The Container Store Group, Inc. (NYSE:TCS)
Q4 2015 Earnings Conference Call
April 25, 2016 05:00 PM ET
Anne Rakunas - Investor Relations
Kip Tindell - Chairman and CEO
Melissa Reiff - President and COO
Jodi Taylor - CFO
Seth Sigman - Credit Suisse
Chris Horvers - JPMorgan
Steven Forbes - Guggenheim Securities
Matthew Fassler - Goldman Sachs
Daniel Binder - Jefferies & Company
Denise Chai - Bank of America Merrill Lynch
Good afternoon everyone and thanks for joining us today for a pre-recording of management remarks pertaining to The Container Store’s Fourth Quarter and Fiscal 2015 Earnings Results.
Speaking today are Kip Tindell, Chairman and Chief Executive Officer, Melissa Reiff, President and Chief Operating Officer, and Jodi Taylor, Chief Financial Officer. In addition to posting a press release with our Fourth Quarter and Fiscal Year 2015 results to our Web site, we have posted a written transcript of management’s prepared remarks on our Web site as well. A live Q&A session will follow today at 5pm Eastern time, and a replay of the Q&A session can be accessed at containerstore.com later this evening.
Before we begin, I need to remind you that certain comments made during this recording may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those are referred to in The Container Store’s press release issued today. The forward-looking statements made today are as of the date of this call and The Container Store does not undergo any obligation to update their forward-looking statements.
Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call. A reconciliation schedule showing the GAAP versus the non-GAAP financial measures is available in The Container Store’s press release issued today. If you do not have a copy of today’s press release, you may obtain one by visiting the Investor Relations page of the Web site at containerstore.com.
And with that, I’ll turn the call over to Kip. Kip?
Hello. Thanks to all of you for joining us for our pre-recorded remarks on The Container Store’s fourth quarter and 2015 fiscal year, prior to our live Q&A. Fiscal 2015, an investment year for The Container Store, was met with both success, and challenge.
I’m proud of what we accomplished this year, with a key callout being on our on-time rollout of the single biggest and most innovative initiative in our Company’s history, TCS Closets. We also conducted an exhaustive analysis of our cost structure, which is expected to drive substantial SG&A savings in fiscal 2016.
With the heavy lifting we did in fiscal 2015, we believe we’ve strategically positioned our Company to succeed long-term amidst an evolving retail landscape. Now, specific to the fourth quarter: We exceeded our stated expectations on total consolidated fourth quarter sales and delivered earnings in line with our previously provided outlook.
From a comp store sales standpoint, we performed much better than we projected for the fourth quarter ending up 0.2% comp store sales versus stated guidance of down 3% to down 5%, marking the third consecutive quarter of positive comp store sales.
Importantly, we saw improved and positive comp store sales across non-TCS Closets and non-Elfa areas of the store during the last two months of the fiscal year for the first time since the fourth quarter of 2014.
Our TCS Closets initiative was again a key driver of fourth quarter performance, providing a 140 basis point lift to overall comp store sales. Specifically, consolidated net sales for the fourth quarter of fiscal 2015 were $232.1 million, up 3.5% compared to the fourth quarter of fiscal 2014, after converting the Elfa International AB portion of consolidated net sales from Swedish krona to U.S. dollars.
Net sales in The Container Store retail business for fourth quarter of fiscal 2015 were $214.2 million, up 4.7% as compared to the fourth quarter of fiscal 2014. Elfa International AB third-party net sales for the fourth quarter of fiscal 2015 were SEK151.9 million, down 4.4% compared to the fourth quarter of fiscal 2014.
Converting Elfa International third-party net sales to U.S. dollars reduced the consolidated net sales results by 0.4%, from 3.9% to 3.5%, or $0.9 million for the fourth quarter of fiscal 2015 compared to the fourth quarter of fiscal 2014 using the prior year conversion rate for both periods.
Earnings per share were $0.20 for the fourth quarter of fiscal 2015, which was in line with previously stated expectations and included approximately $0.02 per share in spend for key strategic initiatives. This compares to Adjusted EPS of $0.24 in the fourth quarter of fiscal 2014.
For fiscal 2015, we executed and delivered on our stated initiatives and achieved just slightly positive comp store sales growth, but it rounds to flat. We also exceeded our most recent annual comp store sales outlook of minus 1% to minus 1.6%. We view this as an improvement in trend after having started the year with an outlook of minus 2% to flat for comp store sales then raising its floor upon release of our second quarter earnings to minus 1% to flat, and in fact, completing the year at just slightly positive, to 0%,in comp store sales.
As we’ve consistently said, fiscal 2015 was an investment year for our Company as we strategically, and importantly, put extremely focused and significant financial, human and operational resources into key initiatives designed to transform our business in order to address the changing retail landscape and set the stage for long-term growth.
We took our quarterly comp store sales trend from slightly negative to slightly positive, and as I mentioned earlier, we successfully rolled out our TCS Closets and Contained Home on time, to each and every store.
I want to thank our entire organization for an extraordinary effort in achieving this major, major milestone. It was a significant undertaking for a Company of our size.
We also introduced free shipping on orders over $75 and are realizing incremental sales and profitability. We increased our POP Stars by approximately 1.6 million to over 3.3 million at the end of fiscal 2015.
And specific to the fourth quarter for POP, we executed many test and learn marketing communications with our POP Stars, which we believe resulted in incremental sales and engagement. We also saw positive, incremental success of our multi-channel strategy that reached our customers in a variety of ways including email, personalization of messages served up when these customers visited our web site, re-targeting messaging that identified a targeted customer and served up messaging about our offer to them as they visited other online sites and use of all of our social channels. So, we are touching our customers several times, through various channels, as opposed to a single channel marketing touch.
We implemented a number of enhancements to the Company’s digital platform including more strategic targeting and organic search programs in our continued effort to win before the store, upgrades to the native search platform and we also launched a lifestyle blog, ContainerStories.
As you know, content is king and this blog helps to improve our organic search results. In fact, our top referring digital source over the last quarter was organic search, which saw an estimated 19% improvement over the prior quarter and made up about 40% of the traffic hitting our site.
We also expanded our presence by opening 10 wonderful new stores, including one relocation, and extended our reach into seven brand new markets while adding stores to two existing markets. We remain very pleased with our overall new store performance.
We executed our distribution center automation project that successfully went live this month, two weeks ahead of schedule, and on budget. I’d like to really thank our distribution center team for executing on this important initiative, which is intended to drive supply chain and payroll efficiencies for the rest of our future.
And we jumped to number 14, from number 27, on Fortune magazine’s list of the 100 Best Companies to Work For in America, marking the Company’s seventeenth consecutive year on that list.
I’m so incredibly proud that as our business has evolved, we’ve been able to ensure our employees continue to feel motivated and inspired to serve each other, our customers and the Company.
As we head into fiscal 2016, we see great opportunity to leverage the investments we made in fiscal 2015, to really give them wings, while also taking an even closer look at our expense structure.
Expense management, of course, has always been a priority, but as we announced on our third quarter call just recently, we’ve embarked on an SG&A savings program, a robust program. We are focused on cutting costs in a comprehensive manner, but in a way that does not compromise the success of our custom closet focus, or harm our Company culture.
We are doing this through a combination of actions, including a company-wide salary and wage freeze and also a 401k match freeze, a reduction in payroll expense, and continuous and extensive efforts to drive costs out of each and every area of the business.
As I mentioned, we’re focused on maximizing the potential of our key initiatives while leveraging our many strengths in order to innovate, differentiate, and continue to position The Container Store for decades to come as the loved, relevant and much-needed retailer it has always been.
I’m going to turn it over to Melissa to provide more specifics about fiscal 2016 and the initiatives we’re prioritizing for this year. Melissa?
Thanks Kip, and hi everyone. As Kip shared, we did do some heavy lifting in fiscal 2015, in addition to carefully evaluating our expense structure as we head into fiscal 2016.
In combination with a prudent plan for comp store sales, and moderating new store growth, these expense initiatives are expected to contribute to our projected earnings per share for fiscal 2016 at nearly double or triple the level that we achieved in fiscal 2015. And yes, we do have an intense focus on Closet Domination.
We absolutely intend to maximize TCS Closets, Elfa, and closet completion product sales, through continued improvements to our custom closet selling process and employee selling skills training, as well as an enhanced online and in-store experience, new product development, and a robust marketing plan.
The benefit of the investment in the launch of TCS Closets is expected to be realized in fiscal 2016 and beyond, as we leverage all of these continuous improvement efforts.
Closet-related solutions are the dominant category for The Container Store, making it our primary area of expertise and the most natural and strategic area for enhanced focus and continued differentiation, we know closets, and intend to lead the custom closet market.
We will continue to leverage our online and in-store demand and traffic, in addition to our network of Contained Home Organizers to sell these solutions, while also more strategically and overtly positioning The Container Store as the ultimate resource for custom closet organization systems.
In addition, we’ll maintain our focus on having our customers choose to have their Elfa solution installed versus purchasing their solution and installing it them themselves. In fiscal 2015, approximately 66% of our Elfa spaces sold were installed, versus approximately 53% in fiscal 2014.
In our experience, the faster the customer gets their new Elfa space installed, the more likely they’ll be back sooner to purchase another space. Our installers know what they’re doing, and install Elfa with expertise.
Our Customer Financing Program is expected to launch this summer and is intended to drive incremental spend and increased conversion of our higher average ticket in Elfa and TCS Closets solutions. We will provide more details on this program with our first quarter release in fiscal 2016, but we’re excited to have Synchrony as our customer financing partner.
And specific to TCS Closets, our $10,000 TCS Closets average ticket has sustained itself. We did complete the rollout of TCS Closets to all stores on December 19, 2015, and the fourth quarter represented the first time for all of our stores to sell the line during the holiday season and during our annual Elfa sale, albeit not all stores had the line the entire quarter.
The benefit to the quarter’s comp store sales from TCS Closets was 140 basis points, just below the 180 basis points that we realized in the third quarter. We did experience some anticipated seasonality during that time and believe our customers were focused on perhaps something other than installing closets in December, which is understandable.
After the holidays, the volume of Elfa sold during our ever-important Elfa sale muted the impact of TCS Closets as a percentage of overall sales. In fact, if you take the stores that had TCS Closets in the third quarter, these stores had a 5.1% increase in their TCS Closets sales from the third to the fourth quarter.
So we did see an increase in total TCS Closets sales, but since the non-TCS Closets sales are so much greater in fourth quarter during our annual Elfa sale and the holidays, again, this muted the benefit to comp store sales that I mentioned earlier.
As we continue to gain momentum with all our stores now selling TCS Closets we anticipate that experienced selling will be more effective against those two events, the holiday time period and our annual Elfa Sale.
We’re pleased to see that after the fourth quarter closed, during fiscal March and April to date, early results have indicated a return to the TCS Closets sales contributions of third quarter, and continue to build. We’ve a robust pipeline of engaged TCS Closets customers and we continue to remain very excited about the initiatives potential.
As it relates to our new stores, we’re committed to their importance and continue to see an abundance of untapped market opportunities, which allows us to achieve scale on our enterprise-wide investments. We are pulling back just a little this year as we digest our key initiatives that we launched last year, and implement the cost savings program Kip spoke of.
And while on the topic of new stores, we’re going to use fiscal 2016 to plan for a pilot of a reduced square footage format to open in fiscal 2017. While we’re still pleased with our new store performance, we believe this format will further optimize and maximize future, smaller market productivity.
We will evaluate our store growth plan each year, adjusting it as appropriate, in response to the overall retail environment, real estate opportunities, and our operational priorities. For fiscal 2016, we plan to open a total of eight new stores, inclusive of one relocation. Four of these stores will open in the first half of the fiscal year, with the first store of the fiscal year opening in June.
Three new stores plus the relocated store will open in the second half of the fiscal year. These markets include, Novi, Michigan, Palm Beach Gardens, Florida, Pittsburgh, Pennsylvania, Des Moines, Iowa, Troy, Michigan, Omaha, Nebraska, Baybrook, Texas and a relocation of our Chestnut Hill, Massachusetts store.
Another project for fiscal 2016 that we’re undertaking is an integrated campaign designed to communicate to our customers the TCS Difference, surrounding the value and differentiation of our products, our services and what we stand for as a Company. All compelling reasons we believe to shop with us. We can and should do an even better job of communicating these messages to our customers through a variety of platforms, initially beginning online.
Now I’ll hand it over to Jodi to go through our financial results and outlook in more detail.
Thank you, Melissa, and good afternoon, everyone. Today I’ll be reviewing our fourth quarter and full, fiscal 2015 results, and then discuss our guidance for fiscal 2016.
Before I do, however, I’d like to touch upon our previously announced change in our fiscal year-end. Our fiscal year-end has changed from the Saturday closest to February 28 to the Saturday closest to March 31 of each year. This change is effective beginning with our current 2016 fiscal year, which began on April 3and will end on April 1, 2017.
We’ve included recast historical unaudited financial information for the first three quarterly periods of 2015 in today’s press release and these are also posted on our Web site under the Investor Relations link.
We expect to report results for the March 2016 fiscal month transition period, as well as the recast historical unaudited financial information for the fourth quarter of 2015, when we release our results for the first quarter that ends July 2, 2016.
Turning to our fourth quarter results. The consolidated net sales were $232.1 million, up 3.5% compared to the fourth quarter of fiscal 2014, but up 3.9% when using the prior year conversion rate for both periods.
Sales for The Container Store retail business were up 4.7% to $214.2 million, primarily due to new store sales. Overall, our fourth quarter comp was up 0.2%, which reflects a slow start to the fourth quarter, slightly improving sales trends post-holiday and notable strength in the last few weeks of the Annual Elfa sale.
Also, as Kip mentioned, we saw a 140 basis point lift to our fourth quarter comps from TCS Closets. I want to spend a moment discussing the revenue impact of the strong end to our annual Elfa sale. This year the sale ended on February 27, which is the last day of our fiscal year. Last year, the sale ended two days after the fiscal year ended.
Typically we see very strong sales at the end of the annual Elfa sale, and this year was no exception and was even more pronounced than last year. While we recognize comp store sales, an operating measure, when sales are placed and rung at the register, in accordance with accounting rules, we cannot recognize revenue in our financial statements until the product is received by the customer, including not until product is installed in the home.
So until then, the associated sales remain in deferred revenue on our balance sheet. This deferred revenue balance was $16 million in the fourth quarter of fiscal 2015, a $4.6 million increase over the prior year period, with the increase largely reflecting the end of quarter sales that were delivered and installed in March.
However, we still incur all expenses associated with completing the sale in the store at the time the transaction is rung up. The good news is, with our fiscal year change, all of these timing shifts and dynamics should now happen intra- quarter in our new fiscal fourth quarter, limiting shifts between the quarters.
Now moving on, we ended the quarter with 79 stores and approximately 2 million of gross square footage, as compared to 70 stores and approximately 1.8 million of gross square footage at the end of the fourth quarter of fiscal 2014. We continue to be pleased with our new store performance.
As a reminder, the composition of our fiscal 2015 class of stores was more heavily weighted to smaller markets resulting in projected average sales in year one for the fiscal 2015 class of stores of approximately $6 million, which was as expected. This compares to approximately $8 million which is the simple average sales volume for our store fleet for stores open a full-year in fiscal 2015, excluding the high volume Manhattan stores.
In addition, we had more new store openings in the second half of fiscal 2015, with 6 out of the 9 new stores opening in the second half, compared to 3 out of 7 stores in the second half of fiscal 2014. So there was a difference in both the mix of the openings, as well as the timing of the openings when compared to the prior year.
Turning to Elfa International AB, Elfa’s third-party net sales were down 4.4% from the fourth quarter of fiscal 2014 in Swedish kronor. Additionally, the strengthening of the U.S dollar against the Swedish krona led to a negative conversion impact of $900,000 in the fourth quarter of fiscal 2015.
The Swedish krona depreciated approximately 4.8% year-over-year against the U.S dollar during the fourth quarter of 2015, on average. As 8 a result of this conversion impact, Elfa’s third-party net sales in U.S dollars declined approximately 8.8%.
Now, on to profitability. In the fourth quarter, we maintained strong TCS gross margins of 57%, in line with the prior year period. On a consolidated basis, gross profit dollars increased 3.6% to $134.3 million.
Consolidated gross margin expanded 10 basis points as strength in the U.S dollar against the Swedish krona benefited consolidated gross margin by approximately 160 basis points and together with the higher gross margin at Elfa International AB, more than offset the expected approximate 65 basis point impact from free shipping, an increase in lower margin service sales in the mix, and the higher spend related to our strategic marketing and promotional strategy.
We continue to generate incremental sales and profitability from our everyday free shipping on orders over $75. In fact, for fiscal 2015, we saw a $203 average ticket on those free shipping over $75 orders compared to our everyday average ticket for online orders in fiscal 2015 of $118. This outcome validates our decision to invest a portion of the FX benefit behind this initiative.
Elfa International AB gross margin improved 330 basis points to 39.2%, primarily due to improved production efficiencies and stabilization of freight costs, partially offset by increased direct materials costs. Elfa has been vigilant in seeking and achieving supply chain and logistics efficiencies as evidenced by these results.
Moving on to SG&A. As a percentage of sales, consolidated SG&A increased 140 basis points to 45% in the fourth quarter of fiscal 2015, as compared to the fourth quarter of fiscal 2014. The increase in the year-over-year rate primarily reflects the following factors: expense incurred of $0.02 per diluted share related to our strategic initiatives, slightly above our expectations of $0.01 per share. This results in incremental expense of approximately 40 basis points of SG&A expense; and a larger percentage of total net sales coming from The Container Store retail business as expenses at TCS are higher as a percentage of sales than those at Elfa. This creates approximately 30 basis points of deleverage year-over-year; and as expected, we incurred an increase in DC payroll costs compared to the fourth quarter of last year associated with fulfillment of an increased number of orders shipped directly to customers. This contributed approximately 30 basis points of expense deleverage; also, given the revenue implications of the strong end to the Elfa sale I discussed earlier, we incurred the expenses for those deferred revenues, primarily store payroll related, without the corresponding revenue recognition which contributed approximately 20 basis points of expense deleverage.
New store pre-opening expenses increased approximately $800,000 year-over-year due to the opening of two stores in the fourth quarter of this year, compared to one store opening in the fourth quarter last year. As a result, pre-opening expenses deleveraged by 30 basis points year-over-year, as expected.
Our net interest expense in the fourth quarter of fiscal 2015 was $4.2 million, roughly in line with the prior year period. The effective tax rate for the quarter was 33.9%, compared to 25.2% in the fourth quarter of last year. The increase in the effective tax rate is primarily due to a shift in the mix of domestic and foreign earnings.
Our net income for the quarter was $9.4 million, or $0.20 per diluted share, compared to adjusted net income of $11.8 million, or $0.24 per diluted share, in the fourth quarter of last year.
Now turning to full fiscal year results. Our press release issued this afternoon includes details of our fiscal 2015 financial performance. Sales increased 1.6% over the previous year to $794.6 million, driven by a 3.8% increase in The Container Store retail business. Elfa third-party sales decreased 0.6% in local currency, primarily due to a combination of some weaker sales in Russia and to a lesser degree in Norway, partially offset by improved sales in Sweden.
The U.S dollar strengthened against the Swedish Krona by 18.6% on average during fiscal 2015, resulting in a negative conversion impact of $13.1 million in fiscal 2015. As a result of this conversion impact, Elfa third-party sales declined 16.2% in U.S dollars.
Our comparable store sales for the year were flat in fiscal 2015, following a 1.4% decrease in fiscal 2014. Consolidated gross margin decreased 30 basis points year-over-year to 58.3% of sales.
Gross margin at The Container Store decreased 60 basis points during fiscal 2015. The consolidated gross margin decline was primarily due to the following: first, a higher response to other promotional activities with an approximate 70 basis point reduction to gross margin rate year-over year; second, the April 2015 introduction of everyday free shipping on orders over $75 contributing to reduction of gross margin of approximately 65 basis points; third, a growing mix of lower-margin service sales in fiscal 2015 as compared to fiscal 2014. This resulted in an approximate 30 basis point reduction to gross margin year-over-year. These reductions were partially offset by the impact of the stronger U.S. dollar which increased gross margin year-over-year by approx 105 basis points during fiscal 2015.
Additionally, the gross margin decline at The Container Store was partially offset by an improvement in Elfa gross margin of 110 basis points which aided gross margin -- consolidated gross margin by approximately 20 basis points.
Consolidated SG&A as a percentage of sales increased 190 basis points to 49.6% in fiscal 2015, primarily due to the following year-over-year changes: one, incremental spending associated with our major initiatives, resulting in approx 65 basis points of deleverage; two, a larger percentage of total net sales coming from The Container Store, which has a higher SG&A as a percentage of sales. This resulted in approx 50 basis points of deleverage; three, unusually high health care claims at The Container Store, resulting in approx 35 basis points of deleverage; four, increased investment in store payroll for enhanced sales floor coverage, contributing approx 20 basis points of deleverage; and five, distribution payroll due to fulfillment of an increased number of orders shipped directly to customers, resulting in approx 20 basis points of deleverage.
Net income was $0.11 per diluted share based on 48 million shares outstanding, and includes $0.08 per diluted share in annual strategic initiative spend, as well as $0.01 in port delay expense in the first quarter of fiscal 2015. This compares to adjusted net income of $0.34 per diluted share based on 48.5 million shares outstanding last year
Turning to our balance sheet, we ended the year with $13.6 million in cash, $327.9 million in outstanding borrowings, and combined availability on revolving credit facilities and cash on hand of approximately $104 million.
As a reminder we use the strong cash flow generated in our fourth quarter to pay down all of the balance on our revolving credit facility at The Container Store at the end of each fiscal year. Our peak utilization of our $100 million revolving credit facility throughout fiscal 2015 was $28 million.
We ended the quarter with inventory up 3.2%, compared to the end of fiscal 2014, with the increase primarily due to new stores. On a per store basis, TCS retail inventories actually decreased approximately 8.5%.
Now, turning to our outlook. For fiscal 2016, we expect consolidated net sales to be between $830 and $845 million, comp store sales to be down 1.5% to up 0.5%, and diluted net income per share to be between $0.20 and $0.30 based on a weighted average of 49 million diluted shares outstanding.
We expect TCS and consolidated operating margins to improve, based primarily on the expense savings program Kip and Melissa discussed that we’ve implemented. We expect our tax rate for the full-year of fiscal 2015 -- of fiscal 2016 to be approximately 39%, and our annual interest expense at today's LIBOR rates to be approximately $17 million.
Now I'd like to provide more color on our outlook for the year. It’s important to remember that we’ve changed our fiscal year, which will affect the quarterly cadence of our financial results.
Again, please refer to the recast results included within our press release. The most affected quarters will be our fiscal third and fourth quarters. When recasting our historical results into the new quarterly cadence, Q3 and Q4 have historically been more equal in terms of financial results. This is because the month of December will move into third quarter, which is a large five week month that includes the holidays and the beginning of the Annual Elfa Sale.
In terms of foreign exchange, our guidance assumes an average SEK rate of approximately 8.15 in our cost of goods sold at TCS for fiscal 2016, which is approximately the current SEK rate. This compares to the actual average SEK rate of approximately 8.1 in cost of goods sold in fiscal 2015.
We’re currently projecting limited impact to Elfa’s third-party sales due to the conversion of the U.S dollar against the Swedish Krona. FX is also expected to have minimal impact to gross margin at the current rate of SEK to U.S dollar.
As a reminder, TCS purchases Elfa products in SEK. While the fiscal year impact to gross margin is projected to be relatively flat year-over-year at the current FX levels, within the year it is expected to be a slight tailwind to the first quarter, moderating in the second half of the year and expected to completely dissipate and actually become a slight headwind at the current SEK levels in the fourth quarter year-over-year.
We currently have no SEK contract hedges for fiscal 2016 and will be purchasing all Elfa products for TCS in SEK at the current spot rate at the time of purchase. Using these FX assumptions, we currently forecast our fiscal 2016 consolidated gross margin to be relatively flat year-over-year.
We anniversaried the introduction of free shipping over $75 this month in April 2016, so we expect that headwind associated to gross margin rate experienced in fiscal 2015 due to free shipping to dissipate in impact considerably.
We also currently project no incremental impact to gross margin in fiscal 2016 as compared to fiscal 2015 from promotional activity changes. Additionally, we expect the gross margin headwind to continue in fiscal 2016 and slightly accelerate related to the growing mix of lower margin services as we continue to grow the amount of TCS closets sales, which overall currently achieve a lower gross margin rate due to the product being comprised of a larger portion of lower-margin installation and delivery services.
However, we project that Elfa will continue with their supply chain improvement initiatives and contribute positively to overall consolidated gross margin year-over-year and help to offset the impact of the lower margin services. It’s important to remember that although service gross margin rate is lower than that for our products, the two go hand-in-hand and together drive higher profits.
As Kip mentioned, in early fiscal 2016 we embarked upon a significant SG&A savings program, carefully approaching it so as not to impact the success of the key initiatives we’ve launched, or to harm our corporate culture. The actions we have taken include a wage freeze for all employees, freezing of our 401k match, both of which were enacted in early March. Reductions in payroll expenses throughout the business, as well as numerous efforts to drive costs down throughout the entire company.
The benefit from these actions expected to be realized in fiscal 2016 is embedded in our guidance, where we expect significant expense leverage despite conservative comp store sales outlook. It is important to note that these SG&A savings actions represent a reduction to SG&A from the level we’d have incurred absent these moves.
In fiscal 2016, we expect to incur approximately $35 million in CapEx. Nearly half of this will be related to opening seven new stores and relocating one store. This store growth of 8.3% is a moderation from the approximately 12% square footage level growth of fiscal 2015.
We continue to believe in the long-term opportunity to more than double our current chain size, but have prudently lowered planned store growth for fiscal 2016 as we execute our SG&A savings program and maximize the benefit of our key TCS Closets initiative.
Looking at the first quarter specifically, or the period starting April 3 and that ends July 2nd, there are a few key points to share: one, we introduced free shipping over $75 in April 2015 and experienced strong sales upon that launch. We will be anniversarying that strong introduction in first quarter of fiscal 2016.
Two, we expect a slight benefit to gross margin from FX as previously outlined. Three, we expect the SG&A savings program, while in place now with cost-cutting initiatives like the wage and 401K match freeze enacted in early March to become more impactful as the year progresses.
And four, note that the port delays we experienced in the first quarter of fiscal 2015 primarily impacted the month of March, which is no longer in the fiscal first quarter in light of our fiscal year change so we don’t expect that to benefit our first quarter fiscal 2016 in our outlook.
Regarding the March stub period, which will be reported along with our first quarter results, as I mentioned earlier, we had a meaningful increase of $4.6 million in deferred revenue at the end of fiscal 2015 compared to the prior year period, the majority of which was recognized in our income statement in the month of March. This allows us to largely offset the impact of the shift of timing of the conclusion of the Elfa Sale between the two fiscal years, as well as the Easter holiday closing shift from April last year into March this year.
As a result, we expect to be able to realize EPS and Adjusted EBITDA at a similar level to last year in fiscal March despite the Easter closing and Elfa sale shifts that occurred in March this year.
In summary, during fiscal 2015 we made significant investments in our strategic initiatives and expect to see meaningful benefit from these in fiscal 2016 and beyond. We’ve looked critically at our cost structure and taken the necessary steps to cut expenses and forego certain cost increases, without jeopardizing the health and success of our strategic initiatives or harming our company culture.
We believe we have positioned our Company to achieve a meaningful improvement and profitable sales growth in fiscal 2016. That concludes my portion. Thank you. Kip?
Thank you. We believe that the important investments we made in fiscal 2015, coupled with our fiscal 2016 SG&A savings program, will contribute significantly to our efforts to meaningfully improve financial results. And we thank you all for joining us for these remarks. Thank you very much.
Greetings and welcome to The Container Store Fourth Quarter and Fiscal 2015 Question-and-Answer Session. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder this conference is being recorded.
I’d now like to turn the conference over to your host, Ms. Jodi Taylor. Thank you. Ms. Taylor, you may now begin.
Thank you, Chris. Good afternoon, everyone, and thanks for joining us today for The Container Store’s fourth quarter and full-year fiscal 2015 Q&A session with the investment community. I’m Jodi Taylor, Chief Financial Officer. And with me on today’s call are Kip Tindell, Chairman and Chief Executive Officer and Melissa Reiff, President and Chief Operating Officer.
This afternoon, we issued our fourth quarter and fiscal 2015 results and posted a press release to our Web site. At that time, we also posted a recording of our prepared remarks, as well as a written transcript. In addition, today’s Q&A session is being recorded and a replay can be accessed at containerstore.com later this evening.
In line with our previously announced change in our fiscal year, included in today’s press release is recast historical unaudited financial information for the first three quarterly periods of 2015. This is also posted on our Web site under the Investor Relations link. Results for the March 2016 fiscal month transition period, as well as the recast historical unaudited financial information for the fourth quarter of fiscal 2015 which, based on the new fiscal year, would have ended on April 2, 2016 are expected to be reported when we released our results for the first quarter ending July 2, 2016.
Before we begin, I need to remind you that any forward-looking statements we make today are subject to the Safe Harbor statements found in our SEC filings and in our press release. With that, I’ll hand the call back over to Chris, so we can take your questions.
Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Seth Sigman from Credit Suisse. Please proceed with your question.
Okay. Thanks for taking the question. I wanted to start with the question about TCS Closets. In the release you discussed which seems like a seasonal slow down in the fourth quarter, but then improvement in March and April. Can you elaborate on that and give us a sense of maybe how it’s contributing now and how do you think about it for the full-year?
Sure, Seth. This is Jodi, and I will take that for you. As you probably saw on the TCS Closets, did grow from third to fourth quarter. If you look at all of the stores that had TCS Closets in the third quarter and compare their sales to those sales they generated in the fourth quarter, they were actually up 5.1% for third to fourth quarter. We do believe that this is based somewhat on the overall seasonality of our business throughout the year.
We do see quite a bit of spike in our volume in our fiscal fourth quarter, specifically if you look at our total comp-store sales from third to fourth quarter, they’re 29% higher in fourth quarter than in third quarter. So even though our TCS Closets sales grew nicely. The rest of the business, i.e. the denominator, changes significantly and it’s muted the TCS Closets as a percentage of total sales. We think that, we’ve this unique combination of the holidays, followed by our ever important annual Elfa sale. And so the holiday period certainly we’re learning what may or may not existed to our seasonality there.
And then we’re of course working on many selling process improvements to be sure that we can better integrate selling even more so, we want to look inward as much as we can of TCS Closets during this large labor intensive selling period that we’ve of the Elfa sale. We think maybe our employees may even have been a little bit more comfortable selling Elfa since we’ve such tenure they’ve been doing that for years. So we want to make sure we look for every opportunity we can to generate even more sales. And to your last question, we’re back to the Q3 level shortly after the Elfa sale ended and really do believe we’re in a great position to build on that as the year progresses.
Okay. Thank you for that. And then just one clarification on the March stub period. There were a lot of moving pieces discussed, but if you net it all out, how should we think about comps during that March period and then also for the first quarter relative to what you just reported? Thanks.
Sure. As far as March goes, we -- I know we spoke to it a little bit in our remarks here, but the March stub period is going to be reported along with our first quarter results in August. And we did have as you saw in our disclosures, a meaningful increase of $4.6 million in deferred revenue at the end of fiscal 2015. And the majority of that is -- was recognized in our income statement in March from a financial statement perspective. This will -- has allowed us to offset largely the impact of the shift in timing, of the conclusion of the Elfa sale between those two fiscal years. You will note that we had our Elfa sale ending two days into fiscal 2015, March 2015 versus no days in fiscal March of 2016. Plus as you know March has the Easter holiday closing this year where it didn’t last year. So, as a result of the high level, we do expect to be able to report EPS and adjusted EBITDA at similar levels to last year in March despite the Easter closing and those Elfa sales shifts say that 10 times, that occurred in March this year.
Okay, got it. Thank you.
And our next question comes from the line of Chris Horvers from JPMorgan. Please proceed with your question.
Thanks and good evening. Can you -- two questions. Can you talk about how you think the cadence of the year on a comp side is? And then the second question is, you mentioned that ’16 is going to be a big expense focus year. Can you remind us how much you spent this past year on rolling Closets and Contained Home out and then sort of what the underlying expense rate savings was aside from that?
Sure, Chris. This is Jodi. I think your first question was the cadence on the comp side and we did see our comps throughout the quarter continue to build and definitely saw that when we were in the month of February, we saw real strong conclusion to the end of our Elfa sale, which really helped to strengthen the quarter’s result. On the SG&A side, we did in fact realize as you’ve seen in our release, just over $6 million of expenses were about $0.08 per share in the full fiscal year for rolling out all of our initiatives in fiscal 2015. Not replicating a good portion of that was -- is part of our outlook for savings, but it’s much, much deeper than that. We do expect to realize many millions of savings of expenses throughout nearly all areas of our business including Elfa. And remember that, there are definitely cost inflation in our fiscal ’16 numbers that would have led to some increases in our baseline SG&A absent to any cost action, things like wage increases and other general cost increases. So what I know you’re seeing as you look at our outlook is an opportunity to have meaningful leverage in our SG&A expenses. Even with our conservative sales -- comp store sales outlook of negative 1.5 to positive half.
And so just following up on those two, so the cadence of comps this year, do you expect that to build throughout the year as we go from 1Q to 4Q? And then on the savings aspect of that, can you remind us how much of that -- what was the one-time aspect of what you spent this year in that $0.08?
Sure. As far as the cadence of comps for the year, there is of course always going to be some seasonality as there is holiday shifts that can impact the quarters. And do remember that we had a change in the fiscal year, so that the quarter’s now end one month different than they used to. So, first quarter is, for example, April through June now whereas it was March through May, you have to take that into consideration. However, we’ve a couple of assumptions as we think about our comps at a high level for fiscal 2016. One is that we introduced in April 13 actually of last year free shipping on orders over $75. In the new quarterly cadence, that is in place or up against those sales for the vast majority of first quarter and we did see a real strong initial reaction when we created that offer last year. So, we will be up against that throughout the year. Additionally, with TCS Closets, we do think that we will continue to gain momentum in TCS Closets as we get even more comfortable with selling that product and as where it just continues to spread through our marketing and other media that it is an option for customers and more and more traffic coming through our stores. So, those are probably the two key drivers, two thought process as it relates to outlook.
Thanks very much.
And our next question comes from the line of Steven Forbes from Guggenheim. Please proceed with your question.
A quick question on just the EPS guidance for the year. When you referred to the adjusted EPS guidance, is that adding back the adjustments like you do for adjusted EBITDA. I guess, I’m just having a little trouble reconciling the two?
We -- Steven, this is Jodi, and adjusted EPS, I know there is a bridge that we provide in our press release, we do not consider the same adjustments for adjusted EBITDA that we do for adjusted EPS. Adjusted EPS is largely those items like, for example, in fiscal 2014 we had adjusted EPS. We did not have that for fiscal 2015. In fiscal 2014, it was largely due to some reorganization costs that we had at our Elfa subsidiary where they had some one-time expenses that they incurred. Additionally, they had some one-time gains associated with -- in those consolidation efforts, some gains that they had associated with selling an entity and a property.
So that $0.20 to $0.30 not the $0.30 number that you refer to is not adding back pre-opening expenses?
No, no. Absolutely, that’s correct.
Okay. Then I guess, to changing the topic here, as it relates to maybe the smaller footprint you talked about. You mentioned smaller markets, but is it really just smaller markets, because from our visits to the stores, there is a lot of open space, open customer space and even around the checkout there. Is the opportunity to reduce the footprint by reducing that open space or that really a reduction in the SKUs in the assortment within the store?
I will start and I think probably others that are going to want to hop in here. As Steven, I don’t want to hog all the questions here. We, first of all, let me be clear the smaller footprint store that we intend to pilot in fiscal 2017 is by no means anything to do with not being happy or successful in our smaller markets where we’ve opened new stores. We continue to be very pleased with our new stores. Really its more what we think is an opportunity to be able to further optimize and enhance profitability by taking that box and really stepping back and reevaluating what we’re doing. We don’t believe that it’s something that will be in every single smaller market. It’s something that we will just look opportunistically and Steve where it makes sense to do so.
Yes. Hi, it’s Melissa. Yes, we’re going to evaluate it market by market. But it doesn’t necessarily mean its going to be fewer SKUs or necessarily a different assortment. It’s just going to be a smaller square footage and we feel like that 8.3% square footage growth feels like the right level for its fiscal 2016, given our priorities and then we will evaluate it every year.
It gives you more flexibility too, sometimes there is a great site, that’s 18,000 or 19,000 square feet and you don’t take it simply because you’re not sure you can merchandise it correctly. 23 is a pretty popular box size. Its little bit more competitive than something a little bit smaller than that. You can have a really expensive market. You can have a smaller market. You can have all sorts of things that will allow the use of that flexibility, and we really think in many cases we can achieve virtually the same sales with that smaller footprint, you know that does for profitability. So, we’re excited to start doing this and see where it leads us.
I guess, just so we could plan a visit. Is there -- does that mean it’s going to be a store in this year that opens up with that smaller footprint or is that not until the following year?
No, it’s Melissa. And yes, its fiscal ’17.
Okay. Thanks, guys.
We will keep you posted.
And our next question comes from the line of Simeon Gutman from Morgan Stanley. Please proceed with your question.
Mr. Gutman, your line is live.
Can you hear me?
Yes, now we can.
Sorry, this is Josh on for Simeon. Sorry about that.
Oh, hi, Josh.
So you’ve given a lot of color over the past one or two years about the consumers being in a funk. I’m curious as to how you diagnose the current backdrop and whether or not you’re seeing the high-end consumer improve?
Well, I think we’ve mentioned the word [indiscernible]. But I think the real buzz word today in retail is of course traffic. Most retailers are a little bit concerned about traffic. Our friends at Google will tell you that 90% of retail sales are still bricks and mortar, but the majority of those are digitally influenced. So you got to win before the store. You’ve to do everything to achieve differentiation and satisfaction at the store level, but you really have to win before the store, because that’s how she is choosing which store she is going to and that’s what impacts really all retailers’ traffic at this point in time. That we were pleased to see traffic improve during the quarter and while traffic continues to be somewhat challenging from most or much of the entire retail industry, we’ve seen a gradually improving trend in our traffic in the past few quarters. I think, I don’t know about funk. I would say that most retailers will tell you that perhaps millennials are not quite as consumptive as boomers, they’re more experiential unless theme oriented, I’m just trying to talk about things that you read and hear and that I do with the National Retail Federation so much. Those are the trends that we see and it’s kind of a need to see what you can do to out digitally influence your customer base versus other retailers while at the same time looking around and saying what can I do better than anybody else? What I’m I best equipped at doing? And we really feel like that we’re in a unique position to be able to meaningfully increase our average ticket through our custom Closet, large average ticket and this feels like TCS Closets coupled with our many Closet -- real Closet domination, this thing that we just spent a year of rolling out and now have, a year’s worth of investment in. So, you kind of couple that with highly trained long tenured sales people that The Container Store is known for and we’re saying well, let’s see if we can do a better job on traffic than we have in the very recent past and that most retailers were doing, while we do, what we do best which is Closets and average ticket. So, that’s pretty much the strategy and our response to what most retailers might see is, sort of a sea change in retail. So average ticket is a big focus and refusing to acknowledge the traffic can’t improve, Josh, sorry.
Sure. Since you brought it up Kip, would you mind delineating between traffic and in ticket growth throughout the quarter?
Well, we don’t break it out, and we’re not going to start breaking it out. But I will tell you that the retail industry is experiencing what is experiencing sort of traffic wise, so we’re saying let’s just make sure we continue to improve our traffic numbers, and let’s really kick the ball out of the park or hit the ball out of the park when it comes to average ticket, because if you look at where we’ve muscles we ought to be good at average ticket. And by gosh we have been, we’ve been very pleased with our average ticket results, but you got to do both or you -- what you gain and one you lose in the others. So, we think we’re figuring that out and dealing with the changing sea tied with retail strategically and very effectively and I’m very proud of our strategies in dealing with those changes.
And Josh, it’s Melissa. If I could just add one thing, to say me think of it when Kip was talking that the whole Closet related solutions are absolutely the dominant focusing category for us and of course that has a huge average ticket that goes with it. But we’re making it our primary area of expertise and it’s most natural and strategic area for enhanced focus for us and continued differentiation, because we know Closets and we really do intend to dominate that Closets that has some Closet market. And then we’ve also made -- this one Kip was talking about win before the store, we’ve made a lot of enhancements to our whole digital platform this past year, which we talked about it in the script that everything from even more strategic targeting to site personalization to improving our organic search and our native search and adding our container store stories which is our lifestyle blogs that we introduced in June of 2015. And now we’re also going to be launching our TCS Difference, which we’re really excited about, because that is really a very integrated campaign that’s going to communicate to all of our customers what indeed does make our products different and the value in a differentiation of our services and also what we stand for as a Company. So, we feel like those are all really important and good reasons and compelling reasons for our customers to shop with us and we’ve got to do a better job in communicating those and we’re going to do that this year initially beginning online and then using other channels and platforms as well.
Okay. Thanks for everything.
And our next question comes from the line of Matthew Fassler from Goldman Sachs. Please proceed with your question.
Good afternoon. This is Matt here. So the first question I’d like to ask you relates to the Elfa sale and the time of the Elfa sale. You talked about a few million dollars that will still over from a revenue recognition perspective into the next fiscal year. As we think about the gross margin rate and flow through it, it looks like that were probably be about $0.03 to earnings. So I just want to confirm that the math we did, gets us to the right place there.
Matt, this is Jodi. That actually spills over into the stub period of March, just to confuse you a bit since we changed our fiscal year. So, the deferred revenues that we had at the end of the fiscal year, at the end of February, partly those orders were delivered and/or installed with our customers in March, which allows us to offset the Easter shift as well as the shift from timing of the sales. So, it’s a little bit not quite as black and white as what you’ve indicated.
I guess, yes to my point was that if you think about the underlying demand and you forget about the timing change that you probably would have earned towards $0.03 more in the quarter you just reported?
I understand exactly what you’re saying. We’ve incurred expenses.
Yes, that’s correct. We’ve incurred expenses associated with those sales and we didn’t get that revenue to book into the year and Matt you’ve done the right math.
And was that consistent with the original thinking of timing or did that surprise you a bit with the timing of the revenues fell off versus the calendar?
We actually ended up with a larger search for sure at the end of the sales and we had expected, as indicated by that that comp coming in at 0.2%.
Got it. Thank you. My second question relates to cycling the free shipping for orders of $75 and over. Has revenue from that initiative from a run rate perspective continue to build? In other words, has it gotten bigger? We can’t tell obviously what seasonality just looking at the numbers, but we do expect that cycling that would be a big challenge for you or would you say that you had enough momentum build in that initiative that it might that it might [indiscernible] cycle as we would have feared?
You know I -- what I expect, Matt this is Jodi again. What we talked about previously and been consistent since we rolled it out is that we’re generating enough of a high average ticket there to where we’ve made it a profitable endeavor for us, which is really exciting and what we had anticipated would occur, but just confirm that’s being good. I know we put in our release and script that the average ticket for those free ship online sales has been over $200 at 203 versus the average ticket for the typical online sales $118. So, that’s made it a successful endeavor. We did have an initial excitement when it first came out, but it is something that we do think has the ability to continue to stay strong. We don’t know where it goes. We do think that the good news is from a gross margin headwind perspective, its once we lap the anniversary which as I said was in April of this month, that pressure we had on gross margin which was about 65 basis points for the full fiscal year. We expect that will significantly dissipate.
Great. And my final question relates to CapEx. I believe based on the guide and just a quick look at the press release, that is coming down nicely year-on-year. Is that entirely about the store growth or are there other elements of the capital plan that will be down year-on-year?
Matt, this is Jodi. It is $35 million consolidated, which you’re right it’s down year-over-year. It’s actually a combination. We had, as you may recall, a significant investment in automation in our distribution center that we incurred largely the cost associated with that in fiscal 2015. So, we wrap that up, that actually has gone online and rare to say, but two weeks early and on budget. So, we’re excited about that and we will get those efficiencies through part of our cost savings program that we’ve discussed. And then the balance is, I’d say about half of it is related directly attributable to the new stores. But of course, capital we invest is largely growth related beyond that as well.
Great. Thank you so much guys for the detail.
And our next question comes from the line of Daniel Binder from Jefferies. Please proceed with your question.
Thank you very much. I think in your outlook you talk about flattish margin for this coming year. I was just curious, if you could speak a little bit to the competitive landscape where you’re seeing on pricing and both during the quarter and what you’re seeing currently?
Well, we’ve always said -- its Kip. We’ve always said that everyone and no one is our competition, then that continues to be the case. I mean, we’re fortunate and that we’ve almost no head to head competition whatsoever. In our estimation there is not massively more people doing little bits of storage in organization here and there. Everybody from mass merchants to super markets has always done a little bit of storage in organization there. Then our house where it’s mixed, that doesn’t really seem to be growing, what the issue is the time and convenience is really the competitor to us to any specific retailer. It’s not head to head. It’s just time and convenience. Our stores are an average of 21 minutes drive time for the average customer. So if you’re in the mass merchant or you’re online and there is a sweater box that you don’t really believe is better than ours or you actually think ours is a better value, you still may as a matter of convenience buy that product online since or in that mass merchant, since you’re already there. So we’ve to be increasingly good enough to cause that extra trip, cause that extra step not unlike a great wine store out-dueling a grocery store, who is selling a pretty good selection of wine at pretty good prices. That’s really our competition that always has been our competition as the convenience of technology makes everything more and more available that that’s what really make our focus. Still the vast majority of our products are proprietary in nature. We sell solutions rather than items, which helps to protect us against big online retailers. So in many ways The Container Store is very well positioned competitively. But we’ve to do everything that we do better and better to get her to make that extra trip to make that extra click to deal with the fact that no, I want that better shoebox. It’s just a shoebox. You don’t want have a better shoes, its just wrapped, its just wrapping paper. You got to want that better wrapping paper and it’s our job to make sure that she choose the different step, make that extra step. Jodi, I know you like to talk about that too. So, more can have you please?
Yes, Dan, specific to your question about promotional activity, if you look at the fourth quarter in particular, we had -- if you look at the gross margin year-over-year, you start with that 10 basis points on a consolidated basis. The impact year-over-year for promotional activity was a decline in gross margin of approximately 40 basis points. So it’s a relatively small difference. One of the things that I -- when you look forward into fiscal 2016 that I want to point out is, as I mentioned already, we come up against the anniversarying of the free shipping which we know impacted our gross margin by about 65 basis points over the course of the year. We also very much expect and will be more targeting our promotional activities, so that we expect very minimal impact to gross margin due to discounting. We -- you will recall we did a lot of test and learn activities in fiscal 2016 with our growing POP database, really looking at this as a year to experiment and try to determine really frankly what we will and we wont replicate, particularly did a lot of that in the second quarter. So year-over-year we really do expect to be able to moderate against the activities promotionally of last year on the whole. And I think that that should be helpful.
So it’s an important thing. I mean, in that second quarter we tested and learn, we experimented particularly with email and we selected those promotional activities we felt like increased sales the most while giving away the least bit of margin. So we’re excited to take what we learned from that and go forward.
And if I could just ask one another question, just regarding this finance program which you will be introducing, can you give us any color on expectations or what that should do for sales and obviously credit can help drive sales, but just curious if you have any sort of initial expectations around what that can do for you?
Hi, Dan. It’s Jodi again. We do intend to launch that fully chain wide in the summer. And we will get into a lot more specifics fully once that launches we’re holding on, on giving all the specifics on at this point that obviously as I think we said before, we believe this should be attracted to customers that are purchasing Elfa and TCS Closets particularly through the custom Closet purchases. But we also believe that customers may find it appealing as well to do a completion products may perhaps run out of check book before they run out of the desire to purchase our products. So, we’re anxious to roll it out and we will see at that point what happens.
Looks like summer and our partner is Synchrony, which I think we mentioned in the release and the script.
You know another thing that’s interesting about that is that our store people feel like there is so many of our Elfa customers are actually expanding a home, or building a new house and they currently buy one or two Closets with and this will enable them to do more multiple Closets simultaneously. And so that should help with the average ticket on Elfa as well and it makes perfect sense if you’re more Closet at once rather than one at a time.
Do you have any stats on the number of customers that are requesting financing as they do these bigger projects?
It’s Melissa. We really don’t. It’s anecdotal, but we’re really encouraged by what we hear and we really think that this is going to be a big kind of milestone for our Company and we’re looking forward to selling a lot of that big spaces with completion products as Jodi said, utilizing the financing.
We were very impressed with what furniture retailers taught us about quite affluent couples financing fairly low price points and we’re not really offering any estimates what it will mean to our business, but as you know TCS Closets has an average ticket of $10,000 and Elfa is up there as well, so we’re really looking forward to seeing the results of that.
Great. Thank you.
And our next question comes from the line of Denise Chai from Bank of America Merrill Lynch. Please proceed with your question.
Thank you. I’d like to get more color under SG&A savings, because you said you expected many millions of savings. Could you quantify what’s built your guidance and is it a one-year program or something that we’re going to see continued benefit from say in the coming year or two?
Hi, Denise. It’s Jodi. Let me provide just a bit more of some of the example areas that are included as part of this robust program. One is in March. We’ve already announced early this month or last month, I should say, a wage freeze to all of our employees and when doing so the annualized savings from that is approximately $5 million of which approximately $2 million is realized this year and the remainder in fiscal 2017, because our employees have differing dates for their reviews based on their anniversary dates. We also announced a freeze of our 401k match and that’s approximately $3 million of annual savings. Additionally, let me back up that majority of the expenses as part of the savings program, the biggest portion is coming from payroll and benefits related costs. Things like I just outlined as well as we talked a bit about the distribution center efficiencies we expect to be able to get, both just through improved operational efficiencies plus the automation which we expect to save over a $1 million in distribution center payroll this year. We also are looking at wage reductions or not wage reductions, efficiencies in payroll throughout the company, optimizing our scheduling, improving our efficiencies, not filling all open position. And throughout literally every area of the business, we’ve reduced and/or renegotiated costs in our business with and these are costs we do expect we should be able to hold. With the prevailing mantra of course being that we don’t to do anything that’s going to harm our company culture or going to in anyway harm sales or the progress of these initiatives like TCS Closets. And as you can see its meaningful leverage in the year, expected even with the conservative sales outlet and we do expect that many of these expense savings will benefit fiscal 2017 as well.
Okay. Thank you. And then, just a follow-up on that. So, from fiscal say ’12 to ’14, your margin was round about 6% or a little bit better. Do you have a timeline to sort of get back to that level and what you see is the risks and opportunities in terms of margins?
We haven’t stated a specific timeframe, but we certainly do see an opportunity through controlling of our SG&A expenses. Of course, stabilizing and continuing to see gross margins in the ranges that we talked about, leveraging the benefits of our initiative through our comp store sales. We think it’s important obviously to see the benefits of TCS Closets and other efforts. And we do expect that we can see some -- very meaningful improvement to our operating margin. But to tell you a specific timeframe, I think would be imprudent of me to do.
Okay, understood. Thank you so much.
There are no further questions at this time. I will turn the conference back over to Management for any closing remarks.
Thank you everybody for joining us today.
Yes, we appreciate. Have a good evening.
Ladies and gentlemen, this does conclude today’s teleconference. We thank you for your time and participation today. You may disconnect your lines at this time and have a wonderful rest of your day.
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