Farah Soi - IR, ICR Inc. William A. Tindell, III - CEO and Chairman Melissa Reiff - President, COO and Director Jodi Taylor - CFO.

Chris Horvers - J.P. Morgan Joshua Siber - Morgan Stanley John Heinbockel - Guggenheim Securities Matt Nemer - Wells Fargo Aram Rubinson - Wolfe Research Dan Binder - Jefferies Lee Giordano - CRT Capital Denise Chai - Bank of America Merrill Lynch.

Greetings and welcome to The Container Store Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Farah Soi.

Thank you, Farah. You may begin..

Thank you, operator. Good afternoon everyone and thanks for joining us today for The Container Store's third 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 the call to 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. Those 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. 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 Web-site at containerstore.com. I will now turn the call over to Kip.

Kip?.

Thank you, Farah, and I hope everybody had a great wonderful holiday and start for the New Year. As you saw in our press release, adjusted net income was $3.2 million or $0.07 per adjusted diluted common share in the third quarter of fiscal 2014, meeting consensus estimates.

Net sales were $190.9 million, up 1.4% over third quarter last year, Company comparable store sales for the third quarter were down 3.5% compared to last year, which was at the low end of our guidance of flat to negative low single digits. However, fourth quarter-to-date comparable store sales are up 2.7%.

Online sales increased 13.2% for the third quarter compared to the third quarter of last year. While we were not satisfied with our comparable store sales in the third quarter, specifically our traffic trends, and we are vigorously working to fix it, we are passionately emerged in looking under every rock to improve our store traffic.

It's the traffic that has been the culprit. We are however pleased with our many other third quarter metrics like our stable gross margins, disciplined expense management and our comparable store average ticket increase of almost 2%.

And while we still have much of our wonderful annual Elfa sale in front of us, we're particularly encouraged by our fourth quarter to date comparable store sales which include a 620 basis point improvement over the third quarter.

Our fourth quarter to date comparable store sales gains consist of both an average ticket increase and an increase in traffic.

Given the scope of the change in momentum between the third quarter and the fourth quarter to date as well as the importance of our fourth quarter to our annual results, which isn't a share of this interim quarterly sales information with you today, but we don't intend to make this a call practice.

Our three key initiatives that are designed to increase traffic and average ticket, POP!, Contained Home and TCS Closets, continue to rollout through the end of 2015.

As with every major merchandising, marketing and customer service oriented initiative that we've introduced throughout our history, each month, each quarter and each year that they mature, these initiatives become more and more impactful to our business.

Melissa, why don't you talk a little bit more about store operations in general and particularly those initiatives?.

You bet. Thanks, Kip, and hi everyone. Thanks so much for joining our call today. I had the privilege this past year of visiting each of our wonderful 69 stores and it really was an amazing experience, listening and learning so much. Our VP of stores and I held a 2.5 hour very interactive early morning meeting with each store team.

We answered questions, we shared perspective, we also met with each store management team, we walked the entire store from a visual aspect and reviewed every store task and assumption operationally, and oftentimes we even worked with customers too which of course was really fun.

But my point is, we were very pleased to confirm that employee morale and customer enthusiasm for our solutions based selling and high quality service is truly at an all-time high. I'm also excited that we identified with our store teams some great areas of opportunity to increase efficiencies and further heighten the customer experience.

For example, we discovered some back of house efficiencies that will allow us to reallocate more customer-facing hours to our sales floor, hours devoted to providing even better service for our customers.

And then with regard to scheduling, we recognized the importance of reinforcing even more so that our scheduling system is a great tool that helps ensure we are staffed at the right levels and at the right times for our customers.

When we combine that with a thorough understanding of our employees' wants and needs and our managers' intuition and judgment, we're able to create schedules that optimize our business, make our employees happy and therefore of course our customers happy.

We class and customize our business tools to support our employee first culture in order to ultimately benefit the business.

And then as it relates to delivery, we recognized that we needed improved system support and communication between our delivery partner and our stores to improve scheduling and on time service to our customers 100% of the time, and we've been able to implement systems integration with our delivery partner and immediately have already improved our communication, time limits and customer satisfaction.

And then on the marketing side, we're digging even deeper into our database and are executing a shift in evolution in our direct mail strategy. We believe this will impact traffic positively by more efficiently and effectively touching, communicating with, yet even hugging more often our top 30% of our customers who give us 83% of our sales.

And we're also looking at additional branding opportunities to communicate more to our customers that The Container Store can deliver the promise of an organized life to them, what that really looks like and feels like, because we know that that's what our customers need and so desperately want the deserve.

And as Kip said, we are looking under every rock, as we always have, to improve our comp store numbers, specifically traffic. We know that some of these opportunities, initiatives and enhancements are already making a difference in our fourth quarter and will continue to have even more of an impact throughout 2015 and beyond.

And then just a little bit specific to our top three key initiatives that Kip mentioned. We continue with our rollout of Contained Home and TCS Closets to all stores and we're happy with the effect they are having on customer excitement as well as our wonderful employees.

I mean it's so wonderful to see the pleasure and the great pride our employees take in delivering wonderful service around these programs to our customers. And then POP!, Perfectly Organized Perks, our customer frequency program.

To date, we have over 1.5 million customer enrolments or what we call our 'POP! Stars' since launching in all stores last July.

Early analysis shows that customers who were part of our pilot of this program in California in July of 2013 and have been in the program for over one year have increased their frequency on average by at least one visit since joining the program.

I mean that's pretty wonderful as the top 30% of our customers give us 83% of our sales and they visit our store on average about four times a year, and we know that many of our POP! Stars are in that top 30%.

So that means you're talking about many customers who visit four times a year increasing their visits by at least one more trip, and I think that's really something that we're all very excited about.

Our program should become even more relevant in 2015 as we continue to surprise and delight our POP! Stars with the deployment of additional technology to support deeper, one-on-one customized connections, offers and conversations with these loyal omni-channel customers.

And then we have Contained Home which is our in-home customized design and organization service that's currently now available in 25 stores with rollout planned next week in our White Plains and Westbury, New York stores and our Paramus, New Jersey store, and then next month Contained Home will be offered in our five San Francisco Bay Area stores, and we plan to have the service in all stores by the end of 2015.

We do remain encouraged by the services average ticket to date of over $2,000. TCS Closets, our beautiful new exclusive collection of solid, custom, built-in closet solutions. You'll remember we launched TCS Closets in our Dallas-Fort Worth market last November.

Early results of the pilot show an average ticket of significantly much more than our Contained Home average ticket of over $2,000 and rollout of TCS Closets will continue in March next launching in our four Washington DC area stores and our remaining five Texas stores, and the collection will be available in all stores by the end of 2015.

And lastly, we have wonderful new stores as we have one more store to open this fiscal year in the Phoenix area in Glendale, Arizona at Arrowhead Towne Center on February 7. Glendale will be our seventh new store in fiscal 2014, plus the one relocation we did in Oak Brook, Illinois.

And in fiscal year 2015, we plan to open two new stores including one relocation which will have us exceeding our goal of 12% square footage growth. We have secured all of these 2015 store sites and we'll announce the specific grand opening dates in our fourth quarter earnings release in April.

Thank you and I'd now like to turn it over to Jodi Taylor, our CFO, for our financial highlights.

Jodi?.

Thank you, Melissa, and good afternoon everyone. Now I'd like to review our third quarter results and then review our outlook for the year. Net sales in the third quarter were $190.9 million, up 1.4% from the third quarter of fiscal 2013. Sales in The Container Store retail business were up 2.9% to $168.5 million.

Elfa's third-party net sales increased by 1.9% in Swedish krona. However, due to the significant depreciation of the Swedish krona against the U.S. dollar, which was down almost 12% in third quarter alone, Elfa's third party net sales declined 8.6% in U.S. dollars. The translation of Elfa's net sales from Swedish krona into U.S.

dollars negatively impacted Elfa's third party net sales by approximately $2.6 million in the third quarter of fiscal 2014. We ended the quarter with 69 stores and approximately 1.73 million of gross square footage, as compared to 63 stores and approximately 1.58 million of gross square footage at the end of third quarter of 2013.

Our comparable store sales for the quarter declined by 3.5%, which included a 1.8% increase in comparable store average ticket. We were pleased that our TCS gross margin remained consistent and stable at 58.9%. Elfa segment gross margin declined 150 basis points, primarily due to a shift in sales mix.

As a result, on a consolidated basis, gross margin declined 40 basis points as the decline in Elfa gross margin was partially offset by a larger portion of consolidated net sales coming from the higher gross margin Container Store segment.

As a percentage of sales, consolidated SG&A increased 200 basis points to 49.2% in the third quarter of fiscal 2014, primarily due to deleverage of fixed cost associated with lower comparable store sales at The Container Store.

Additionally, we incurred approximately 30 basis points of incremental cost associated with implementation of our strategic initiatives at The Container Store as well as 30 basis points of incremental public company costs as we incurred a full quarter this year as compared to last year due to our IPO occurring late in the third quarter of 2013.

As previously discussed, during the third quarter of 2014, we recorded a $3.3 million non-taxable gain on the sale of one of our Elfa subsidiaries whose principal asset was a building. We also recorded a taxable gain of $560,000 on the sale of an additional building at Elfa during the third quarter, for a combined gain of $3.8 million.

Our net interest expense in the third quarter of 2014 was $4.3 million compared to $5.8 million in the third quarter of fiscal 2013, with the year-over-year decline due to lower interest rates achieved through refinancing our term loan facility at The Container Store in November 2013 as well as repayments on debt obligation.

Due to the non-taxable gain on the sale of the Elfa subsidiary, our effective tax rate for the quarter was 34.2% [compared to] [ph] negative 39.9% rate from third quarter of last year which was a direct result of the IPO related stock-based compensation expense recorded at that time which was deferred for tax purposes until the options are exercised.

Net income for the quarter was $6.2 million or $0.13 per diluted share compared to a net loss of $9.5 million or $1.39 per diluted share in the third quarter of last year. Last year's net loss per diluted share reflects $15.6 million in 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 tax affected gain on the sale of asset just mentioned and detailed in the reconciliation table in our press release, net income per diluted share for the third quarter of 2014 was $0.07 compared to adjusted net income per diluted share of $0.11 in the third quarter of 2013.

We were pleased to deliver this earnings performance despite sluggish comparable store sales performance. We were able to manage our cost well at both The Container Store and Elfa.

Turning to our balance sheet, we ended the quarter with $14 million in cash on our balance sheet, $364 million in outstanding borrowings, and combined availability on revolving credit facilities with cash on hand of $74 million.

We ended the quarter with well-managed inventory of $104 million, down 1.2% as compared to $105 million at the end of last year's third quarter despite a store count increase of almost 10%. Inventory at The Container Store retail business remained consistent year-over-year. In Swedish krona, Elfa's inventory also remained consistent year-over-year.

However, due to the depreciation of the Swedish krona against the U.S. dollar, Elfa's inventory declined in U.S. dollars. Taking this into consideration, our consolidated inventory is approximately the same as it was in the prior year as we have reacted to sales trends efficiently.

It is important to note that we've not seen any impact for the discussion with the delays at the U.S. ports and have managed through this with virtually no impact to our business to date. Now I'd like to turn to our outlook. After incorporating third quarter extra results and considering the recent strengthening of the U.S.

dollar, we expect consolidated net sales for the year to be $785 million to $795 million, comparable store sales to be at flat to down slightly, and diluted net income per share to be in the $0.52 to $0.55 range based on a weighted average of 49 million diluted shares outstanding.

We expect our tax rate for the full fiscal year 2014 on a GAAP basis to be 31%, or 41% on an adjusted basis after excluding one-time gains on the sale of an Elfa subsidiary and building as well as the nonrecurring tax benefit this year. We continue to expect our annual interest expense at today's LIBOR rates to be approximately $17.5 million.

Now I'd like to provide some more color on our implied fourth quarter guidance. One, first on sales, given our reported quarter to date sales performance and the recent strengthening of the U.S.

dollar which hurts the conversion of Elfa's revenues, our full year sales outlook now assumes fourth quarter comp to be up in the low single digit range driven by the expected impact of our planned initiatives as well as cycling the difficult fourth quarter weather from the prior year, and implied fourth quarter sales of $227 million to $237 million.

Second, on gross margin, we expect slight gross margin improvement at The Container Store due to the strengthening dollar, with a portion of this improvement to be offset by expected decline at Elfa due to sales mix. Third, we continue to expect SG&A to improve significantly as a percentage of sales year-over-year in the fourth quarter.

Fourth, we are therefore narrowing our previously issued EPS range for fiscal 2014 to $0.41 to $0.44, which implies fourth quarter adjusted EPS of $0.31 to $0.34. With that, I'd like to turn the call back over to the operator so that we can take your questions..

[Operator Instructions] Our first question comes from the line of Chris Horvers with J.P. Morgan. Please go ahead with your question..

So first a question on 3Q sales and then I'll follow-up with a question on 4Q sales. So you reported third quarter pretty solidly through it. You reported second quarter pretty solidly through the third quarter and gave guidance.

So I was curious, what deviated from your expectations in sales, sort of what happened in the last month of the quarter, was it something that happened in the mix, and then I'm focusing on the TCS segment of course?.

Chris, this is Jodi, and we don't disclose the specifics of our comps by month throughout the quarter. However, we did as you know report that our fourth quarter to date comp store sales are up 2.7% and our Elfa sale has started out well. So we certainly reflected that in our guidance that we provided to you today..

I was asking more about the third quarter coming at the low end of the range that you provided.

What deviated from your expectations in the third quarter?.

Really the quarter certainly didn't progress as we hoped. We did hope that it would be not at the lowest end of our range but certainly it was a little more challenging on the traffic side than we had originally envisioned..

Okay. And then a little bit on what you just touched on with the fourth quarter to date. Can you reflect on the last year? Obviously Elfa starts December 26 and you extended it towards the end of February last year.

So was the impact of the weather on the Elfa sale more acute in the January-February timeframe in any sense and perhaps how much you made up at the end when you extended the sale?.

Chris, I know you'll remember this, last year we extended the sale really because of the historic weather trends and really did that just to give our customers an opportunity to get into the store and be able to make those purchases that they had not been able to make during the sale..

Okay.

And the weather obviously, the timing of that was January and February, it was the time of the start of the sale?.

Absolutely. We had increment weather go all the way through the end of the fiscal year, and as you'll recall for us with our fourth quarter having both the holidays and the annual Elfa sale, that is obviously more significant or is significant to us in terms of an impact..

Okay. And then squeeze one last one in, when you launched POP! Star, you talked about the customers really wanting more communication from The Container Store and that's what POP! Star enabled.

So I'm curious what you've learned so far that surprised you one way or the other? And then you mentioned that incremental one trip plus from those who've been in the program a year. Can you tell whether that's a four time visitor or a two time visitor? Thanks very much..

Yes, you bet, Chris. It's Melissa, I can answer that I think.

The POP! Star program, we have been extremely pleased which as I said in my remarks having 1.5 million POP! Stars, and the early analytics from these customers who were part of the original pilot test that we did in California and that have been in the program over a year as I said in my remarks, they've increased their visit by at least one trip.

And so we think that's pretty wonderful as I said, because again, the top 30% of our customers give us 83% of our sales and many of those are POP! Stars. So just think about that. If they come one more time, our top 30% come four times a year, if they come one more time, that's going to be pretty darn amazing.

So we're going to continue to collect all the data that we need to tied to each POP! Star and we're going to continue to send out generic.

Right now we're sending out generic surprise and delight offers, but as I mentioned in the beginning of this year we're going to be using more technology to customize our surprise and delight offers to them and communicate even more to them with offers and tips and all the communication that they have asked for..

Thanks very much..

Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question..

This is Joshua Siber on for Simeon today.

So you guys mentioned you don't give monthly comps, but could you possibly speak directionally how compares look for the remainder of the quarter?.

Yes, I can. You want me to take that, Jodi? I'm happy to. Josh, this is Melissa. We have been, as we always have, we are turning over every single rock and we think that we have a lot in play for this fourth quarter.

And as Kip said in his remarks, every week, every month, quarter, our initiatives, they become much more meaningful and we really have much more impact to the business. Also, this has been really recently a very price promotional retail environment and we have resisted jumping into that.

We're very, very passionate about balancing gross margin and revenues so that we lead to the highest level of profitability and we feel like without pricing power that's another key reason that our comp store sales so far to date look, have an increase of 2.7.

So we are also very, very, very well-prepared for the rest of the quarter with our Elfa sale in terms of of-course all of our training and all of our service and we are optimistic..

Okay. Just a separate topic. You rolled out Contained Home about a year ago in the Dallas area.

How does that market compare versus your expectations right now and how does it compare to the initial rollout?.

The Contained Home program, that service is really gaining momentum, and as I said, the average ticket is over $2,000. By the end of 2014, we're going to be in 33 stores. So the momentum is obviously really been – we've seen it in the Dallas market, Dallas-Fort Worth market, but we also have been encouraged as we've continued to roll it out.

The momentum continues to build and build and build.

So we'll have it in all stores right along with TCS Closets by the end of 2015, and that really breaks down to 12 stores in the first quarter of 2015, 16 stores in the second quarter, approximately 14 stores in the third quarter, and then approximately the remaining four stores in the fourth quarter of 2015..

Okay, thank you very much..

Our next question comes from the line of John Heinbockel from Guggenheim Securities. Please go ahead with your question..

I know it's early but I wanted to get some initial read on TCS Closets conceptually.

So what are you finding with consumer interest and then actual closed transactions versus your plan, number one? Number two, is that yet helping the Elfa business or is that yet to come in the stores where you have it? And then third,, what do you think it does in terms of adding to the overall quality halo of the entire store, because the presentation is so striking, what do you think – are you able to at all model what you think that does to those stores as consumers know about the product?.

John, first of all, I'm so delighted that you've been in the stores and you've seen TCS Closets and our beautiful displays, and I think it just magnifies everything. And so far we think that it definitely is helping Elfa sales and that of course is terrific. The customer reaction in the Dallas-Fort Worth market has really been very positive.

It was interesting, we had an event at the Dallas NorthPark store called Closets & Cocktails where we had about 800 customers and influencers and the media attend and we were very pleased with the response.

I think it's too early, John, or I know it's too early to really give any specific metrics on it, but the whole thing about closet domination, and John, you know I'm raising my hands about that, this is just going to add to our offering to give our customer whatever she wants, and when any consumer thinks of closets, we want her to think of The Container Store.

So it's just broadening our offering and I think it's obviously going to be a win-win for Elfa too..

The average ticket, I know you said it's north of Contained Home..

Significantly..

[Indiscernible] so judging by what I saw, could it be two to three times of the ticket of Contained Home?.

Yes. It's significant for sure..

Okay.

And then on your comment on gross margin being up slightly in the fourth quarter, I would have thought with the weakness in the krona that it could be a decent amount better than slightly, and I know you really don't like to be promotional, so my question was, is that conservatism or is there really a plan to do more on the promotional side in the fourth quarter?.

Right. I think part of the answer for you, John, this is Jodi, is that as you said, there really wasn't any measurable benefit to the gross margin in the third quarter and the benefit would be – we are expecting it to be relatively minimal into the fourth quarter and that's all been incorporated into our guidance.

Remember that we do turn currently our Elfa inventory at The Container Store about four times a year and we use an average cost inventory system, and we had really procured the vast majority of our Elfa inventory for this year's sale by the time the new surge in the dollar had occurred. So the benefit to that is really more of a future discussion.

And of course while on the whole for us the impact of a rising dollar is a good thing for us, historically you've got to offset there to the Elfa P&L that occurs, but net-net the impact on gross margin is greater than that..

So it's a next year benefit, and would I be crazy if I think about where the krona is now that that benefit would clearly be in excess of 50 basis points once it's incorporated into your P&L?.

We will make sure when we give guidance in April for fiscal '15 we'll have obviously more information at that point on where the [indiscernible] has trended. As I said, it's a good thing for The Container Store absolutely on a net basis to have the dollar go up, but I can't quantify that yet at this early juncture..

Okay, thank you..

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

So first on the quarter as they trend, you mentioned it was driven by both traffic and ticket.

I just want to clarify, is traffic a positive territory right now and do you think that it could be up for the fourth quarter?.

Matt, this is Jodi and the answer is, yes, traffic is in positive territory for the fourth quarter to date. We are seeing that 2.7% increase that we indicated coming both from a mix of traffic and ticket, which we're pleased with. As far as predicting the breakdown for the quarter, we really don't want to get that granular.

You did see our guidance was for low mid single digits for the quarter though..

Okay.

And then secondly, you mentioned in your gross margin discussion that there was an impact from the Elfa sales mix, and I just wanted to see if we could get some more color on that?.

Sure, sure. As far as at Elfa, you'll recall that they have – first of all, they do business in about 30 countries with a lot of different accounts.

They also have different product – two main product lines that have different margin components to them, one being the products like we sell here at The Container Store and then also they have sliding doors.

So the mix of sales between countries and product lines can lead to slightly different gross margin results for them between periods, and this was the primary contributor to the year-over-year decline at Elfa..

Okay, so it was a mix into sliding doors or away from and then any specific countries?.

I don't have any specific countries necessarily to call out but the mix is going, like you say, between sliding doors and the interior products, as we call them the [steel] [ph] products. Sliding doors generally tend to have a higher gross margin for them, so yes, between sliding doors and steel..

Okay.

And then just lastly on Contained Home and TCS Closets, you mentioned the average ticket for those products, I'm wondering if you'd be willing to comment on the potential frequency of sales of those items that are selling kind of one or two times per day per store, can you put any parameters around that? And then, are the customers, are the early customers for those product sets new to file or are those existing customers?.

We're not getting real specific on for the answer to your first question, but they are both new customers and existing customers..

Matt, this is Jodi. I realize I misspoke and I need to clear up something. I believe I just said that our guidance was low mid single digits. That is not what we said. I misspoke. It's low single digits..

Understood. Thanks so much..

Our next question comes from the line of Aram Rubinson with Wolfe Research. Please go ahead with your question..

I wanted to ask you a little bit more about the change you seem to be embracing.

First of all, can you help us qualify the degree of change that you are looking under all these rocks and turning over rocks, are we talking about a 5 degree turn of the wheel for the Company, are we talking about a 15 degree turn of the wheel, if you can help us with that, and then I had a follow-up?.

It's Melissa. I don't know if it's 5 to 15, I don't know the answer to that.

I can just tell you that, as I mentioned in my remarks, we have really looked at, picked up a lot of efficiencies in the back of house in our stores, we've refined our scheduling even more to optimize the business and to have happy employees and happy customers, we've made some great improvements with our delivery partner, we're touching 30% of our customers more often, we're working on branding opportunities to really continue to communicate to our customers the promise of an organized life.

During this Elfa sale, we have done incredible follow-up in our stores with our customers. For example, during our shelving sale, we had many customers purchase spaces and we followed back up with them to see if they'd like to do another space.

We've also followed up with customers who have designs in our Custom Design Center but they are not sold, we followed up with them.

We've done better than ever in the 20 years I've been with the Company in training everyone in our store that you can be an Elfa salesperson, even if you're not necessarily an Elfa designer in the Custom Design Center you can be an Elfa salesperson and sell the concept of Elfa in tag-team.

So I mean we just – and that's just a few of the many, many, many, many rocks and efficiencies that we're always looking at. So I don't know what the ultimate impact of all that is going to be, but I know it's going to be strong. And we're also doing some more specific marketing towards the end of the Elfa sale this year.

So as expected, I'm encouraged and optimistic but those are some of the many rocks that we have turned..

So one thing you did mention that I found as interesting is that opening price points are often kind of needed to make traffic happen and I didn't hear in your litany of rocks that you turned over that maybe kind of doing more opening price point instead of the better-best-exceptional doing the more traditional good-better-best, and then is turning over rocks going to be a foundational principle of the firm?.

Okay, you'll take the first?.

That was a joke..

I was just going to say, okay. I thought you were being funny on that second question.

Jodi, you want to…?.

[Indiscernible] This is Jodi. I think as it relates to the opening price point conversation, we really do that. That's really what good-better-best-exceptional is. It's showing an opening price point with our store high-quality item and working the way up the ladder to the really exceptional product that yet has a higher retail.

So I think that's what we believe is our merchandising strategy. So I'm not sure I exactly fully understand the question.

And then of course during this fourth quarter, Elfa is on sale most of this quarter, and at 30% off, that's still for us a very, very strong gross margin because of our ownership of that company and really goes back to what we talked about in our opening remarks, it just is another testament to the pricing power that we have here in our business..

I appreciate that. I'm sorry for the quote but thank you and have a good new year..

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

I just wanted to drill down a little bit more into the comp quarter to date to the extent that you can and as we consider weather, incremental comp promotions year-over-year that maybe we didn't have last year, and then just the core initiatives, just given the rough change in the pace of comp, I was wondering if you could break down how much did those three elements you thought contributed to the change?.

Dan, this is Jodi. I know Melissa walked through a long list of the things we've done that we believe have contributed to the shift in trend that we've seen. It's impossible to quantify and say this much is because of this, this much is because of that.

We really do believe it's sort of 100 things done well and different and a combination of coming together to provide us with an improving trend, and one of the things that we had said previously coming to fruition..

Okay.

What about maybe just focusing on the weather side of it, I know you don't talk really a lot about the monthly comps but it seemed like December was probably unusually soft last year, so did you try to figure out if that run rate now is sort of a real truth measure of what the end of line run rate could be over the balance of the quarter?.

I'm not sure that's an accurate statement, Dan. This is Jodi again. If you ask from a weather perspective, there was poor weather all the way through into February, and with us having the annual Elfa sale going on, it was certainly more impactful to us than a lot of folks.

And I think, to answer your other question, I think the strong consumer demand that we've seen at the start of the Elfa sale is a positive and it's certainly part of the explanation in terms of the improvement in results, and of course weather, but I won't say to you that I thought weather was worse in December than the other months, I don't believe that to be accurate..

Okay, that's helpful. And one more if I could just on the POP! program. I know that you guys were reluctant to give much color on the comp lift in the California market until you had more time under your belt. Appreciate the color on the extra visit.

I'm just curious, can you translate that into what the comp lift looks like in that market now that you've been there for a full year with the program versus the control group?.

Dan, again this is Jodi. We don't really want to start reporting comps by state or by quarter. And I think we've said, one of the things that caused us to be a little slow to give any metrics is we wanted enough time to pass for us to really feel like we had [indiscernible] a look at post and pre-behavior.

So you know that we rolled to the rest of the stores July of 2014. So it's been there now for about five months.

We need more time for that to develop to be able to look at those stores again pre and post-behavior in our database and when we feel like that's there, we will give it and that will give us some much greater sampling of information than just California..

Okay, great. Thanks. Good luck in 2015..

Our next question comes from the line of Lee Giordano with CRT Capital. Please go ahead with your question..

I was hoping you could talk a little more about new store performance, some of the stores you opened this year and how they've been relative to your expectations and maybe also relative to how the legacy stores had performed and opened up in the past?.

This is Kip. First of all, we're really happy to achieve our 12% square footage growth this year and we have only one more store to open this fiscal year in Phoenix in early February. We will hit that 12% again next fiscal year and we've been really pleased with our new store openings in 2014.

In fact, I think sort of indicative of how pleased, the one store I was the most worried about is on track to give us a mid-teens to high-teens four-wall adjusted EBITDA first year, which is wonderful.

I mean anytime you can get 15% or 20% first year four-walls EBITDA out of a new store, that's wonderful and that's the store that we were the most worried about. So these stores continue to do very, very, very well. We've said for the past year that never before have our new stores contributed so much to the bottom line of the Company.

No major surprises with any of that. We are excited about the lineup for next year with 10 locations including one relocation, and almost all those leases have been signed, they are all quite definite. So we have nothing but great things to say about what's going on real estate-wise and the performance of our new stores..

That's great. Thank you..

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

So we talked about the negative mix shift at Elfa.

Do you see this as one-off or continuing or is there actually any way to predict this?.

I did say it's a little tough to predict but it's not that significant to the results normally.

Remember that third quarter for them, Denise, is their largest quarter because they are manufacturer, so that's when their sales are generated as they're shipping to their retail accounts, their wholesale accounts in advance of their holidays, and in our case the Elfa sale.

So normally it's really not much of a discussion and certainly something that has not been anything we tried to talk about much..

Okay. And you also mentioned in terms of the outlook that in the fourth quarter SG&A would improve a lot year on year. So just wondering besides comp leverage, the release mentions disciplined expense management.

I mean are there any particular initiatives in place?.

On the expenses, we always are very, very active and on top of managing our variable costs to whatever the current sales trends are. We've proven through our history we're adept at doing that and we'll continue to do that through fourth quarter.

We certainly always look in any quarter at opportunities for any sort of evaluation of discretionary spending trends depending again upon the trend. And in fourth quarter we no longer have the public company costs during both periods, so that's no longer the discussion like it was this quarter and last quarters. It's been about a 30 basis point drag.

So, yes, I think that overall it's a combination of improved trends in sales and tight management of our costs..

Okay, thanks. And just one more.

As Contained Home and TCS Closets grow and become more material, should we expect the gross margin to be impacted either positively or negatively?.

Contained Home and TCS Closets, we are not suggesting that those will have an impact to our margin one direction or another at this juncture..

If they grow though, I mean just how do their margin fit relative to the house?.

Relatively similar..

Okay, great. Thank you..

Thank you. Ladies and gentlemen, that is all the time we have for questions for today. I would like to turn the floor back over to management for closing remarks..

We want to thank you again for joining us today and look forward to updating you in April on our fourth quarter results. Thank you very much..

Thank you. Bye-bye..

Thank you, ladies and gentlemen. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..