Farah Soi - IR, ICR Inc. William Tindell - Chairman and Chief Executive Officer Melissa Reiff - Chief Operating Officer Jodi Taylor - Chief Financial Officer.

Joshua Siber - Morgan Stanley Seth Sigman - Credit Suisse Chris Horvers - JPMorgan John Heinbockel - Guggenheim Securities Matt Nemer - Wells Fargo Securities Dan Binder - Jefferies Denise Chai - Bank of America Merrill Lynch Lee Giordano - Sterne, Agee & Leach.

Greetings and welcome to The Container Store Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now turn the conference over to your host, Mr.

Farah Soi of ICR. Thank you, Mr. Soi. You may now begin..

Thank you, operator. Good afternoon, everyone, and thanks for joining us today for The Container Store’s second 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 comp store sales were up 0.1% this quarter compared to second quarter of fiscal 2014.

Consolidated net sales were $195.5 million, up 1.2% compared to the second quarter of fiscal 2014, after converting the Elfa International AB portion of consolidated net sales from Swedish krona to U.S. – to the U.S. dollars.

Elfa International AB third-party net sales for the second quarter of fiscal 2015 were SEK135.2 million, up 7.2% compared to the second quarter of fiscal 2014. Converting Elfa International AB third-party net sales to U.S.

dollars reduced the consolidated net sales from 3.1% to 1.2%, or $3.8 million for the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014 using the prior year conversion rate for both periods.

Consolidated net income per diluted share EPS was $0.06 for the second quarter, reflecting, as planned, approximately $0.02 per diluted share attributable to spend for our key strategic initiatives.

Fiscal 2015 continues to serve as an investment year for us, as we take the necessary steps to properly and fully support employee training, customer service improvements and marketing for our strategic initiatives. Accordingly, we believe the biggest impact of these initiatives, these major three initiatives to sales will come in 2016 and beyond.

Jodi, of course, will cover all of the – more of the financial highlights a bit later.

Our sales performance in the second quarter exceeded our expectations with positive comparable store sales, a result of even more strategic customer engagement and service initiatives, coupled with the snowballing effect of our major three initiatives, in fact, the benefit from TCS Closets to our comparable store sales more than doubled from the first quarter to the second quarter of fiscal 2015.

I’m very proud of the solid execution across our entire organization during the ongoing roll out of these major strategic initiatives, including TCS Closets, Contained Home, and our in home organization service.

With initiatives of this magnitude and complexity, we believe it’s vitally important to make the appropriate investments in order to ensure their future success.

We remain on track for the full successful rollout of these initiatives by the end of fiscal 2015, and with each market’s launch, we continue to improve our visual displays, we continue to improve our training and selling processes, and that all allows us to further leverage our investments to-date.

We have streamlined the path to purchase options for TCS Closets, which has already increased our capacity and shortened the turnaround time for custom closets orders by approximately 28% from first to second quarter. This is an important development, I think you’ll enjoy hearing Melissa talk more about it in just a moment.

We continue to evolve our customer engagement strategy with even more compelling, relevant, and strategic communications based on customers individual purchase behavior and lifestyle.

These ongoing test and learn customer touch points were allowing us to further improve the effectiveness of our customer engagement, our customer engagement efforts in order to maximize sales and profitability.

Our intense and ongoing focus on solutions-based selling and the number of units sold in each transaction also continues to become more and more impactful and is another driver of our second quarter sales increase.

We’re optimistic about where we’re headed with fiscal 2015 serving us an investment year with the implementation of these major strategic initiatives continuing to roll out and mature. Melissa will now give you some updates on those major initiatives and some notable operational highlights.

Melissa?.

You bet. Thanks, Kip, and hey, everyone. As Kip, mentioned we continue to be pleased with the roll out of our new custom closets collection TCS Closets with the average ticket exceeding $10,000 since launch, greatly surpassing our day-to-day average ticket of approximately $60.

To-date, about 20% of TCS Closets customers are considered to be brand new customers with 23% of TCS Closets customers purchasing more than one TCS Closets, which is wonderful. As Kip alluded to, we have also added a new what we call path to purchase for TCS Closets something that we have always had for Elfa.

In addition to the option of working with the Contained Home professional organizer to purchase TCS Closets, the customer can now also choose to work with one of our store-based expert salespeople to complete their purchase of TCS Closets.

These are customers who might not need or want organizing services from the Contained Home organizer, as part of their custom closet purchase, but instead want our expert TCS salesperson to work with them to complete the TCS Closets purchase.

Initially, when we rolled out TCS Closets, we thought that all customers purchasing this upscale closet solution would always want to have a Contained Home professional organizer assist them with the full transaction, and many, of course, still do.

However, we have found that we also have many customers that prefer to use our in-store expert salesperson and complete their TCS Closets purchase right in the store. We then measure and install their beautiful space in their home.

This additional path to purchase allows us to tailor our customers experience for TCS Closets even more precisely to her needs. And with this additional option as Kip said we have shortened the sales cycle by approximately 28% from first quarter to second quarter, while also increasing capacity.

TCS Closets was available in 61 stores, as planned at the end of the second quarter. The collection is on track to roll out to each new store upon its opening, and you can see the remainder of the roll out schedule in our press release.

Contained Home, our in-home organization service now has approximately 160 Contained Home organizers to-date and satisfaction with this service remains high, with over 90% of our customers saying they would recommend Contained Home to a friend. Average ticket continues to exceed $2,500 program-to-date.

Contained Home was also available in 61 stores, as planned, at the end of the second quarter and like TCS Closets is on track to roll out to each new store upon its opening, again the detail of all the roll out schedule is in our press release for you to reference.

We have now enrolled more than 2.6 million POP! Stars in the POP!, Perfectly Organized Perks, our customer engagement program since launching in July 2014, and we continue to add about 25,000 POP! Stars each week.

Ongoing analysis of the program shows that customers who have been in the program for over one year have increased their shopping frequency on average by approximately one visit since they joined the program.

This is based on looking at those customers on our database for the one-year prior to when they became a POP! Star and comparing that purchase behavior to the first-year after they joined POP!. And when doing so, we see one – we see approximately one incremental visit. This platform is a new way that we will communicate with and engage our customers.

We do so through personalized tips and product solutions most relevant to their behavior and individual lifestyle. They are enticed to shop anyway they like, in our stores, online, via mobile, and they’re rewarded along the way with tailored communications, including exclusive access, perks and events, all in order to deepen engagement and loyalty.

As Kip mentioned, our customer engagement strategy continues to evolve and this quarter we were very tailored and targeted in our customer offer strategy. Because of this, our customers responded more strongly to our communication and promotional offers this quarter, as we test and learn to maximize sales and profitability.

For instance, we helped our fabulous POP! Stars beat the heat in August. For one weekend only, we invited our POP! Stars to join us in-stores for light refreshments and snacks, as well as a 15% savings off of their purchase and a chance to win one of three daily prizes.

The promotion generated several million in sales from POP! Stars with an average ticket during the promotion period that trended above the company average. Additionally, in the last few weeks of August, we had a free installation offer for Elfa orders over $750, which was very well received and it was highly profitable for us.

Our vertical integration of Elfa International AB affords us very attractive gross margins and we prioritize any opportunities that incorporates Elfa as a result. We love our growing installation business. In fact, year-to-date as of second quarter, our percentage of Elfa spaces that are installed is almost 70%.

We used to not even offer installation, and now almost 70% of our spaces are installed. We know that the sooner we get our customers enjoying their Elfa solutions the sooner the likelihood is of them returning to purchase another Elfa space. We continue to be very pleased with our new store performance.

We opened three new stores and relocated one store during the first-half of the fiscal year to end the quarter with 73 stores with six additional new stores opening in fiscal 2015, two of which have opened and four of them currently in various stages of the opening or construction process. Last month we opened in Milwaukee and in Phoenix, Arizona.

Later this month, we’ll open in Christiana, Delaware, and we’ll round out the fiscal year with opening – openings in Oxnard, California; Sacramento California; and then Alpharetta, Georgia and we’re on track to meet our targeted 12% square footage growth for fiscal 2015. Our new store performance really does continue to be very strong.

Over the past three years, as of the end of the second quarter of fiscal 2015, the 17 new stores that were opened for 12 months had an average adjusted EBITDA margin of approximately 19% in their first-year of operation.

We’re still opening in great large metropolitan areas, in addition to select smaller markets with sales volume maybe lower, but still occupancy costs and we are able to generate very attractive profitability and return on invested capital which, of course, is our focus.

Additionally, through a myriad of efficiencies, we have substantially reduced payroll associated with opening a new store, ultimately realizing at approximate 25% reduction in our grand opening expenses when comparing the average amount spent per store – per new store opening in fiscal 2015 to fiscal 2014.

In addition to our major strategic initiatives, we continue to focus on shorter-term sales growth opportunities. This morning we announced we have signed an agreement to partner with Synchrony Financial to implement a new customer financing program, with a planned launch in spring of 2016.

Whether we are designing luxurious custom TCS Closets or Elfa spaces for our customer, or working with them directly in their homes to our Contained Home service, or customizing the perfect kitchen, office, garage, or kid’s room storage solution using our 10,000 innovative products, we want to make it even easier for our customers to organize every area of their life.

And the container store credit card will help many of our customers complete the storage and organization products and solutions that they’ve been dreaming about.

As we said in the press release, providing financing options is just another example of our increased focus on adding convenience offerings to our service repertoire that our customers expect and deserve from us, things like free shipping for orders over $75, or click and pick up orders and also enhanced delivery options.

Synchrony Financial brings a deep understanding of their retail environment and shopping preferences, and we look forward to parting with them to further drive customer engagement and loyalty. Our newly rebranded business sales function business solutions, while still in its infancy is growing at a rapid rate.

We market this area of our company as your dedicated source for storage and organization solutions for your business and more optimistic about its potential, especially as we look forward to 2016 and beyond.

We continue to focus on enhancements to our mobile and multi-channel shopping experience with improved search engine optimization, video content, and community question and answer functionality, all of which are increasing our conversion and sales.

And we’re also using our website to increase brand awareness with initiatives like our June 2015 launch of Container Stories, our Life Style Blog, which offers great content and a chance to see our products and solutions at work, improving customers’ life in real spaces.

As we continue to the second-half of our fiscal year, we’ll develop opportunities to drive greater loyalty and advocacy among our customers ensuring that wherever she shops in-store online or via mobile she delighted with her shopping experienced, and we’re enhancing her life to differentiated product solutions, expert salespeople and convenient time saving services.

So, yes, we’re excited about what’s ahead of us, as we move forward and to the really fun holiday selling season, our annual Elfa sale and, of course, all of 2016. Thanks so much. I’d now like to turn over to Jodi to review our financial highlights..

launching fee shipping on orders over $75 that we discussed last quarter. However, we remain confident that this is driving incremental sales and related gross margin dollars that more than offset the expense associated with free shipping. In second quarter, the estimated impact to consolidated gross margin rate was approximately 70 basis points.

Also, a strong response to our targeted promotional test and learn offers in second quarter, as Melissa just explained, and a growing mix of service revenue, which carries a lower gross margin than our product revenue.

Installation is our largest component of service revenue and it has a gross margin rate approximately half of TCS products gross margin rate. The estimated impact to second quarter consolidated gross margin rate was approximately 20 basis points. The gross margin decline for the quarter was partially offset by the strengthening of the U.S.

dollar against the krona. Elfa International AB gross margin improved 340 basis points to 38.1%, primarily due to improved production efficiency, as well as the shift in sales mix.

Going forward, Elfa has anniversaried the largest of the improved production efficiencies and we would expect gross margin during the second-half of fiscal 2015 to be more consistent with the prior year gross margin. On a consolidated basis, gross margin declined 60 basis points to 58.2%.

As a percentage of sales, consolidated SG&A increased 120 basis points to 47.9% in the second quarter of fiscal 2015, which was better than our expectations.

The 120 basis point change was primarily due to incremental expenses incurred at the Container Store retail business related to increased investment in store payroll, for enhanced sales floor coverage, and in the distribution center due to fulfillment of an increased number of orders shipped directly to customers, as well as expected costs incurred related to our major initiatives.

Our expenses were well managed during this quarter. Our net interest expense in the second quarter of fiscal 2015 was $4.2 million compared to $4.4 million in the second quarter of fiscal 2014. The effective tax rate for the quarter was 40.1%, compared to 17.5% in the second quarter of last year.

The increase in the effective tax rate was primarily due to $1.8 million reduction in tax expense recorded in fiscal 2014, primarily related to a refund of tax paid in a prior period, combined with a shift in the mix of domestic – projected domestic and foreign earnings.

Our net income for the quarter was $2.7 million, or $0.06 per diluted share, compared to adjusted net income of $5.1 million, or $0.11 per diluted share in the second quarter of last year.

Turning to our balance sheet, we ended the second quarter with $16.4 million in cash, $362.6 million in outstanding borrowings, and combined availability on revolving credit facilities and cash on hand of $71.5 million.

We ended the quarter with inventory up 10.5%, compared to the end of second quarter of 2014, with the increase primarily due to new stores, as well as new product introductions, largely related to Elfa products sold at the Container Store. On a per store basis, inventories increased approximately 2.5%.

As we’ve mentioned previously, since TCS Closets is custom manufactured at our supplier’s facility for each customer and delivered direct to the customer, there’s virtually no inventory associated with TCS Closets. We hold no inventory in our stores or our distribution center for TCS Closets.

Now turning to our outlook, we continue to expect consolidated net sales to be $800 million to $815 million. However, we are narrowing our outlook for the change in comparable store sales for fiscal 2015 to a range of negative 1% to zero from the previously provided negative 2% to zero.

Diluted net income per share is still expected to be in a $0.30 to $0.38 range, based on a weighted average of 49 million shares – diluted shares outstanding.

This outlook now includes an anticipated $0.07 per diluted common share headwind related to the implementation of our initiative $0.02 of which was realized in the first quarter and again in second quarter with an assumed $0.02 expected to be realized in third quarter and an additional $0.01 in fourth quarter.

We expect to complete the roll out of our initiatives in fourth quarter. We have increased our expected spend for initiatives roll out for third quarter by $0.01 due to additional incremental investments, largely in payroll-related costs for implantation and training.

This outlook also includes the $0.01 drive related to the first quarter port delays and higher associated freight costs that we discussed when reporting our first quarter results.

We continue to expect our tax rate for the full year for fiscal 2015 to be approximately 39% and our annual interest rate – interest expense of today’s LIBOR rate to be approximately $17 million.

However, due to timing and mix of earnings between third and fourth quarters, we do expect our third quarter tax rate to be approximately 44% and our fourth quarter tax rate to be slightly lower than the annual rate of 39%. Our average SEK rate assumptions for this year remain very close to what we originally articulated.

We’ve assumed an SEK 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 third quarter specifically, we’ve assumed an average SEK rate of 8.6. Since Elfa International AB’s SEK sales will convert to fewer U.S.

dollars, we continue to expect currency to be a drag of approximately $15 million on our consolidated fiscal 2015 sales. This FX outlook while a sales headwind is expected to benefit consolidated gross margins in fiscal 2015, as we benefit from TCS purchases of Elfa products in SEK.

As a reminder, we 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 by far most beneficial in the fourth quarter when we sell a considerable amount of Elfa at the Container Store during our annual Elfa sale. Specific to the third quarter of fiscal 2015, there are few items to highlight.

One, as mentioned, we expect our income tax rate in third quarter to be approximately 44%, which would then be offset by a rate in fourth quarter slightly lower than the estimated full-year tax rate of 39%.

Two, the increased initiative spend just discussed of $0.01 is expected to hit in third quarter for a total of $0.02 initiative spend in third quarter. Three, we currently expect our gross margin rate in third quarter to be approximately the same as in third quarter of last year, as we would expect the modest benefit from a stronger U.S.

dollar against the SEK to be primarily offset by the lower gross margin rate from our everyday free shipping threshold of over $75. As already mentioned, we still expect the most notable impact from the stronger U.S. dollar against the SEK to be in fourth quarter.

Four, finally, we estimate that the increase in our SG&A due to our initiative spend in third quarter will be partially offset by ongoing efforts to manage our variable expenses. Therefore, we currently expect third quarter SG&A as a percent of sales to be slightly above last year’s level.

So in summary, we’re pleased with the progress we’re making on our initiatives and the associated positive traction we’re beginning to see. 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 will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Simeon Gutman of Morgan Stanley. Please go ahead..

Hi, this is Joshua Siber on for Simeon. Can you quantify what – I know you spoke that you mentioned that the comp contribution from TCS Closets was more than doubled in Q1.

Can you quantify that and speak to ticket versus traffic growth?.

Hi, Joshua, this is Jodi. And as far as being specific, we’re not going to be; we did more than double the benefit from first quarter to second quarter for the overall comp impact, which we’re very pleased to see that snowballing effect as we’ve spoken to.

And then also as I think, based on the past, we don’t break down our sales between ticket and transaction specifically..

Okay.

My follow up to that then is the increased payroll at the DCs, do you expect that to be a headwind until you lap the introduction of free shipping next year?.

That’s a good question. And really what we hope to happen at the cost to fulfill in the distribution center, while it’s an increase over last year specifically at the distribution center is actually less than it costs us to fulfill an order in our store.

So we’re in a mode as we noted, where we have contributed some additional payroll costs to provide for additional floor coverage just to make certain we’re providing the level of excellence and service that we need for these key initiatives and for all the demands in our business.

However, we would expect over time that that would, as I said, be more than offset with savings in the store, because it is less expensive to fulfill those orders in the distribution center than it is in the stores..

Okay. Thank you very much..

Thank you. The next question is from Seth Sigman of Credit Suisse. Please go ahead..

Okay. Thanks very much. Hey, guys..

Hi, Seth..

Some real encouraging signs on TCS Closets, I guess, one of the questions that we get is just the size of the market – the addressable market.

Can you just talk about the variability that you’re seeing in TCS Closets across the stores, where it’s rolled out, particularly on the ticket side? And anything else that you’re learning that gives you confidence that there’s a bigger opportunity out there? Thanks..

Hi, Seth, this is Melissa. Well, we’ve spoken about this snowballing effect and we’re certainly seeing that. And as I said in my remarks, the average ticket is still is over $10,000. So we’re incredibly optimistic about TCS Closets and really excited to get in all stores across all markets by the end of the year.

I don’t know Kip, if you have anything else you want to add to that..

Well, the snowball seems to be ahead of where we anticipated. Snowball are a lot like running to play golf or tennis, as you get better and better out the more you do it. We are not perfect right out of the gate on this.

This is an extremely complex thing for retail to undertake and frankly, we’re very happy with our snowball, we’re getting better and better at that golf game every time we go out and play..

That’s right. And, Seth, the path to purchase that I also mentioned in my remarks really has been a part of our enhancement of the program and has really, as I said, we really reduced the sales cycle from about 28% from first quarter to second quarter, while also increasing our capacity.

So that’s a really good thing, and we’re excited about the future..

Okay, that’s helpful. And I guess my follow up is, if you look at the business excluding TCS Closets, can you just give us a sense of what you’re seeing directionally, if there’s any change from last couple of quarters your general assessment of the health of the consumer in your business? Thanks..

Hi, Seth, this is Jodi. What’s interesting for us is that you’ve heard us talk about, we have a number of key initiatives that are helping to fuel our sales.

TCS Closets, of course, is while it’s a snowball and it’s absolutely growing and it’s more than double what it was, it’s still not near the meaningful nature we expected to be to the total comps since it’s still not fully rolled out and it has been in some of these markets still for a very limited period of time.

And we also have the benefit to sales of our everyday $75 free ship, which has definitely driven some incremental sales and we’re confident also is driving incremental profitability. So, that is as well helping our sales.

And then, Melissa, I know talked in her remarks about a number of other opportunities that we have and things we’re doing, one of the biggest differentiators, of course, to us is the incredible service we have.

And we’re making sure we’re putting our money where our mouth is and really investing in that floor coverage, because we felt this so in our efforts to make sure we were controlling expenses that perhaps we were shorting our store sales for coverage more than we should and so we really made sure to make some committed investments to that throughout this year with these great initiatives..

Okay. Thank you for that..

Thank you. The next question is from Chris Horvers of JPMorgan. Please go ahead..

Thanks. Good evening. So first on the top line, so you said that benefit from TCS Closets more than doubled, I mean, is that the straight math? I mean, the number of stores who have had – who have now TCS Closets is far more than doubled.

So I guess that maybe a more direct way to ask is the experience that you had in the Dallas Fort Worth market, are you seeing similar experiences as you go into these other markets in the programs age?.

Chris, I can take that. This is Jodi, hi. We’re, in fact, seeing that when we go into the markets in fact, there are some markets that we’re seeing that it’s growing at a much greater rate than it grew when we first rolled into Dallas. And we think that’s a combination of we’re learning every single day and getting better with.

So as we’re rolling it into a market, we’re able to really we think train and maximize those customer experiences in ways that we weren’t doing when we were sort of on training we hope, but I think we were in Dallas, so that’s definitely part of it.

And then as Melissa spoke to the enhanced path to purchase has definitely shortened that timeline from when a customer is first introduced to TCS Closets to when they are making the commitment which is critical. We want to catch them while they’re still interested..

And helped with the capacity, and now 23% of our TCS Closets purchases include multiple spaces. So that’s just going to continue to be part of the whole snowball as well, Chris..

And I think it’s important to note that we also are getting better and better at implementing TCS Closets in each new store. We’re better at training. We’re better at getting salespeople familiar with it and confident of it and comfortable with it.

So the impact that it has in a brand new store is better and quicker than it was a long time ago when we first implemented it in Dallas..

Understood.

And I think people step back on the quarter and say, while I mean the margin dynamics were surprising on a gross margin line, and so why isn’t it structural right? Why isn’t the free ship rollout to the prior question something that’s going to persist, you said that was 70 basis points the growth of the service aside with installation and TCS Closets in Contained Home, why is not a persistent pressure? And then and also on the promotional side is that, because you are saying gross margin flat in the third quarter, trying to reconcile that back to the – this second quarter experiences one can maybe argument that these pressures persist?.

Hi, Chris, this is Jodi again, and that’s a great question. And absolutely, I mean, you’re well aware that at TCS we have our industry defined gross margin that’s always in the high 50s on a consolidated basis and certainly we discount far, far less than most retailers.

But simultaneously, we always want to make sure we’re looking for opportunities to be sure, we’re balancing opportunities for incremental sales with profits, particularly now that we’ve got this opportunity that we didn’t have even a year ago with over 2.6 million POP! Stars, so we can go from always having had some sort of promotion or discounting going on in our store that always broad based to now we can do it much more strategic way, much more in a test and learn basis, and really figure out very economically with e-mail, which is low cost quickly what does or doesn’t work, so we can make sure we make adjustments for the future.

Of course, remember too that much of our product assortment is proprietary exclusive, so we can always be offensive. We don’t have to be defensive with our margin, and we’ve always shown quite discipline, of course, balancing that listening to our customers and making sure we’re doing what’s best for us financially.

As far as what happens going forward, there are two factors that are known that we think will impact gross margin going forward and that is as you’ve noted, first the introduction of the free shipping and as I commented that was approximately it has been running consistently about 70 basis points to the gross margin rate, while generating incremental gross margin dollars, if you analyze that solely.

So we would expect that to continue. And the second is the growing mix of services in our sales mix mainly installation which as I noted carries a gross margin rate that’s about half of products and that in gross margin rate for Q2 was about 20 basis points. So we would expect those to go forward.

However, we also would expect the benefit of the improving dollar in third quarter to largely offset those in the third quarter. So that’s why we are messaging relatively flat..

And so the promotional, so then this promotional – undefined promotional impact in the second quarter, I guess, how much was that promotional impact, and why is that going away?.

We did some unique test and learn type activities in the second quarter. We were up against some broad based discounting and frankly the reaction to those this year was better than it was last year.

In the third quarter, the third quarter is largely driven by our shelving sale, as well as just the events we do as we head into gift wrap wonderland and the holiday season setup that we do into the Thanksgiving November period.

So we don’t really anticipate anything considerably different year-over-year other than, of course, we will continue to do some refined test and learn strategies with that growing POP database.

But that can mean a variety of things as you’ve seen things like we’ve done – we can do free promotions that we do with our vendors where we may have a free gift that we will send to limited POP! Stars that achieve whatever metrics we think are important for them to come in and drive that incremental visit to come get that gift.

So it’s not necessarily something that’s always going to be in anyway gross margin related..

Very strategic and very targeted..

Understood. Thanks very much..

The great thing about this POP promotions also is that they are primarily email oriented which cost less than a penny as opposed to our old database more catalog oriented, which cost a little less than $0.50. So these highly targeted POP store oriented test and learn promotions carry a very much lower marketing cost as well..

Thanks very much..

Thank you..

Thanks..

Thank you. The next question is from John Heinbockel of Guggenheim Securities. Please go ahead..

Hey guys one thing and they have made some tactical shifts with some of the events I’m curious how they perform so summer sale versus HRH the dorm event this year and then adding Elfa to the shelving sale, when you think about those three. How do you think they perform versus expectations they have a positive impact on traffic or ticket.

And did you learn anything you might tweak going forward?.

Hi John, it’s Jodi..

Hi..

And Melissa and I’m going to tag team a little bit on this one, but I’ll start first with college, because I think that dorm was a good example of how we’re trying to look more creative we had options for what we can do.

In the past from many years what we had done is every single store would have a college night and it was a Sunday and we do it after the store close incurred quite bit of additional cost as you can imagine to send direct mail piece to open the store and have customers come in just for two hour period in order to save money to buy back-to-school dorm stuff.

This year we decided to do two separate weekends spread apart similar discount very targeted, but primarily email focus with some direct mails to specific targeted list that we knew would be productive..

Giving them more time than just in one two and half hour event..

And more opportunities into that one night and we were pleased with the results for what occurred so our dorm events did better this year’s than they did last year and we incurred less cost to be able to implement those, so I think that’s a good example of us stepping back and not just doing promotions or even campaigns exactly the way we’ve always done them and be willing to step back into something new..

Okay, then I was going to say one of the interesting stats you had in your release the 23% of the TCS Closets purchases are multiple Closets so curious is the average ticket there then substantially greater than 10,000.

and what do we know about those 23% in terms of how loyal they are, what type of spenders they are, how much potential is there in their wallet?.

John, it’s Melissa hey well it’s still so new to really speak as specific as we would like. But I think it is super encouraging that 23% of those TCS Closet customers are purchasing more than one space. And again it’s going to continue to improve as we roll it all out.

So again the path to purchase is helping that so, so, so much our training just gets better, and better, and better. So yeah I’m we’re pleased with that and we’re also pleased John, with that stat that 20% of TCS Closets purchased by new customers so we’re encouraged..

I also think the customer financing, so it’s encouraging more of that..

Okay, thank you..

Yeah, the customer financing John, Kip says absolutely will encourage more of that..

And we also think that it may help we certainly hope it will help people when they have the change of life event like moving into new domicile, building a new house going ahead and doing all of the Closets in the home more than two or three or one or four with the customer financing we’re looking forward to see that work hand in hand with the Elfa and TCS Closets..

Thank you. The next question is from Matt Nemer of Wells Fargo Securities. Please go ahead..

Afternoon everyone..

Hello..

So, I just wanted to piggy back on something that Chris, asked about earlier.

How do we ensure that POP stars targeted POP star promotions don’t sort of retrain your best customers I mean just by reference I’m kind of waiting for the next $75 or 400 how do you keep from sort of retraining behavior?.

Hey, it’s Melissa. Well, when we designed the program, it was designed to surprised and delight our customers, our POP! Stars. And we are continuing to be creative with the offers to delight and surprise them monthly, and we’re going to continue to grow that base of $2.6 million, particularly as we roll out more stores.

So I’m not too concerned about that. Jodi, Kip, I don’t know if you have anything to add. But I really feel like those POP! Stars, we want to reward our best customer as best as possible.

And it’s not just about discounts, as you know, it is about free gifts and special events and treating them just like that example I gave in my remarks about that did include a 15% discount approaches.

But they were more excited it seemed like about coming in and having a snack and having something to drink and really having their personalized one-on-one kind of tour of the store with our salespeople. So we will continue to broaden our surprise and delight offering and be very strategic and targeted with us..

We’ve always been very stubborn about gross margin and discounting, and we believe we still do far less than the industry as a whole does. These are meant to be very strategic in nature and now with the – how personalized we can get for this POP! Stars, they can be so much more pertinent, so much more personalized in nature.

We get vendor sponsor gross margin help on things, so that it becomes sort of margin neutral and we are experimenting particularly this last quarter we experimented with a lot of different things. We never had disability for and interesting to try different things.

But what we are trying to do is to find things like a free installation, which carries with an installed closet which is high margin and high average ticket and very much potato chip.

We have always believed that a customer that buys our Elfa, particularly a customer that buys Elfa and has installed is much more likely than someone who hasn’t bought one and much more likely than someone who hasn’t had it installed to come back and buy another closet soon.

So we’re historically from merchant’s view point very big grudging about discounts, and we are trying to test and learn and try at a very creative and strategic ways that does not mortgage the future on that consistent with the way we’ve always been about discounting while trying to optimize this wonderful POP! initiatives that we are so pleased with..

And, Matt, just one more point, it’s Melissa. That additional visit that I talked about in my remarks to my POP! Stars and we compared the year prior to them joined the program in the year after, I mean, that is an incremental spend and we are seeing that and have every reason to believe that that’s going to continue and hope increase..

Okay. That’s very helpful. And then just one quick follow up, if I could.

On the customer financing offer, how big of a hurdle is that in the path to purchase for somebody that’s buying a closet system? And how will that be marketed within the store, or outside of the store?.

Well, it’s Melissa again, and Jodi you can, of course, chime in as well. But, again, we just announced this morning about this new partnership with Synchrony, which we are really excited about. So we are working on the marketing plan as we speak, and all of the specifics along with that.

But there just going to be required some training in our store – a lot of training in our store to make sure our salespeople are very comfortable with it, it’s easy to understand, it’s easy for the customer to understand as well.

Because as Kip said, we really do think that this is going to impact many, many customers who might just purchase one Elfa space, or one TCS Closets to purchase multiple. So, Jodi, you might have a couple of things to add. You were very involved in that contract..

No, we did a very exhaustive process to select our partner and to negotiate the contract and feel really good about. In the past we’ve taken here and we are going to make sure we’ve waited 37 years to launch such a program.

We’re going to make sure we launch it correctly with all the right marketing, with all the right training, and all the important things that need to go along with that to be sure it’s successful. Matt, we don’t know yet what the offering is going to entail, of course, because we’re working through that.

But one constant we continue to discuss is having, say, for example, an option, where a customer who is looking at one of these large ticket Closets or Elfa spaces, or really any products they want in the store for completion would be able to purchase with some period of time with no interest.

So we think that from a cost perspective that that would be very economical. This is not something that we’re not going to be the bank, we are not going to have the risk on this. So please rest assured it’s not a recourse type of agreement and again, we’re really excited about the partnership..

And we will market and advertise and promote and communicate this service consistent with the brand and consistent with the way we think our customers who want to receive it..

Great. That’s helpful. Thanks so much..

Thanks so much..

Thank you. The next question is from Dan Binder of Jefferies. Please go ahead..

Hi, good morning, I should say it’s Dan Binder. I had a few questions first was if you can speak to the cadence of the quarter. And then secondly 19% EBITDA margin that you cited I think it is little bit lower than where the stores were historically I was just curious what is contributing to that.

And then finally you mentioned incremental visit from the customer on the POP program I was just wondering if that incremental spend is equivalent to the average ticket higher or lower?.

Hi, Dan, it’s Jodi. Let me try to take this the first one on the cadence of the quarter you know we don’t give specifics by quarter. But we can tell you that the quarter did build and we think that is the large part related to the snowball of our initiatives as it continue to take hold and get into more market.

With regards to the EBITDA question that you asked for new stores I’m actually glad you brought up new stores, because I want to make sure that everybody understands we’re definitely very thrilled with the performance of our new stores.

And I realize that you do a calculation with the limited and information you have, but this high level calculation sometimes isn’t reflective of the actual results that we’re seeing. So at that it might be helpful to just share a few actual results to what our new stores are doing so you that information.

As you refer to, if you look at the last three years the first year performance of those 17 stores they had an average of about 19%, which is not far at all off of the IPO stat of 21%, but still extraordinarily high by retail standards for first year and very, very we’re very proud of it.

The second thing is the payback for this group of stores continues to be generally two to three years with just a few exceptions that again we’re getting a return on that investment and that’s obviously is critical.

Specific to sales this group of 17 stores has had a sales range from $4.5 million to $12 million with an average in excess of $7 million. And of course that varies from year-to-year a bit depending on the size of markets that we’re opening in.

It’s few other things just to keep in mind as you’re looking at new store productivity there of course I said the mix of stores in any given year is unique remember that in fiscal 2015 we happen to have a higher mix of smaller lower volume stores that of course meet our profitability on return target.

The other thing as we opened several stores in the later part of a quarter, which of course yield less revenue for the calculation time period perfect example is Tucson, Arizona which opened in Q1 on the very last day of the quarter.

Also remember that our comp store definition includes a store coming into the comp the beginning of the 16th month after it opened. We recall that we have a really big opening period in that first 90 days can actually be a challenge for us to come up against that volume from the opening period.

But I think in the calculation it’s looking at it after a 12 months period. So there can actually be a decline in month 14 or 13, 14, and 15.

And then finally as I talked about in the last call service revenues from our installations business is now part of our comp, but it used to reside in the non-comp revenue so you got an extra good job to provide or you’ll see less revenues attributable to new stores..

And then Jodi I think he asked about the POP and that’s been the average ticket and I think I’m right on this and this Dan this incremental visit so far is on a full average ticket purchase, but it is an incremental spend right Jodi..

Absolutely..

I just want to add an exclamation point to it Jodi so about the new stores I really feel that we have a rare business option to be with our new stores we feel as our new stores have never performed better.

Over the past three years as of quarter two the 17 new stores that were opened a year had an average adjusted first year EBITDA of approximately 19%. We think that’s fabulous and we’re really, really happy with that. So we’re really pleased to be and marching forward with our 12% square footage growth per year.

The payback is two to three years with only couple of exception. So we’re delighted in those results..

Okay. Thanks..

Thank you. The next question is from Denise Chai of Bank of America Merrill Lynch. Please go ahead..

Okay, thanks. Just a question on gross margin how much is the stronger U.S.

dollar help?.

Hi, Denise, this is Jodi. It was actually pretty nominal to the quarter it was not a huge contributor to the result for this quarter.

As I mentioned we fully expect the bulk of that benefit to be in the fourth quarter when we sell the vast majority of our Elfa and when we’ve had enough time to fully cost through the ownership of inventory that we have at lower rate..

Okay, thanks and my – I understand that you’re not going to be too specific about the dollar stores, but you continue to use this word snowballing. So just want to get behind what’s driving that.

Are you seeing better conversion rate, because of the better selling and sort of shorter selling cycle that you’re doing now is that the number of classes people are buying or are you just getting more inquiries, because more people realize you’ve got the product now?.

Denise hey it’s Melissa it’s the combination of all of that absolutely combination of all of that and as Jodi, said the we’re not the TCS Closet definitely contributed meaningfully to the comps in the Dallas Fort Worth marketing Q2, but not just quite as meaningful as it did in Q1. But so I mean yeah this is we’re seeing that for sure..

Okay, thank you.

Just one more quick one with the lower free shipping threshold how much of a list have you seen in ecommerce and where is it running now as a percentage of sales?.

You’ll see that our online sales were up about 70% in the quarter so it was a big, big boost to our online sales. And I don’t have the penetration in front of me Denise I’m sorry..

Okay, great. Thank you..

But Denise we thought about dressing up as snowballs for this call so I like to jump..

Thank you and our final question is from Lee Giordano of Sterne, Agee & Leach. Please go ahead..

Thanks. Good evening everyone. I had a question on the mark..

Hi Lee..

Hi just on the marketing plans for Closets and Contained Home just wondering how you’re getting the word out that those are now both up and running in the stores. And then in terms of the marketing spend do you anticipate any one time cost this year associated with those initiatives. Thanks..

Yeah, we’ve got a robust marketing plan for both TCS Closets to Contained Home that includes of course incredible in-store signage and print and newspaper and magazine and billboard. And yeah I mean the one time spend it’s part of our overall marketing spend for the year. It’s….

And Lee, this is Jodi specific to the one time spend that is part of the $4.5 million or the amount we’re talking about the $0.07 for overall spend for the year related to the rollout of the initiatives.

If you look at the actual spend for Q2 about $0.02 that we’ve outlined about 60% or 65% of that marketing, so this was the quarter that we started the national advertising and magazines and then continue to do all the Closets and cocktail events in a variety of markets to really get to those key influencers and but they know about this product line..

We done the Closet and cocktail in-store events now I guess and probably gosh I don’t know 8 or 9 and we have more plans and they’re really wonderful, because we target customers to come in the store that evening our chief merchant Sharon Tindell is there onsite or our TCS Closet buyer or both to present to sometimes 3, 4, 500 people and that’s another way to get the word out along with of course all the other kind of mix of marketing that we’re doing, but it’s all included in that annual marketing spend..

Okay. Thank you..

Thanks..

Thank you. I would now turn the conference back over to management for any additional and closing comments..

Well we thank you again for your time today and your ongoing support and interest in the Container Store. We’ll talk to you soon. Thanks..

Until, next time yeah..

Bye, bye guys..

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