Container Store Group (TCS) made its public debut on Friday, November 1. Shares of the specialty retailer of storage and organization products ended their first day with gains of 101.1%.
After such a successful public offering, I will remain cautious and stay on the sidelines. The high valuation, lack of earnings and slower growth makes the decision for me easy.
The Public Offering
Container Store Group is a retailer of storage and organization products, being the only national retailer solely devoted to the category. The company aims to provide order in a busy and chaotic world, helping customers to save time, space and quality of lives.
The company operates 62 stores with an average size of 19,000 square feet, spread out in 22 different states.
Container Store Group sold 12.5 million shares for $18 apiece, thereby raising $225 million in gross proceeds. All shares were being sold by the company, with no shares being offered by selling shareholders.
Initially, bankers and the firm set an initial price range of $14-$16 per share, a range later revised to $17-$18 per share. Shares were eventually sold at the high end of the adjusted initial public price range.
Some 26% of the total shares were offered in the public offering. At Monday's closing price of $35.35 per share, the firm is valued at $1.72 billion.
The major banks that brought the company public were JPMorgan, Barclays, Credit Suisse, Morgan Stanley, Bank of America/Merrill Lynch, Wells Fargo and Jefferies, among others.
Container Store Group was founded back in 1978 built upon an employee-first culture, based upon the Foundation Principles. Besides operating with 62 stores, Container Store furthermore owns Elfa, a Swedish manufacturer.
The focus of the company has been on a highly trained workforce, hiring just 4% of annual applicants. Turnover is just 10% per annum and extensive training, flexibility and satisfaction places the company on the Fortune's list of top 100 best companies to work for.
For the year ending on March of 2013, the Container Store Group generated annual revenues of $706.8 million, up 11.5% on the year before. Net losses narrowed from $30.7 million to just $0.1 million, despite a $7.3 million loss on the extinguishment of debt and much lower goodwill and impairment charges.
Revenues for the first half of this year came in at $343.4 million, up 9.3% on the year before. Net losses narrowed from $9.1 million to $0.7 million.
The company operates with $12.7 million in cash and equivalents. Total debt stand at $371.0 million, resulting in a net debt position of around $360 million. The proceeds from the offering will be used to make distributions to holders of senior and junior preferred stock.
With the equity in the business being valued around $1.72 billion, Container Store Group is valued at 2.4 times annual revenues and a non-meaningful earnings multiple.
As noted above, the offering of Container Store Group has been a huge success. The company priced the offering at $18 per share, some 20.0% above the midpoint of the original preliminary offering range. Ever since shares have seen more upside, currently trading some 135.7% above the midpoint of the preliminary offering range.
Note that Container Store Group's highly successful public offering is based on the promise of growth. The company aims to open 6 stores this year, having already opened 5 stores so far this year. The company aims to open another 7 stores in 2014, as it sees potential of 300 stores going forward.
Growth is important, as comparable store sales is slowing down. Comparable growth rates already slowed down to 4.4% for the past year, with growth slowing down to just 2.9% in the first six months of this year. Growth was largely driven last year by online sales which rose by 25%, making up 5.4% of total sales.
As such, I am quite worried about Container Store going forward. The tough competition from large brick-and-mortar stores as well as online competitors, the slower comparable growth, the debt position, and the lack of earnings make me very hesitant. This is especially the case after shares have doubled since the initial price range.
I remain on the sidelines, seeing little prospects for further share price appreciation.