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

Chris Horvers - JPMorgan John Heinbockel - Guggenheim Securities Simeon Gutman - Morgan Stanley Seth Sigman - Credit Suisse Cody Ross - Wolfe Research Denise Chai - Bank of America Merrill Lynch Matt Nemer - Wells Fargo Securities.

Greetings and welcome to The Container Store Fourth 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]. And now I'll turn the conference over to your host, Farah Soi. Please go ahead..

Thank you, operator. Good afternoon everyone and thanks for joining us today for The Container Store's fourth quarter and fiscal 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 website at containerstore.com. I'll now turn the call over to Kip.

Kip?.

Thank you, Farah and good afternoon everyone. As you read in our press release, fourth quarter sales of $224.3 million were up 3.4% from fourth quarter 2013 and adjusted EPS was $0.24 as opposed to $0.22 from the fourth quarter last year.

For the full year, sales were $781.9 million, up 4.5% from fiscal 2013 and adjusted EPS was $0.34 as compared to $0.33 in fiscal 2013. Our fourth quarter comparable store sales decreased 0.8%. Unfortunately, the quarter did not conclude according to the early in the quarter trends.

Weather was a contributing factor as we experienced winter storms during the vitally important last four days of our annual elfa sale when historically about 20% of our 50-day sales -- elfa sales occur.

And also during the last week of our 19-day sale extension went over the went over the past two years over 60% of total elfa sales during the sale extension have been realized during that time of the week. Additionally, the stronger U.S. dollar had a significant impact on the conversion of our Elfa subsidiary reported sales.

Weather and foreign exchange headwinds aside, our sales performance fell short of our expectations in fourth quarter and in fiscal 2014. We can and will do better. Jodi will outline in more detail our financial results for the fourth quarter and fiscal 2014 a little later.

We focused on strengthening our business as we build for the future in order to create long-term value for all our stakeholders.

We remain confident of, and excited about, the potential of our three key strategic initiatives; TCS Closets, Contained Home and POP! with fiscal 2015 serving as an investment year for these programs in order to bolster their longer-term success.

We’ve committed a sizeable amount of resources to sales closets in particular and it may take several quarters for us to see the ever growing impact, but we're very, very confident and excited about the benefit it will bring to our business.

We expect that like with every one of our major merchandizing initiatives that have been successful that we've introduced throughout our history, each month, each quarter that even year that they mature such complicated initiatives more and more impactful to the business and as Melissa will tell you in a minute, we're excited about the early traction we're already seeing for these three big initiatives.

We're signing up tens of thousands of new POP! Stores every week and we're seeing sharpened frequency increasing for these customers in Road and POP! program, stores that have Contained Home the longest were experiencing among the strongest overall sales in the company and TCS Closets in the Dallas-Fort Worth market where we've piloted and now also in Houston, California and DC has had an average since inception of over $10,000.

TCS Closets is experiencing so far an average ticket of over $10,000, but all those are relatively small sample size. TCS Closets is having a positive impact on comp store sales growth in those stores that have it. We'll go over a roll-out program for when TCS Closets and then other initiatives hits each of these stores.

All in all, this is very encouraging. We're also working on many shorter term opportunities to drive the business to innovate and differentiate. These are initiatives that we're also excited about that focus on driving today's sales and optimizing and enhancing our core business.

Things like communicating more frequently and effectively with our best customers, top 30% of our customers that give us approximately 83% of our sales.

We're also enhancing our already robust shopping experience through programs like free shipping and new delivery options as well through mobile with further enhanced Click & Pick Up improvements to our online elfa Custom Design Center to include walk-in closets.

The improvements to our elfa Custom Design Center that includes walk-in closets that did not include before importantly and we're increasing our focus on the solutions space selling and service that our customers have always come to expect from The Container Store and that truly differentiates us, we sell solutions not items.

Through increased measurement of service oriented metrics including a specific focus on units per transaction, we'll continue to help our customers in the truest sense of the word by giving her perfect complete solutions.

Along with this and our ongoing commitment to training and development, we're also focusing even more on leadership development programs for our employees and as a perfect complement to the launch of TCS Closets, we're in the process of developing a customer financing program that $10,000 average ticket and it's financing program we think will go hand in hand beautifully to further help TCS Closets.

So these are just a few of the many smaller shorter term initiatives in addition to our big three initiatives that you hear a lot about that we're working on. So again I am very optimistic about where we're headed.

We do see fiscal 2015 as an investment year with all of these initiatives continuing to roll out and mature is going to take a little time, but we're confident, very confident in their potential and Melissa is now going to share even more detail about those three major initiatives as well as a couple of the shorter term opportunities I just mentioned.

Melissa?.

You bet, thanks Kip and hi everyone. Yes, our three major strategic initiative TCS Closets, Contained Home and POP! continue to roll out through the end of fiscal 2015 and believe me that can't come soon enough for us.

Our employees are thrilled and ready to continue to support and launch these initiatives as they mature and roll out through the rest of the year. Staying true to our foundation principles and focus on communication and training, we're ensuring these initiatives receive all the attention and focus, fully supported and executed with excellence.

So let me give you an update please on each of them. TCS Closets, we launched a pilot at TCS Closets, our new exclusive collection of solid, custom, built-in solutions in the Dallas-Fort Worth market in November of 2014.

Each solution is custom built from the floor up using luxurious one-inch thick profile construction and exclusive finishes and gorgeous glass or solid doors, locking jewelry doors, beautiful hardware, customizable islands and soft lighting.

Every detail of the state-of-the-art customer experience has been designed to differentiate the line from other built-in closet offerings, including a very quick turnaround from time of design to purchase, delivery and installation.

These are the newest developments in design technology that we believe highly differentiate TCS Closets from other closet systems on the market. Our press release details our specific roll out for TCS Closets for the rest of fiscal 2015. We have launched TCS Closets in 18 of the 28 stores planned for the first quarter of this year.

In the second quarter 23 stores will roll out with TCS Closets followed by nine more in the third quarter and then the final three in the fourth quarter.

We ended fiscal 2014 with TCS Closets in seven Dallas-Fort Worth stores and were very pleased as Kip said with the early results of that launch again showing an average ticket to date of over $10,000.

To date, just five months into the launch in the Dallas-Fort Worth market with a small sample size of closets sold thus far, we're experiencing a notable impact to the total comp store sales growth in those stores that have it, which is an exciting signal of what the program can do again as it grows into maturity.

The Dallas-Fort Worth market was our best performing one from a comp perspective for fourth quarter and for all of fiscal 2014. We directly attribute this to the fact that the Dallas-Fort Worth market has had Contained Home, the longest and now TCS Closets.

As you can imagine because of the highly customized and manufacture to order nature, TCS Closets does have a longer selling cycle than the other solutions we sell. So we expect the most meaningful impact to sales from this initiative will come in fiscal 2016 and beyond.

We will be supporting the roll out of TCS Closets with local and national marketing, including direct mail, online, in-store events, public relations, social media and advertising and national home décor and design magazines.

Contained Home or in-home customized design organization service is available in 34 of our 70 stores at the end of fiscal 2014. Again, we shared our detailed roll out plan for Contained Home in our press release.

We’ve launched Contained Home in seven of the 12 stores planned for the first quarter and from there we’ll roll out 12 more stores in the second quarter, nine in the third quarter and the final three in the fourth quarter.

We're hiring experienced Contained Home organizers in each of our markets with the ability to quickly scale as customer demand increases. We currently have 100 professional organizers as part of our Contained Home team. And average ticket for the service of Contained Home remains strong at over $2,000 since inception.

In general, stronger sales performance is being experienced in store that have Contained Home the longest and momentum is continuing to build in those stores with incremental sales directly attributable to the service.

And POP!, Perfectly Organized Perks, our customer frequency program has now reached two million customer enrolments since launching in all stores July of 2014 and we're steadily enrolling around 30,000 customers a week.

Ongoing analysis with programs shows that customers who have been in the program for over one year have increased their shopping frequency and average by at least one visit since joining the program. And remember we’ve all anniversary the program with all stores until this year in July.

The deployment of additional technology for the customization of the POP! program in fiscal 2015 will support deeper one-on-one even more customized connections, offers and conversations with these loyal customers.

In addition to these three key strategic initiatives, Kip mentioned we're working diligently on a number of other shorter term opportunities designed specifically to drive additional traffic and sales. So I’m just going to expand a bit on a couple of them.

For instance we have an intent focus on communicating more with our best customers and doing so more frequently. These are our top 30% as Kip said who have historically generated over 80% of our revenue.

This is done by utilizing all marketing channels, incorporating imagery and messaging to communicate the benefit of a truly living and organized life.

Online services, in order for our time starved customers to more easily shop, we're strengthening our model during fiscal 2015 beginning with our most recent introduction of free shipping on purchases in store or online of $75 or more, followed by more click and deliver markets and enhanced deliver from store options.

We will continue to make it convenient for our customers to shop with us anywhere, anytime, anyway she wants. We’re also enhancing our Click & Pick Up experience making it more convenient for our customers who use their smartphones to tell us when they're in the parking lot, so we can immediately bring their products to them if they choose.

And we will continue to enhance our online elfa custom design center to make it smarter, faster and more visually engaging as well as enhancing our Elfa configurator to accommodate an even larger variety of solution opportunities.

So those are just a couple of our shorter term opportunities coupled with our three key strategic initiatives that will further energize and grow our business over the medium and long-term. And then our new stores, in fiscal 2014 we opened eight new stores inclusive of one relocation. We continue to be very pleased with our new store performance.

In fact over the past four years, the first year four-wall adjusted EBITDA margin has averaged a very positive 21.4% for stores opened more than a year and the average invested capital has been paid back in just two and half years. We opened 10 stores in fiscal 2015 inclusive of one relocation for square footage growth of 12%.

Our press release details the planned opening date for these new fiscal 2015 stores and all of our new stores will open with TCS Closets and Contained Home. Thanks so much for your attention and I would now like to turn it over to Jodi who is going to review our financial highlights..

Thank you, Melissa and good afternoon everyone. Now I would like to review our fourth quarter and full-year results and then discuss our guidance for fiscal 2015. Net sales in the fourth quarter were $224.3 million, up 3.4% from the fourth quarter of fiscal 2013. Sales in The Container Store retail business were up 5.6% to $204.7 million.

Elfa’s third party net sales increased by 6.2% in the local currency; however due to the significant depreciation of the Swedish Krona against the U.S. dollar, which was down almost 24% in the fourth quarter, Elfa’s third party net sales declined 14.9% 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 $4.9 million in the fourth quarter of fiscal 2014. We ended the quarter with 70 stores and approximately $1.8 million of gross square footage as compared to 63 stores and approximately $1.6 million of gross square footage at the end of the fourth quarter of 2013.

Our comparable store sales for the quarter declined by 0.8. As Kip said, we had a strong start to the fourth quarter after which the business softened in January and into February impacted in part by adverse weather in many of our high volume markets during our highest volume days. In addition, we were impacted by port delays in the fourth quarter.

While it’s difficult to quantify the exact impact of the port delays, our best estimate is that this cost us approximately 40 basis points in fourth quarter comparable store sales. Our TCS gross margin was 57% an increase of 30 basis points primarily due to the appreciation of the U.S. dollar against the Krona.

Elfa’s segment gross margin was 35.9% down 470 basis points primarily due to a shift in sales mix as well as higher freight cost. As a result, on a consolidated basis, gross margin declined 40 basis points.

As a percentage of sales, consolidated SG&A declined 90 basis points to 43.6% in the fourth quarter of fiscal 2014 primarily due to expense savings on marketing and other SG&A cost at elfa partially offset by decreased leverage of fixed cost at The Container Store retail business.

Our net interest expense in the fourth quarter of fiscal 2014 was $4.2 million compared to $4.3 million in the fourth quarter of 2013. Our effective tax rate for the quarter was 25.2% compared to negative 12.5% in the fourth quarter of last year.

The increase in the effective tax rate is primarily due to the release of valuation allowances on certain domestic deferred tax assets during the fourth quarter of fiscal 2013. Net income for the quarter was $13 million or $0.27 per diluted share compared to $18.3 million or $0.38 per diluted share in the fourth quarter of last year.

On an adjusted basis, excluding certain non-operating items that are detailed in the reconciliation table in our press release, net income per diluted share for the fourth quarter of 2014 was $0.24 compared to adjusted net income per diluted share of $0.22 in the fourth quarter of 2013.

Our press release issued this afternoon includes details of our full year financial performance. So I’m just going to touch on a few highlights. Sales increased 4.5% to $781.9 million driven by a 5.7% increase in Container Store retail business.

Elfa third-party sales increased 4.7% in local currency, primarily due to stronger sales in the Nordic market, but they declined 4.5% in U.S. dollars. Our comparable store sales for the year decreased by 1.4% following a 2.9% increase in fiscal 2013.

Consolidated gross margins decreased 20 basis points year-over-year to 58.6% of sales with gross margins at the Container Store increasing 10 basis points and a decline at elfa driving the consolidated decline.

Consolidated SG&A as a parentage of sales increased 40 basis points to 47.7% in fiscal 2014 primarily due to decreased leverage of fixed cost, increased cost as a result to becoming -- being a public company and the implementation of strategic initiatives.

Adjusted net income of $0.34 per diluted share based on $48.5 million diluted shares outstanding compared with $0.33 per diluted share based on 48.9 million adjusted diluted shares outstanding last year.

Turning to our balance sheet, we ended fiscal 2014 with $25 million in cash, $335 million outstanding borrowings and combined availability on revolving credit facilities and cash on hand of $98 million. Our merchants continued to manage our inventory with excellence particularly as sales didn’t meet our expectations.

We ended the year with inventory down 2% compared to the end of fiscal 2013 despite a store count increase of just over 11%. Inventory at the Container Store retail business was up 4% year-over-year. However inventory on hand was down 2%. The difference being in-transit inventory largely due to the port situation.

In Swedish Krona, elfa’s inventory was down 9%; however due to the depreciation of the Swedish Krona against the U.S. dollars, elfa's inventory declined 30% in U.S. dollars leading to the overall 2% decline in consolidated inventory.

We did experience some port related out of stock situations primarily in February and then into March and early April although we did our very best to mitigate the impact by rerouting orders to alternative ports and increasing our expected transit times for orders.

It is difficult to qualify the precise impact to our business especially since we offer multi functional solutions, but our debt estimate is approximately 40 basis points of comp impact in fourth quarter or about $800,000.

March was impacted more and we expect the first quarter sales impact of approximately $1.5 million or approximately one percentage point of comp. Additionally, we will incur higher transportation cost in the first two quarters of fiscal 2015 to get products to our distribution center. Now turning to our outlook.

For fiscal 2015 we expect consolidated net sales to be $800 million to $815 million, comparable store sales to be in the range of negative 2% to flat and diluted net income per share to be in the $0.30 to $0.38 range based on a weighted average of 49 million diluted shares outstanding.

This outlook includes an anticipated $0.06 per diluted common share headwind related to the implementation of our initiative as well as a $0.01 drag related to the port delays and higher associated freight cost.

We expect our tax rate for the full year of fiscal 2015 to be approximately 39% and our annual interest expense at today’s LIBOR rates to be approximately $17 million. Now I’d like to provide more color on our guidance for the year.

We expect typical seasonality with the first quarter generating the lowest volume sales and the fourth quarter the highest. We historically generate a loss in the first quarter and we expect that to be the case again this year exacerbated by the cost of our initiative as well as the impact of the port related delays.

Inclusive of an expected approximate $0.02 EPS impact from initiative spend as well as an expected $0.01 EPS impact from lost sales and higher freight cost associated with the port delays for our combined estimated EPS drag of $0.03, we expect our first quarter loss per share to be in the range of $0.12 to $0.14.

With regard to 2015 comp, we have our key strategic initiatives like our TCS Closets, Contained Home and POP! that we're ramping and we remain excited about their potential though their impact will begin to be felt more in the back half of the year based on the rollout plan and when sales to begin to materialize from initial rollout.

Given the factors I’ve already discussed, we expect first quarter comp to be down approximately 3% to 4%. We also assume an average SEK rate of approximately $8.7 for our P&L in fiscal 2015 as compared to the actual average rate of $7.15 in fiscal 2014. Since elfa’s SEK sales will convert to fewer U.S.

dollars, we expect FX to be a drag of approximately $16 million on our consolidated fiscal 2015 sales. This FX outlook while the sale headwind is expected to be a tailwind to consolidated gross margins in fiscal 2015 as we benefit from TCS purchases of elfa products in SEK.

We've currently hedged for approximately 55% of our SEK purchases of elfa products at TCS and are estimating an average rate of approximately $8.2 in our cost of sales at TCS. Keep in mind our inventory turns approximately four times a year. So this gross margin benefit from a weaker SEK is realized over time.

It will be minimal impact in the first half of the year, partially offset by the impact of the incremental freight already discussed due to the port situation and most impactful in the fourth quarter, when we sell a considerable amount of elfa during our annual elfa sale.

We plan to invest approximately $4.5 million in SG&A in our initiatives in fiscal 2015 or $0.06 per diluted common share. This will be disproportionally spent in the first three quarters of the year as we continue to roll our Contained Home and TCS Closets and expect to have all in place by December of 2015.

Given the investment in our growth initiatives and our expectation for comparable store sales in fiscal 2015 we expect SG&A as a percentage of net sales due to do leverage approximately 250 basis points in the first two quarters of the year and to be relatively consistent to last year as a percentage of sales into that half of the year.

In fiscal 2015, we expect to incur approximately $49 million in CapEx. The vast majority of this will be spent on our new store construction and related cost as well as implementation of our initiative such as TCS Closets. The remainder will primarily go towards our existing stores and our distribution and production facilities.

Our outlook assumes that 2015 will be an investment year with regard to initiatives and the full financial impacts will not be realized into fiscal 2016 and beyond. In summary, external headwinds in Q4 notwithstanding, the business did not perform to our expectations.

As Kip and Melissa went through, we’re focused on the implementation of all of the initiatives discussed and look forward to realizing the associated benefit as we move through fiscal 2015 and primarily in fiscal 2016. And with that I’d like to turn the call back over to operator, so that we can take your questions..

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Chris Horvers from JPMorgan..

Can you talk about, how you would diagnose your traffic problem because, year ago you talked about the weather and the customer being in the funk but the macros now better in 4Q aside extra whether you're guiding down two to three in the first quarter, extra port two.

So can you talk about what diagnose the traffic problem and can you reconcile that against the incremental strip comment. If you aren’t getting that one trip the average customer visits two to three times per year then it suggest that non-member visits are down, substantially..

Sure Chris, this is Jodi and I’ll start that. I know you entered several or asked several questions here. But let me start first with your traffic question. Our Q4 comp was primarily driven by traffic as you can imagine, weather was definitely a factor.

And of course driving traffic is always going to be important to us, but with our evolving business model and our initiative, we’re focused of course on just driving comp store sales overall. That’s really the metric where we’re aligned to driving and it's what’s certainly makes the most sense to us we believe.

Now specifically on the weather and some of the other things that happened in Q4, I think there might be some information there we could additionally share regarding that and Kip, maybe you would like to go into that just a little bit more for us..

Well as we mentioned and no one likes to talk about weather, but weather hit during the peak windows of the office sale period this year. We experienced winter storms during the all important last four days of the regular elfa sale when historically 20% or even slightly more, 20% of the 50 day sales of the elfa sale occurred.

So during those last four days of the 50-day sale, at least 20% of the sales usually occur and that was when we have that February 9, 10, 11, snowstorm that caused so many store closures for us.

And that was particularly bad in our higher volume markets and then that pushes sales into the sale extension, which you have during years of bad weather and so the 19-day sale extension, over 60% of the sale extension sales occur during the final week of the sale extension. And we got weather that untimely among as well.

So that’s kind of the weather story. We had very little weather in store closures in December and comp store sales increased. So slight increase 2.4% kind of middle weather in January and we were down 0.2%. And then we had a lot of very timely or untimely weather during February and the comp of that month was up -- down 5.9%.

So that’s a pretty dramatic thing. You have December up over two and February down six and weather certainly played a key role in that even though I hate to talk about weather..

Understood, but as you think about your guide for the first quarter down two to three even fully back out the port issue, is there something broader that weather is a problem, is there a pricing issue with the customer? Is it that you’re not getting the online sale like other retailers and hence the lowering of the free ship threshold? Is it that you depend more on sort of the halo trip when she is out shopping outside of the elfa sale timeframe?.

I think Jodi is going to take that, but no, we’re pleased with the online sales growth general, go ahead Jodi..

Yeah, Chris you pointed out obviously the port, which the port was one percentage point approximately our estimate for first quarter hit and so there really frankly is a bit more noise and uncertainty in this first quarter. So we wanted to take that into consideration with our guide for first quarter.

And also remember that first quarter is only about 20% of our full year’s sales historically. So it’s by far our lowest in terms of general importance..

Okay. Thanks very much..

Thank you. Our next question comes from John Heinbockel from Guggenheim Securities..

Hey guys, couple of things, if I think about Dallas Fort Worth as the future, right because you got everything rolled out there and it’s the most mature. So how does did that mark, I know you said that was -- it was the best comp in the fourth quarter.

But maybe a little more color could that have been positive mid single-digit or better? And then if you look at traffic and ticket, did that -- did you have solidly positive traffic in Dallas in the quarter? Just I want to sort of triangulate, if that’s the future, what can we look forward to?.

Hey John, it’s Mellissa, we’re really very happy with what we saw at the Dallas Fort Worth market with both TCS Closets and Contained Home, but we’re not going to get into specifics.

But the customers have been responding as I think you know, because you’ve been in the stores to our in-store display and our offerings and we continue to really think this is going to be a game changer like Kip said on the last call.

So, we’re just not getting into specifics on that right now, but we were very pleased and the progress is really, really strong..

Well I think you also have to understand that with these initiatives particularly TCS Closets, we’re still -- sometimes we talk about golf analogy. It’s -- you’re not quite the golfer in the first month or two that you play that you’re after two or three years. And so these are very complex sale. It's manufactured to order, non-refundable.

We plan on as we do with these big initiatives getting better later in the year, in year and year three. So those what I mentioned as, I wouldn’t look at Dallas Fort Worth as being the future. I would say it’s the beginnings of the future.

Dallas Fort Worth and everybody else will get better and better at selling TCS Closets and it’s still part of that test so far that rollout but a little bit like golf..

And we’re continuing to build the pipeline John. As you know, we’re tracking all of the engagements and the conversion to sale very carefully by Contained Home organizers as well as by store..

So secondly on the financing initiative, can you go into a little more detail on that and to what degree -- does that carry any kind of risk in terms of credit risk on your part?.

Okay. Let me go first -- John its Mellissa. Yeah, we’re really excited about this and we’re going to have more detail to share in the future, but rolling out TCS Closets with that high average ticket above $10,000 we really feel that our customers are going to respond very, very favorably to a very simple customer financing plan that we want to offer.

So yeah, we’ll have more to share, but this we’re hoping to have that in place by the end of the year..

John just to add real quick here, your question about recourse and we’re looking at a program that would have no recourse..

Okay, and then one last thing the 30% of customers like to do the 83%, remind me what their shopping frequency is what.

And where do you think that can ultimately improve to?.

Yeah John, Melissa again, yeah their shopping frequency about that top 30% is about four -- little over four times a year. The average customer is still at about 2.5..

So come in on that one time….

Exactly, so that one time incremental visit by the POP! Star I mean is huge. It really is. If they’re only shopping four if they all come one more time, which would be great. But the POP! Stars are a bit -- but most of the POP! Stars that are rolling are, are our best customers as well..

Okay. Thank you..

Thanks John..

Thank you. Our next question comes from Simeon Gutman from Morgan Stanley..

Thanks its Simeon Gutman. Looking forward on TCS Closets this may have been asked on the prior calls, but can you dimensionalize the market opportunity of higher-end installed closets just the U.S.

size if you have some estimate? And then in the small sample size you have so far, is that an elfa customer or is that a new customer to TCS? Is it someone you’ve seen before or is it entirely a new customer?.

Yeah, well on the market size of TCS Closets, most of the other -- really all of the other manufacturers in that field kind of agree that it’s frustratingly difficult, it's actually sort of impossible to quantify the size of the overall U.S. market.

And that’s because the overwhelming majority of that market is still -- is still contractors and builders and cabinetry work and it’s not something you buy through a service or a retail store.

We certainly intend and hope to we’ll endeavor to dominate that market and change that to where people are buying it more from us rather than the contractors or the handy man or that type of thing. That makes it more to quantify. It also allows for a really great opportunity we think.

The TCS Closet customer we believe to be slightly over more fluent, a little bit more traditional customer than the elfa customer and she will typically what is designed for her, she will typically that customer will use this in her master bedroom Closet and then still use elfa and the kids room and the pantry and linen Closet and the guest room even.

And there’s a little bit less traditional customer that wants elfa in her master bedroom closet. So it's best what is designed for. We've noticed actually going through it a little bit further the top 30% customer that gives 83% of our sales still buys elfa at about 102% ratio to average, but -- plus she busy everything else at more than 200%.

So she is not putting elfa in the master bedroom closet. Early indications are that this fits exactly what she is looking for, for the master bedroom closet and she will continue to buy for elsewhere in the house. It's the same customer that's why it didn't cannibalize sales during the elfa sale. We planned on that.

We designed it for that, but we're able to reasonably well confirm that we weren’t losing sales to TCS Closets during the elfa sale and that was as planned.

Does that make sense?.

Yes, do you -- it does. Do you, but there is a part of the market that is still getting a higher end closet from other retailers or some of the higher end franchises and we know a couple of these by name.

Do you know the difference between the direct market meaning through those stores like a higher end closet versus the indirect, meaning through the contractor?.

Well no. if I understand the question, nobody has been able to get it grasp for how many builders and contractors and remodel contractors and builders are doing that. That's what our competitors in this field and all our people would like to be able to quantify, but we can't.

That's why it's hard to quantify the overall market, but we believe it's huge and furthermore we hope and believe that closets are becoming more and more a thing, a little bit -- we sometimes talk about it in terms of the way that bath and kitchen were in the 70s and 80s, we believe closet before us were moving to that type of market size.

And if The Container Store could housekeeping seal approval and friendly sales people and approachability and all of that, that should -- that may in fact compete very favorably with the complexities of the builder-contractor special services like that..

Okay. And then my follow-up question is regarding the comp outlook for next year. Can you talk about just some of the assumptions that went in.

You said the port strike we know is going to hurt in Q1, does it assume the backdrop remains the same and then is there no benefit from TCS Closets or Contained Home within next year's outlook?.

Yes, I am happy to take that. We in our comp guidance and we conservatively assume very limited benefit from the initiative rollouts during fiscal 2015. We were assuming the bulk of that benefit is going to be achieved in fiscal 2016 and beyond, but for that investment expense to occur in fiscal 2015..

Thank you. Our next question comes from Seth Sigman from Credit Suisse..

Great, thanks very much. Good afternoon, guys.

Some comments earlier about some marketing savings in the quarter and some cost related to elfa in Q4, can you elaborate on the change that were made in Q4 and if maybe there are some opportunities in 2015 to offset some of the investments and some of the traffic trends that you're seeing?.

Sure, I am happy to take that Seth. As far as our expenses, we're definitely on top of our expenses. If you look at our quarter, we basically had expenses increase 1.5%, yet our overall sales increased 3.4%.

We understand that staying on top of our expenses is something that is very important and we're always trying to balance making sure that we don't in any way risk the top line by taking cuts that would in fact hurt our sales. So we're constantly looking at that. As I think you probably know about half of our expenses are variable.

The fixed side of our business a big part of that is occupancy that we can't change, but as it relates to the remaining fixed cost structure would be extremely limited in terms of increases that we're doing to the fixed cost portion of our business.

So we definitely looked at our cost structure as carefully as we can, but layered into it as we I noted the full expense associated with the roll out of the initiatives without the benefit per se..

Okay. Understood. And then you outlined a number of online initiatives for you shipping over $75 some delivery options and I know it's early, but have you seen any improvements as you've done that or is that something that you've tested in the past where you've seen some strong results? And color there would be helpful..

Yes sure Seth. This is Jodi and I am happy to take that. We have definitely tested free shipping. We have the ability to do a lot of testing and AB testing on our website and have done that over the course of several years. So that's definitely something that we have some experience in looking at.

We intentionally set the spend threshold to achieve free shipping at a level to encourage incremental average ticket.

So while we expected that we will see some slight degradation to the gross margin percentage with this move, we expect to more than offset that with split the incremental sales gross margins that we will -- the incremental sales and the related gross margins that we'll generate. So of course we will monitor it, but we have tested it before..

And we just started with this new day and day out of $75 with the order of $75 free shipping..

Yes, as far as your question on the reaction, so far customers have initially responded very favorably to it and of course it's very early. We rolled it out April 13..

Yes..

Yes, got it. All right. Thanks guys..

Thanks..

[Operator Instructions] Our next question comes from the line of Aram Rubinson from Wolfe Research..

Hi guys. It's Cody Ross filling in for Aram. One high level question and one little housekeeping question. In terms of your strategy, you guys have plenty of initiatives going on.

At any time have you guys considered revising your strategy in terms of rolling out fewer stores or redoing how you guys merchandize the store, anything like that?.

Well of course that's a question you ask yourself every day for decades. What we're looking at is 12% square footage growth. Jody mentioned that's 11% more stores for the year. 12% more square footage growth. CapEx size and that type of thing plays a role. How much real estate -- real estate development is taking place.

Therefore you get more fewer turnkey new store locations, but the bottom like boils down to we're getting, we're experiencing a wonderful more than 20% first year four-walls EBITDA on our new stores. We feel like never before have our new stores been so successful, brought more to the company.

We're doing very well and a little bit smaller size markets like Raleigh and Charlotte and what we call the Indianapolis of The Container Store, those sales were surprisingly close to what they are in Chicago and LA and the cost is quite a bit less. Look, we only had -- we only have 70 stores in 36 years.

So we really don't have to worry about us running the RPM needle into the web. We're getting great return on these new stores. We've spend much of our history growing a lot faster than this and the recession and post recessionary years were a bit like a horse in the bond that was really ready to run.

So we feel like that this is well, well within our growth capabilities. That's very much a core competency having a very easy time with it, not impacting the existing store, comp store sales and just taking advantage of that great business opportunity that we have.

12% seems right all things considered and we're confident that's the right growth target for us today..

And Cody, it's Melissa, your question about remerchandising, that is something that we do kind of on an ongoing basis and have for 36 years and I hope you get a chance to get into the stores recently that do have TCS Closets and see the displays and how we've made improvements to our elfa displays too and the propping and the styling.

You know Sharon Tindell, our Chief Merchant and her team just continue to upgrade the store on an ongoing basis and they design every new store which has its own nuance. So that's something that we talk about and look at on an ongoing basis..

And herein and your question too is these sort of art of how faster roll out TCS Closets being public now should you roll it out faster or slower it’s a very complicated initiative.

When manufacturing to order it’s even more complicated than designing somebody’s full elfa Closets and we also feel very confident that we’re hitting the right balance between pressures that we have to roll it out faster and making sure that we optimize success and I’m very proud of the way the organization is hitting that curve just right..

Thank you for that and just I guess in terms of how you're looking at it last year for you to rewind, you guys haven’t changed your thinking about any of those strategies correct like you guys are still going on the same path and trajectory that you originally planned on?.

Yes..

Okay.

And then housekeeping I think I might have missed this, did you guys discuss at all your ticket and the components of comps just how much ticket and traffic were down?.

As I just generally, this is Jodi, I had alluded to this yesterday in the first question Chris that I asked, the comp decline was primarily driven by traffic and weather of course played a huge factor into that..

Okay. Thank you very much. I appreciate it..

Thanks Cody..

Thank you. Our next question comes from Denise Chai from Bank of America Merrill Lynch..

Okay, thank you.

Can we get some color on how your comps performed across geographies for example in markets that weren’t particularly impacted by weather like in the West?.

Did you want to take Kip, sorry hi Denise it's Melissa. Yeah, there was a variation in the comp performance by geography due to weather.

If we remove just the Boston area stores, our Q4 total comps would improve by 40 basis points and if we removed the 13 stores in the Northeast including Boston and Mid-Atlantic, our Q4 comps would have been 150 basis points higher. So it definitely had an impact on our Q4 results and those of course were the areas that were impacted the most..

Well you remove the Northeast and you get positive comps or the negative comps. We keep them, so it's determined. The Northeast if you take it out….

Yes if you take all 13 of those stores, its Q4 comps would have been 150 point -- basis points higher. So that will take as positive..

Okay got it. Thank you..

Thank you..

And also -- we understand that you’re working with the luxury developer in the Dallas Fort Worth market on the Closets business. So could we kind of get more color on that and do you see that as a meaningful business in the future.

So perhaps if you could talk about some of your B2B sales initiatives and relationships?.

I see the B2B..

We’re not really working with a luxury developer in Dallas Fort Worth market for Closet business..

No it’s for Elfa..

We've spent more than a couple of years developing a new line that we call TCS Closets to Companion elfa that was manufactured elsewhere. We went out and found and partnered with the people that we thought did the best job with that type of product and have hence redesigned it.

So it’s 20 years, its 20 years newer technology, newer designs than other people in the field and that is starting out in the DSW market, but we’re rolling that out of course nationwide..

Right but Denise, its Melissa. Answering your question about B2B, we are continuing to develop that business working with people like Marriott and some others. But it’s very specific right now to elfa.

Now down the road, TCS Closets could come into play don’t know yet, but we do have some nice partnerships with some of those developers and builders particularly with specific to elfa..

Okay. Great thank you very much..

Thank you. Our next question comes from Lee Giordano from Sterne Agee..

Thanks good afternoon everybody.

Could you talk a little more about the marketing strategy as you’re rolling out TCS Closets and Contained Home, how are you getting the word out particularly to new customers that these are new efforts in your stores than you calling out the elfa thanks?.

You bet, it’s Melissa. Hi Lee we have a really robust plan, marketing plan for both TCS Closets and Contained Home that will as I think I said in my opening remarks it really will include everything from direct mail to social, to in-store, to public relations, to events in store, we're really excited about hosting what we call Closets and Cocktails.

And I think some of you may have even attended, some of you already had to really target those customers that we know real TCS Closets and will use the Contained Home service.

So yes, we're investing a lot this year in that and really excited about it, along with national and local branding on magazines and advertising that we feel that’s just perfect for us. So we’ve got a good solid plan in place..

Actually, we also have, we have the key that we have the advantage of having millions of transactions, customers that we have in our stores each year that our competitors in this space do not have -- that the few of them have, store fronts have little but no traffic.

So that’s where the origination of these stores needs to take place with wonderful sales person recognizing that this one sounds like a TCS possibility. This one sounds like an elfa one.

We're very excited about the fact that these millions of customers that are already in our stores, that already have a propensity for stores and organization and closet and that type of thing. That’s a huge leg up over our competitors in the field..

Thank you. Our next question comes from Alan Rifkin from Barclays..

Thank you. If we look at the shopping habits of your customer and the response not only to the elfa sale, that 60% of those revenues coming in the last week and 20% in the last four days.

Have you contemplated any sort of shift in the marketing strategy of these sale events perhaps shortening them in length and then increasing them in number or anything like that?.

Yeah and I wanted to change the holidays too, both of them over the fourth quarter because it's little bit like a basketball game. So all of that fourth quarter. We’ve discussed that for 30 years. The problem or the good news is that, the elfa sales take on life on its own.

It’s the customers no other, they plan on it and that’s okay, because elfa’s what we call the potato chip item. Very few people buy elfa only once. You can't eat just one. That’s why it's potato chip item.

So we believe it would take four or five years of negative comps against the elfa sale if we moved it to another time because it does have that life of its own. You could almost not market it at all and you still have a pretty good elfa sale.

Also there is a very definite after the holiday season is over kind of a natural, now that the tree is down and the relatives are gone, get the house back in order type thing. So all types of big storage items for us and other people sell unusually well during that period of time.

As the Container Store has grown into very much a national team, we certainly have taken it on the chin a few years. The year before was what we felt was the worst elfa whether would had in our history and then we thought this year because of the timing of it was even worse than that.

So I guess all odds going forward, it would rather be somewhat okay..

Thank you. And interest of time, our last question is coming from the line of Matt Nemer from Wells Fargo Securities..

Good afternoon.

I just had a follow up question on the Closets launched in Texas, I’m wondering if you could just talk to the consistency of, I realize that there have only been five months, but the consistency across the various stores, when you plug it in, does it sort of look the same in almost every store or are their differences in terms of each market the demographics of each market etcetera..

And you’re talking specific to TCS Closets, right?.

Exactly..

Again it’s just too soon to talk, it’s really address any of the other markets outside of Dallas Fort Worth, but in the Dallas Fort Worth market, we have seven stores and if I look back on the sample size of the closets we’ve sold, they are across all seven stores, more coming from some than others as you could imagine Matt, but yes all seven stores..

We're talking consistency in terms of market or sales so far, I think what Melissa is mostly alluded to sales so far because they also had it so much longer. We had noted with interest that it takes, it takes a period of several weeks for the in a new store before the sales really start moving.

That happen in Dallas and that’s happening with our new stores as well. And looking at other very large ticket retail products, that’s the case with big furniture, big kitchen designs that type of thing as well..

Thank you. I’ll now turn the call back over to our speakers for closing comments.

Well thank you very much for joining us today and we do look forward to talking to you again in July. Thank you again..

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation..