Anne Rakunas - ICR, Inc., IR William A. (‘‘Kip’’) Tindell, III - CEO and Chairman Melissa Reiff - President and COO Jodi Taylor - CFO.

Simeon Gutman - Morgan Stanley Christopher Horvers - JPMorgan Matthew Nemer - Wells Fargo Securities Daniel Binder – Jefferies & Co. Denise Chai - Bank of America/Merrill Lynch.

Greetings and welcome to The Container Store, Second Quarter 2014 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Ms.

Anne Rakunas from ICR. Thank you. Ms. Rakunas, you may begin..

Thank you, operator. Good afternoon everyone and thanks for joining us today for The Container Store’s second quarter fiscal year 2014 earnings call. On today’s call are Kip Tindell, Chairman and Chief Executive Officer; Melissa Reiff, President and Chief Operating Officer; and Jodi Taylor, Chief Financial Officer.

After Kip, Melissa and Jodi have made their formal remarks we will open up the call for your questions. I need to remind you that certain comments made during this call 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. These risks and uncertainties 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 undertake any obligation to update their forward-looking statements. And finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call.

A reconciliation schedule showing the GAAP versus 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 website at containerstore.com. And I will now turn the call over to Kip.

Kip?.

Thanks, Anne. Hello everyone. Thank you for joining us today to talk about our results for our second quarter 2014. Adjusted net income increased 38.7% to $5.1 million or $0.11 per adjusted diluted common share compared to $3.7 million or $0.08 per adjusted diluted common share for the second quarter of fiscal 2013.

Net sales were $193.2 million, up 5.2% as compared to the second quarter of fiscal 2013. Company comparable store sales for the second quarter were down 0.4%. Our gross margin is strong, our SG&A management is strong and we continue to achieve increased average ticket growth.

We are pleased that this combined with our strong new store growth helped drive our earnings performance with a 38.7% increase in adjusted net income despite those sluggish comparable store sales. We also have maintained our pricing integrity and I think this is really important in an increasingly promotional retail environment.

We are very excited about our new store growth with three more openings ahead of us still this year. Our targeted annual 12% minimum square footage growth is among the fastest growth rates in the retail industry at this time.

We’ve opened five new stores this fiscal year already, including one store relocation and three more still planned for this fiscal year as well.

They are Salt Lake City area in Murray Utah Fashion Place Mall, store’s opening October the 18th; Chicago, the South Loop in the Roosevelt Collection, opening November 15th; and Phoenix area in Glendale Arizona, Arrowhead Towne Center opening February the 7, 2015.

We are very encouraged by the prospects of our three major initiatives to help increase traffic and average ticket; POP!, Contained Home and TCS Closets.

TCS Closets is in fact without a doubt the most significant merchandising initiative in our history, leveraging our core competency of high service sales of exclusive solutions based component products and systems Melissa will update you in more detail on these three major initiatives in a moment.

As we move into the second half of the year we are well positioned and well invested in our infrastructure, very well positioned, very well invested in our infrastructure to support our increasing omni-channel customer base and the new store growth that we have had and are planning for the near future.

We continue to be encouraged as we move closer to our important fourth quarter, a very important fourth quarter, always so important to The Container Store where we will be competing this year against last year’s weather which impacted traffic and sales more than any other time in our history.

Historically over 60% of our net income has been derived in the fourth quarter but this year because of last year’s weather we expected to derive approximately 70% of our reported net income for this year.

We will continue to maximize every customer interaction while also focusing on the long-term health, long-term and medium term health and growth opportunities of our business as well as to our beloved employees and culture. Thank you so much. Melissa you want to go into more detail about the initiatives and about anything else..

You bet. Thanks, Kip and hey everyone. As Kip mentioned I want to briefly discuss our three major initiatives today in a little bit more detail. Again TCS Closets, our POP! Customer frequency programs and Contained Home, previously called ATHOME.

These are initiatives that are designed to drive traffic and average ticket and deepen the engagement with our customers. So first let’s talk just a second about TCS Closets. As Kip said it really is the most significant merchandising initiative in the history of The Container Store. We are preparing for this pilot launch of TCS Closets.

We are just so excited about it. Our new exclusive collection of solid custom-built solutions crafted from the highest quality material with a variety of choices in wood range finishes and extras, including lighting, glass doors, Island, hampers and innovative storage options for shoes, jewelry and hand bags.

We are planning to launch TCS Closets in our seven stores in the Dallas/Fort Worth Metroplex beginning in November and of course that includes services in our stores from our expert sales people and in the home from our Contained Home Organizers and installation service professionals.

TCS Closets is planned to rollout to the rest of our stores by the end of 2015. We really believe the average ticket on an average master TCS Closets will greatly exceed our day to day $60 average ticket and be much more than the $2,000 average ticket our Contained Home service has experienced to-date.

Therefore, we do believe TCS Closets will contribute meaningfully to comparable store sales increases in the longer term. Next is I want to talk a second about POP! our Perfectly Organized Perks customer frequency program.

POP! has reached almost 1 million customer enrollments since launching at all stores in July and approximately 50% of our store sales are now associated with our POP! Stars. We are in the enrollment phase of POP! And have enrolled more customers than we had anticipated at this early juncture.

As we continue to enroll more and more customers we will be able to further engage and surprise and delight her in a more personalized and targeted way as we enter 2015 and deeper mine our growing data analytics. And then we have Contained Home.

That’s our in-home customized design and organization service that is currently available in Dallas and Houston and Austin and Manhattan and Los Angeles, and we have plans to rollout in Washington DC later this month and in Denver and San Antonio in November. The service is expected to be available in all of our stores by the end of 2015.

We are encouraged by the service’s average ticket to-date of $2,000, again much higher than our day-to-day $60 average ticket. So I’d now like to turn over to Jodi who is going to review our financial highlights..

Thank you Melissa and good afternoon everyone. Now I’d like to review our second quarter results and then also review our outlook for the year. Net sales in the second quarter were $193.2 million, up 5.2% from the second quarter of fiscal 2013. Sales in The Container Store retail business were up 5.7% to $174.8 million.

Our third party sales at our Swedish subsidiary, Elfa were up 3.7% in Swedish krona. However due to the depreciation of the Swedish krona against the U.S. dollar, Elfa’s third party net sales in U.S. dollars declined slightly by 0.1%.

We ended the quarter with 67 stores and approximately 1.7 million of gross square footage as compared to 61 stores and approximately 1.5 million of gross square footage at the end of second quarter 2013. Our comparable store sales for the quarter decreased by 0.4% which included a 1.4% increase in average ticket.

In the second quarter of fiscal 2014 approximately 41% of Elfa sales were derived from The Container Store with the balance of sales primarily derived from Scandinavia. Our consolidated gross margin increased by 40basis points to 58.8% from 58.4% in the prior year.

Gross margin in The Container Store retail business increased 50 basis points to 58.3%, primarily due to an increase in margins on non-Elfa department reflecting a shift in sales mix. This was partially offset by lower margins at Elfa branded product just simply due to a shift in timing of promotions that occurred during the second quarter.

The Container Store gross margin increase was partially offset by a decrease in Elfa’s gross margin of 160 basis points to 34.7% primarily driven by a change in their sales mix during the quarter.

As a percentage of sales consolidated SG&A increased by 10 basis points to 46.8% in the second quarter of fiscal 2014 primarily due to public company costs which we did not incur last year, as well as the implementation of strategic initiatives including the rollout of the POP! program and the Contained Home rollout.

This was offset slightly by lower sales and marketing expenses in Elfa which were due in large to favorable timing.

Our net interest expense in the second quarter of 2014 was $4.4 million compared to $5.5 million in the second quarter of fiscal 2013, with the year-over-year decline due to lower interest rates achieved through the refinancing of our term loan facility at The Container Store that we did in November 2013 as well as repayment on our debt obligations.

Our effective tax rate for the quarter was 17.5% compared to 30.5% in the second quarter of last year.

The decrease in the effective tax was primarily due to a $1.8 million reduction in cash expense we recorded in this quarter of fiscal 2014 primarily related to an expected refund of tax paid in the prior period partially offset by a shift in the mix of projected domestic and foreign earnings.

Our net income for the quarter was $7 million, compared with $4.1 million in the second quarter of last year and net income per diluted share attributable to common shareholders was $0.14 compared to net loss per share attributable to common shareholders of $6.06 in the prior year period.

Last year’s net loss per share reflects 21.9 million of preferred distribution. As a reminder we exchanged our issued and outstanding preferred stock for common stock in connection with the IPO in late fiscal 2013.

On an adjusted basis, excluding the expected tax rate recorded in the second quarter and the adjustments in the prior year as detailed in the reconciliation table in our press release, net income per diluted common share of the second quarter of 2014 was $0.11 compared to adjusted net income per diluted common share of $0.08 in the second quarter of 2013.

Turning to our balance sheet, we ended the quarter with $15 million in cash on our balance sheet, $366 million in outstanding borrowings and combined availability on revolving credit facilities with cash on hand of $73.4 million.

We ended the quarter with well managed inventory of $95.7 million, up 5% as compared to $91.2 million at the end of last year’s second quarter and with the store count increase of almost 10%. Now I'd like to turn to our outlook. We expect consolidated net sales for the year to be $800 million to $810 million.

Comparable store sales for the year to be flat to up slightly and diluted net income per share, common share to be in the $0.52 to $0.57 range based on a weighted average of 49 million diluted common shares outstanding.

Included in our outlook is a $3.3 million non-taxable gain on the sale of one of our Elfa subsidiary whose principal asset was a building which we’ll record in the third quarter of this year.

Due to the non-taxable nature of this entity sale and the tax benefit we recorded in the second quarter of 2014 we now expect our tax rate for the full fiscal year 2014 on a GAAP basis to be approximately 30% or approximately 38% on an adjusted basis.

We continue to expect our annual interest rate at today's LIBOR rates to be approximately $17.5 million. Now I'd like to update you on our expectations for comp and SG&A cadence per share.

First on comp, we expect third quarter comps to be flat to down low single digits and fourth quarter comps to be up in the low to mid-single digit range driven by the expected impact of our planned initiatives as well as the cycling of the difficult fourth quarter weather from the prior year.

Second, we expect third quarter consolidated SG&A as a percentage of sales to de-lever significantly given expected deleverage of fixed cost associated with the flat to down low single digit comp at The Container Store as well as expected SG&A deleverage at Elfa due to further consolidation of our sales and marketing functions to improve our operational efficiency, which is resulting in some short term duplicated costs during the third quarter.

Remember this also includes incremental costs associated with becoming a public company that were not incurred in the prior year until we went public November 1 of last year which was the very end of third quarter. We expect SG&A to improve considerably as a percentage of sales year-over-year in the fourth quarter.

As we have discussed before fourth quarter is seasonally our most important quarter and in fiscal 2014 we expect to deliver nearly 70% of our full year GAAP EPS at approximately 80% of our full year adjusted EPS in the fourth quarter. With that I'd like to turn the call back over to the operator so that we can take your questions.

Operator?.

Thank you. Ladies and gentlemen at this time we will be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the like of Simeon Gutman from Morgan Stanley. Please proceed with your question. .

Thanks. It's Simeon Gutman. First, thinking about the fourth quarter, Kip and Jodi both called out that 70% of net income comes or should come this year from that quarter and that coincides with the annual office sale and you're up against an easy compare.

So going into this year and/or reflecting on prior years do you ever get a sense, whether it's anecdotally or something in the numbers about the pent-up demand for Elfa customers either purposely deferring their purchase? And then in terms of the Elfa sale is there anything different about how you are going to approach it this year given that you'll be up against an easy comparison?.

Well, this is not Jodi, this is Kip and usually -- you know it’s -- we call a potato chip item.

I mean Elfa more than any product ever been associated with people buy it again and again and so if you can introduce people once a year on your highest volume, it’s 24% of our sales, highest gross margin, highest volume product, that simply tends to ensure they are going to buy more Elfa, at another time either on sale or not on sale.

So that's the genesis of that and more people we can get to try Elfa in a small way during the sale are going to buy it later on as well. We are little bit like a basketball game, how basketball game you don’t really pay attention to the fourth quarter.

It’s always been that way we are the only retailer I know that gears up for its two peak seasons simultaneously. We have to gear up for the holiday season and the office sale in the fourth quarter.

That’s why last year’s weather had more of an impact on The Container Store than it does most people because I mean let’s face it, January and February are the two worst months of most retailers’ business and January and February are even bigger for us than December and that’s the differential between the 60% and 70% this year.

What would you add to that, Jodi?.

No, I think the only thing I would add is clearly in my opinion in this retail climate you have a consumer who continues to see a lot of promotions out there in all of retail.

So from our vantage point certainly if you see also selling at full price during the year you can look at the fourth quarter when it’s on sale for 30% off and generally you could argue that that would certainly be quite appealing to the consumer with their current mindset..

What most people are saying, what you read, what the media says, what most retailers are saying is that people are right now very choosy about what they are buying they are responding to price promotion. It’s very promotional environment out there in retail right now.

We were delighted to see the response when we had our little I mean we are maintaining a great deal of pricing power. We’re not promoting as much as I believe the rest of the industry is right now we are not overly proud on that. We are balancing it.

We did have a couple of three day -- go into that a little bit but fortunately we are able to see really strong Elfa sales when we did put the thing on sale here just a few weeks ago, why don’t you go into that..

Most recently, hi, it’s Melissa. The end of August to really recognize our back-to-school and dorm customer.

We ran a couple of very strategic promotions which again is not really anything new we’ve done that throughout the year, for years, but we ran a couple of very strategic promotions three days each where we offered 15% off, the first one was online only or using our click and pickup service and then the second time we did it, it was also in-store and Kip is right we had a great response to Elfa even at 15% off.

So yes I mean we’ve got strong pricing power and we’re very strategic with our promotions and we will continue to do that..

So I think that right now people are more prone to buy Elfa and anything else if it’s on sale than it was not on sale for us and for most of the industry frankly, that seems to be the MO and I -- we feel like that the approach that we take with our Elfa sale which is kind of our ace in the hole is the right approach.

Like every year we look at should we increase the discount this year, should we change anything and I think strategically we think we are exactly where we need to be with it going into the fourth quarter. And of course this fourth quarter will be a lot more fun than last fourth quarter, assuming we don’t have the worst weather in 35 years again..

Bill and just to power phrase something you just said and I think what was implied in Jodi’s answer, the discount of 30% sounds like it’s going to be the same.

What about time frame, eligible other products, adjacent products and I don’t know if you can connect it to the POP! incentives since you have a lot more POP! members but I guess those type of things and the comparisons sort of build the confidence and that’s why hence the fourth quarter outlook against an easy compare..

Well I have one more thing with the strength of U.S. dollar we have more flexibility to possibly change our discount structure for the Elfa sale this year. We chose not to do that..

Right it’s 30% off the same Simeon.

Yeah, Jodi what were you going to say?.

No, I think from the POP! program which you are well aware, that is our surprise and delight opportunity for our customer. So we will continue to do test and learn with that which we have been doing and we will continue to try different offers.

And while we can’t be specific obviously as to what that’s going to mean for any specific month because that’s part of the sign-up program that certainly as we have opportunities we will take advantage of those primarily through that program..

Okay.

And then can you just clarify you mentioned in the guidance the sales and marketing effort, I think you said consolidating some areas can you just discuss what that relates to?.

Yes, I can. Elfa has as you may recall, they have been really sort of reinventing their business now for the last couple of years.

They have consolidated a lot of their operations, they eliminated an unprofitable subsidiary and those were in fiscal 2012 results and they are continuing to look for every opportunity they can to make their organization more efficient and they had disparate sort of sales and marketing functions not all concentrated.

After lot of discussion so to say, consolidation there made a lot of sense for organizational efficiencies. So we've moved forward on that and that is occurring as we speak over in Sweden. .

It's basically SG&A improvement I mean this subsidiary that Jodi was talking about in her prepared remarks is really just building and it was done that way for beneficial tax reasons but we are consolidating a lot of Elfa is sort of flowing operations in a manner that's yielding a better SG&A situation.

We've had a number of management changes over the last three or four years and cultural improvement changes that are leading towards a better reception on the part of labor unions and the management there to make more efficient some of these operations also helps.

You have the whole EU mentality where it is one, or one Europe so we don't need a facility in every other country. We're consolidating mostly to Southern Sweden where the main production facility is in Vastervik, Sweden. And that's very exciting.

We also at the same time have moved marketing and travel type things to Malmo, Sweden which allows us to penetrate continental Europe a little bit better than from a small village of Vastervik over the middle of Sweden.

So that's a long story but we're really happy with management improvements and expense efficiency gains and overall excellent gains out of Elfa as they hopefully emerge from a still sluggish, still much more sluggish situation than we have here post-recession. .

Okay. Thank you. .

Thanks Simeon..

Our next question comes from the line of Chris Horvers from JPMorgan. Please proceed with your question. .

Sure. Thanks. Hope you can hear me, I’m at the airport here.

Can you talk about what drove the gross margin pressure in the Elfa product? Was that sort of a lack of utilization of the Elfa facility passing through or was that more you focused those two-three day events and can you also talk about with Contained Home initiative, are you seeing Elfa department outperform in the stores that you've rolled that initiative to?.

Okay, this is Jodi. I can take -- actually both or anybody jump in, but on the first one Chris I just want to clarify, I was -- when I spoke to gross margin I am talking to Elfa segment not Elfa within The Container Store itself.

I think that was your question, within the Elfa segment what caused there pressure or was there -- just clarify if you don't mind for me, I want to make sure I heard you correctly there. .

Yeah….

There’s been no pressure on the Elfa gross margin, it’s quite the opposite. .

No, I thought you said there was pressure on gross margin because of mix, Elfa versus non-Elfa, it's just mix, it's nothing to do with the merchandise margins on the Elfa product in the stores..

That's correct. That is absolutely correct. .

Okay..

And then your second….

But just to clarify that, I mean we're seeing strength in gross margin lines across the board and we're certainly seeing strength with the Elfa product as well and we are feeling good about the strength of the U.S. dollar versus the Swedish kroner. So I want to just to be clear we don't sense that we are feeling a pressure on Elfa gross margin..

And then Chris I think your second question was with regards to Contained Home sales, what are we seeing there as far as how those customers are purchasing and what is Elfa’s domain appeal with those customers and the answer is yes that Elfa is over the majority of the sales that we're deriving from Contained Home customer when they're spending that $2000 average ticket, so yes that's definitely the case..

It is in fact the first thing the customer thinks of with that program, the first thing the employee thinks of, but it is a full store service. It's not just Elfa. In fact we have to work hard to make sure everybody understands that it’s not just about Elfa. Of course we’d rather sell Elfa than anything else since we own the factory..

Right. But the Contained Home organizers are going through continued extensive training in selling the entire store..

Right. But as you presumably at $2000 average ticket that it's the Elfa organization solutions got to be a big constituent of that.

So can you talk about maybe how those Elfa departments have performed relative to you are sure that the [inaudible] doesn’t have Contained Home rolled out?.

Yeah, we are not going to get in to specifics around Contained Home since it’s still in a handful of stores but we are absolutely seeing a lift in stores that have the Contained Home service, that is across the board for us, that’s….

That’s right, we need to be further along in the testing before we put out metrics to everybody on that, but yes..

Okay. And then also on the POP! Stars, I know you mentioned that’s about 50% of your sales currently, I think your average consumer comes in two-three times a year.

Are you seeing a frequency pick-up and can you talk about those metrics at all?.

Chris, it’s Jodi, I’ll jump and then we will let somebody jump in here as well but you are right our average customer doesn’t shop as much as we’d like, or she’s in two to three times a year so, remember that….

Which is industry wide, I should think..

And remember that right now we’ve rolled this out to all stores July 15. So during the second quarter is what we are calling enrollment phase of the program and as Melissa said we have about 1 million people already signed up for the program and that’s representing almost half of our sales tied to our POP! Stars.

We are well above our expectations in terms of where we thought we would be with how many sign-ups of people in our stores which we were happy about but from a frequency perspective for the majority of our -- or virtually all the chain, the customer when they are signing up for the POP! Program they were already in our store right because this is the program where they are in there and we are talking to them about and we are getting them to enroll.

So you haven’t picked up that frequency yet, that’s something that is to come down the road. So in terms of saying to you that POP! materially changed anything short-term it’s not that way. We’re right now in what we are calling the enrollment phase of the program, with trying to get people signed up..

And that, the two to three times per year is an all customer number. Probably 30% of our customers who represent over [8%] of our sales shop very much more frequently than that and the POP! program is of course meant to further cultivate that segment that’s over 80% of our sales..

Thanks very much..

Thank you..

Our next question comes from the line of Gary Balter from Credit Suisse. Please proceed with our question. Mr. Balter, your line is live. Do you have yourself on mute? Our next question comes from the line of [John Heimbach]. Please proceed with your question..

A couple of things, do you guys -- the POP! Stars representing 50% of store sales, any general sense of what percent of POP! Stars are making up that 50%, you know is it a small percentage as is same to your total sales 25%-30% or is it broader than that?.

I am not sure I fully understood the question. Are you asking what portion of our transactions are represented by POP! Stars versus dollars..

No, so if I look at the number of POP! Stars, right, 25% of POP! Stars representing the vast majority of 50%, is it the 80-20 roll, is it 25% or is it broader you are getting there’s 40% or 50% of I’m just trying to figure out how concentrated that 50% is of yourselves?.

We don’t have that now. We are still in the middle of tests with the thing, but I mean it’s not going to be nearly as concentrated as the overall customer..

Yeah..

We have like most retailers, we have some customers that are not particularly good customers but there is not many or any POP! Stars that aren’t very good customers. So it’s got to be sort of the opposite of what you see for the whole, it’s going to be very much non-concentrated like that..

Because I guess the question when you think about traffic, how can you generate more traffic without diluting gross margin? Because a lot of retailers will generate traffic with lower margin product and make it up on higher margin, your margins are so good and you have chosen not to that.

Is there anything you look at and say this stuff we can sell but we don’t, that still has a fairly robust growth that can get people in the door more frequently or is that really not a possibility?.

We focus on having our highest margin products also be our highest volume products and I think that’s the key to having a great gross margin.

The reason that we have the gross margin that we do is because we have been given the financial incentive to perfect selling methodology of those products which carry the highest gross margin, and so we have done that.

Elfa is a great example but we -- I think the POP! Star customer is the one that also tends to buy that sort of multifaceted hard to buy, hard to sell Elfa like component type product too which does carry the highest gross margin and the highest average ticket..

Okay, but is there -- I guess yes, go ahead..

I think that Sharon and team are always thinking of products from that vantage point and as you know we change our 20% or so of our SKUs on an annual basis. So to the extent it makes sense within our core categories we do, but we also, as we talked about before really try to stay true to our concept.

So I don’t think you are going to find this John to your point adding candy at the registers or anything, that’s just not who we are, no..

But I think I missed part of your question.

I was excited to talk about the so weird for somebody to have their highest volume products also be their highest gross margin products, but there was another part of the question I was anxious to answer, can you repeat it?.

Well, the question was more on the lines of whether it be food containers or things that people, the average selling price might be less than Elfa, it might be little more consumable or disposable such that you can get them in the door more frequently, not lower margin but just maybe the mix shifting a little bit to get, drive more traffic….

See the POP! thing, the reason that we waited 35 years to introduce our frequency program was really because we felt like most people give away too much gross margin needlessly in their affinity program.

So this is more as Melissa talks about surprise and delight, we are kind of giving them hugs, we are kind of giving them more information, tips of my favorite restaurants in the world, big food guy, I want to be able talk to the chef. I don’t want a discount. The stores I don’t care much about, I just want a discount.

So this POP! program is more respectful of gross margin than most of them and we feel like we are getting movement, good mobility without needlessly giving away gross margin and I actually think that the best way, the very best way to increase traffic is to get your best customers, certainly something as broad as that 30% of your customers, who are your best 30% of your customers to shop -- who are already shopping at least twice as frequently as the entire customer base to get them to shop even more frequently and that’s what POP! is exactly designed to do.

Now we are in the middle of this rolling out nationwide test. So we are a little reluctant to give kind of fourth and fifth and sixth inning metrics but it all seems to be moving the way that we logically thought it strategically would at this point..

All right, one last thing on TCS Closets, I mean obviously you are not going to say publicly but do you have a pretty good sense of how many units you think you can sell at least in the Dallas stores. I don’t know if you are going to look at it monthly or quarterly but you have a fairly good sense of what you can sell.

And then how quickly do you think that starts to impact those stores, is it, there is, do you think it takes a couple of months or is it longer than that?.

We just -- if you plan those numbers on your own you have an idea what the average ticket is, how many stores there are so you start adding those sales of how many of them per day or week or month is the average store going to sell and then you see what impact that can have to average ticket. We don’t know.

I mean we are just about to roll it out to the first store. So it’s far away for us to say each store’s got to sell this many per week or whatever but we have run all the numbers and if these store sales x, it has this impact if they sell y and it’s pretty delightful stuff.

I mean it’s -- we are very excited to be able to provide those metrics soon, let us get into the test first..

Still baking in the oven..

Okay, thank you..

Thanks John..

Our next question comes from the line of Matt Nemer from Wells Fargo Securities. Please proceed with your question..

Thanks so much. Good afternoon.

I was hoping that you could talk to the impact that the unique promotions that you had this past quarter, such as the 25 Off Elfa in June and 15% off promos in August, might have had on -- the impact they might have had on your comps and on your gross margin in the quarter?.

Sure. So Matt, this is Jodi. The 25 off Elfa in June that you're referring to is something we've done for a number of years, where in May and June we run what we call Elfa Preferred and offer Elfa at 25% Off and it’s -- we do a targeted mailing. .

Very specific targeted mailing from our database..

Yeah, to our customers. So that is not something new. We had done that previously. What was a little bit different this year is those that got the mail offer were actually able to redeem that offer through June. They didn't just have the month of May like they had in the prior years. So that's the distinction there..

Because we had a misprint in the mailing and that's why, because normally Matt it's the May customers that receive Elfa Preferred can use it the month of May and then the June customers that receive Elfa Preferred can use in the month of June.

But this year the only difference to last year was that the May customers could use it through June, as Jodi says..

Right, and then I assume that you're referring to some of the top offers that we're doing as well which we have some very good capability to be able to analyze those very carefully and make sure that they're being profitably done and that's exactly what we're doing because part of the program is figuring out which ones customers do or don't respond to and making sure that we watch all aspects of its sales [feature] as well as the profitability being driven from the -- and then I think Melissa you want very briefly to the 15%....

The same thing that we talked is that what you're talking about Matt, to the two, the hug and….

Yeah, I was just trying to figure out if you think that those had any financial impact on you, in the quarter..

The 15 and 25 thing?.

The 15, 15….

Yeah, I mean at the end of the day Matt, it's a relatively nominal discount. So we don't believe that it had a material impact to the gross margin as evidenced by the fact that it was still at 40 basis points for the quarter..

Got it, okay..

Well and I think that we felt like that had a small impact on gross margin percentage and a significantly better impact on the actual gross margin dollars and interestingly at those percentage off levels we are not really doing what most industry is where they're kind of feeling like they have to do 40 to get any movement at all. So….

Yeah, it's pretty benign.

And then another technical question, was there any impact from the krona on the consolidated gross margin?.

It wasn’t of any material nature. I think one thing that is important for everybody to understand as it relates to the Krona, because I know we've seen a strengthening of the dollar, we use a cost inventory. So it's always weighting the average cost of everything that we own and then everything we acquire.

So there is a lag between when we are actually going to sell and cost out inventory with the higher rate versus when we may procure inventory at a higher rate. So remember our inventory on the whole turns about four times a year. So it's not a one for one thing at all.

And you'll see in our 10-Q that we currently have 47% of our commitments for this year's purchases secured at a rate of 6.8. Compared to last year I believe we had about 70% procured at a rate of 6.7 so that just to give you a little bit of relativity where we're currently at in terms of our commitment. .

Okay. That's super helpful. And then just lastly I think for the quarter you originally had forecast SG&A to delever about 100 basis points and you did quite a bit better than that.

I am just wondering what changed versus your original forecast in terms of SG&A expense and are there any impact items in there that would be considered more non-recurring like incentive comp. .

There is not really anything I would call non-recurring, I think I spoke to the Elfa duplicative costs that are occurring in the quarter.

They won’t actually of course reported below the line but this decision we made to consolidate further their sales and marketing operations does have some duplicative cost in the short term that would be probably the bigger thing to call out. .

So, the difference relative to your original forecast was would just be considered you know general efficiencies and cost management?.

Yes..

And I will just add to what Jodi said about the Swedish krona that it is, in there we had a 7.25 today. We do engage on forward contracts on that, there is so that circumstance is looking better then has in the past couple of years. The past couple of years looking backwards were unusually bad years for the US dollar versus Swedish krona.

Things look a lot brighter in that front as we look forward but we’ll see..

Got it, okay. Good to hear, thanks so much..

Thanks Matt..

Thanks..

Our next question comes from the line of Dan Binder from Jefferies. Please proceed with your question..

Hi, good afternoon..

Hi, Dan..

Hi, Dan..

You talked about the promotional environment being intense, I’m just kind of curious when you look at the landscape are there particular players that you are seeing more promotional then not and given what sounds like reasonably good responses to these three day sales would you consider running more of them to drive a better comp?.

In a balanced way I think you know we can continue to experiment with that. As we get into the holiday season we are a little more reluctant to do that our stocking staff and our decorative packaging and [wrap] are those things they have a long history of experimenting with promoting or not promoting those.

We tend to do very, very well without promotion on those items. Their gross margin continues to go you year after year.

We talked about in the last call we are not proud, we are not stubborn, we will try to play this, the cost benefit of the volume plus gross margin return as skillfully as our 36 years of experience with doing that has you know allowed us to do.

What’s interesting is that those numbers were fairly low you know when we are doing something at 15% or 20% and 25% I think a lot of people feel like you can’t get any movement at all until you are 40%, 50%, 60%, 70% and so we are going to maintain our pricing power. We think that’s really important.

Most aspects of the business are quite good right now but comp store sales are quite sluggish and I think that we don’t want to get to the -- we have many period of time in our history where comp stores were unusually higher or unusually low and they always move back to the middle at some point in time but we are not waiting around for that event to happen, we have huge major initiatives designed to push it and not smaller initiatives to push it but when we get there we want our pricing integrity and our pricing power to remain intact..

And our brand..

So when you look at the promotional environment, I mean is it more on opening price point from folks like Wal-Mart and Target and Bed Bath or is it somewhere else in the mix?.

Well I guess it’s a collage back to [dorm] time, we had new players enter that arena for the first time. They really had very little to offer, if I might say so.

They weren’t really about -- I mean these particularly these freshmen girls going off to college and not really have the wardrobe at home when they go live in the dorm room and I believe have their shoes at home and so it’s not so much that people have a lot of great solutions for their wardrobe and shoes when they got to the dorm room, it’s just that they have one or two or three literally as opposed to hundreds or thousands that we have but they also have the clothing, they are kind of one-stop shop.

They have the little mini refrigerator, they have all types of things. They can’t really compete with us on storage and organization but they can compete with us on what you need when you are going back to the dorm room, back to school plus it’s all at about half off. And so we are having that to be kind of promotional environment..

Understood.

I was curious on the Closets business, how many measures you monitor this carefully but how many requests do you get from customer in a typical store whether it’s on a weekly or monthly basis for a Closets solution that historically you haven’t been able to provide?.

Hey, it’s Melissa.

You would be surprised how frequently we get asked for that and we have being busy with our stores so much this year and it just comes up over and over again, it’s like again they want loyalty program about 35 years, they wanted to come into their home for the last 35 years, they want us to offer more of what we talked about before the whole Closets domination, more of a variety.

Many customers love Elfa but many customers may want a different solution. So we are going to have that closet domination and we are going to have an incredible offering as we said that we are going to be launching here in the Dallas/Fort Worth Metroplex next month..

So when you think closet you think The Container Store first. You don’t just think of whatever kind of closets you want we will have it and we will have the best of that realm.

This will be the highest quality best closet of its type in our minds available and it’s a slightly different customer, slightly more, little bit older and more upscale demographic customer perhaps as then compared to sort of the Lexus to go with our Toyota. I think they work hand-in-hand.

We are hopeful of little to no there are some members of our organization I think could enhance Elfa sales as opposed to cannibalize it.

Lex-Toyota analogy gets tossed out a lot but basically some customers want Elfa’s more open environment and some people want a more closed, more built in looking environment and it’s very exciting to finally give them what they want.

You have to understand when you own the factory you are not real anxious for them to buy something other than that stuff you make in that factory..

But I actually think Kip, it’s Melissa, I actually think that it could be the same customer as well. I think the customer can want a TCS Closet and can also want Elfa both. So we are hoping for our cake and eat it too..

Well, I think that can be with that customer you can have this maybe in the master closet and the other in some of the other….

Pantry, gross, linen closets, kitchen..

So we are very excited to have these initiatives in various stage of testing and the really big one the TCS closet getting ready to open up.

And then they will sort of remain in the oven baking and rolling out as each month as each quarter goes on and I think we certainly endeavor and hope to see that show up more and more and more on stubbornness of the comp store sales but in the meantime we are going to continue to manage SG&A as we have been and the gross margin as we have been and try to make the other metrics offset the sluggishness of the sales, if and these initiatives do what they are designed to do, I think we’ll have a much different story in the short to medium term on the comp store sales..

Thank you..

Thanks Dan..

Our next question comes from the line of [Alan Ruskin] from Barclays. Please proceed with your questions..

Couple of questions if I may.

Kip just looking at things a little bit bigger picture with your performance not as strong as what you would like for a few quarters now, do you think there is anything going on with either the performance of the stores by class or geography or any particular markets that are underperforming? And then as a follow-up you guys raised your minimum square footage growth just a short time ago to at least 12%.

Is there any reconsideration that maybe show things down a little bit until you see a sales rebound? Thank you..

On our square footage growth we are never before has the new stores favorably impacted the company as much as it has this year, last year, the year before. With these new stores we are getting over 20% four walls EBITDA first year out of these new stores. We’re particularly excited since I call it the Indianapolising of The Container Store.

We discovered people love us just as much in Indianapolis as they do in Chicago and the best location Indianapolis costs quite a bit less than the best location in Chicago but the sales are surprisingly close to the same. So we feel it’s a rare business opportunity.

I know a lot of people are tempering their bricks and mortar locations and I think they are going to talk and other retailers think they got to do it all online but as long as we are able to open stores in the United States with so many -- such a long runway ahead of this, getting our capital back and what’s that averaging Jodi two and half years was a actually 22%, 21%, 23% of four walls EBITDA first year that’s great stuff.

We are got to continue to do that and we are -- I was pleased that we were able to hit the new 12% number even this fiscal year because normally it takes us 10 months to open a store once we identify it..

And then Alan I think your other question was about geography and vintage, is that right?.

Yes. .

We will look under every rock and go ahead..

We don’t really. .

No I was going to say vintage for us there is generally not a huge disparity, although I will say that as we have, I think we talked a lot about the fact that we see a large honeymoon when a new store opens and as we have more new stores coming into the base up against the prior year at times depending on when the stores open and come in that can in fact mean that newest vintage might not be as high in comp performance as some at older ones.

So, we have seen a little bit of that as well..

I mean is there any, so if the new store is still doing you know north of 20% returns I mean it is an issue that maybe the stores are reaching maturity quicker than what, that you still -- I mean I guess I am just trying to find out what the real culprit is here in comps not being as strong as what we anticipated..

Well it’s been, I guess the genesis of that tended to be around holiday time last year, if you know you certainly have those easy comps that we are about to meet in the fourth quarter of this year between now and then each of these initiatives and everything else that we are doing to raise frequency and raise average ticket will continue to work better.

So….

Okay..

It’s -- I can assure you that our company believes that the employee morale is the best it’s ever been equal to or above then it has ever been and it’s certainly appears as though the customers love The Container Store as much as they always have.

Occasionally comp store sales will give very high or very low and you have to look under every rock to try to determine what’s causing that so that you can enhance it even more or trying to factor around and we are doing that in every manner that we know and we are very excited about these initiatives that as we say are in the oven and every time we add another store or two or three to these initiatives that begins to impact average ticket a bit more.

And normally what The Container Store can do best, what is our wheel house is selling exclusive to us products that are component or metric in hard to sell products that no other retailers really wants to get into, the mass merchants aren’t going to get into selling something like Elfa or TCS Closets or you go in to the store and sales people almost like little architects designing your Closet and so these programs are designed to be right in the wheel house of our competency in terms of selling that type of product.

So we do have high hopes for success of those things..

Okay, thank you very much. I appreciate it..

Thanks Alan..

Thanks Alan..

Our next question comes from the line of Denise Chai from Bank of America/Merrill Lynch. Please proceed with your question..

Okay, thanks for taking my question. Just wanted to go back to what you are saying about SG&A, how there was a favorable timing in terms of lower sales and marketing cost at Elfa.

So I was wondering if you would quantify this and looks like the second quarter was more favorable does not mean that it’s going to be a negative in the third quarter because you also referenced SG&A de-leverage in the third quarter?.

Denise, this is Jodi. And that was really wasn’t as you heard me prioritize the explanations it was a major driver to the explanations for the quarter.

It was not a real material discussion that I -- it was warranted to mention to because you will see in the 10-Q that there is separate disclosure on the Elfa segment separate from The Container Store but as we all know Elfa’s is about less than 15% of profit and sales to The Container Store consolidated..

Okay, okay, thank you.

And then in terms of your comp guidance for the third quarter and fourth quarter, just to isolate traffic, should we still think of traffic as being negative in the third quarter and then turning positive in the fourth quarter when you are up again such a weak comparison so, just wondering if you can give some color on that please?.

You know we haven’t really wanted to put out there where we think the sales are going to come from whether it’s traffic or whether it is from average ticket. So I don’t think that’s something we will be specific on Denise..

Okay.

And lastly, on foreign exchange are you seeing any kind of margin impact from ForEx and how much visibility do you have there?.

Yes, I mean you can look at the current rate and I think I have mentioned that there is a lag between when we can buy -- when you buy Swedish kroner at today’s rate and when you actually see that through your gross margin. So yes there is optimism for that, don’t forget too though that Elfa’s earnings then convert to fewer U.S. dollars.

So there is an offset as well..

Okay, thank you..

We are delighted to see the U.S. dollar-Swedish kroner strongly advance from 6.4 just a few months ago to 7.25, that’s always beneficial for The Container Store when you have that happen. We buy forward contracts, we buy forward contracts for a portion of our purchases and we buy at the spot rate for those other purchases.

So even as we speak as we are paying invoices we’re paying the new higher spot rate as opposed to the lower rate. So, that’s a good thing.

Yes, that’s a good thing and that will attribute over the short to medium term to gross margin and we are, well we are trying to get the comp store sales to -- back to where we want to be we are proud and feel like we are making strong progress on the gross margin and SG&A and new store growth..

Thank you..

That is all the time we have for questions. I would like to hand the call over to Melissa Reiff for closing comments..

Yes, hi, it’s Melissa on behalf of Kip and Jodi, just want to say thank you so much for your time today and your great questions and we will look forward to talking with you again very soon at the next quarterly earnings call. So thanks very much guys..

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day..