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 Denise Chai - Bank of America Merrill Lynch Dan Binder - Jefferies Cody Ross - Wolfe Research Matt Nemer - Wells Fargo Securities Lee Giordano - Sterne, Agee & Leach.

Greetings and welcome to The Container Store First Quarter 2015 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.

I would now like to turn the conference over to your host, Farah Soi, Investor Relations from ICR. Thank you. You may begin..

Thank you, operator. Good afternoon everyone and thanks for joining us today for The Container Store's first quarter fiscal 2015 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 will now turn the call over to Kip.

Kip?.

Thank you, Farah and good afternoon everyone. As you saw in our press release, our comparable store sales for the first quarter of fiscal 2015 were down 0.9% compared to the first quarter of fiscal 2014, exceeding our outlook for the first quarter of down 3% to 4%.

If you exclude lost sales due to West Coast port delays, which were estimated at about one percentage point, comparable store sales would have been approximately flat for the quarter. Consolidated net sales were $169.8 million down 2.1%, however they were up 0.9% when you exclude the impact of currency.

We exceeded our stated outlook for the first quarter of a loss of $0.12 to $0.14 per share and consensus estimate of a loss of $0.13 with a net loss of $0.11 compared to a net loss of $0.07 for the first quarter of fiscal 2014.

Net loss of approximately $0.03 per share for the quarter is attributable to spending on key strategic initiatives, the big tree key strategic initiatives and lost sales due to West Coast port delays.

As we had mentioned before, our first quarter historically represents about 20%, only about 20% of our annual sales and typically those generate a net loss. Our first quarter financial performance exceeded our expectations as we delivered better than forecasted comparable store sales and improved gross margin.

Jodi will cover all the financial highlights a bit later. The continued implementation of our three major strategic initiatives, TCS Closets, Contained Home and POP! remains on track, just as planned, and we’re encouraged by the start of the ‘snowballing effect’ on the results of these three big initiatives.

As we expected, we’ve seen that our stores with the strongest comp store sales are the ones that have had TCS Closets and Contained Home the longest. In fact, if we isolate our seven Dallas-area stores, TCS Closets alone added three percentage points to incremental comparable store sales to those stores in this recently just completed quarter.

So while it's early, we're very encouraged by these initial results and expect this positive impact on our business to continue and to be more apparent in the second half of '15 and into 2016. We have a laser like focus on our customer experience, which begins with ensuring that our employees are well trained, informed, happy and productive.

We've sustained very high ranks on both Fortune and Forbs Magazine's Best Employers list for many, many years as well as on many, many local market media top work price list.

We remain passionate in our devotion to nurturing our employees and culture so that our customers in turn feel loved and delighted with their TCS experience and organizational solutions.

Herb Kelleher Southwest Airlines always said we take great care of our people, they take great care of our customers and our customers take great care of our shareholders and we wholeheartedly agree.

With our second quarter in full swing we want every customer, no matter where she is shopping, in our stores, online, via a mobile device to be delighted with both the solutions that we're providing her and the service that she expects, wants and deserves.

Our customers look to us as the experts who can deliver on the promise of an organized life that all the wonderful benefits that come with an organized life, less stress, more productivity and more time to live life to the fullest, whether it's a beautiful custom TCS closet and in home visit from one of our contained home organizers on efficient, enjoyable mobile experience, we look for every opportunity to enhance and improve each facet of our customer's experience and thus our business through employee training, product differentiation and innovative technology.

So we're optimistic about where we're headed with fiscal 2015 serving as an investment year with the implementation of our major strategic initiatives continuing to roll out and mature. We remain confident in maintaining our previously stated and EPS outlook for the fiscal year.

Melissa will now give you updates on our major initiatives and some notable operational highlights.

Melissa?.

You bet. Thanks Kip and hey everyone. Appreciate you joining us this afternoon.

Yes, as Kip mentioned, we are very pleased with the rollout of our fabulous new custom closet collection with the average ticket continuing to exceed $10,000 since launch, which greatly is exceeding our day to day average ticket of approximately $60 and as TCS Closets rolls out in each our stores, we are experiencing more rapid acceptance and action by customers and our employees.

This is very encouraging, and again really speaks to that snowballing effect, Kip that you talked about.

We believe that shorter timeframe between launch and when sales are achieved is a direct result of a continued refinement and enhancement we are making in our training support, in store displays, the selling process and the overall customer's experience.

In addition, more than 90% of TCS Closets' customers have made a subsequent purchase with buying a TCS Closet, which is also pretty damn encouraging.

You may remember too that from a merchandizing, marketing and training standpoint, we are still in a void in our closet offering with the addition of an exclusive higher end custom building solution for our customers and as we thought and planned for, there was a synergistic relationship between TCS Closets and our best selling elfa shelving and drawer system, both of which are located in the custom closet section of our stores.

We've experienced a positive sales trend in both elfa sales and elfa average ticket in our stores that have had TCS Closets the longest. As expected, our customers are buying both TCS Closets and elfa as we're now able to offer them robust, custom closet options for all areas of their home.

It's about that closet domination that I think I talked about last time. We want everyone to think of The Container Store first when thinking of purchasing any type of closet solution.

We're also excited that we have launched our national marketing campaign to support TCS Closets that includes beautiful ads in the following magazines, ELLE Décor and Traditional Home, Veranda, Departures and Architectural Digest.

Our marketing plan also includes a direct mail support and select Closets and Cocktails influence of events in some of our stores. These in-store events are designed to debut our new TCS Closets collection to highly targeted customers. In addition, the campaign includes online presence, social media and public relations.

TCS Closets was available in the planned 36 stores at the end of our first quarter and is on track as we communicated to roll out to all other existing stores and the stores by the end of fiscal 2015. You can reference our press release for the specific roll out schedule.

At the end of our first quarter, Contained Home our in-home organization service was available in the planned 47 stores and is also on track to roll out to all stores by the end of fiscal 2015 and that specific schedule was also in the press release.

The contained home average ticket is approximately $2500, again much higher than our every day average ticket of approximately $60.

We are rapidly contracting with more and more contained home organizers in each of our markets and we're now up to 130 fabulous experienced organizers to date and satisfaction with our contained home service and our organizers is high with over 90% of our customers giving the service of four or five, out of five stars on our follow-up survey.

Contained home will also be supported by national marketing campaign that includes advertising and home design magazines and direct mail, online presence, social media and public relations.

And on to POP!, Perfectly Organized Perks, we've reached an excess of two million members, Our POP! Stars, we call them since launching in July of 2014 and we are adding about 25,000 stars each week.

As we enter this next phase of POP!, we will further capitalize on our customer data to create even deeper and more one on one customized connections and offers and conversations with our POP! Stars and in order to support the surprise and delight component of POP!, we're continuing to work with our wonderful vendors to create unique, special and exciting opportunities to interact with our POP! Stars and you know POP! is, it really is more than an initiative.

It's becoming kind of a new way in which we most effectively communicate with and engage with and inspire our customers. It will become the center of our customer's experience with our brand.

We will use the insights we have from each customer to guide them along their organization journey to personalize tips and product solutions most relevant to their individual life styles and we're going to continue to entice them to shop with us and we wore them along the way with exclusive access, perks, events and insights into their favorite brand in order to really deepen our engagement and their royalty.

Under our new stores, we continue to open with much fan fare and excitement. During the first quarter, we opened in Tucson, Arizona. We're selectively opening in some great smaller markets like Tucson and while sales volume may be lower, some more occupancy cost and we're able to generate very attractive profitability and return on invested capital.

We are comfortable -- we're comfortable with our growth rate and believe we have a rare business opportunity here. Opening these new stores doesn’t hurt our existing operations. We have the opening process perfected. We're also achieving superb financial terms, impressive payback and an extremely strong first year adjusted EBITDA.

We also recently opened in Overland Park Kansas at Hawthorne Plaza and that is successful opening. It was terrific with the party attended by more than 2,000 guests, lines around the building on grand opening morning eager to shop and we had fantastic media coverage.

Both Tucson and Kansas City had fantastic opening weekends and are performing to our expectations. You can see the rest of our planned stores in our press release as we will open 10 new stores this fiscal year including one relocation.

And last time we have talked with you all, we spoke about the fact that in addition to our key strategic initiatives, we're also working diligently on many other shorter term opportunities designed specifically to drive comparable store sales.

I would like to review a few of those opportunities now knowing too that we will continue to look under every rock for additional ways to drive comp store sales. One of these is our intense focus on communicating more with our best customers and doing so more frequently. These are our top 30% who have historically generated over 80% of our revenue.

As we launched our summer sale a couple of weeks ago, our marketing strategy will reflect its focus with multiple targeted direct mail touches communicating our sale message in our hundred of products on sale to help our customers live life organized.

We’re also utilizing our marketing channels featuring imagery and messaging to communicate the benefit of truly living an organized life. You will see this not only in our direct mail, but also in our national magazine ads and real simple HGTV and House Beautiful.

You will also this approach communicated in our new Life Style Blog Container Stories, which is a wonderful opportunity for our customers to becoming even more emotionally connected to our brand as able to see our innovative solutions that work in not only their lives, but our employees lives as well.

We expect the blog to stir our customer's imagination with relevant content and fresh ideas for organizations.

In conjunction with our summer sale, we also launched our newly designed website with enhanced navigation, TCS Closets, Contained Home and POP! now have more prominent presence on their home page with this redesign and we continue to strengthen our online services model in order for our time starved customers to more easily shop.

We are pleased with the initial results of our introduction of free shipping on purchases in store and online of $75 or more and we’re continuing to work on our launching click and delivery in more of our markets as well as enhanced deliver from store options.

We want to make it easy and convenient for our customers to shop with us anywhere, anytime, anyway she wants.

And our customers are really loving our new Click & Pick Up enhancements that allow them to use their smartphones to tell us when they are in the parking lot of our store, so we can immediately bring their products, their solutions out to the car, I mean talk about convenience.

And then speaking of mobile shopping experience, we just have to -- I just have to share it with retail icon Walter Loeb mentioned in a Forbes article a couple of weeks ago starting a survey that was done from last year’s holiday period by FitForCommerce.

They shopped three website, mobile sites and stores and Walter shared that the best mobile site performance was by us, The Container Store saying and I quote Walter said I know how attentive The Container Store staff is, so this best-in-class performance is no surprise to me. So we thought that was pretty cool. So thank you Walter.

And just today we launched some exciting enhancements to our Elfa custom design center that will improve our customer's experience and allow our Elfa designers to move through the design and selling process more quickly and effectively. Okay. Jodi I think it's your turn now.

Thank you so much for listening and Jody is going to do our financial highlights..

Okay. Thank you, Melissa and good afternoon everyone. Now I would like to review our first quarter results and then discuss our outlook. Net sales in the first quarter were $169.8 million, a 2.1% decline from the first quarter of fiscal 2014.

However, consolidated net sales were up 0.9% after converting elfa’s net sales result from Swedish Krona into U.S. dollars using last year's conversion rate for both periods. As Kip said, our first quarter comparable store sales were ahead of our expectations. Sales for The Container Store retail business were up 2% to $152.7 million.

Our Q1 comp was down 0.9%, which included the anticipated approximate one percentage point impact from disruptions related to the West Coast port situation. Excluding the port disruption to sales, our comp store sales were approximately flat for the quarter.

It is very important to note that starting in fiscal 2015 our comparable store sales definition includes installation and organization service revenues. Our TCS Closets offering is price and sold inclusive of installation services, which is the driver for this change.

Our Q1 and fiscal 2015 outlook provided in April, contemplated this change, which simply represents a reallocation of revenues from the non-comp bucket to the comp bucket both in fiscal 2014 and fiscal 2015 numbers for purposes of calculating the fiscal 2015 comp store change. So we added services to both last year and this year for the calculation.

We assume the comparable store sales benefit for the full fiscal year 2015, from this reallocation is about 40 basis points, which again had already been factored into out guidance from April.

Turning to elfa, elfa third party net sales were down 5.8% from the first quarter of fiscal 2014 in Swedish Krona, primarily driven by weakness in the Russian market price where in fiscal 2014 also derived approximately 10% of their third party sales, combined to this with lower sales in Norway. Additionally the strengthening of the U.S.

dollar against the Swedish Krona led to a negative conversion impact of $5.2 million in the first quarter of fiscal 2015. The Swedish Krona depreciated approximately 31% against the U.S. dollar during first quarter of fiscal 2015. Largely as a result of this conversion impact, elfa's third party net sales in U.S. dollars declined approximately 28%.

We ended the quarter with 71 stores and approximately $1.8 million of growth square footage as compared to 66 stores and approximately $1.65 million of growth square footage at the end of the first quarter of 2014.

Now on to profitability, on a consolidated basis, gross margin increased 40 basis points due to the higher mix of TCS sales when compared to the prior year period. Our TCS gross margin was 58.2% in line with the first quarter of fiscal 2014. As a modest increase in gross margin due to the strengthening of the U.S.

dollar against the Krona was offset by a shift in timing of Elfa product offers, the introduction of everyday free shipping on orders over $75 combined with a shift in product and services mix. Elfa segment gross margin was 39.3% down 160 basis points primarily due to higher freight cost.

As a percentage of sales consolidated SG&A increased 290 basis points to 55.3% in the first quarter of fiscal 2015, which was largely in line with our expectations.

The 290 basis point change was primarily due to the impact of a larger percentage of total net sales coming from the Container Store retail business combined with increased healthcare cost, the expected increased cost related to strategic initiatives and deleveraging of occupancy cost.

Our net interest expense in the first quarter of fiscal 2015 was $4.2 million, compared to $4.3 million in the first quarter of fiscal 2014. Our effective tax rate for the quarter was 36.7% compared to 35% in the first quarter of last year.

Net loss for the quarter was $5.2 million or $0.11 per diluted share compared to net loss of $3.6 million or $0.07 per diluted share in the first quarter of last year.

This is inclusive of the approximate $0.01 EPS drag from the port related disruptions that led to lost sales and higher freight cost in first quarter as well as the approximate $0.02 Q1 drag from spend on our initiative, both of which were contemplated in our Q1 EPS guidance that we share with you back in April.

Turning to our balance sheet, we ended the first quarter with $10 million in cash, $346 million in outstanding borrowings and combined availability on revolving credit facilities in cash on hand of $83 million.

We ended the quarter with inventory of 9.5% compared to the end of first quarter of 2014 due to new stores, catch-up overseas of inventory associated with the port delays and timing of receipts associated with merchandized campaigns.

Since TCS Closets is custom manufactured at our supplier's facility for each customer and delivered direct to the customer, it has virtually no impact on our inventory ownerships. We hold no inventory in our stores or our distribution center. Now turning to our outlook, we remain confident in the full year outlook we provided in April.

We continue to expect consolidated net sales to the $800 million to $815 million and comparable store sales in the range of negative 2% to 0%. Diluted net income per share is still expected to be in the $0.30 to $0.38 range based on the weighted average of $49 million diluted shares outstanding.

This outlook still includes an anticipated $0.06 per diluted common share headwind related to the implementation of our initiative, $0.02 of which was realized in Q1. It also includes the $0.01 drag related to the Q1 port delays and higher associated freight costs.

We continue to 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. Our average SEK rate assumptions to this year remains very close to what we originally articulated.

We, expect the conversion rate of approximately 8.6 for our P&L in fiscal 2015 as compared to the actual average rate of SEK7.15 in fiscal 2014. For the second quarter specifically we expect an average SEK rate of 8.6. Since elfa’s SEK sales will convert to fewer U.S.

dollars, we expect FX to be a drag of approximately $15 million on our consolidated fiscal 2015 sales. This FX outlook while the sales 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.

As a reminder, we’ve currently hedged for approximately 55% of our SEK purchases of elfa products at TCS and are estimating an average rate of approximately SEK8.2 in our cost of sales at TCS. We continue to expect this to be most impactful in the fourth quarter when we sell a considerable amount of elfa during our annual elfa sales.

We still plan to invest approximately $4.5 million in SG&A in our initiatives in fiscal 2015 or $0.06 per diluted common share after spending $0.02 of this in the first quarter and an estimated $0.02 in the second quarter. We are assuming $0.01 per share will be spent in Q3.

We continue to expect to complete the rollout of our initiatives in fourth quarter.

Given this investment in our growth initiatives and our expectation that the sales impact of these initiatives will become even more impactful in the second half of the year, we currently expect SG&A as a percentage of net sales to deleverage similar to the magnitude of first quarter.

So in summary, we’re pleased to exceed what we said we would accomplish financially in first quarter. As Kip and Melissa discussed today in their remarks, we’re on schedule with the rollout of our strategic initiatives and are very encouraged with the early progress being made.

We’re maintaining the fiscal 2015 outlook first provided on our fourth quarter call and look forward to realizing the benefit of our initiatives as we move into the second half of fiscal 2015 and into fiscal 2016. And with that, I’d like to turn the call back over to the operator, so that we can take your questions..

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of Chris Horvers with JPMorgan. Please proceed..

Thanks. Good afternoon..

Hi Chris..

Wanted to talk a little bit more about the POP!, you gave a lot of wonderful details around Contained Home and TCS Closets, and the snowball effect.

Can you talk about what you're seeing in the POP! program? You mentioned sign-up rates, but how about the return rate in terms of follow-up shopping and how far, similar on a similar trend, how far are you along in customizing the marketing to the POP! Star and how will that -- what will that look like, by the time we get to the fourth quarter?.

Hi Chris this is Jodi. I’ll take the first part and I think Melissa will take your second part of the question. You’ll recall that the all stores primarily came online with POP! in just over a year ago or just about a year ago in July about a week ago.

So we will not yet have the information for people that have fully been in the program for more than a year except for states other than -- except for the states that rolled out prior to that.

However, we were able to confirm once again the same information we previously have provided, which if you continue to look at those -- those individuals who have been in our database prior to enrolling in POP! and they’ve now been on the POP! program for one year. So we look at their one year POP! behavior and we compare to their pre-POP! behavior.

We’re continuing to see at least one incremental visit and incremental spend as well. So we’re confirming the same statistics we previously said. We look forward to having a whole lot more stores and customers we expect mark when we move into the next quarter..

And higher average ticket. Hi Chris, this is Melissa and higher average ticket as well.

So once -- this we're anniversarying this month we'll be able to have a much better analysis to be able to communicate more, but in terms Chris customizing and communicating to our POP! Stars, we are utilizing our adobe campaign tool and we’re really excited about the data that we’re collecting.

We’re doing a lot of test and learn and we've recently with our summer sales, we’ve launched a lot of customized email to our POP! Stars. So the program is really excelling.

We’re happy about with an excess of 25,000 POP! Stars a week, now obviously that will go down as the program continue to mature, but we’re also going to get a lot of new POP! Stars from new stores.

So yeah, we’re very encouraged about the program and really do feel like it is going to kind of be the center of our brands so to speak in terms of the way we engage our best and loyal customers..

And then as a follow-up question, I think last quarter, you talked about a deferred financing program that you were going to roll out.

Can you talk about where you are in that process, and whether it will be out in time for the elfa sale in 4Q?.

Yeah, Chris we’re not ready yet to get into specifics on the timing of that or the specifics of the exact program we’re going to offer. But we do remain very excited about the potential of this given our large taken on TCS Closets and Contained Home and are looking very forward to be able to be more specific on that when we have that finalized..

Yep..

Thank you. Our next question comes from the line of John Heinbockel with Guggenheim Securities. Please proceed..

So, I wanted to drill down a little bit on the TCS impact. The 300 basis point lift in the Dallas stores, is the bulk of that direct TCS Closets, as opposed to halo for elfa, and people coming back? And then I know 90% have come back.

Do you have a sense of what percent of TCS buyers were not loyal or frequent Container Store customers before?.

Hi, John its Jodi. I’ll take the first part of that question. The three point comp lift was solely associated with TCS Closets. So in those seven stores collectively. So that was specific only to TCS Closets..

And what was the second question again John? Its Melissa?.

It’s the 90% and how do we know how many were TCS customers prior to purchasing TCS Closets?.

How many were not?.

Sorry, how many are new?.

Yeah..

I don’t have that number in front me..

We do have that data and -- but not in front of us. So we'll have to get back to you on that..

Yeah, we can get.

John, can we get back to you on that number?.

Sure. And then as a follow-up, if you think about -- I guess the math on that right would work out to be a little less than -- a bit less than one TCS Closet sold, right, per store, per week.

When you think about the 300 basis point maturation, are you seeing that, 300 for the quarter, or I guess with 300 now, is that going 300, 350, 400, how is that progressing by, I guess, by month maybe, or how do you think it progresses by quarter, as it matures?.

Well, it's the snowball image to keep in mind.

We’re not as good at this yet as we will be next month and next quarter and next year and it’s a bit like learning to play golf, but who knows what you guys score the first month, the first week, the first year and in fact with similar big hairy merchandizing initiatives in the past, they turned to give us list for about three years and then levelled off.

So we’re happy with that snowball so far, but we do believe it continues to build.

Jodi?.

Yeah and John, just as a remainder for everyone, we started March 1, this fiscal year with just the seven Dallas Fort Worth stores. So that is truly for the entire quarter the only group of stores that were there for the entire quarter and of course those stores rolled out right around Thanksgiving in November.

So as of today, we’re very proud of the fact that we’ve already 46 stores as of this day when I’m speaking to you and plan to have 49 at the end of the second quarter. So we’ve been rolling it out quite rapidly into the marketplace as you’ve seen in the rollout schedule, but some of those have still been for relatively short period of time.

So we think it’s a bit premature to speak to cadence of number of projects sold with frequency yet since this is still continuing as Kip said to build in any market..

Snowball golf game..

Thank you. Our next question comes from the line of Simeon Guttmann with Morgan Stanley. Please proceed..

Hi good afternoon. First, a follow-up to John's questions, the 90% who are returning, can you say if -- I guess they are buying from a different department, just because you can't buy an individual item from the TCS Closet.

And then I'm sure you take the tradeoff of $10,000 versus $60 any day, but can you talk about traffic in the Dallas market? Is that materially better as well than other markets?.

Yes I’m happy to take the question about traffic. We're not going to get specific as much as you might like us to with regards to that. Our focus is clearly as a team all about driving comp and we absolutely don’t -- not focus on traffic.

It’s always going to be important to us, but what’s most important with our initiatives is just driving our overall comp store sales. So that’s our focus. Clearly to your point there is a relative -- a lot of relativity comparison there between the 10,000 average ticket and that's of the 10,060.

So it clearly is having an impact on the overall sales as we’ve outlined..

Okay. And then my follow-up sorry, okay..

Go ahead Simeon..

So my follow-up, not to be too fine in details, but I believe in Kip’s scripts and then Jodi and yours, you mentioned that these initiatives should help especially in the back half of this year and into 2016.

And again not to be too acute here, but is there any seasonality in the business such that why shouldn’t we see this momentum continue to build even in the next quarter or am I reading too much into how it was awarded?.

Simeon its Melissa, I think we absolutely will and that is again the snowballing. I don’t think it’s seasonal. I think that we’re going to continue to market this collection and right along with Contained Home and it’s going to continue to build..

Yes and I think Simeon the key point here is that it’s collectively still in a small group of stores long enough to see this snowball start to change materially the overall answer yet. So in terms of how we’re thinking about that we definitely see the snowball as getting bigger as you move through the second half..

We’re evolving each aspect of it as we live with this thing. It really is like learning to play the game of Golf. You’re not very good the first week or month and you learn adjustments to make. We’re adjusting to displays.

We’ve adjusted -- we’re adjusting everything that we do with these three big initiatives weekly, really probably almost daily, particularly the training and we’re training, we’re getting better and better at it and we're still not very good at it is a good news. We're going to be a whole lot better at it in the future..

The design process, the props, the displays, the signage we continue to refine and enhance and just learn everyday and make it better and better..

I would say we're not very good at it. We're not very good at it compared to what will be next month, next year, even two years from now, but this is our wheel house. This is Custom Closet design. That's what we do with elfa. That's what we're all about. So this is exactly what we should be focusing on and yeah $10,000 is more than $70 and so or $60.

So we’re thrilled with the average ticket contribution and encouraged by the fact that there is still a long runway for us to perfect this thing. It’s truly a custom closet that is manufactured per customer and it’s a lot to bite of than chew and we're just delighted with the early results..

That said, I think one thing that we're very proud of is that for our size of company who has taking on this initiative to roll out this TCS Closet offering and redo the entire custom closet selection section of every store including all new displays, all new props; training for all our employees, all our installers etcetera and we’ve not missed a single launch date and it has really gone very, very smoothly, which we're proud of, optimistic that we'll continue..

Thank you. Our next question comes from the line of Denise Chai with Bank of America. Please proceed..

Okay. Thank you.

So just first another question on closets in Dallas, just simple math that that's 10% of your store seeing a 300 basis point comp lift, should we think of the lift to the overall comp being around 30 basis points?.

We’re not getting into the specifics, but I know I noted Denise that it's not a significant impact yet to comp. So we'll be more specific when we have more stores than it's moving the dial more materially..

Okay.

And just in terms of currency, what was the gross margin benefit in the fourth quarter and also what is embedded in your guidance given the exchange rates that you’re assuming?.

Sure, it might be helpful for me to outline a couple of things. One is what the last year rates were on the P&L for SEK rates, because that certainly comes into bearing as you’re thinking about the numbers for converting the elfa P&L. So I’ll start with that even though it’s not specific to gross margin.

First quarter of this year was the most significant. It was a 6.5 rate last year versus an 8.5 actual this year that’s the 31% difference I spoke to. Then in second quarter last year's actual average rate on the P&L was 6.8. Third quarter it was 7.3 and in fourth quarter it was 8.0 for the full year being the number I spoke to which is the 7.15.

So as you can see with that, there’s a bigger difference in FX on the P&L expected in the first quarter then there is as you proceed through to the fourth quarter to get to that total of $15 million of impact for conversion of their sales of which we realize 5.2 million in first quarter. So almost a third of it came from the first quarter.

On the margin side, I noted I know in my remarks that it was a modest number. It was approximately 50 basis points neutralized by the other items that I spoke of in detail. So that our gross margin at TCS segment was flat at 59.2% year-over-year..

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

Thank you. I was wondering if you could talk a little bit about the timing differences in the elfa business specifically that you mentioned in the formal remarks.

And then my second question was around the Closet and Contained Home profit ability versus the corporate average, how that looks, better or worse similar?.

Sure. I can take that. Your question on the timing, are you specifically talking about the comments related to gross margin? Is that what you’re referring to? Dan, I want to make sure I’m clear on your question..

Yes..

Okay. Yes, what that is pertaining to is we do what is called an elfa preferred promotion and we do that in May and June of each year. And this year the timing of that was such that customers were allowed the opportunity to use their offers when it was initially mailed both in May and June.

Whereas last year we had split the database and a portion had May and a portion had June. So we took a bit of a different strategy. So that’s what we were referring to with regards to that specific.

And then your second question I think was related to the Contained Home and TCS Closet profitability is that what you were talking about there and I think the distinction to give you there is the service component versus the product component. The product component is the same products as what we’re selling elsewhere in the store.

So they’re going to have the same retail gross margin that we sell anywhere in anyone of our 72 stores. The service component is lower. Our installation business, which is predominantly the majority of the service component runs approximately half of our product gross margin..

And there’s still inventory. The annual turn is something close to infinity and so if retail profits volume, gross margin plus annual turn it’s a bit of a Google type business model and that there is no inventory really at all.

And the margins on TCS Closets are very, very good and somewhat comparable to what we do with elfa and our other Closet organization good..

[Operator Instructions] Thank you. Our next question comes from line of Aram Rubinson with Wolfe Research. Please proceed..

Hi this is Cody Ross on for Aram Rubinson. A quick question regarding your free shipping that’s now over or under I should say $75.

How has that behavior changed with online customers? Have you seen an uptick in traffic and sales or has it remained steady since?.

Hi Cody this is Jodi and great question. We always kind of joke around here that customers widely overvalue free shipping these days, consistent with what Melissa said, we want to make sure we can give our customers what they want whenever and however they want at their convenience.

So we spoke to this a bit last quarter when we designed our free shipping -- everyday free shipping status, we intentionally said it is $75 in order to drive incremental spend. We had that in mind thinking that if we set it at that level based on test we had done that we could cover the cost of free shipping and gain incremental sales.

And of course it’s been a short period of time. We rolled it out in mid April.

So we’re clear from a relativity perspective, it’s only about six weeks in the quarter, but we have seen -- we’re very pleased with the initial response to what our customers clearly like to have this option and we were confident that ultimately it’s going to be something that will drive some net incremental sales and net incremental profit..

You’re cautious when you’re selling empty boxes to be as cavalier with free freight as many retailers but we -- so we weren’t the first on the block to do this, but it has been met with a great reaction by the customers.

The margin differential between accommodating that free freight is greatly outweighed by the incremental, truly incremental volume increase and I don't guess we have precise numbers on that yet. We’re very, very comfortable that this has been a great thing for us to do..

Great. Thank you. And if I can just follow-up with one more, if our calculations are correct, we saw NST that dropped pretty significantly in this quarter.

Have you guys seen a reason for that or can you just explain what might be going on with the new stores?.

Hi Cody, it’s Jodi again. Remember what I said if you will about the service revenues and that has moved from the non-comp side of the coin to the comp side of the coin because of TCS Closets are now being a one combined price. So I think you need to take that into consideration because on the surface that may make your calculation appear a bit worse.

We really have had no change in our views on our new stores since we issued our outlook in 2015. As Melissa noted they've opened well.

What does come into play of course is just the market in which we’re putting a store and we’ve got some great smaller markets like a Providence or a Tucson where we've opened sales volumes targeted to be a bit lower, but with the profitability still expected to be very attractive and returns to be very well, very strong as well..

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

Thanks. Good afternoon, everyone..

Hi Matt..

I didn’t hear anything on the call about second quarter comp guidance.

So I’m just wondering if there is a reason that was omitted and then also can you talk about the quarterly impact of the reallocation of installation into comps? Is it about 40 Bps per quarter or is there any variability around that?.

Sure. Hi Matt, it’s Jodi. I'll take the second one first. The quarterly impact of services we don’t expect to be significantly different quarter-to-quarter. Certainly approximate 40 basis point estimate is our best one to provide. As far as the outlook, you’ll recall that it hadn’t been our practice to provide quarterly guidance on any regular basis.

When we were doing our April outlook and releasing Q4 in thinking about the significant reset that we had to perform with regards to our strategic rebuilding initiatives and the roll out of those and all it was going to take from an investment perspective, we really felt as though we had to not only give specific guidance for the year, but also significantly reset the first quarter because the first quarter for us as you know is our lowest in terms of sales and profitability contribution.

So our approach is to stick to our annual guidance. We reiterated that as you heard today. We did speak to the fact that we expect the impact of our initiatives to be more apparent in the second half of the year and into fiscal 2016 and we certainly have reflected that in our reiteration of our annual outlook for the year..

Okay. Got it. Thanks, it’s helpful. Just one more follow-up on the model Jodi, there was a mention of a number of marketing campaigns for Closets, Contained Home as well as increased communication with best customers.

In terms of marketing spend dollars for the year, can you give us any guidance for that number? Is it still kind of a mid $30 million number? Does it start to tick higher?.

I will answer you this way. If you look at the $4.5 million expense that we have for the initiative, that’s the $0.06 that we’ve outlined for the year. Approximately half of that is marketing related.

The majority of the balance is more training related, recruitment and training, but yes, so ultimately when we get to the end of the year, for us it’s a year where we have now the POP! database growing and that allows us to communicate with our best customers in a cost effective way and it allows us to really reassess how we allocate our marketing pool.

So we’re trying to continue to be smart and efficient and analyze it carefully, but don’t anticipate any sort of massive incremental spend on marketing at all..

No, I still have that magical mix of marketing and lot of support again behind TCS Closet and the Contained Home as I outlined in the remarks..

Thank you. Our next question comes from the line of Lee Giordano with Sterne, Agee. Please proceed..

Thanks. Good evening, guys. On Contained Home it looks like the average ticket is actually going up now it’s around $2,500, used to be close to $2,000. Just maybe any color on what’s driving an increase there.

And then secondly, 130 contractors or organizers to date, how many do you think you’ll get to eventually and can you just remind us how those organizers are allocated? Are they on the P&L of employees or are they individual contractors? Thanks..

Jodi, you’ll take the first..

Yes, I will, I’ll take the first part. Hello. As it relates to your first question, which is the Contained Home average ticket, we had previous -- now keep in mind that this program has now been in place for a couple of years. So this is a much more mature program Contained Home….

And we've got over 50 stores to date..

50 of our stores as of today right and exactly 50 stores as of today. So it’s much more mature, been around much longer. So we program to-date have consistently been trending at approximately $2,500 average ticket when you include the service that the customer has elected to do which is primarily installation.

But over $2,000 number we were putting out previously was not inclusive of the service component. So we wanted to be more precise in giving you what the exact number is that would impact our comp store sales calculation since both of those numbers are part of comps..

And then in terms of the number of Contained Home organizers as I reported to-date we have about 130 and there’s not a specific number. We’re going to continue to hire as many as we need as the demand has continued to increase since snowball. So my guess is I don’t know by the end of the year it could be 200 plus for sure..

But I think the most important question is to be clear that these people are not employees. They’re professional organizers.

These professional organizers exists in every market in the country and they’re independent contractors being professional organizers and they’re already experts in this field and many of them don’t quite have the sales volume that they would like to have, but when they partner with the Container store, of course that that’s wonderful for them, it’s wonderful for us.

They’re already experts and we train and develop them with this product, which we feel and they feel is the best in the marketplace for that type of closet. And one of the great -- and two of the great things about TCS Closet is there’s virtually no inventory and the employees are not all employees. The sales force is not out employees.

So that adds to the profitability of it and we’ve been delighted in the quality of these people. They’re great customers, because they’re buying our goods for their business anyway and this really makes it to where their employees without being on the payroll and just pay the commission on performance..

And the Container organizers, they’re the complete store inclusive of course of TCS Closets..

Great. Thank you very much..

You bet..

Thank you. At this time, I’d like to turn the call back over to Management for any closing remarks..

Well, thank you very much everyone. We’ve really enjoyed speaking with you today and we look forward to speaking with you next time to give you some more updates on the initiatives and overall business. Thank you all very much..

Thank you..

Bye, bye..

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