Tuesday, November 26, 2013

Is the Container Store (TCS) a Buy? Credit Suisse Says Yes

I have never heard of this company but it seems to be getting positive buzz.

The Container Store is poised for incredible growth. 

According to a recent report by Credit Suisse, the retailer, which went public earlier this year, could more than double in worth to $4 billion. 

The specialty home organization store currently has 63 locations, but will soon expand to 300. 

Credit Suisse analysts Gary Balter, Simeon Gutman, and Andrew Kinder cite a few reasons why The Container Store is killing it.

The reasons are:

1. Great customer service
2. Cannot replicate the "experience"
3. 50% of merchandise is exclusive
4. Associates love to work there and turnover is low
5. Celebrities like it.

The first 3 are there to differentiate it from Wal-mart and Amazon. You need great customer service, the "treasure hunt" effect (that Costco has) that keeps you returning, and stuff you can't buy for cheaper on Amazon to succeed in retail. If you have those things you can compete effectively with the Amazon and Wal-mart on something other than price.

The fourth thing is like Home Depot, lulumon and Costco. If you treat your employees right you get the great customer service from number one. If you treat your employees like trash you end up having to deep discount to get any business at all. Finally, number 5 is fickle so it shouldn't factor into the stock price too much. 

The stock looks pretty pricy at $40.06 which is 97x forward PE. It also has a large debt load at $392 million with only $12 million in the bank. I assume that cash got topped off by the IPO so hopefully that won't be an issue. I also question whether it can go from 63 locations to 300 quickly. I would need to look at some quarterly numbers and see those expansion plans before I would pull the trigger.

Upon looking at the website it gives me a pseudo-Ikea vibe. Most of the items look like they are a step up from Target and worlds ahead of Wal-mart or K-mart. Actually the assortment of different goods are similar to Ross's Depressed for Less. Lots of jars and wrapping paper and kitschy little items for the Kitchen or Dorm room. I have a feeling they aren't all piled on the floor like Ross's and are instead displayed nicely. 

They also have elfa which is a modular storage solution that looks very high margin. For instance a woman's heels closet (Carrie Bradshaw from Sex in the City just passed out in joy) costs $2621.94. It pretty much looks like a bunch of wooden shelves and metal backing pieces covered in white rubber. That cannot have cost too much to make so the margin must be very nice.

In any case I can see me going into one of these stores when the come to Hawaii. This kind of store would thrive over here judging by how many people are in Bed, Bath, and Beyond on any given day. This place seems very similar but you can get a larger mixture of things from a look around the website.

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