

    

Numerator:

Net income

$

19,669

$

2,412

$

23,199

$

1,959

Denominator:

Weighted-average common shares — basic

 

48,570,843

 

48,313,671

 

48,491,286

 

48,987,525

Options and other dilutive securities

942,382

56,747

458,967

185,108

Weighted-average common shares — diluted

49,513,225

48,370,418

48,950,253

49,172,633

Net income per common share — basic

$

0.40

$

0.05

$

0.48

$

0.04

Net income per common share — diluted

0.40

0.05

0.47

0.04

Antidilutive securities not included:

Stock options outstanding

 

1,895,557

 

2,527,745

 

1,965,591

 

2,364,692

Nonvested restricted stock awards

310,422

74,291

164,556

6.  Income taxes

The provision for income taxes in the thirteen weeks ended December 26, 2020 was $8,181 as compared to $1,886 in the thirteen weeks ended December 28, 2019. The effective tax rate for the thirteen weeks ended December 26, 2020 was 29.4%, as compared to 43.9% in the thirteen weeks ended December 28, 2019. During the thirteen weeks ended December 26, 2020, the effective tax rate rose above the U.S. statutory rate of 21%, primarily due to tax related to stock-based compensation, U.S. state income taxes, officer compensation limitation and the impact of the global intangible low-taxed income ("GILTI") provision from the Tax Cuts and Jobs Act ("The Act"). During the thirteen weeks ended December 28, 2019, the effective tax rate rose above the U.S. statutory rate of 21% primarily due to tax related to stock-based compensation, U.S. state income taxes, and the impact of the GILTI provision.

The provision for income taxes in the thirty-nine weeks ended December 26, 2020 was $10,356 as compared to a provision of $1,428 in the thirty-nine weeks ended December 28, 2019. The effective tax rate for the thirty-nine weeks ended December 26, 2020 was 30.9%, as compared to 42.2% in the thirty-nine weeks ended December 28, 2019. During the thirty-nine weeks ended December 26, 2020, the effective tax rate rose above the U.S. statutory rate of 21%, primarily due to stock-based compensation, U.S. state income taxes, officer compensation limitation and the impact of the GILTI provision. During the thirty-nine weeks ended December 28, 2019, the effective tax rate rose above the U.S. statutory rate of 21% primarily due to tax related to stock-based compensation, U.S. state income taxes, and the impact of the GILTI provision.  

7.  Commitments and contingencies

In connection with insurance policies and other contracts, the Company has outstanding standby letters of credit totaling $3,961 as of December 26, 2020.

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 financial condition, results of operations, or cash flows on an individual basis or in the aggregate.

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8.  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 thirty-nine weeks ended December 26, 2020:

Foreign

currency

Pension

Foreign

hedge

liability

currency

    

instruments

    

adjustment

    

translation

    

Total

Balance at March 28, 2020

$

(5,563)

$

(2,611)

$

(28,121)

$

(36,295)

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

10,791

(697)

12,454

22,548

Amounts reclassified to earnings, net of tax

1,009

1,009

Net current period other comprehensive income (loss)

 

11,800

 

(697)

 

12,454

 

23,557

Balance at December 26, 2020

$

6,237

$

(3,308)

$

(15,667)

$

(12,738)

Amounts reclassified from AOCL to earnings for the foreign currency forward contracts 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 9.

9.  Foreign currency forward contracts

The Company’s international operations and purchases of inventory products 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.

During the thirty-nine weeks ended December 26, 2020 and December 28, 2019, the TCS segment used forward contracts for 90% and 87% of inventory purchases in Swedish krona, respectively. Generally, the Company’s foreign currency forward contracts have terms from 1 to 24 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 hedging instruments in the TCS segment as cash flow hedges, as defined. Changes in the fair value of the foreign currency hedging instruments that are considered to be effective, as defined, are recorded in other comprehensive 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. The Company assessed the effectiveness of the foreign currency hedge instruments and determined the foreign currency hedge instruments were highly effective during the thirty-nine weeks ended December 26, 2020 and December 28, 2019. Forward contracts not designated as hedges in the Elfa segment are adjusted to fair value as SG&A on the consolidated statements of operations; however, during the thirty-nine weeks ended December 26, 2020, the Company did not recognize any

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amount associated with the change in fair value of forward contracts not designated as hedging instruments, as the Company had none of these instruments outstanding.

The Company had a $6,237 gain in accumulated other comprehensive loss related to foreign currency hedge instruments at December 26, 2020, of which $1,639 represents an unrealized loss for settled foreign currency hedge instruments related to inventory on hand as of December 26, 2020. The Company expects the unrealized loss of $1,639, 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 loss, net of taxes, are presented in Note 8 of these financial statements.

10.  Fair value measurements

Under GAAP, 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 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 December 26, 2020, March 28, 2020 and December 28, 2019, the Company held certain items that are required to be measured at fair value on a recurring basis. These included the nonqualified retirement plan, which consists of investments purchased by employee contributions to retirement savings accounts. 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 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.

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

December 26,

March 28,

December 28,

Description

    

    

Balance Sheet Location

    

2020

    

2020

    

2019

Assets

Nonqualified retirement plan

 

N/A

 

Other current assets

$

6,116

$

5,066

$

6,249

Total assets

$

6,116

$

5,066

$

6,249

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 December 26, 2020, March 28, 2020 and December 28, 2019, the estimated fair value of the Company’s long-term debt, including current maturities, was as follows:

December 26,

March 28,

December 28,

    

2020

    

2020

    

2019

Senior secured term loan facility

$

200,000

$

198,041

$

241,286

2019 Elfa revolving credit facility

9,050

Obligations under finance leases

389

274

293

Revolving credit facility

 

 

78,000

 

58,000

Total fair value of debt

 

200,389

 

285,365

 

299,579

11.  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.

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.

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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.

Thirteen Weeks Ended December 26, 2020

    

TCS

    

Elfa

    

Eliminations

    

Total

Net sales to third parties

$

256,544

$

18,934

$

$

275,478

Intersegment sales

 

 

23,915

 

(23,915)

 

Adjusted EBITDA

 

37,631

 

9,378

 

(4,564)

 

42,445

Interest expense, net

4,040

59

4,099

Assets (1)

1,003,828

114,375

(10,021)

1,108,182

Thirteen Weeks Ended December 28, 2019

    

TCS

    

Elfa

    

Eliminations

    

Total

Net sales to third parties

$

211,971

$

16,686

$

$

228,657

Intersegment sales

 

21,385

 

(21,385)

 

Adjusted EBITDA

17,924

 

6,118

 

(2,035)

 

22,007

Interest expense, net

5,056

78

5,134

Assets (1)

1,049,889

100,571

(8,178)

1,142,282

Thirty-Nine Weeks Ended December 26, 2020

    

TCS

    

Elfa

    

Eliminations

    

Total

Net sales to third parties

$

628,933

$

46,472

$

$

675,405

Intersegment sales

 

 

47,499

 

(47,499)

 

Adjusted EBITDA

 

77,633

 

18,051

 

(4,693)

 

90,991

Interest expense, net

13,282

258

13,540

Assets (1)

1,003,828

114,375

(10,021)

1,108,182

Thirty-Nine Weeks Ended December 28, 2019

    

TCS

    

Elfa

    

Eliminations

    

Total

Net sales to third parties

$

628,282

$

46,327

$

$

674,609

Intersegment sales

 

 

53,800

 

(53,800)

 

Adjusted EBITDA

 

46,820

 

14,155

 

(5,899)

 

55,076

Interest expense, net

15,960

285

16,245

Assets (1)

1,049,889

100,571

(8,178)

1,142,282

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

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

Thirteen Weeks Ended

Thirty-Nine Weeks Ended

    

December 26,

    

December 28,

    

December 26,

    

December 28,

2020

2019

2020

2019

Income before taxes

$

27,850

$

4,298

$

33,555

$

3,387

Add:

 

 

Depreciation and amortization

 

8,498

 

9,689

 

26,270

 

28,137

Interest expense, net

 

4,099

 

5,134

 

13,540

 

16,245

Pre-opening costs (a)

 

95

 

2,482

 

111

 

5,988

Non-cash lease expense (b)

 

(1,762)

 

(355)

 

8,311

 

(1,532)

Stock-based compensation (c)

 

2,177

 

799

 

4,986

 

2,575

Management transition costs (d)

1,200

1,200

Loss on extinguishment of debt (e)

 

893

 

 

893

 

Foreign exchange losses (gains) (f)

 

73

 

(37)

 

202

 

(98)

Elfa France closure (g)

(1)

402

Employee retention credit (h)

(1,028)

(1,028)

COVID-19 costs (i)

367

1,863

Severance and other (credits) costs (j)

(17)

(2)

1,088

(28)

Adjusted EBITDA

$

42,445

$

22,007

$

90,991

$

55,076

(a)Non-capital expenditures associated with opening new stores and relocating stores, and net costs associated with opening the second distribution center, 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. Non-cash lease expense increased in the thirty-nine weeks ended December 26, 2020 due to renegotiated terms with landlords due to COVID-19 that resulted in deferral of $11,900 of certain cash lease payments, of which approximately $10,100 remains deferred as of December 26, 2020, and the modification of certain lease terms for a substantial portion of our leased properties. In the thirteen and thirty-nine weeks ended December 28, 2019, lease expenses associated with the opening of the second distribution center were excluded from Non-cash lease expense and included in Pre-opening costs.

(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)Costs related to the transition of key executives including signing bonus and relocation expenses recorded as selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance.

(e)Loss recorded as a result of the amendments made to the Senior Secured Term Loan Facility in the third quarter of fiscal 2020, which we do not consider in our evaluation of our ongoing operations.

(f)Realized foreign exchange transactional gains/losses our management does not consider in our evaluation of our ongoing operations.

(g)Charges related to the closure of Elfa France operations in the second quarter of fiscal 2019, which we do not consider in our evaluation of ongoing performance.

(h)Employee retention credit related to the CARES Act recorded in the third quarter of fiscal 2020 as selling, general and administrative expense which we do not consider in our evaluation of ongoing performance.

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(i)Includes incremental costs attributable to the COVID-19 pandemic, which consist of hazard pay for distribution center employees in the first quarter of fiscal 2020 and sanitization costs in the first, second and third quarters of fiscal 2020, all of which are recorded as selling, general and administrative expenses which we do not consider in our evaluation of ongoing performance.

(j)Severance and other credits/costs include amounts our management does not consider in our evaluation of our ongoing operations. The fiscal 2020 amounts include costs primarily incurred in the first and second quarters of fiscal 2020 associated with the reduction in workforce as a result of the COVID-19 pandemic and the related temporary store closures in fiscal 2020.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary note regarding forward-looking statements

This report, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements included in this Quarterly Report, including without limitation statements regarding expectations for our business, anticipated financial performance and liquidity, including, without limitation impacts of, and our plans in response to, the outbreak of COVID-19, and anticipated capital expenditures and other expenses, are only predictions and involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These include, but are not limited to: the outbreak of COVID-19 and the associated impact on our business, results of operations and financial condition; our ability to continue to lease space on favorable terms; costs and risks relating to new store openings; quarterly and seasonal fluctuations in our operating results; cost increases that are beyond our control; our inability to protect our brand; our failure or inability to protect our intellectual property rights; overall decline in the health of the economy, consumer spending, and the housing market; our inability to source and market new products to meet consumer preferences; failure to successfully anticipate consumer preferences and demand; competition from other stores and internet-based competition; vendors may sell similar or identical products to our competitors; our and our vendors’ vulnerability to natural disasters and other unexpected events; disruptions at our Elfa manufacturing facilities; deterioration or change in vendor relationships or events that adversely affect our vendors or their ability to obtain financing for their operations, including COVID-19; our payment terms for goods and services, and our negotiation of alternative terms for lease payments and other business contracts, each as a result of COVID-19; product recalls and/or product liability, as well as changes in product safety and other consumer protection laws; risks relating to operating two distribution centers; our dependence on foreign imports for our merchandise; our reliance upon independent third party transportation providers; our inability to effectively manage our online sales; effects of a security breach or cyber-attack of our website or information technology systems, including relating to our use of third-party web service providers; damage to, or interruptions in, our information systems as a result of external factors, working from home arrangements, staffing shortages and difficulties in updating our existing software or developing or implementing new software; our indebtedness may restrict our current and future operations, and we may not be able to refinance our debt on favorable terms, or at all; fluctuations in currency exchange rates; our inability to maintain sufficient levels of cash flow to meet growth expectations; our fixed lease obligations; disruptions in the global financial markets leading to difficulty in borrowing sufficient amounts of capital to finance the carrying costs of inventory to pay for capital expenditures and operating costs; changes to global markets and inability to predict future interest expenses; our reliance on key executive management; employee furloughs and uncertainty about their ability to return to work; our inability to find, train and retain key personnel; labor relations difficulties; increases in health care costs and labor costs; violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery and anti-kickback laws; impairment charges and effects of changes in estimates or projections used to assess the fair value of our assets; effects of tax reform and other tax fluctuations; significant fluctuations in the price of our common stock; substantial future sales of our common stock, or the perception that such sales may occur, which could depress the price of our common stock; risks related to being a public company; our performance meeting guidance provided to the public; anti-takeover provisions in our governing documents, which could delay or prevent a change in control; and our failure to establish and maintain effective internal controls. Other important risk factors that could affect the outcome of the events set forth in these statements and that could affect our operating results and financial condition are described in the “Risk Factors” section of our Annual Report on Form 10-K for the fiscal year ended March 28, 2020 (the “2019 Annual Report on Form 10-K”), filed with the Securities and Exchange Commission (the “SEC”) on June 17, 2020.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this report. Because forward-looking statements are inherently subject to risks and uncertainties, you should not rely on these forward-looking statements as predictions of future

23

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events. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein after the date of this report, whether as a result of any new information, future events or otherwise.

Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to the “Company,” “we,” “us,” and “our” refer to The Container Store Group, Inc. and, where appropriate, its subsidiaries.

We follow 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 our fiscal year is the 52- or 53-week period ending on the Saturday closest to March 31. Fiscal 2020 ends on April 3, 2021 and will include 53 weeks and fiscal 2019 ended on March 28, 2020 and included 52 weeks. The third quarter of fiscal 2020 ended on December 26, 2020 and the third quarter of fiscal 2019 ended on December 28, 2019, and both included thirteen weeks.

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. We feature The Container Store Custom Closets consisting of our elfa® Classic, elfa® Décor, Avera® and Laren® closet lines. Our vision is to be a beloved brand and the first choice for customized organization solutions and services. Our customers are highly educated, very busy and primarily homeowners with a higher than average household income. We service them with storage and organization solutions that help them accomplish projects, maximize their space, and make the most of their home.

Our operations consist of two operating segments:

   The Container Store (“TCS”), which consists of our retail stores, website and call center (which includes business sales), as well as our installation and organizational services business. As of December 26, 2020, we operated 93 stores with an average size of approximately 25,000 square feet (19,000 selling square feet) in 33 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 substantially all of our products directly from one of our two distribution centers. Our first distribution center in Coppell, Texas, is co-located with our corporate headquarters and call center, and our second distribution center located in Aberdeen, Maryland, became fully operational in fiscal 2019.

   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. 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 three manufacturing facilities with two located in Sweden and one located 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.

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Management Transition

As previously disclosed, during the third quarter of fiscal 2020, Melissa Reiff notified the Company of her retirement as President and Chief Executive Officer, effective February 1, 2021 (the “Effective Date”). In light of Melissa’s retirement, the Company’s board of directors appointed Satish Malhotra to succeed Ms. Reiff as President and Chief Executive Officer, as of the Effective Date. Mr. Malhotra was also elected as a Class III director of the Company, as of the Effective Date.

Ms. Reiff will continue as an employee of the Company to provide transition services to Mr. Malhotra and the Company through the expiration of her employment agreement on March 1, 2021. In accordance with her agreement, Ms. Reiff will continue to serve as Chairwoman of the Company’s Board until the conclusion of the Company’s annual meeting of shareholders to be held in 2021.

Business Update Related to Coronavirus

The novel coronavirus (“COVID-19”) pandemic had a negative impact on the Company’s first quarter of fiscal 2020 operations and financial results. We experienced significant disruptions in store operations, including the temporary closure of all stores to in-store customer traffic which adversely affected our business, results of operations and financial condition, and saw a significant increase in our curbside pick-up and online selling. Since the second quarter of fiscal 2020, all 93 stores were open with limited capacity. As a result, online sales somewhat moderated during the second and third quarters of fiscal 2020 as customers shifted to purchasing in-store, compared to the significant increase in online sales experienced while our stores were temporarily closed to in-store customer traffic in the first quarter of fiscal 2020. We will continue to review local, state, and federal mandates as we may need to temporarily adjust our operations to comply, as COVID-19 and other uncertainties continue to unfold. The Company has taken actions to tightly manage costs, working capital and capital expenditures to preserve the Company’s financial health. As previously announced, the Company furloughed approximately 2,800 employees, primarily in its stores, as well as a portion of corporate employees, and reduced the base salaries of its executive officers and certain other employees, due to COVID-19. As of the date of this filing, we have no furloughed employees and approximately 4,500 active employees and have returned temporarily reduced base salaries to their pre-COVID-19 levels. We continue to prioritize the health and safety of our customers and employees by implementing strict health and safety protocols in our stores, including intensive and frequent cleaning procedures and limitations on the number of customers shopping in each store at any given time. Furthermore, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020 and the Company is implementing applicable benefits of the CARES Act. As such, we have deferred approximately $5,200 of employer payroll taxes as of December 26, 2020 and recorded an employee retention credit of approximately $1,000. We will continue to monitor guidance from the Centers for Disease Control and Prevention, state, local and federal guidance, and the impact of COVID-19 on the Company's business, results of operations, financial position and cash flows.  

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 and unless otherwise stated.

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Results of Operations

The following data represents the amounts shown in our unaudited consolidated statements of operations expressed in dollars and as a percentage of net sales and operating data for the periods presented. For segment data, see Note 11 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Thirteen Weeks Ended

Thirty-Nine Weeks Ended

December 26,

December 28,

December 26,

December 28,

2020

2019

2020

2019

Net sales

$

275,478

$

228,657

$

675,405

$

674,609

Cost of sales (excluding depreciation and amortization)

 

115,991

 

94,292

 

291,621

 

283,633

Gross profit

 

159,487

 

134,365

 

383,784

 

390,976

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

 

115,870

 

111,972

 

303,328

 

334,281

Stock-based compensation

 

2,177

 

799

 

4,986

 

2,575

Pre-opening costs

 

95

 

2,482

 

111

 

5,988

Depreciation and amortization

 

8,498

 

9,689

 

26,270

 

28,137

Other (income) expenses

 

(13)

 

(1)

 

1,089

 

375

Loss (gain) on disposal of assets

 

18

 

(8)

 

12

 

(12)

Income from operations

 

32,842

 

9,432

 

47,988

 

19,632

Interest expense, net

4,099

5,134

13,540

16,245

Loss on extinguishment of debt

893

 

 

893

 

Income before taxes

 

27,850

 

4,298

 

33,555

 

3,387

Provision for income taxes

 

8,181

 

1,886

 

10,356

 

1,428

Net income

$

19,669

$

2,412

$

23,199

$

1,959

Thirteen Weeks Ended

Thirty-Nine Weeks Ended

December 26,

December 28,

December 26,

December 28,

2020

2019

2020

2019

Percentage of net sales:

 

  

 

  

 

  

 

  

 

Net sales

 

100.0

%  

100.0

%  

100.0

%  

100.0

%  

Cost of sales (excluding depreciation and amortization)

 

42.1

%  

41.2

%  

43.2

%  

42.0

%  

Gross profit

 

57.9

%  

58.8

%  

56.8

%  

58.0

%  

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

 

42.1

%  

49.0

%  

44.9

%  

49.6

%  

Stock‑based compensation

 

0.8

%  

0.3

%  

0.7

%  

0.4

%  

Pre‑opening costs

 

0.0

%  

1.1

%  

0.0

%  

0.9

%  

Depreciation and amortization

 

3.1

%  

4.2

%  

3.9

%  

4.2

%  

Other (income) expenses

 

(0.0)

%  

(0.0)

%  

0.2

%  

0.1

%  

Loss (gain) on disposal of assets

 

0.0

%  

(0.0)

%  

0.0

%  

(0.0)

%  

Income from operations

 

11.9

%  

4.1

%  

7.1

%  

2.9

%  

Interest expense, net

 

1.5

%  

2.2

%  

2.0

%  

2.4

%  

Loss on extinguishment of debt

0.3

%  

%  

0.1

%  

%  

Income before taxes

 

10.1

%  

1.9

%  

5.0

%  

0.5

%  

Provision for income taxes

 

3.0

%  

0.8

%  

1.5

%  

0.2

%  

Net income

 

7.1

%  

1.1

%  

3.4

%  

0.3

%  

Operating data:

 

 

  

 

 

 

Number of stores at end of period

 

93

 

93

 

93

 

93

 

NonGAAP measures (1):

 

  

 

  

 

  

 

  

 

Adjusted EBITDA (2)

 

$

42,445

 

$

22,007

 

$

90,991

 

$

55,076

 

Adjusted net income (3)

 

$

20,705

 

$

2,411

 

$

26,112

 

$

2,249

 

Adjusted net income per common share — diluted (3)

 

$

0.42

 

$

0.05

 

$

0.53

 

$

0.05

 

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(1)We have presented EBITDA, Adjusted EBITDA, adjusted net income, and adjusted net income per common share – diluted as supplemental measures of financial performance that are not required by, or presented in accordance with, accounting principles generally accepted in the United States of America (“GAAP”). These non-GAAP measures should not be considered as alternatives to net income or net 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 Leonard Green and Partners, L.P. (“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. Please refer to footnotes (2) and (3) of this table for further information regarding why we believe each non-GAAP measure provides useful information to investors regarding our financial condition and results of operations, as well as the additional purposes for which management uses each non-GAAP financial measure.

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.

(2)EBITDA and Adjusted EBITDA have been presented in this Quarterly Report on Form 10-Q as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as net income before interest, taxes, depreciation, and amortization. Adjusted EBITDA is calculated in accordance with our Secured Term Loan Facility (as defined below) and the Revolving Credit Facility (as defined below) 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 in our evaluation of ongoing operating performance from period to period as discussed further below.

EBITDA and Adjusted EBITDA are included in this Quarterly Report on Form 10-Q because they 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 and executive performance evaluations, and we use Adjusted EBITDA 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.

EBITDA and Adjusted EBITDA are not GAAP measures of our financial performance or liquidity and should not be considered as alternatives to net income 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. Additionally, EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as they do not reflect certain cash requirements such as tax payments, debt service requirements, capital expenditures, store openings and certain other cash costs that may recur in the future. EBITDA and Adjusted EBITDA contain certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized. In evaluating Adjusted

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EBITDA, 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, such as pre-opening costs and stock compensation expense. Our presentation of Adjusted EBITDA 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 EBITDA and Adjusted EBITDA supplementally. Our measures of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.

A reconciliation of net income to EBITDA and Adjusted EBITDA is set forth below:

Thirteen Weeks Ended

Thirty-Nine Weeks Ended

December 26,

December 28,

December 26,

December 28,

2020

2019

2020

2019

    

    

    

    

    

Net income

$

19,669

$

2,412

$

23,199

$

1,959

Depreciation and amortization

 

8,498

 

9,689

 

26,270

 

28,137

Interest expense, net

 

4,099

 

5,134

 

13,540

 

16,245

Income tax provision

 

8,181

 

1,886

 

10,356

 

1,428

EBITDA

 

40,447

 

19,121

 

73,365

 

47,769

Pre-opening costs (a)

 

95

 

2,482

 

111

 

5,988

Non-cash lease expense (b)

 

(1,762)

 

(355)

 

8,311

 

(1,532)

Stock-based compensation (c)

 

2,177

 

799

 

4,986

 

2,575

Management transition costs (d)

1,200

1,200

Loss on extinguishment of debt (e)

 

893

 

 

893

 

Foreign exchange losses (gains) (f)

 

73

 

(37)

 

202

 

(98)

Elfa France closure (g)

(1)

402

Employee retention credit (h)

(1,028)

(1,028)

COVID-19 costs (i)

367

1,863

Severance and other (credits) costs (j)

(17)

(2)

1,088

(28)

Adjusted EBITDA

$

42,445

$

22,007

$

90,991

$

55,076

(a)Non-capital expenditures associated with opening new stores and relocating stores, and costs associated with opening the second distribution center, 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. Non-cash lease expense increased in the thirty-nine weeks ended December 26, 2020 due to renegotiated terms with landlords due to COVID-19 that resulted in deferral of $11,900 of certain cash lease payments, of which approximately $10,100 remains deferred as of December 26, 2020, and the modification of certain lease terms for a substantial portion of our leased properties. In the thirteen and thirty-nine weeks ended December 28, 2019, lease expenses associated with the opening of the second distribution center were excluded from Non-cash lease expense and included in Pre-opening costs.

(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)Costs related to the transition of key executives including signing bonus and relocation expenses recorded as selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance.

(e)Loss recorded as a result of the amendments made to the Senior Secured Term Loan Facility in the third quarter of fiscal 2020, which we do not consider in our evaluation of our ongoing operations.

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(f)Realized foreign exchange transactional gains/losses our management does not consider in our evaluation of our ongoing operations.

(g)Charges related to the closure of Elfa France operations in the second quarter of fiscal 2019, which we do not consider in our evaluation of ongoing performance.

(h)Employee retention credit related to the CARES Act recorded in the third quarter of fiscal 2020 as selling, general and administrative expense which we do not consider in our evaluation of ongoing performance.

(i)Includes incremental costs attributable to the COVID-19 pandemic, which consist of hazard pay for distribution center employees in the first quarter of fiscal 2020 and sanitization costs in the first, second and third quarters of fiscal 2020, all of which are recorded as selling, general and administrative expenses which we do not consider in our evaluation of ongoing performance.

(j)Severance and other credits/costs include amounts our management does not consider in our evaluation of our ongoing operations. The fiscal 2020 amounts include costs primarily incurred in the first and second quarters of fiscal 2020 associated with the reduction in workforce as a result of the COVID-19 pandemic and the related temporary store closures in fiscal 2020.

(3)Adjusted net income and adjusted net income per common share – diluted have been presented in this Quarterly Report on Form 10-Q as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define adjusted net income as net income before restructuring charges, charges related to the impact of COVID-19 on business operations, credits pursuant to the CARES Act, severance charges associated with COVID-19, loss on extinguishment of debt, certain gains on disposal of assets, certain management transition costs incurred and benefits realized, charges incurred as part of the implementation of our optimization plan, charges associated with an Elfa manufacturing facility closure, charges related to the closure of Elfa France operations, and the tax impact of these adjustments and other unusual or infrequent tax items. We define adjusted net income per common share – diluted as adjusted net income divided by the diluted weighted average common shares outstanding. We use adjusted net income and adjusted net income per common share – diluted 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 share – diluted 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.

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Table of Contents

A reconciliation of the GAAP financial measures of net income and net income per common share – diluted to the non-GAAP financial measures of adjusted net income and adjusted net income per common share – diluted is set forth below:

Thirteen Weeks Ended

Thirty-Nine Weeks Ended

December 26,

December 28,

December 26,

December 28,

2020

2019

2020

2019

    

    

    

    

    

Numerator:

 

  

 

  

 

  

 

  

 

Net income

$

19,669

$

2,412

$

23,199

$

1,959

Management transition costs (a)

 

1,200

 

 

1,200

 

Loss on extinguishment of debt (b)

 

893

 

 

893

 

Elfa France closure (c)

(1)

402

Employee retention credit (d)

(1,028)

(1,028)

COVID-19 costs (e)

367

1,863

Severance (f)

(15)

1,088

Taxes (g)

 

(381)

 

 

(1,103)

 

(112)

Adjusted net income

$

20,705

$

2,411

$

26,112

$

2,249

Denominator:

 

  

 

  

 

  

 

  

Weighted-average common shares outstanding — diluted

 

49,513,225

 

48,370,418

 

48,950,253

 

49,172,633

Net income per common share — diluted

$

0.40

$

0.05

$

0.47

$

0.04

Adjusted net income per common share — diluted

$

0.42

$

0.05

$

0.53

$

0.05

(a)Costs related to the transition of key executives including signing bonus and relocation expenses recorded as selling, general and administrative expenses, which we do not consider in our evaluation of ongoing performance.

(b)Loss recorded as a result of the amendments made to the Senior Secured Term Loan Facility in fiscal December 2020, which we do not consider in our evaluation of our ongoing operations.

(c)Charges related to the closure of Elfa France operations in the second quarter of fiscal 2019, which we do not consider in our evaluation of ongoing performance.

(d)Employee retention credit related to the CARES Act recorded in the third quarter of fiscal 2020 as selling, general and administrative expense which we do not consider in our evaluation of ongoing performance.

(e)Includes incremental costs attributable to the COVID-19 pandemic, which consist of hazard pay for distribution center employees in the first quarter of fiscal 2020 and sanitization costs in the first, second and third quarters of fiscal 2020, all of which are recorded as selling, general and administrative expenses which we do not consider in our evaluation of ongoing performance.

(f)Includes costs primarily incurred in the first and second quarters of fiscal 2020 associated with the reduction in workforce as a result of the COVID-19 pandemic and the related temporary store closures in fiscal 2020, which we do not consider in our evaluation of ongoing performance.

(g)Tax impact of adjustments to net income which are considered to be unusual or infrequent tax items, all of which we do not consider in our evaluation of ongoing performance.

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Thirteen Weeks Ended December 26, 2020 Compared to Thirteen Weeks Ended December 28, 2019

Net sales

The following table summarizes our net sales for each of the thirteen weeks ended December 26, 2020 and December 28, 2019:

    

 

    

December 26, 2020

    

% total

    

December 28, 2019

    

% total

TCS net sales

$

256,544

 

93.1

%  

$

211,971

 

92.7

%

Elfa third party net sales

 

18,934

 

6.9

%  

 

16,686

 

7.3

%

Net sales

$

275,478

 

100.0

%  

$

228,657

 

100.0

%

Net sales in the thirteen weeks ended December 26, 2020 increased by $46,821, or 20.5%, compared to the thirteen weeks ended December 28, 2019. This increase was comprised of the following components:

    

Net sales

Net sales for the thirteen weeks ended December 28, 2019

$

228,657

Incremental net sales increase due to:

 

  

TCS net sales (including a $22,920, or 98.1%, increase in online sales)

 

44,573

Elfa third party net sales (excluding impact of foreign currency translation)

 

549

Impact of foreign currency translation on Elfa third party net sales

 

1,699

Net sales for the thirteen weeks ended December 26, 2020

$

275,478

The Company’s consolidated net sales for the thirteen weeks ended December 26, 2020 increased $46,821 or 20.5%, compared to the thirteen weeks ended December 28, 2019. TCS net sales increased $44,573 or 21.0%, with other product categories up 22.2%, contributing 1,260 basis points of the increase, and Custom Closets up 19.5%, contributing 840 basis points of the increase. Online sales increased 98.1% in the thirteen weeks ended December 26, 2020 as compared to the thirteen weeks ended December 28, 2019. Elfa third party net sales increased $2,248 or 13.5% in the thirteen weeks ended December 26, 2020. After converting Elfa’s third party net sales from Swedish krona to U.S. dollars using the prior year’s conversion rate for both the thirteen weeks ended December 26, 2020 and the thirteen weeks ended December 28, 2019, Elfa third party net sales increased $549 or 3.3%.

As a result of the impact of the COVID-19 pandemic on our Company stores and the Company’s policy of excluding extended store closures from its comparable sales calculation, we chose not to provide comparable store sales metrics in the first quarter of fiscal 2020. Additionally, in the second and third quarters of fiscal 2020 we only had one store that would not be considered for comparable store sales metrics, and therefore the overall increase in net sales and comparable store sales were materially consistent. We do not believe that comparable store sales will be a meaningful metric in fiscal 2020.

Gross profit and gross margin

Gross profit in the thirteen weeks ended December 26, 2020 increased by $25,122, or 18.7%, compared to the thirteen weeks ended December 28, 2019. The increase in gross profit was primarily the result of increased consolidated sales partially offset by decreased consolidated gross margin. The following table summarizes the gross margin for the thirteen weeks ended December 26, 2020 and December 28, 2019 by segment and total. The segment gross margins include the impact of inter-segment net sales from the Elfa segment to the TCS segment:

    

December 26, 2020

    

December 28, 2019

TCS gross margin

 

57.2

%  

57.6

%

Elfa gross margin

 

40.3

%  

37.7

%

Total gross margin

 

57.9

%  

58.8

%

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TCS gross margin decreased 40 basis points primarily due to increased shipping costs as a result of a higher mix of online sales combined with incremental shipping surcharges instituted by third party carriers, partially offset by less promotional activity and a favorable mix of higher margin product sales in the thirteen weeks ended December 26, 2020. Elfa gross margin increased 260 basis points primarily due to lower direct material costs. In total, gross margin decreased 90 basis points, primarily due to the decrease in TCS gross margin during the thirteen weeks ended December 26, 2020.

Selling, general and administrative expenses

Selling, general and administrative expenses in the thirteen weeks ended December 26, 2020 increased by $3,898, or 3.5%, compared to the thirteen weeks ended December 28, 2019. However, as a percentage of consolidated net sales, SG&A decreased 690 basis points as compared to the thirteen weeks ended December 28, 2019. The following table summarizes SG&A as a percentage of consolidated net sales for the thirteen weeks ended December 26, 2020 and December 28, 2019:

December 26, 2020

December 28, 2019

 

    

% of Net sales

    

% of Net sales

 

TCS selling, general and administrative

 

39.2

%  

45.4

%

Elfa selling, general and administrative

 

2.9

%  

3.6

%

Total selling, general and administrative

 

42.1

%  

49.0

%

Total selling, general and administrative expenses as a percentage of consolidated net sales decreased 690 basis points primarily due to leverage of occupancy costs and payroll costs on higher sales during the third quarter of fiscal 2020, combined with reductions in marketing costs and other expenses. Given the COVID-19 driven cost reductions in the third quarter of fiscal 2020, we do not expect this level of leverage in the event of similar sales increases in the fourth quarter of fiscal 2020 as we return expenses to the business in a disciplined manner and commensurate with our sales recovery.

Pre-opening costs

Pre-opening costs declined to $95 in the thirteen weeks ended December 26, 2020 from $2,482 in the thirteen weeks ended December 28, 2019, primarily due to $2,182 of net costs associated with the opening of the second distribution center in the thirteen weeks ended December 28, 2019. The company did not open any new stores in the thirteen weeks ended December 26, 2020 and opened one relocation store in the thirteen weeks ended December 28, 2019.

Interest expense and loss on extinguishment of debt

Interest expense decreased by $1,035, or 20.2%, in the thirteen weeks ended December 26, 2020 to $4,099, as compared to $5,134 in the thirteen weeks ended December 28, 2019. The decrease is primarily due to lower interest rates, combined with a lower principal balance on the Senior Secured Term Loan Facility (as defined below). On November 25, 2020, the Company entered into the Seventh Amendment. The Seventh Amendment amended the Senior Secured Term Loan Facility to, among other things, allow the applicable interest rate margin to remain at 4.75% for LIBOR loans and 3.75% for base rate loans. The Company expects to incur less interest expense in fiscal 2021 than it will incur in fiscal 2020.

Additionally, we recorded a loss on extinguishment of debt of $893 in the third quarter of fiscal 2020 in conjunction with the Seventh Amendment.

Taxes

The provision for income taxes in the thirteen weeks ended December 26, 2020 was $8,181 as compared to $1,886 in the thirteen weeks ended December 28, 2019. The effective tax rate for the thirteen weeks ended December 26, 2020 was 29.4%, as compared to 43.9% in the thirteen weeks ended December 28, 2019. The decrease in the effective tax rate is primarily due to the impact of discrete items on higher pre-tax income in the third quarter of fiscal 2020.

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Table of Contents

Thirty-Nine Weeks Ended December 26, 2020 Compared to Thirty-Nine Weeks Ended December 28, 2019

Net sales

The following table summarizes our net sales for each of the thirty-nine weeks ended December 26, 2020 and December 28, 2019:

    

 

    

December 26, 2020

    

% total

    

December 28, 2019

    

% total

TCS net sales

$

628,933

 

93.1

%  

$

628,282

 

93.1

%

Elfa third party net sales

 

46,472

 

6.9

%  

 

46,327

 

6.9

%

Net sales

$

675,405

 

100.0

%  

$

674,609

 

100.0

%

Net sales in the thirty-nine weeks ended December 26, 2020 increased by $796, or 0.1%, compared to the thirty-nine weeks ended December 28, 2019. This increase was comprised of the following components:

    

Net sales

Net sales for the thirty-nine weeks ended December 28, 2019

$

674,609

Incremental net sales increase (decrease) due to:

 

  

TCS net sales (including a $86,673, or 124.7%, increase in online sales)

 

651

Elfa third party net sales (excluding impact of foreign currency translation)

 

(2,262)

Impact of foreign currency translation on Elfa third party net sales

 

2,407

Net sales for the thirty-nine weeks ended December 26, 2020

$

675,405

The Company’s consolidated net sales for the thirty-nine weeks ended December 26, 2020 increased $796 or 0.1%, compared to the thirty-nine weeks ended December 28, 2019. TCS net sales increased $651 or 0.1%, with other product categories up 1.0%, contributing 60 basis points of the increase, and Custom Closets partially reducing the increase by 50 basis points. Our online sales increased 124.7% compared to the thirty-nine weeks ended December 28, 2019. Elfa third party net sales increased $145 or 0.4% in the thirty-nine weeks ended December 26, 2020. After converting Elfa’s third party net sales from Swedish krona to U.S. dollars using the prior year’s conversion rate for both the thirty-nine weeks ended December 26, 2020 and the thirty-nine weeks ended December 28, 2019, Elfa third party net sales decreased $2,262 or 4.8%. TCS and Elfa net sales were negatively impacted by COVID-19 during the first quarter of fiscal 2020.

As a result of the impact of the COVID-19 pandemic on our Company stores and the Company’s policy of excluding extended store closures from its comparable sales calculation, we chose not to provide comparable store sales metrics in the first quarter of fiscal 2020. Additionally, in the second and third quarters of fiscal 2020 we only had one store that would not be considered for comparable store sales metrics, and therefore the overall increase in net sales and comparable store sales were materially consistent. We do not believe that comparable store sales will be a meaningful metric in fiscal 2020.

Gross profit and gross margin

Gross profit in the thirty-nine weeks ended December 26, 2020 decreased by $7,192, or 1.8%, compared to the thirty-nine weeks ended December 28, 2019. The decrease in gross profit was primarily the result of decreased consolidated gross margin. The following table summarizes the gross margin for the thirty-nine weeks ended December 26, 2020 and December 28, 2019 by segment and total. The segment gross margins include the impact of inter-segment net sales from the Elfa segment to the TCS segment:

    

December 26, 2020

    

December 28, 2019

TCS gross margin

 

55.7

%  

57.3

%

Elfa gross margin

 

40.7

%  

36.7

%

Total gross margin

 

56.8

%  

58.0

%

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Table of Contents

TCS gross margin decreased 160 basis points primarily due to increased shipping costs as a result of a higher mix of online sales and increased promotional activity, partially offset by a favorable mix of higher margin product sales. Elfa gross margin increased 400 basis points primarily due to a favorable customer and product sales mix and lower direct material costs. In total, gross margin decreased 120 basis points primarily due to the decrease in TCS gross margin during the thirty-nine weeks ended December 26, 2020.

Selling, general and administrative expenses

Selling, general and administrative expenses in the thirty-nine weeks ended December 26, 2020 decreased by $30,953, or 9.3%, compared to the thirty-nine weeks ended December 28, 2019. As a percentage of consolidated net sales, SG&A decreased by 470 basis points. The following table summarizes SG&A as a percentage of consolidated net sales for the thirty-nine weeks ended December 26, 2020 and December 28, 2019:

 

December 26, 2020

December 28, 2019

 

    

% of Net sales

    

% of Net sales

 

TCS selling, general and administrative

 

41.9

%  

46.2

%

Elfa selling, general and administrative

 

3.0

%  

3.4

%

Total selling, general and administrative

 

44.9

%  

49.6

%

Total selling, general and administrative expenses as a percentage of consolidated net sales decreased 470 basis points primarily due to reductions in payroll, marketing costs, and other costs in the thirty-nine weeks ended December 26, 2020.

Pre-opening costs

Pre-opening costs declined to $111 in the thirty-nine weeks ended December 26, 2020 from $5,988 in the thirty-nine weeks ended December 28, 2019 primarily due to $5,030 of net costs associated with the opening of the second distribution center in the thirty-nine weeks ended December 28, 2019. The Company did not open any new stores in the thirty-nine weeks ended December 26, 2020 and opened two new stores, including one relocation, in the thirty-nine weeks ended December 28, 2019.

Other expenses

Other expenses increased to $1,089 in the thirty-nine weeks ended December 26, 2020 from $375 in the thirty-nine weeks ended December 28, 2019, primarily due to severance costs associated with the reduction in workforce as a result of the COVID-19 pandemic and the related temporary store closures in fiscal 2020.

Interest expense

Interest expense decreased by $2,705, or 16.7%, in the thirty-nine weeks ended December 26, 2020 to $13,540, as compared to $16,245 in the thirty-nine weeks ended December 28, 2019. The decrease is primarily due to lower interest rates, combined with a lower principal balance on the Senior Secured Term Loan Facility (as defined below). On November 25, 2020, the Company entered into a seventh amendment (the “Seventh Amendment”) to the Senior Secured Term Loan Facility. The Seventh Amendment amended the Senior Secured Term Loan Facility to, among other things, allow the applicable interest rate margin to remain at 4.75% for LIBOR loans and 3.75% for base rate loans. The Company expects to incur less interest expense in fiscal 2021 than it will incur in fiscal 2020.

Additionally, we recorded a loss on extinguishment of debt of $893 in the thirty-nine weeks ended December 26, 2020 in conjunction with the Seventh Amendment.

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Table of Contents

Taxes

The provision for income taxes in the thirty-nine weeks ended December 26, 2020 was $10,356 as compared to a provision of $1,428 in the thirty-nine weeks ended December 28, 2019. The effective tax rate for the thirty-nine weeks ended December 26, 2020 was 30.9%, as compared to 42.2% in the thirty-nine weeks ended December 28, 2019. The decrease in the effective tax rate is primarily due to the impact of discrete items on higher pre-tax income in the thirty-nine weeks ended December 26, 2020.

Liquidity and Capital Resources

We have relied 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 2019 Elfa Senior Secured Credit Facilities (as defined below) as our primary sources of liquidity.

Due to the uncertainty related to COVID-19, in the first quarter of fiscal 2020, the Company took various actions to preserve its liquidity and increase its financial flexibility. We extended payment terms for most goods and services and renegotiated alternative terms for lease payments as well as other business contracts. In addition, we significantly reduced merchandise purchases and reduced or stopped discretionary spending across all areas of the business. As stores reopened and sales trends increased, we significantly increased merchandise purchases to align with sales trends. We also returned to normal payment terms for most vendors by the end of the third quarter of fiscal 2020. The Company has planned to substantially reduce capital expenditures for fiscal 2020 as compared to fiscal 2019 with a primary focus on critical activities, such as maintenance capital and necessary technology investments.

Our primary cash needs are for merchandise inventories and direct materials, payroll, store leases, capital expenditures associated with opening new stores and updating existing stores, as well as information technology and infrastructure, including our distribution centers, and Elfa manufacturing facility enhancements. The most significant components of our operating assets and liabilities are merchandise inventories, accounts receivable, prepaid expenses, operating lease assets, and other assets, accounts payable, operating lease liabilities, other current and noncurrent 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. We believe that cash expected to be generated from operations and the remaining availability of borrowings under the Revolving Credit Facility and the 2019 Elfa Senior Secured Credit Facilities will be sufficient to meet liquidity requirements, anticipated capital expenditures and payments due under our existing credit facilities for at least the next 12 months. In the future, we may seek to raise additional capital, which could be in the form of loans, bonds, convertible debt or equity, to fund our operations and capital expenditures. There can be no assurance that we will be able to raise additional capital on favorable terms or at all.

At December 26, 2020, we had $27,895 of cash, of which $14,101 was held by our foreign subsidiaries. In addition, we had $96,830 of additional availability under the Revolving Credit Facility and approximately $13,399 of additional availability under the 2019 Elfa Revolving Credit Facility (as defined below) as of December 26, 2020. There were $3,961 in letters of credit outstanding under the Revolving Credit Facility and other contracts at that date.

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Table of Contents

Cash flow analysis

A summary of our key components and measures of liquidity are shown in the following table:

Thirty-Nine Weeks Ended

December 26,

December 28,

    

2020

    

2019

    

Net cash provided by (used in) operating activities

$

116,689

$

(1,136)

Net cash used in investing activities

 

(11,605)

 

(29,284)

Net cash (used in) provided by financing activities

 

(146,304)

 

36,751

Effect of exchange rate changes on cash

 

1,360

 

276

Net (decrease) increase in cash

$

(39,860)

$

6,607

Free cash flow (Non-GAAP) (1)

$

105,019

$

(30,432)

(1)See below for a discussion of this non-GAAP financial measure and reconciliation to its most directly comparable GAAP financial measure.

Net cash provided by (used in) operating activities

Cash from operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, stock-based compensation, and deferred taxes as well as the effect of changes in operating assets and liabilities.

Net cash provided by operating activities was $116,689 for the thirty-nine weeks ended December 26, 2020 and was comprised of a net change in operating assets and liabilities of $66,091, net income of $23,199 and non-cash items of $27,399. The net change in operating assets and liabilities is primarily due to an increase in accounts payable and accrued liabilities, an increase in taxes payable and a decrease in cash operating lease payments, partially offset by an increase in merchandise inventory purchases. The increase in accounts payable and accrued liabilities was primarily due to timing of inventory receipts and payments combined with a temporary increase in vendor payment terms.

Net cash used in operating activities was $1,136 for the thirty-nine weeks ended December 28, 2019. Non-cash items of $27,260 and net income of $1,959 were more than offset by a net change in operating assets and liabilities of $30,355. The net change in operating assets and liabilities is primarily due to an increase in merchandise inventory, combined with an increase in accounts receivable, partially offset by an increase in accounts payable and accrued liabilities. The increase in merchandise inventory is primarily due to inventory build-up related to the second distribution center and new product introductions. The increase in accounts receivable is primarily due to the seasonality of sales. The increase in accounts payable and accrued liabilities is primarily driven by timing of inventory receipts and payments.

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 centers.

Our total capital expenditures for the thirty-nine weeks ended December 26, 2020 were $11,670. We incurred capital expenditures of $6,467 for maintenance capital and information technology investments. We incurred capital expenditures of $3,362 related to the distribution centers. The remaining capital expenditures of $1,841 were primarily related to investments in our existing stores. We did not open any new stores during the thirty-nine weeks ended December 26, 2020.

Our total capital expenditures for the thirty-nine weeks ended December 28, 2019 were $29,296. We incurred capital expenditures of $13,434 related to the opening of the second distribution center in Aberdeen, Maryland, which became fully operational in late fiscal 2019. We incurred $9,249 of capital expenditures for new store openings, relocations and existing store remodels. We opened two new stores, including one relocation, during the thirty-nine weeks ended

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December 28, 2019. The remaining capital expenditures of $6,613 were primarily for investments in information technology and new product rollouts.

Net cash (used in) provided by financing activities

Financing activities consist primarily of borrowings and payments under the Senior Secured Term Loan Facility, the Revolving Credit Facility, and the 2019 Elfa Senior Secured Credit Facilities.

Net cash used in financing activities was $146,304 for the thirty-nine weeks ended December 26, 2020. This included net repayments of $78,000 on the Revolving Credit Facility and net repayments of $9,910 for the 2019 Elfa Senior Secured Credit Facilities. In addition, the Company made net repayments of $52,281 on indebtedness outstanding under the Senior Secured Term Loan Facility of which $47,172 was in conjunction with the Seventh Amendment, repayments of $122 on indebtedness outstanding under the 2019 Elfa Senior Secured Term Loan Facility, and paid $412 in taxes in connection with the withholding of shares upon vesting of restricted stock awards.

Net cash provided by financing activities was $36,751 for the thirty-nine weeks ended December 28, 2019. This included net proceeds of $46,000 from borrowings under the Revolving Credit Facility, partially offset by net repayments of $5,365 for the 2019 Elfa Senior Secured Credit Facilities. In addition, the Company made combined repayments of $3,512 on indebtedness outstanding under the Senior Secured Term Loan Facility and the 2019 Elfa Senior Secured Term Loan Facility, and paid $372 in taxes in connection with the withholding of shares upon vesting of restricted stock awards.

As of December 26, 2020, TCS had a total of $96,830 of unused borrowing availability under the Revolving Credit Facility and zero borrowings outstanding under the Revolving Credit Facility.

As of December 26, 2020, Elfa had a total of $13,399 of unused borrowing availability under the 2019 Elfa Revolving Credit Facility and zero borrowings outstanding under the 2019 Elfa Senior Secured Credit Facilities.

Free cash flow (Non-GAAP)

We present free cash flow, which we define as net cash provided by (used in) operating activities in a period minus payments for property and equipment made in that period, because we believe it is a useful indicator of the Company’s overall liquidity, as the amount of free cash flow generated in any period is representative of cash that is available for debt repayment, investment, and other discretionary and non-discretionary cash uses. Accordingly, we believe that free cash flow provides useful information to investors in understanding and evaluating our liquidity in the same manner as management. Our definition of free cash flow is limited in that it does not solely represent residual cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt service and other contractual obligations. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our Consolidated Statements of Cash Flows. Although other companies report their free cash flow, numerous methods may exist for calculating a company’s free cash flow. As a result, the method used by our management to calculate our free cash flow may differ from the methods used by other companies to calculate their free cash flow.

Our free cash flow fluctuates as a result of seasonality of net sales, building inventory for key selling periods, and timing of investments in new store openings, existing store remodels, infrastructure, information systems, and our distribution centers, among other things. Historically, our free cash flow has been lower in the first half of the fiscal year, due to lower net sales, operating income, and cash flows from operations, and as such, is not necessarily indicative of the free cash flow for the full year. However, our positive free cash flow of $105,019 for the thirty-nine weeks ended December 26, 2020 increased as compared to negative free cash flow of $30,432 for the thirty-nine weeks ended December 28, 2019. Free cash flow generation during the thirty-nine weeks ended December 26, 2020, was strong, despite the significant impact of COVID-19 in the first quarter of fiscal 2020, as a result of the many actions undertaken by the Company to preserve liquidity, including temporary reductions in inventory purchases, temporary extension of payment terms, and reduced capital expenditures which focus on maintenance capital and necessary technology investments. The Company returned to normal payment terms for most vendors by the end of the third quarter of fiscal 2020. Additionally,

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during fiscal 2020, the Company renegotiated terms with landlords as a result of the COVID-19 pandemic, which resulted in the deferral of approximately $11,900 of certain cash lease payments, of which approximately $10,100 remains deferred as of December 26, 2020, and the modification of certain lease terms for a substantial portion of our leased properties. Less than half of these lease amounts are expected to be repaid in the second half of fiscal 2020 and the remaining amounts are expected to be repaid primarily in fiscal 2021.

The following table sets forth a reconciliation of free cash flow, a non-GAAP financial measure, to net cash provided by (used in) operating activities, which we believe to be the GAAP financial measure most directly comparable to free cash flow:

Thirty-Nine Weeks Ended

December 26,

December 28,

    

    

2020

    

2019

 

Net cash provided by (used in) operating activities

$

116,689

$

(1,136)

Less: Additions to property and equipment

 

(11,670)

 

(29,296)

Free cash flow

$

105,019

$

(30,432)

Senior Secured Term Loan Facility

On April 6, 2012, The Container Store Group, Inc., The Container Store, Inc. and certain of our domestic subsidiaries entered into a credit agreement with JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent, and the lenders party thereto (the “Senior Secured Term Loan Facility”). On November 25, 2020, the Company entered into Amendment No. 7 (the “Seventh Amendment”) to the Senior Secured Term Loan Facility. In connection with the Seventh Amendment, the Company (a) paid down approximately $47,200 of the outstanding loans under the Senior Secured Term Loan Facility, which reduced the aggregate principal amount of the loans under the facility to $200,000 and (b) amended the Senior Secured Term Loan Facility to, among other things, extend the maturity date to January 31, 2026 and impose a 1.00% premium if a voluntary prepayment is made from the proceeds of a repricing transaction within the one year anniversary of the Seventh Amendment. Commencing on March 31, 2021, the Company will be required to make quarterly amortization payments of $500 on the term loan facility, with the balloon payment for the remaining balance due on January 31, 2026. Prior to the date of delivery of a compliance certificate for the fiscal quarter ended December 26, 2020, the applicable interest rate margin for LIBOR loans was 4.75%, subject to a LIBOR floor of 1.00%, and 3.75% for base rate loans and, thereafter, may step up to 5.00% for LIBOR Loans and 4.00% for base rate loans unless the consolidated leverage ratio achieved is less than or equal to 2.75 to 1.00. As of December 26, 2020, the aggregate principal amount in outstanding borrowings under the Senior Secured Term Loan Facility was $190,687, net of deferred financing costs.

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 cross-default provisions and also require certain mandatory prepayments of the Senior Secured Term Loan Facility, among these an Excess Cash Flow (as such term is defined in the Senior Secured Term Loan Facility) requirement. As of December 26, 2020, we were in compliance with all covenants under the Senior Secured Term Loan Facility and no Event of Default (as such term is defined in the Senior Secured Term Loan Facility) had occurred.

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Revolving Credit Facility

On April 6, 2012, The Container Store Group, Inc., The Container Store, Inc. and certain of our 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”). On November 25, 2020, the Company entered into Amendment No. 5 (the “Fifth Amendment”). The Fifth Amendment amends the Revolving Credit Facility to extend the maturity date to the earlier of (a) November 25, 2025 and (b) October 31, 2025 if any portion of the Senior Secured Term Loan Facility remains outstanding on such date and the maturity date of the Senior Secured Term Loan Facility is not extended.

The aggregate principal amount of the facility is $100,000. Borrowings under the Revolving Credit Facility accrue interest at LIBOR+1.25%. 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 December 26, 2020, we were in compliance with all covenants under the Revolving Credit Facility and no Event of Default (as such term is defined in the Revolving Credit Facility) had occurred.

2019 Elfa Senior Secured Credit Facilities

On March 18, 2019, Elfa refinanced its master credit agreement with Nordea Bank AB entered into on April 1, 2014 and the senior secured credit facilities thereunder, and entered into a new master credit agreement with Nordea Bank Abp, filial i Sverige (“Nordea Bank”), which consists of (i) an SEK 110.0 million (approximately $13,399 as of December 26, 2020) revolving credit facility (the “2019 Original Revolving Facility”), (ii) upon Elfa’s request, an additional SEK 115.0 million (approximately $14,008 as of December 26, 2020) revolving credit facility (the “2019 Additional Revolving Facility” and together with the 2019 Original Revolving Facility, the “2019 Elfa Revolving Facilities”), and (iii) an uncommitted term loan facility in the amount of SEK 25.0 million (approximately $3,045 as of December 26, 2020), which is subject to receipt of Nordea Bank’s commitment and satisfaction of specified conditions (the “Incremental Term Facility”, together with the 2019 Elfa Revolving Facilities, the “2019 Elfa Senior Secured Credit Facilities”). The term for the 2019 Elfa Senior Secured Credit Facilities began on April 1, 2019 and matures on April 1, 2024. Loans borrowed under the 2019 Elfa Revolving Facilities bear interest at Nordea Bank’s base rate +1.40%. Any loan borrowed under the Incremental Term Facility would bear interest at Stibor +1.70%.

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The 2019 Elfa Senior Secured Credit Facilities are secured by the majority of assets of Elfa. The 2019 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 Group Equity Ratio (as defined in the 2019 Elfa Senior Secured Credit Facilities) of not less than 32.5% and (ii) a consolidated ratio of net debt to EBITDA (as defined in the 2019 Elfa Senior Secured Credit Facilities) of less than 3.20. As of December 26, 2020, Elfa was in compliance with all covenants under the 2019 Elfa Senior Secured Credit Facilities and no Event of Default (as defined in the 2019 Elfa Senior Secured Credit Facilities) had occurred.

Critical accounting policies and estimates

The preparation of financial statements in accordance with GAAP 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. A summary of our significant accounting policies is included in Note 1 to our annual consolidated financial statements in our 2019 Annual Report on Form 10-K.

Certain of our accounting policies and estimates are considered critical, as these policies and estimates are the most important to the depiction of our consolidated financial statements and require significant, difficult, or complex judgments, often about the effect of matters that are inherently uncertain. Such policies are summarized in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our 2019 Annual Report on Form 10-K. As of December 26, 2020, there were no significant changes to any of our critical accounting policies and estimates.

Contractual obligations

There were no material changes to our contractual obligations from those disclosed in our 2019 Annual Report on Form 10-K, other than those shown in the table below, primarily related to paydowns of outstanding borrowings under the Senior Secured Term Loan Facility and Revolving Credit Facility and certain modifications to our operating leases as a result of renegotiated terms with landlords.

Payments due by period

Within

    

Total

    

1 Year (Remaining)

    

 3 Years

    

 5 Years

    

After 5 Years

Recorded contractual obligations

Term loans

$

200,000

$

500

$

4,000

$

4,000

$

191,500

Revolving loans

 

 

 

 

 

Operating leases (1)

548,817

26,868

 

174,392

 

139,832

 

207,725

Total 

$

748,817

$

27,368

$

178,392

$

143,832

$

399,225

(1)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. During fiscal 2020, the Company renegotiated terms with landlords as a result of the COVID-19 pandemic, which resulted in the deferral of approximately $11,900 of certain cash lease payments, of which approximately $10,100 remains deferred as if December 26, 2020, and the modification of certain lease terms for a substantial portion of our leased properties.

Off-Balance Sheet Arrangements

There have been no material changes to our off-balance sheet arrangements as disclosed in our 2019 Annual Report on Form 10-K.

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Recent Accounting Pronouncements

Please refer to Note 1 of our unaudited consolidated financial statements for a summary of recent accounting pronouncements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 26, 2020.

Changes in Internal Control

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended December 26, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are subject to various legal proceedings and claims, including employment claims, wage and hour claims, intellectual property claims, contractual and commercial disputes and other matters that arise in the ordinary course of business. While the outcome of these and other claims cannot be predicted with certainty, management does not believe that the outcome of these matters will have a material adverse effect on our business, results of operations or financial condition on an individual basis or in the aggregate.

ITEM 1A. RISK FACTORS

There have been no material changes to our risk factors as previously disclosed in Item 1A of Part I of our 2019 Annual Report on Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

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ITEM 3. DEFAULT UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Incorporated by Reference

Exhibit
Number

Exhibit Description

Form

File No.

Exhibit

Filing
Date

Filed/
Furnished
Herewith

3.1

Amended and Restated Certificate of Incorporation of The Container Store Group, Inc.

10-Q

001-36161

3.1

1/10/14

3.2

Amended and Restated Bylaws of The Container Store Group, Inc.

8-K

001-36161

3.1

11/12/20

10.1

Amendment No. 7 to Term Facility Credit Agreement, dated as of November 25, 2020 among The Container Store, Inc., the guarantors party thereto, JPMorgan Chase Bank, N.A., as administrative agent and the lenders from time to time party thereto (Senior Secured Term Loan Facility)

*

10.2

Amendment No. 5 to Term Facility Credit Agreement, dated as of November 25, 2020 among The Container Store, Inc., the guarantors party thereto, JPMorgan Chase Bank, N.A., as administrative agent and the lenders from time to time party thereto (Revolving Credit Facility)

*

10.3

Employment Agreement, dated December 21, 2020, between Satish Malhotra and The Container Store Group, Inc.

8-K

001-36161

10.1

12/22/20

31.1

Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a)

*

31.2

Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a)

*

32.1

Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350

**

32.2

Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350

**

101.INS

Inline XBRL Instance Document

*

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101.SCH

Inline XBRL Taxonomy Extension Schema Document

*

101.CAL

Inline XBRL Taxonomy Calculation Linkbase Document

*

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

*

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

*

101.PRE

Inline XBRL Taxonomy Extension Presentation

*

104

Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline Instance XBRL Document

*

*     Filed herewith.

**   Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

The Container Store Group, Inc.

(Registrant)

Date: February 3, 2021

\s\ Jeffrey A. Miller

Jeffrey A. Miller

Chief Financial Officer (duly authorized officer and Principal Financial Officer)

Date: February 3, 2021

\s\ Kristin Schwertner

Kristin Schwertner

Chief Accounting Officer (Principal Accounting Officer)

45