The Container Store has benefited from the pandemic’s lifestyle changes as Americans tried to find order in their lives by tackling the kitchen junk drawer or springing for elaborate closet remodels.
The cleaning out of closets, cabinets, pantries, home offices and garages hasn’t stopped, and those efforts have attracted more competitors to the $20 billion a year organization products market, said Satish Malhotra, the Coppell-based retailer’s chief executive officer.
“I think it’s indicative of the fact that there are so many people out there just overwhelmed with clutter and, quite frankly, they just don’t know how to start,” Malhotra said.
The new competition includes big-box retailers like Walmart, which added a small collection of products from The Home Edit brand known for its Netflix series, and Target, which launched its own private label called Brightroom, as well as the multiplying mom and pop carpenters getting into the closet remodeling business.
Malhotra said what separates the Container Store from its rivals is the breadth of product — 10,000 items including 1,600 created with sustainable materials — combined with expertise, reliability and warranties.
The retailer just gave itself a big boost to its ability to sell custom spaces that cost more than $2,000 with the acquisition in late December of Chicago-based Closet Works Co.
Mostly, Malhotra said, he wanted the company for its U.S.-based manufacturing, which will give the retailer more capacity to move deeper into custom closets.
The Container Store paid $21.5 million for the company that makes wood-based storage solutions. Closet Works also has designs that aren’t in The Container Store’s selection, such as wall beds and the “360 Organizer,” a storage unit that makes corners more productive by swiveling to display shelves or hooks on each side of the unit. (Think of a really tall Lazy Susan.)
Malhotra said the $6 billion custom closet part of the business is extremely fragmented with small players. He told analysts Tuesday during an earnings call that Closet Works, as a longtime regional player, was doing about 13 times the volume in wood-based custom closets than The Container Store’s five area stores combined.
“So clearly we are leaving money on the table,” Malhotra said. “I think that bodes well for us as we think about how we deepen our penetration in these regional markets.”
The Container Store has been selling Elfa modular storage systems since 1978 and bought the Swedish manufacturer in 1999. The retailer started moving into wood-based closets in 2015 and more aggressively in 2019 by creating its Laren and Avera custom lines. It opened two stores dedicated to custom closets in Dallas and Los Angeles and added displays to its other stores.
Last year was Malhotra’s first year as CEO at The Container Store, after spending more than 20 years at Sephora since the beginning of the French beauty brand’s U.S. entry.
He called 2021 a foundation year where he focused on building his team, improving productivity and enhancing e-commerce with a new mobile app and loyalty program coming in a few weeks. Work has also included a new marketing campaign launching later this month.
The year was also spent making sure stores are comfortable selling premium spaces, he said. The just-completed quarter included a promotion on the Avera custom wood line with sales that averaged $6,000.
“We now have dedicated designers in our stores, almost 90 plus designers of which about a third of them, quite frankly, are doing over a $1 million in sales to date,” he said. “And coupled with this great assortment that we now have, thanks to the Closet Works acquisition, I think we really are off to the races.”
Plans to move into more markets are in the works with a smaller 12,000-square-foot store. The 94-store chain with annual sales of almost $1 billion is on a path to add 100 stores and become a $2 billion company, and that will be more visible starting next year, Malhotra said.
The process of identifying locations, negotiating leases and building a store can’t be rushed, and now there’s the added shortages of labor and construction materials, he said. Two new stores have been announced with a fall opening in Colorado Springs and spring 2023 in Salem, N.H.
The company’s stock price slid more than 25% in trading on Wednesday after it reported its fiscal third quarter ended Jan. 1. It closed at $8.13, down $2.40 a share, or 23%.
The holiday quarter’s total sales of $267.3 million were down 3% from the same period in 2020.
General merchandise sales fell 5.4% and custom closet sales were flat from the same period the prior year. Fiscal third quarter profit fell to $13.7 million, or 27 cents a share, vs. a profit of $19.7 million, or 40 cents a share, a year ago.
With 2020 being such an unusual year as stores closed for long periods of time in various markets, Malhotra prefers to make comparisons to before the pandemic.
Under those measures, he said, The Container Store reported its third consecutive quarter of sales increases that were at least 16% above the pre-pandemic year of 2019.
Twitter: @MariaHalkias
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