Anne Rakunas - Senior Vice President, ICR LLC Melissa Meyer Reiff - Chief Executive Officer & Director Jodi Lynn Taylor - Chief Financial Officer.

Seth I. Sigman - Credit Suisse Securities (USA) LLC (Broker) Simeon Ari Gutman - Morgan Stanley & Co. LLC Steven Forbes - Guggenheim Securities LLC Daniel Thomas Binder - Jefferies LLC Matthew J. Fassler - Goldman Sachs & Co. Erin Reilly - Barclays Capital, Inc..

Greetings, and welcome to The Container Store First Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Ms. Anne Rakunas at ICR.

Please go ahead, ma'am..

Good afternoon, everyone, and thanks for joining us today for The Container Store's first quarter 2016 earnings results conference call. Speaking today are Melissa Reiff, Chief Executive Officer; and Jodi Taylor, Chief Financial and Administrative Officer. After Melissa and Jodi have made their formal remarks, we'll open the call for questions.

Before we begin, I need to remind you that certain comments made during today's call may constitute forward-looking statements that 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 certainties that could cause actual results to differ materially from such statements. Those 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 obligations to update the forward-looking statements. Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call.

The reconciliation scheduled 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 company's website at containerstore.com. And I'll now turn the call over to Melissa.

Melissa?.

Thank you, Anne, and hi everyone. I appreciate you joining us today. I am delighted to be talking with you all this afternoon just 39 days into my new role as CEO of The Container Store. I'm very proud, humbled, and excited about our future, and thank Jeff, Sharon, and so many others who have contributed to building our amazing company.

I look forward to working closely with our entire leadership team as we chart the future course for The Container Store to drive improved, and sustained top line and bottom line performance, and execute our renewed vision and vigor for innovation and excellence on all metrics. As you may remember, fiscal 2015 was an investment year for us.

We deployed significant financial, human, and operational resources into a number of important initiatives that will help us evolve our business and strengthen our foundation for growth.

The largest initiative by far is our TCS Closets rollout to all stores that concluded December 2015, followed by our Contained Home, our in-home organization service that also rolled out to all stores by December 2015.

Another major milestone for us, was the completion of our distribution center automation project, which went live in April of 2016, and is intended to drive supply chain and payroll efficiencies.

We opened 10 new stores last year, including a relocation, and jumped to number 14 from number 27 on Fortune magazine's list of 100 best companies to work for, and that was marking our 17th consecutive year.

And as we've communicated, we embarked upon a significant cost and efficiency review throughout our entire organization to improve profitability with those efforts expected to drive sustained and substantial SG&A savings.

We remain committed to and confident in our ability to maximize the targeted results of this fiscal year 2016 SG&A savings program. Before turning to the highlights of our financial results for the first quarter, I'd like to remind everyone that what I am sharing represents the 13-week quarter ended July 2, 2016, under our new fiscal yearend.

Comp store sales for the first quarter were down 0.2% under our old comp store sales reporting method, or down 1.4% under our new method including a benefit of approximately 1.2% from the Easter timing shift and Jodi will explain further about that in just a few minutes.

During Q1, we delivered SG&A efficiencies and we achieved a meaningful 230 basis point comp stores sales lift from TCS Closets up from a 160 basis points in Q4 of 2015 using our old comp store sales reporting method, both of these being reflective of our recast fiscal year.

Our first quarter consolidated net sales were $177.4 million in fiscal 2016, a 4.4% increase to last year. Consolidated gross margin for the quarter improved 40 basis points year-over-year.

We also improved our consolidated SG&A margin by 350 basis points of which 130 basis points was largely due to our focused efforts on cost controls and efficiencies. I'd now like to show a little bit more specifics on our TCS Closets initiative.

TCS Closets continued to perform well as I mentioned providing that 230 basis point lift to comps in our first quarter and the average ticket remains consistent at approximately $10,000. And we were pleased with the results of our first quarter elfa promotion, which offers three installation on elfa purchases of $750 or more.

This year's promotion replaced one from last year during the same time period when we offered a 25% discount on all elfa purchases and elfa installation.

Customers responded favorably to this year's promotion leading to strong elfa sales during the quarter and we will continue throughout the year to explore strategic opportunities like this that support our focus on closet domination.

Also with each passing week and month, we're making incremental operational improvements to the selling and design process of TCS Closets.

We will soon roll out a new TCS Closets design tool that is intended to expedite the design process and we have recently launched a program with Salesforce intended to significantly reduce the administrative process time associated with selling TCS Closets.

This of course will allow our sales people to spend more time with customers on the sales floor, selling the product and make for a more efficient and better customer experience.

Our goal for these tools and other improvements is to allow us to capitalize more quickly on our customers' enthusiasm for TCS Closets and draw more customers into the selling process faster, while they are in the store or working with the contained home organizer.

Our new stores, we opened one new store in our first quarter in Novi, Michigan, a suburb of Detroit and we plan to open in additional seven locations including a re-location in the remainder of fiscal 2016, opening two stores in the second quarter and the remaining five in the second half of fiscal 2016.

We continue to see a number of untapped market opportunities and new stores also allow us to achieve scale on our enterprise-wide investments. So we will continue to evaluate our new store growth plan adjusting it as appropriate in response to the overall retail environment, real estate opportunities and operational priorities.

And as we mentioned last quarter, our real estate strategy includes the plan for a pilot of a reduced square footage store to open in Albuquerque, New Mexico during fiscal 2017. We believe the smaller footprint will allow us to be even more productive in smaller markets, and we'll share more on this as we get closer to fiscal 2017.

As you can tell, we have a number of strategies that give us a good foundation for our future, but we want to be more aggressive in driving changes to improve all aspects of our business.

One of those strategies is our new customer financing program, that we just launched last month July 12 with Synchrony Financial, obviously we are only a few short-weeks into the program's launch; however, we have high expectations that this new program can be another significant contributor to our focus on closet domination.

We will deploy some new merchandising initiatives beginning with the opening of our Baybrook store, in Houston this November, inclusive of an expanded custom closet department and reallocated space for more closet and storage products.

We are also continually evaluating and implementing improvements and efficiencies related to non-selling operations of our stores including things like training, reducing store tasks and merchandise processing.

And while we have seen a stronger bottom line and continue to make improvements and gain efficiencies across the business, we recognize the need for change and are strongly committed to improving the topline.

We must deliver sustained improvement, while simultaneously executing with excellence to drive the company's performance for our customers, for our employees and our shareholders, all of our stakeholders.

We are committed to driving our business forward through innovation and experimentation, drawing new and existing customers into our stores and online.

We will continue to work diligently, more swiftly and more creatively while capitalizing on our many differentiators, including our excellent customer service with well trained employees, our large assortment of unique and proprietary or exclusive products and our continued commitment to closet domination, all of this and more while supporting our strong culture.

And now, Jodi, I'd like to ask you please to through our financial results in more details..

Thank you, Melissa, and good afternoon everyone. Today, I'll be reviewing our first quarter fiscal 2016 results and then discussing our outlook for the remainder of the year.

As you are aware, we changed our fiscal year and from the Saturday closest to March 28 to the Saturday closest to March 31 of each year in order to better align our fiscal year with our business calendar.

In our fourth quarter fiscal 2015 earnings release, we included recast historical, unaudited quarterly financial information for the first three quarters of the new 2016 fiscal year. In today's earnings release, we've provided financial information for the March 2016 stub period and the recast fiscal fourth quarter of 2015.

These are also posted on our website under the investor relations link. In light of the company's fiscal year change, all references to prior year results are based on the 13 weeks ended July 4, 2015.

So, turning to our first quarter results for the three months ended July 2, 2016, our consolidated net sales were $177.4 million, up 4.4% compared to the prior year first quarter in U.S. dollars but at 4.2% when using the prior year conversion rate for both periods.

Sales for The Container Store retail business were up 5.1% to $161.2 million, primarily due to new store sales.

As noted in today's earnings release, we've revised the way we calculate our comparable store sales operating measure to reflect the point at which merchandise and service orders are fulfilled and delivered to customers excluding shipping and delivery.

In prior periods, we measured comparable store sales based on merchandise and service orders placed in that period excluding shipping and delivery, which did not always reflect when a purchase was recognized in our financial statements as net sales. This revision has no impact on prior or current period reported net sales.

I'd like to refer you to the recapped operating data table in our press release for quarterly and full year fiscal 2015 comparable store sales on this revised basis, so coming back to our results as Melissa mentioned, our first quarter comp was down 0.2% using our prior reporting method or down 1.4% based on the new reporting method.

We were very pleased that TCS Closets contributed 230 basis points of comp under both calculation methodologies. The shift in the timing of Easter benefited our first quarter 2016 comp by approximately 120 basis points.

Our stores are closed on Easter so this benefit was due to the holiday falling in April of fiscal Q1 last year versus March this year, which was in the stub period as well as in the recapped fiscal fourth quarter of 2015.

We ended the first quarter with 80 stores and approximately 2 million of growth square footage as compared to 72 stores and approximately 1.8 million of growth square footage at the end of the recapped first quarter of fiscal 2015.

Turning to Elfa International AB, Elfa's third party net sales were down 4.1% in Swedish krona, compared to the prior year period, primarily due to lower sales in Russia. This was partially offset by the positive impact of foreign currency translation in the quarter as the krona strengthened against the U.S. dollar.

During the first quarter of 2016 on average, the Swedish krona appreciated approximately 2.3% year-over-year against the U.S. dollar. As a result of this, Elfa's third party net sales in U.S. dollars declined approximately 1.8%. Now onto profitability, in the first quarter consolidated gross profit dollars increased 5.2% to $104.7 million.

Consolidated gross margin expanded 40 basis points, compared to the prior year period. This increase was driven by a 330 basis point improvement in Elfa gross margin primarily due to lower direct materials cost and production efficiencies.

Gross margin at The Container Store retail business was down 10 basis points reflecting a growing mix of lower margin products and services, partially offset by the impact of a stronger U.S. dollar. As a reminder, gross margin at TCS was impacted by prior SEK exchange rates obtained to purchase Elfa products for TCS. Moving on to SG&A.

As a percentage of sales, consolidated SG&A decreased 350 basis points to 52% in the first quarter of fiscal 2016 as compared to the prior year period, primarily due to the impact of employment arrangements entered into with key executives.

These arrangements resulted in associated reversal of accrued deferred compensation net of related cost of $3.9 million. In addition, we began to see the initial benefits from our previously announced SG&A savings program.

Pre-opening expenses decreased by approximately $500,000 to $1.1 million year-over-year as we opened one store in the current year period, as compared to two store openings in the prior year recast quarter. As a result, pre-opening expenses leveraged by 40 basis points year-over-year as expected.

Our net interest expense in the first quarter of fiscal 2016 was $4.1 million in line with the $4.2 million in the prior year period. The effective tax rate for the quarter was 33.3%, compared to 36.8% in the first quarter of last year. The decrease in the effective tax rate is primarily due to a shift in the mix of domestic and foreign earnings.

Our net loss for the quarter was $2.1 million, or $0.04 per diluted share, compared to a net loss of $5.8 million, or $0.12 per diluted share in the first quarter of last year. This includes a $0.05 per diluted share benefit resulting from the above mentioned deferred compensation accrual reversal, net of related management transition cost and taxes.

Turning to our balance sheet, we ended the quarter with $8.2 million in cash, $338 million in outstanding borrowings net of deferred financing cost, which was down approximately $19 million from the same time last year, and combined availability on revolving credit facilities and cash on hand of approximately $78.6 million.

We ended the quarter with inventory down 4.7% compared to the prior year period, with the decrease primarily due to last year's port delays and timing of subsequent inventory flow related to merchandise campaigns. Now turning to our outlook, for fiscal 2016, we continue to expect consolidated net sales to be between $830 million and $845 million.

We are also maintaining our comp store sales outlook, which is to be down 1.5% to up 0.5% using our prior reporting method, as well as our new reporting method. We're reiterating our previously provided EPS range of $0.20 to $0.30.

While we did have a benefit resulting from the accrual reversal associated with the executive employment arrangements entered into during the quarter, there are additional expense implications from the employment agreements for the remainder of fiscal 2016, that will partially offset this first quarter benefit.

This EPS range is based on a weighted average of 49 million diluted shares outstanding. We continue to expect TCS and consolidated operating margins to improve based primarily on the SG&A savings program that we have implemented.

We expect our tax rate for the full fiscal year 2016 to be approximately 39% and our annual interest expense at today's LIBOR rates to be approximately $17 million. We continue to forecast our fiscal 2016 consolidated gross margin to be relatively flat year-over-year.

On the FX front, we continue to expect minimal impact to gross margin based on current SEK US dollar purchase levels. However, by quarter this impact does vary somewhat. As expected, we experienced a slight benefit to gross margin in the first quarter.

We continue to expect moderation in the second half of the year, until we reach the fourth quarter when the benefit is currently expected to dissipate and actually become a slight headwind in the fourth quarter year-over-year.

We've recently secured SEK contract hedges to purchase approximately 40% of our Elfa products for TCS in SEK at an average rate of SEK 8.5 for fiscal 2016. For comparative purposes, our average purchase rate for SEK in fiscal 2015 was approximately SEK 8.4. Additionally, we anniversaried the introduction of free shipping over $75 in April of 2016.

So, we do expect the headwind to gross margin rate experienced in fiscal 2015 due to free shipping to dissipate and impact considerably. We also currently project minimal impact to gross margin in fiscal 2016 as compared to fiscal 2015 from promotional activity changes.

Additionally, we expect the gross margin headwinds to continue in fiscal 2015 related to the growing mix of lower margin services.

As we continue to grow the amount of TCS Closets sales, which overall currently achieve a lower gross margin rate due to the product being comprised in the larger portion of lower margin installation and delivery services.

However, we project that Elfa will continue with their supply chain improvement initiative and contribute positively to overall consolidated gross margin year-over-year and help to offset the impact of the lower margin services at TCS.

It's important to remember that although service gross margin rate is lower than that for our products, the two do go hand-in-hand and together drive higher profits. As we've previously discussed, in early fiscal 2016, we embarked upon a significant SG&A savings program.

The actions we've taken include a wage freeze for all employees, freezing of our 401k match, both of which were enacted in early March, reductions in payroll expenses throughout the business as well as numerous efforts to drive cost down throughout the entire company.

These SG&A savings are expected to become more impactful as the fiscal year progresses. The benefit from these actions expected to be realized in fiscal 2016 is embedded in our guidance where we expect meaningful expense leverage despite the comp store sales outlook. And now, I'd like to provide some color to help you with your quarterly models.

As you know, we generally provided annual and not quarterly guidance. However, with regards to second quarter our Q2 comp store sale through the first five weeks of the 13-week quarter has started out slower than first quarter and we're down mid-single digits.

While we recognize this will create challenging Q2 sales and earnings, because of the proportion of business that occurs in Q3 and Q4 as well as the merchandise and marketing programs that we plan to put in place for our third and fourth quarters combined with the expected cadence of our SG&A savings program, we reiterate our full year guidance.

From a full fiscal year perspective, it's important to remember that historically the vast majority and often all of our net income is derived in the third and fourth quarters.

As I mentioned on our call last quarter, with our recapped fiscal quarters, EPS results for Q3 and Q4 in fiscal 2015 were very similar and we expect that to be the case in fiscal 2016 as well.

This is because the month of December has moved into the third quarter, which is traditionally a high volume 5-week month that includes the holidays and the beginning of our Annual elfa Sale.

We also remain very committed to maximizing our efforts on the cost side of the business through our SG&A savings program and continue to expect that this will have a meaningful improvement to our earnings in fiscal 2016 as compared to last year despite a sluggish sales environment.

As I mentioned, we remain comfortable with our 20% to 30% EPS guidance range. So, in summary, we're pleased with the improvement we saw in our bottom line performance in first quarter, but we're very focused during fiscal 2016 on not only continuing to improve our profitability, but also building our top line sales growth.

We recognize and see the need to be more aggressive to drive changes to improve all aspects of our business while supporting our strong culture. Thank you. Now, I'd like to turn the call back over to the operator so that we can open the lines up for questions.

Operator?.

Thank you. At this time, we'll conduct a question-and-answer session. Our first question comes from Seth Sigman with Credit Suisse. Please proceed with your question..

Thanks for taking the question. Melissa, congrats on the new role..

Thank you, Seth..

I have two questions, first – I'll ask two questions upfront. There may be a cut off here, but first just on TCS Closets.

I was wondering if you can give us a sense of the sales ramp that you've observed there and how to think about comps in year two when they are up and running as we start thinking about anniversarying the bigger benefits that you saw this season (22:56) second half of last year? And then the follow-up question is on the rest of the business down 4%, looks like it was down more than that excluding the Easter benefit, wondering if you could elaborate on the categories there, that are just not performing as well and the steps you're taking to address that including reallocating space as, I think, you alluded to earlier? Thanks..

Hi, Seth. Jodi – this is Jodi, and I'll start first with the question about the cadence on TCS Closets, your first question. Let me just kind of walk through what we saw in terms of comp benefit by quarter last fiscal year.

I think that probably would help answer your question, so if you look at last year's comp benefit that we saw from TCS Closets, it was – and I'll do this under the new method of comp, I think that would be less confusing. It was 30 basis points in Q1, it was 50 basis points in Q2, it was 140 basis points in Q3, and it was 190 basis points in Q4.

This is the recast number using the new comp. And then as you heard us say for Q1 in 2016, it was 230 basis points. So that's been the overall impact to our comps from TCS Closets sort of the ramp, that we've seen that you ask about..

Okay..

And hi, Seth, this is Melissa. And then responding to your question about the rest of the business being down 4% even with the Easter benefit, and elaborating more on the rest of the categories in the store.

Well, first of all, I think, it's important to just remind you that Closet domination is our absolute key priority and obviously we have a host of other products in the store to offer the complete solution for our customers, but we really do look at our comps holistically.

And we're going to have some quarters that drive comps more – down more in some quarters, and up more in others.

So we are going to continue to evaluate with the opening of the Albuquerque, New Mexico store which is a smaller footprint, the merchandising and reallocation changes that we'll make there, but just note, that we're going to be elevating and expediting this moving forward and looking at all different opportunities for us as we progress throughout the year..

And just one follow-up. As you look at the second quarter and the commentary around the slower start. Is there anything specific you can attribute that to and have you seen that slowdown in Closets or is it more broad-based across the other parts of the business? Thanks..

It's really more broad-based for sure, Seth, it's Melissa. And I think like so many other retailers, we're all being challenged with store traffic.

And so we're working on many strategy to positively impact that, but one of the things that really differentiates us I believe is the fact that we focus on solutions and services that really drive the average ticket up which is so, so, so important, and something that we really have an ability to control especially with elfa and TCS Closets.

I don't know, Jodi, if you got anything else to add to that?.

No, I think, you've covered it, Melissa. I think, it's – at the end of the day we're not counting on traffic to materially change. We're instead being proactive and assuming that we need to really capitalize on what we know we can control, which is really around that average ticket growth that we can do..

Right, and we're certainly not standing still, that's for sure, and we're not assuming that traffic trends are going to improve. So we're going to continue to work on those strategies to positively impact the rest of the year, and again focus on solutions and services that drive that average ticket up which is just a huge differentiator for us..

Thank you. Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question..

Hi, there. Hi, Jodi. Hi, Melissa. You may hear some background noise, so I am just going to ask these questions and then jump off. I am just following up on Seth's question..

Okay. Hi, Simeon..

How are you? Just following up on Seth's question. I was going to ask in general could you comment on the consumer, and then I was particularly interested in that given your comment on the second quarter.

It sounds like – is it macro, and you – as Melissa mentioned traffic, the stores being challenged, and did you see a fading at the end of the first quarter? And then my second question is regarding to the expense, I guess the leverage threshold, I mean, we are not in positive comp territory today but can you talk about, I know that you mentioned that there will be an ongoing benefit to some of the exec comp changes, but if let's say you were to let's say comp a positive one would you leverage your expenses at that level or you are still ways off?.

Jodi, I'd just add a couple of comments. Hi, Simeon, it's Melissa, we definitely saw a different trend in July than what we reported in Q1 although we're not obviously breaking it up by month, but that's why we're calling it out.

And it's difficult to try to really speculate the reasons for this change in trend right now, but again we're going to assume that the traffic remains somewhat challenging just like I'm sure you're hearing from every retailer.

So, we're going to continue to work on in-store experience making that experience for the customer even more unique and compelling, and we think coupled with our exceptional customer service and our beautiful collection of proprietary exclusive products, again a big differentiator for us.

So, the second part of his question, Jodi, do you have that?.

Yeah. I do. Simeon, I think, you're asking about the leveragability that we have with expenses.

And I think, I want to just reiterate to you our true commitment to the SG&A savings program that we have already articulated and you can see the results of that already in Q1 and we do expect that benefit to be even more noticeable as the year progresses because some of the initiatives take a bit more time to really be more noticeable in the cost structure.

As far as the benefit you ask about from the comp changes, there is a partial reversal in those contracts that occurs through Q2 and Q4 specifically around primarily stock compensation expense. And so, sort of the net, look at that throughout the year, we took the $0.05 in Q1.

We expect that by the end of the year, that's a benefit somewhere in the neighborhood of around $0.03 so there's maybe another couple cents to come in cost over the remaining three quarters. And then, as far as leveraging expenses, we definitely have targeted for this year to be able to leverage expenses in the range of what you spoke to..

Okay. Thank you..

Our next question comes from John Heinbockel with Guggenheim. Please proceed with your question..

Hey, Melissa, Jodi. It's Steve Forbes on for John today..

Hi..

Kind of maybe a multi-part question, thinking about the evolution of the box longer-term, kind of what (29:39) here.

I know, you commented on a pilot for reduced square footage format, so what is the underlying performance of the business telling you about the store level economics, especially if comp sales don't turn around, right, outside the payroll freezes this year, but have you had a chance to break down the varying components, whether it be net capital investments in the box or ongoing operating cost to identify potential long-term cost savings, to kind of keep an appropriate threshold for the return on capital?.

Yeah. Hi, Steve. It's Melissa. Yeah, we are currently digging into all of that, absolutely all of that, and that's why we're going to test in Albuquerque with that new format, and we're going to continue to be extremely efficient with operations as I mentioned in my remarks. I'm looking at the tasks that our stores perform.

And so we're right in the middle of all of that right now, but I'm excited about getting into that and seeing what we can do to improve profitability for any size of the stores that we open going forward..

I think, specifically, Melissa, just to add to the smaller market concept stores that we're doing, we do see the smaller footprint as an opportunity to improve our operating profits in those locations and increase the returns in those markets.

So that is why we're testing that, we think that that's an opportunity in those markets particular where we know going in that it may be such that the volumes aren't necessarily at the company average at maturity, we think there is a good opportunity there to be even more efficient..

And then just as a quick follow-on, I believe, right, if you kind of look historically, maybe excluding last year or maybe not, the store – the actual store level performance, right, relative to your pro forma expectations has typically met or exceeded your expectations.

I mean, can you put some color on, how the 2015 class is maturing this year or just really any insights you can provide..

I think, you will remember that our 2015 class had a heavier mixture of expected lower volume stores.

So we did not expect that class to have the same average total sales volume in first year that we've seen in some classes of years, not that we didn't target those stores to achieve our financial objectives, but rather just we went into them negotiating expecting that they would do lesser volume.

So that I think, is in fact what we saw, in terms of – so far how those classes have matured and it is a combination of markets that we went into in 2015. We were more heavily weighted to new markets and this year again, more heavily weighted to new markets with us still having number of markets, where we have no presence yet.

That's our first priority, if something comes up for us to be able to go there to a brand new market..

Thank you both..

Yes. You're welcome..

Thank you. Our next question comes come Dan Binder with Jefferies. Please proceed with your question..

Thanks. I was just thinking about your comments on the year-over-year slowdown in the first five weeks, and this obviously coincides with the back to college season.

I'm wondering, if you look at the data and the traffic, are you seeing particular weakness in those type of categories, is the traffic being affected by more of that moving online do you think?.

Hey, Dan. It's Melissa. Back to school and college and doorman, all that's important to us, but relative to other categories, it's not that impactful. But it is something that we definitely focus on. In terms of moving to online, I don't see that, and that's really not been an issue..

Yeah. I think for us, Dan, what I know Melissa spoke to it earlier. If you look at the difference on what's occurred between Q1 and moving into the first five-week of the 13-week quarter in Q2. It has been pretty broad, it's not any specific category calls out to tell you in terms of one or two departments that's driving the difference in trend.

It's really more across the board both geographically, as well as departmentally..

My other question was regarding your comments on commercial. It sounds like year-over-year it's probably promoted – it's a little bit less than last year. In light of the fairly high gross margins to begin within and the negative sales trends.

Have you given any consideration to maybe not necessarily promoting with more events, but maybe just lower pricing every day to attract more buyers or any kind of tweaking to the pricing program?.

Yeah, Dan, that is – it's Melissa. That's such a great question. I mean, it's absolutely we feel a balance. It's really important to remember too that we achieve our stellar gross margin by buying low not selling high, and that's due to the incredible vendor relationship that Sharon and our buyers have built over all these years and that will continue.

And we do and always have had a commitment to being competitive in pricing on those real, Dan, apples-to-apples products that other retailers may offer. I mean, we've had lots of conversation about price perception.

It is very important and we're digging in even more to understand exactly how our customers perceive our pricing, so that we can be really effective in crafting our message in marketing to ensure that our customers really do understand and see the value of our product for like items (35:23) for sure.

So that's a big opportunity for us and one that we're really digging into how to communicate that..

Are you saying it's more on consideration on how to communicate better or more of a consideration on trying to may be in certain markets lower pricing to see the volume reaction?.

No. Dan, it's more how to effectively communicate to our customers kind of what makes The Container Store product different and better perhaps and so they see the value..

Got you.

One last question on closets, the detail you gave us on the contribution of comps was helpful, but perhaps what might be even more helpful if we could, as you have the data available and are willing to share it, if you could give us the transactions per store per quarter to those stores that had TCS in those last four quarters and then as a add on to that, since you had the financing what percentage of those transactions took advantage of financing with Synchrony)?.

Yeah, Dan, financing, it's just too soon to give any information because we just launched in July 14 or 12 – July 12..

I didn't expect Q1 at all, so we don't have any data on that at all Dan yet. We hope to have more obviously next quarter, but as far as closets, I think, what you're getting at is the stat of closets sold per store per week and we did see a slight pickup in that stat from Q1 – I'm sorry....

Q4 to Q1..

Q4 to Q1, so we are seeing that stat continue to improve slightly as we get better at selling and get more awareness of the product line..

And we're also Dan continuing to learn and kind of evaluate what impact seasonality may or may not have on this product category, so we're digging into that as well..

Right, thank you..

Thank you..

You're welcome..

Thank you. Our next question comes from Matt Fassler with Goldman Sachs. Please proceed with your question..

Thanks a lot and good afternoon. A couple of questions if I could. First of all, you obviously spoke about your expectations for the year, the trend quarter to date and the reality that this is a pretty small quarter.

Is the improvement that you're baking into the year-on-year trend for your guidance for the rest of the year dependent on the backdrop or dependent on initiatives you have in place that you think can push the business forward at an accelerated pace?.

It's both..

Yeah. I would say, it's a combination frankly, Matt, it's the actions that we have in place, as it relates to – or putting in place as it relates to driving top line that Melissa spoke to.

And then it's absolutely that part of the cost structure that we spoke to that we're very vigilant around and very committed frankly to flexing as needed and making sure we don't stand still and we stay flexible and nimble. At the same time, still targeting as you heard me say a stable gross margin..

Got it. Thank you. Secondly, on the financing program, you'll probably tell me it's premature, but I'll try anyway.

In terms of who is using this, and I'm not trying to get the impact on the comp per se, but who is using it and where they're attaching it? Are there any surprises there from what you can tell so far in terms of people whose data you already have versus a new source of data for you and do you find that it's more enhancing to big ticket purchases which one would naturally assume, there's a lot of stuff that's financeable within your store (38:58) for the consumer?.

Right. Matt, hey, it's Melissa, and yes, it is, again, fairly but it is definitely helping with larger ticket items like elfa and TCS Closets.

So there's not been any big surprise there, and as I said in my remarks, we're very bullish on this program and have high expectations for being a big contributor not only to TCS Closets, but to Elfa and hopefully the rest of the store as well..

And then one last follow-up.

I don't think you spoke about the POP! program, any if you did, I missed it and if not any updates there on, in terms of growth?.

The good news is, we have over 3.8 million POP! Stars and we are continuing to enroll about over 25,000 a week. So we are continuing once again to dig into that program as well and understand how we can evolve the program to drive more sales and traffic moving forward for both online and in our stores..

Great. Thank you so much..

Thanks, Matt..

Thank you..

Thank you. Our next question comes from Matthew McClintock with Barclays Capital. Please proceed with your question..

Hi. This is Erin Reilly on for Matt.

How are you doing?.

Hi, good Erin..

I wanted to follow-up with you on free shipping, I think you are anniversarying it this quarter on orders over $75 and I wanted to see, if your sense is that this threshold is meeting consumer expectations, if you're thinking about maybe playing around with different promotions on there and are you still seeing it driving incremental spend about the average ticket of $60?.

Hi, Erin. It's Jodi and I'll start with that, I don't know, if Melissa may have something else to add a bit.

But, yeah, we are still seeing that it is a customer that is coming in and using free spend (40:43) is absolutely spending greater than the $75 in a meaningful fashion, so that's continuing to meet our objectives and we are continuing to see it be something that is a positive contributor to profitability for us at that spend threshold.

So we think that, it's something we will continue to offer for the foreseeable future. We're always, always evaluating.

We have the ability on a test and learn basis to test a lot of different things behind the scenes and continue to do that, but obviously we're going to make sure whatever we're doing, we're always maximizing both sales and profitability at our company.

So, right now we are sticking with what we've now had in place as you said just for exactly a year in April..

Great. Thank you..

You are welcome..

Thank you. At this time, I would like to turn the call back over to management for closing comments..

Thank you, operator. And it's Melissa, thank you all so much, and we just really appreciate your interest and your time and you support today, and we will look forward to speaking with you again next quarter. So, thanks so much..

Thank you, everyone..

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