Farah Soi - Investor Relations Melissa Reiff - Chief Executive Officer Jodi Taylor - Chief Financial and Administrative Officer.

Steve Forbes - Guggenheim Securities Matt McClintock - Barclays Seth Sigman - Credit Suisse Matt Fassler - Goldman Sachs Dan Binder - Jefferies.

Greetings and welcome to The Container Store Fourth Quarter Fiscal Year 2016 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Farah Soi. Thank you. You may begin..

Thank you, Matt. Good afternoon, everyone and thanks for joining us today for The Container Store’s fourth quarter and full fiscal year 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 will open the call to questions.

Before we begin, I need to remind you that certain comments made during this call regarding our plans, strategies and goals and our anticipated financial performance 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 important factors are referred to in The Container Store’s press release issued today and in our filings with the SEC.

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. I will remind you that in 2016, The Container Store changed their fiscal year end to the Saturday closest to March 31.

All references to prior fourth quarter and fiscal year results are based on the recast fourth quarter and fiscal year 2015 ended April 2, 2016. Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call.

A reconciliation schedule of the non-GAAP financial measures to the most directly comparable GAAP measures is also 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 Melissa.

Melissa?.

Thank you, Farah and to everyone joining our call. In advance, I do want to thank you for your patience as we have a lot to share today. I will cover highlights of our fiscal fourth quarter performance and fiscal 2016 performance, our fiscal 2017 four-part optimization plan, and lastly, the central elements of our overarching strategic plan.

Jodi will then review our financial results in more detail and discuss our fiscal ‘17 outlook. I am very pleased to report that our fourth quarter performance exceeded our expectations across all financial metrics. We saw improved sales trends from our custom closets business as well as considerable improvement from our other product categories.

Our efforts around revitalizing lapsed customers, paid media mix marketing changes, fresh new spring marketing campaigns and visual in-store updates were all contributing factors to this improvement. Our sales performance was accompanied by strong SG&A control, driving a more than twofold increase in EPS to $0.17 for the fiscal fourth quarter.

For our full fiscal year, we faced challenging top line sales, but overall delivered a sales growth of 2.9%. We had a slight decrease in consolidated gross margin driven primarily by our mix of lower margin products and services at The Container Store.

We substantially leveraged SG&A as we both cycled the peak investments we made in fiscal ‘15 as well as realized the benefits of our savings and efficiency program. This resulted in a threefold increase in earnings per share to $0.31 versus $0.10 in fiscal ‘15. This July will mark the one year since I assumed the CEO position.

I would like to thank all of our great employees at The Container Store to Elfa International for embracing our leadership change and working so diligently these past 10 months to achieve progress on many fronts throughout the business.

While there remains work to be done to drive the improvement we know our business is capable of delivering, I am encouraged with the strategic and operational progress we made in key areas in fiscal ‘16. We have not been standing still and have quickly executed many necessary changes.

Our custom closets business continues to grow as we work towards our goal of closet domination.

On a consolidated basis, our custom closets business, which includes TCS Closets, Elfa sold at both TCS and externally through Elfa International, our closet department products and installation services, generated 48% of our consolidated fiscal ‘16 sales, up from 46% in fiscal ‘15.

We leveraged our unique market position, product offering, much of which is exclusive or proprietary, our service levels and overall category expertise to capitalize on our key differentiators and drive our custom closets business.

For TCS Closets specifically, we still see continued strong growth from this great product category as we expand its presence and the product line.

It remains a key priority for us and was a meaningful contributor to our Q4 and fiscal ‘16 performance, generating 60 basis points of comp sales benefit in Q4 and 150 basis points for the full fiscal 2016.

The comp benefit did moderate some in Q4 since it was the first full quarter that was comping against the completed rollout of TCS Closets in the prior year period. During fiscal ‘16, our Elfa product offerings drove strong and profitable performance. During the fourth quarter specifically, we concluded our Annual elfa Sale on February 28.

The overall sale time period had 1 less selling day in fiscal ‘16 than in fiscal ‘15, but this fourth quarter had 3 additional Elfa sale days as compared to Q4 last year. However, even with the 3 extra days in the fourth quarter this year, Elfa product comp sales were approximately flat for the quarter. On to marketing.

Test-and-learn activities have been one of our prevailing mantras and had been very prevalent in our marketing activities.

In fiscal ‘16, we reached an important 2-year milestone with our POP! customer engagement program and now have a better view into year-over-year purchase behavior of our best customers, which supports these test-and-learn activities.

We are now able to identify out-of-pattern lapsing customers and in Q4, delivered targeted offers to reengage them, which had a quantifiable positive impact to our fourth quarter sales improvement, particularly in our product categories, excluding custom closets. We continue to grow our POP! Star base and ended Q4 with about 4.8 million POP! Stars.

We have also been focused on building and testing our media mix model to optimize our paid media spend. The positive impact of these efforts is most quantifiable in our improved web-generated sales trends in the fourth quarter from increased spending in digital marketing channels like display, search, affiliates and e-mails.

Our SG&A savings and efficiency program that we embarked upon in fiscal ‘16 was inclusive of a wage freeze for all employees and a freeze of our 401(k) match, a reduction in non-customer facing payroll expenses and multiple efforts to drive down unnecessary cost throughout our business.

It’s due to these actions that we were able to generate 220 basis points of SG&A leverage despite comp sales being down 2.4% in fiscal ‘16.

We had 7 successful store openings in ‘16, primarily concentrated in new markets and we ended the year with 86 stores and saw improved performance from the fiscal ‘16 class of new stores relative to the class of fiscal ‘15.

Additionally, we modified our store layout in 2 of the new stores in fiscal ‘16 and have seen better-than-expected sales results in each of these stores since opening. Since its July ‘16 launch, our Customer Financing Program continues to generate higher average tickets on financed versus non-financed Elfa transactions over $500.

And by the end of fiscal ‘16, we had over 6,000 cardholders, giving our customers added flexibility when designing and purchasing new closets. In March, we were honored to be named to Fortune Magazine’s 100 Best Companies to Work For, for the 18th year in a row. Being included on this prestigious list is a tribute to our incredible employees.

Taking excellent care of our employees and all of our stakeholders begins with taking care of our employees and providing an environment of inspiration, innovation, opportunity and accountability.

We intend to lift our wage freeze this summer with an approach to our compensation program that even better aligns with employee contribution as well as company performance.

We believe it is essential to continue to invest in our employees in order to increase engagement, attract and retain great talent and innovate, all in an effort to move our strategic initiatives forward, elevate customer engagement and drive improved performance.

So while we have made progress on many fronts in fiscal ‘16, our organization understands that we have work to do to drive sustained top and bottom line improvements. We are focusing on revitalizing sales through store experience and format evolution.

We are focused on innovation in marketing and merchandising initiatives and we are focused on technology innovation and execution. But our efforts must go beyond this.

After a thorough assessment of our business and given this new, new day in retail and the efficient and necessary way we must run our business, we have also developed a 4-part plan to optimize our consolidated organization. This plan includes number one, sales initiatives.

The objective is to drive sales through deep customer, consumer insight work aligned with a focus on strategic prioritization of initiatives, including a review of price optimization opportunities. We are an organization full of incredibly talented people.

However, we also know that obtaining perspective from outside our company to ensure we maintain best-in-class operations in all areas of our business is invaluable. So during fiscal ‘17, we are partnering with third-parties to assist in identifying and capitalizing on every opportunity to drive profitable sales, traffic and frequency.

Number two, position eliminations, we must be diligent in evaluating our needs in the current business environment and in aligning our structure to ensure we are operating as efficiently as we must, that means making some necessary, albeit very, very difficult decisions.

After analyzing our operations and current positions in our stores, distribution center and our home office, we have identified some full-time positions that we believe are no longer needed as we move our company forward. We are working closely with any employee who is impacted by this decision in a highly communicative, caring and compassionate way.

Number three is Elfa organization realignment. Additionally, at our Elfa business, headquartered in Sweden, we have recently completed an organization realignment. We believe this is a key step in setting up our consolidated business for the future and ensuring we are executing at the highest level.

Number four, ongoing savings and efficiency efforts, in fiscal ‘17, we plan to continue with our SG&A savings and efficiency program. We are extending this focus and are engaged in the project concentrating on our cost of goods as well as a SKU rationalization project to refine our product assortment and maximize profitability.

And while we have competitive pricing on like-for-like products, we are also looking closely at our pricing to ensure we are fully optimizing our profitability and focusing our assortment on exclusive or proprietary TCS branded products.

The net impact of our optimization plan is expected to improve operating income by approximately $12 million to $15 million in fiscal ‘17 or an estimated $20 million on an annualized basis. The impact of these changes is expected to be realized through both gross margin and SG&A.

We will incur cost in the first and second quarters of fiscal ‘17 to execute these efforts and Jodi will elaborate more on that in detail in just a moment.

As we previously discussed in fiscal ‘17, we plan to open locations in Cleveland, Ohio, Albuquerque, New Mexico, Livingston, New Jersey and Staten Island, New York as well as relocate our Chestnut Hill, Massachusetts store.

Our Albuquerque store will be our first reduced square footage store footprint as part of our new store format test and learn efforts.

Albeit a smaller footprint, this store will still offer all of our traditional departments, but with a more edited assortment within many of those departments, yet an expanded custom closets department as compared to most of our existing stores.

Before I turn it over to Jodi and as I shared on our last call, I want to provide you with a few of the central elements of our mid-term to long-term strategic plan. Our four-part optimization plan that I have just spoken about aligns with our broader strategic plan.

However, as our optimization plan continues to unfold, we expect it to impact our strategic plan going forward. But in the meantime, here are the six central elements of our strategic plan. The customer experience in our stores, we are focusing on creating compelling and convenient places and ways for our customer to shop and buy.

Currently, we are working with a prominent design firm to execute a complete redesign of our flagship store here in Dallas, slated for completion this fall.

Our goal for this redesign is to gain insight into the – what the future of new store formats should be while influencing how we will evolve the future of our existing stores’ experience and layout.

While it’s premature to talk about the details surrounding this redesign in our stores of the future, we are looking closely at different smaller formats for our brand and we are really excited about what this Dallas store redesign will teach us.

We have a very strong base of profitable stores and believe we have a long runway for growth with currently only 86 stores in the U.S. We believe we are not an over-stored retailer and we will continue to seek out strategic and profitable real estate expansion for our brand through a variety of formats.

This also includes continuing to invest in our online business through actions to improve our website, content and connection between channels to support store and online sales growth. Number two are products. We will continue to develop exclusive, proprietary and differentiated products and solutions.

Much of this product development as well as SKU rationalization will be influenced by the results of our sales optimization initiatives that we are currently engaged in. We will also focus on enhancing and growing our custom closets business as we believe we have only scratched the surface of this great opportunity.

As always new product introductions from Elfa, which is exclusive to us in the U.S., remains critical. In fact next month, we will launch a robust assortment of new Elfa products. These new product additions will enhance and elevate our current Elfa system and we believe our customers will respond enthusiastically.

Number three is customer acquisition and retention. As we work to engage and excite new and existing customers, our goal remains to drive profitable sales traffic and frequency through a variety of opportunities, such as a testing of an HGTV partnership, improvements to the POP! online user experience and ongoing test and learn activities.

We plan to further optimize our paid media spend by uncovering synergies among various media channels, i.e., e-mail, search, product listing ads and display and enhanced customer targeting based on geographic reasons – regions.

In addition, we will leverage customers – customer analytics by developing a marketing model to fine tune e-mail frequency and continue to develop our targeted offers. A pursuit – number four is the pursuit of profitable growth opportunities.

We see great opportunities for our B2B channel and contained home service in addition to other growth opportunities that include maximizing profitable Elfa third-party sales.

Of course, there is growth opportunity with the potential new store formats I spoke about earlier and we will also determine what if any, strategic partnerships could be viable for our brand. Number five is increasing our operational productivity.

These efforts include improving supply chain productivity as well as ongoing enhancement to technology, much of which will be customer facing. We have begun the implementation of the next phase of our best-in-class supply chain software with an estimated completion in fiscal ‘18.

We are also partnering with a third-party to develop and optimize a long-term plan for our logistics network. And lastly number six, but certainly not least, is investing in our people. As I mentioned, we believe it is essential to continue to invest in our employees with a focus on attracting, developing and retaining incredible talent.

So in closing, we finished the year with our fourth quarter performance exceeding our expectations. We made progress in key areas in fiscal ‘16 and we will build on that progress in ‘17 as we focus on the execution of our four-part optimization plan and mid-term to long-term strategic plan.

It’s about innovation and creativity, being proactive and taking chances and making decisions thoughtfully, yet decisively, while executing quickly. Okay. I will now hand it over to Jodi to go through our financial results and outlook in more detail.

Jodi?.

Thank you, Melissa and good afternoon everyone. For the quarter ended April 1, 2017, our consolidated net sales were $221 million, up 5.3% compared to the prior year period. Sales for The Container Store retail business were $203.3 million, up 5.8%, primarily due to new store sales.

Our fourth quarter comp store sales were down 20 basis points, which included an approximate 60 basis point benefit due to the Easter timing shift.

Our comp sales results were driven by a 60 basis point comp contribution from our custom closets business as well as a notable improvement in trends from other categories of our business, as Melissa shared.

We ended the quarter with 86 stores and approximately 2.1 million of gross square footage as compared to 79 stores and approximately 2 million of gross square footage at the end of the recast fourth quarter of fiscal ‘15.

Now turning to Elfa International, Elfa’s third-party net sales were $17.8 million, up 0.5% compared to the fourth quarter ended April 2, 2016. In the fourth quarter, consolidated gross profit dollars were $127.3 million, an increase of 5% over the prior year period. Consolidated gross margin declined 20 basis points.

Gross margin at The Container Store retail business was down 80 basis points, reflecting a higher mix of lower margin services and to a lesser extent, a higher mix of campaign sales than the prior year period. Elfa International gross margin increased 360 basis points from the prior year period, primarily due to improved production efficiencies.

Consolidated SG&A decreased 260 basis points to 45.2% in the fourth quarter of fiscal ‘16 as compared to the prior year period, primarily due to our SG&A savings and efficiency program we implemented over the last year as well as lower healthcare costs.

New store pre-opening expenses decreased to approximately $300,000 in the fourth quarter as we did not open any stores in the current year period compared to two store openings in the prior year period. Net interest expense in the fourth quarter of fiscal ‘16 was $4.3 million, up slightly from the prior year period.

The effective tax rate for the quarter was 35.2% compared to 36.2% in the fourth quarter of the previous fiscal year. The decrease in the effective tax rate was primarily due to the change in the mix of domestic and foreign earnings.

Our net income for the quarter was $8.4 million or $0.17 per share as compared to a net income of $3.4 million or $0.07 per share in the recast fourth quarter of fiscal ‘15. [indiscernible] fiscal year results. Consolidated sales increased 2.9% over the previous year to $819.9 million driven by a 3.4% increase in The Container Store retail business.

Elfa third-party sales decreased 0.7% in local currency, primarily due to weaker sales in Russia. The U.S. dollar strengthened against the Swedish kroner by 2.6% on average during fiscal ‘16, resulting in a negative conversion impact of $1.7 million for the fiscal year. As a result of this conversion impact, Elfa third-party sales declined 3.1% in U.S.

dollars. Our comp sales for the year were down 240 basis points following a comp sales decrease of 80 basis points in fiscal ‘15. Consolidated gross margin decreased 20 basis points year-over-year to 58.1% of sales.

Gross margin at The Container Store decreased 60 basis points during fiscal ‘16, primarily due to an increase in the mix of lower margin products and services combined with increased sales associated with promotional activities, partially offset by the impact of a stronger U.S. dollar.

Elfa gross margin increased 120 basis points from the prior year period, primarily due to improved production efficiencies.

Consolidated SG&A as a percentage of sales decreased 220 basis points to 47.3% in fiscal ‘16, primarily due to the SG&A savings and efficiency program we’ve been discussing for the past year as well as the reversal of accrued deferred compensation of $3.9 million, which occurred in the first quarter.

We also experienced lower health care costs and a positive impact from foreign currency exchange rates during fiscal ‘16. The positive impact of these items was partially offset by deleveraging of occupancy costs due to the negative comp sales.

New store pre-opening expenses decreased to $6.9 million in fiscal ‘16 compared to $9 million in the prior year. We opened 7 new stores in fiscal ‘16 compared to 10 store openings in fiscal ‘15 inclusive of 1 relocation. Net income was $0.31 per share compared to net income of $0.10 per share based on 48 million shares outstanding each fiscal year.

This includes an approximate $1.8 million net benefit or $0.04 per share of deferred compensation reversals and management transition costs. Turning to our balance sheet.

We ended the year with $10.7 million in cash, $317.5 million in outstanding borrowings, net of deferred financing costs, and combined availability on revolving credit facilities and cash on hand of approximately $99.6 million.

We once again used the strong cash flow generated in our fourth quarter to pay down all the balance on our revolving credit facility at The Container Store at the end of the fiscal year. The peak utilization of our $100 million revolving credit facility at TCS throughout fiscal ‘16 was $22 million.

Additionally, while our term loan does not mature until 2019, we opportunistically will look at refinancing this debt during fiscal ‘17.

We ended the quarter with inventory of $103.1 million, up 20.4% compared to the end of fiscal ‘15, with the increase primarily due to timing of merchandise campaigns and new product inventory receipts as well as inventory associated with new stores.

On a per store basis, TCS retail inventories went up approximately 12%, largely due to the campaign timing and new product receipts. Now turning to our outlook. For fiscal ‘17, we expect consolidated net sales to be in the range of $830 million to $850 million based on a comp sales decline in the low single-digits.

We expect EPS to be between $0.25 and $0.35 per share on a weighted average of 49 million shares outstanding. We expect TCS and consolidated operating margins to improve, driven by our SG&A savings and efficiency program of which some benefits will be realized in fiscal ‘17, as well as the impact of the optimization plan Melissa spoke about.

This is inclusive of full-time position eliminations at TCS, organizational realignment at Elfa International and ongoing savings and efficiency efforts that are expected to benefit both gross margin and SG&A rate in fiscal ‘17.

The costs associated with these actions are included in our outlook and are expected to be approximately $9 million to $11 million on a pre-tax basis or an EPS headwind of $0.12 to $0.14.

We estimate annualized pre-tax benefits associated with the 4-part optimization plan to be approximately $20 million or around $0.25 per share, of which $12 million to $15 million pre-tax or approximately $0.15 to $0.19 per share is estimated to be realized in fiscal ‘17 and is contemplated in our fiscal ‘17 outlook.

We expect our tax rate for the full fiscal ‘17 to be approximately 39% and our annual interest expense, using forward LIBOR rates but not assuming a debt refinancing between now and year-end, to be approximately $18 million. In addition, we expect capital expenditures for fiscal ‘17 to be approximately $33 million.

Specific to Q1 fiscal ‘17, we have a number of non-comparable items to note that are expected to have a significant impact year-over-year. First is the timing of Easter, which benefited Q4 fiscal ‘16. And the offsetting negative impact will hit in Q1 fiscal ‘17, given that our stores are closed on Easter Sunday.

The expected impact to Q1 comp sales is an approximate 70 basis point reduction and the expected impact to Q1 fiscal ‘17 EPS is approximately $0.01 to $0.02 per share.

Second, Q1 fiscal ‘17 will incur optimization plan costs associated with the position eliminations at TCS and organizational realignment at Elfa International, which are expected to be approximately $0.05 per share.

Third, in last year’s Q1 fiscal ‘16, we recorded a $3.9 million deferred comp benefit, which represented approximately $0.05 per share in that quarter. We do not expect any such benefit in fiscal ‘17.

And fourth, keep in mind that we don’t expect to receive any of the benefits associated with the optimization plan in Q1 fiscal ‘17, but rather the benefits associated with these actions are expected to be realized largely in the second half of fiscal ‘17.

Additionally, in Q2 of fiscal ‘17, we expect to incur optimization plan costs associated with third-party assistance for the next phase of our savings and efficiency efforts in an amount estimated to be approximately $0.07 to $0.09 per share. As a result, we expect to generate more than all of our full year EPS in the second half of the fiscal year.

So in summary, while we are pleased to have finished the year with a much improved fourth quarter trend, we will continue our commitment to working hard and smart to drive top and bottom line improvement. We are very focused on that deliverable and we look forward of updating you on our progress next quarter. Thank you.

Now I’d like to turn the call back over to Matt so that we can open up the lines for your questions.

Matt?.

Thank you. [Operator Instructions] And our first question comes from Steve Forbes from Guggenheim Securities. Please go ahead..

Good afternoon..

Hey, Steve..

Maybe regarding the 4-part optimization plan, are the various components listed in a particular order in the release? And then can you expand on the sales initiatives component? You mentioned price optimization, but is that the main focus? And maybe just expand on what you plan on doing with that whether it be marketing on the back of any optimization effort and maybe some of the data that’s going to go into that? And then as you think about kind of rolling that out, the price optimization to the stores, is it going to be methodical, test-and-learn, regional, national, I mean, how are you approaching the messaging behind that?.

Sure. Hey, Steve, it’s Melissa. Well, first of all, they are not in any particular order at all. But let me just say that this is a year, a continued year for us of a lot of test-and-learns. And we are partnering with several third-parties to help us with several projects.

Number one and we think it’s kind of going to set the foundation is our work on customer and consumer insights. This is a project that we have wanted to do for years, that we are very excited about. We think it’s going to teach us obviously a lot. And that also could include some SKU rationalization and price optimization.

Our product turns about 4x on an annual basis and so we don’t have that kind of typical fashion risk out there that other retailers do. So, we can approach this on a very – with a very thoughtful approach and really minimizing any impact to profitability. But we think that there could be something there.

So we will continue to look at the SKU rationalization and make the appropriate and necessary decisions. And then with regards to pricing optimization, we have talked about this before that we really feel confident through all of our comparison analysis, that we really are very competitive on better – or even better pricing on like-for-like items.

And we just simply don’t kind of get the credit for that. I think it probably has to do with our level of high service and beautiful stores. And so there could be a price perception that we are expensive and that’s something that we have got to continue to work harder to overcome.

So – and we also have an assortment that consists of more than half of our sales coming from proprietary or TCS branded products.

But having said that, we do believe that there may be opportunity around select products that our customers might have the most price sensitivity to and maybe making adjustments accordingly, which could mean possibly even adding more opening price points on some of our most sought after products.

So we have got a lot of initiatives in place that we are really going to be digging deep on a lot of fronts and determining the best decisions to make..

And then maybe just a follow-up on the POP! members, because I think – maybe I am wrong here, but I think that was the first data point we got in a little while, the 4.8 million members, I am not sure if you can, but if so can you expand on what you are seeing within that group, I mean I guess as it relates to traffic trends and just general shopping behavior, whether it be share – tracking share of wallet, I mean anything there that’s notable?.

Well, we definitely know that the POP! Stars, the 4.8 million, which is a lot of POP! Stars, and it gets continuing to grow. They are still our most loyal customers, without a doubt. And we have really been focused, as I said in some of the remarks, about building and testing our media-mix model to really optimize our paid media spend.

And we can most easily track sales from our POP! Stars that were influenced by the digital marketing efforts that I spoke about. And so we really – we are really – our POP! Stars are performing. We anniversary that 2-year rollout, which really helps us understand their behavior even better.

So we are very encouraged and we are going to continue to – we worked with the third-party to help us develop that program and continue to develop it. So we are optimistic about our POP! program..

Thank you..

Thanks Steve..

Our next question is from Matt McClintock from Barclays. Please go ahead..

Hi, good afternoon everyone..

Hi Matt..

Hi Matt..

So wow you gave a lot of information on this one as you said..

That was a long opening [indiscernible]..

I will send you my doctor’s bill for the [indiscernible].

So a couple of things I just want to dive a little bit into, the first one is concentrating on cost of goods sold and SKU rationalization, first just on the cost of goods sold piece of it, can you kind of dive a little bit more into the opportunity there to drive cost down of your product by either working with more vendors or I guess, more efficiencies at Elfa?.

Hi Matt. I will take that. I think one thing that might be helpful for you in terms of how to think about that is we scaled the benefits that we expect to see come into fiscal ‘17. And then overall, we have referenced the $20 million annualized benefits, of which $12 million to $15 million is expected to hit in fiscal ‘17.

And if you look at that, we expect to see about half of that come through gross margins and about half of that to come through SG&A efforts.

And of the gross margin portion and actually both portions, they are going to be heavily weighted to the second half of the year, with the gross margin, because of inventory turn, the implications associated with efforts in those negotiations and any rationalization we do for SKUs, it really would most impact later in the year.

So hopefully, that’s helpful to your question..

It is and then just real fast on SKU rationalization, can you just remind us where you are at in terms of the number of SKUs that you carry in your store today versus where you think maybe it could go?.

We have about 11,000 SKUs Matt, right now. And we are just really in the beginning process of that, so I don’t really know where it will go down to. We are still – we will have to give you an update on that the next call..

Okay. And then on the $0.07 to $0.09 of optimization costs that you are going to incur in the first quarter, I am just trying to reference that to the $0.12 to $0.14 of optimization plan costs for 2017.

So are you saying that the vast majority of the costs that you are going to incur on this plan are first quarter, is that the way to think about this and then split evenly of the quarters afterwards?.

Yes. Let me clarify that as well, Matt. So the expenses are – associated with that, we expect $0.05 to hit in Q1, largely due to the severance associated with those efforts at both TCS and then the organizational realignment at Elfa. And then the $0.07 to $0.09 is actually Q2. So that’s how you get to the full year $0.12 to $0.14.

They will all hit in Q1 and Q2, with $0.05 in Q1 and $0.07 to $0.09 in Q2..

Okay, that’s hugely helpful. Sorry, I misheard that one. Okay.

And then just in terms of just improving the customer experience, I want to dive into that a little bit as my last question, clearly it sounds like you have done a little bit of work on that already and that’s where we have seen some improvement in the comp store sales results, but can you just talk about what other options or initiatives or what you can do specifically in the store, whether that be – you talked about visual improvements, but what further visual improvements can you make and maybe give us some examples of what you have done that, so far that have been working for you?.

Right. Well, first of all Matt, we have made a lot of operational improvements in our stores that have not impacted customer facing hours, which is really important to our brand and our concept, because we are such a high service company. And that’s what our expect – our customers expect.

So we have done a lot of improvements operationally, no doubt about it. And this past quarter, we made some visual improvements. We had two new campaigns, fresh new campaigns that I spoke about, that were kitchen and closet as compared to an office campaign last year. So we made some display changes, some signage, some graphic changes.

And we are going to continue with the – with all of our test and learns. In NorthPark, the redesign of NorthPark is I think one of the most exciting things we have ever done and it – we are going to learn so much from that. It’s still going to be The Container Store. It’s still going to be our concept and our foundation.

But you are going to walk in that store, hopefully later on this fall when it’s complete and go, wow, this is something. And that’s going to include everything from – we are looking at everything, the lighting, the fixturing, the cash wrap area, technology, service, because it is all about the customer experience.

And we want her to buy however she wants, online or in the store. But we want to drive her to the store. We think we can best service her in the store. And so we are going to be doing everything we can that’s going to get her out of her house and into the car and to The Container Store..

Perfect. Well, thanks a lot and good luck for all those initiatives, I am sure you have been very busy..

Thanks Matt..

Our next question is from Seth Sigman from Credit Suisse. Please go ahead..

Thanks. Hey, guys and thanks again for all the color on the call.

I had a few follow-up questions first, just in terms of the store growth plans, I think you mentioned four for this year and a relocation, as you have gone through this optimization plan, I am just wondering, what was the conclusion you came to in terms of optimal store growth and where do you see relocations and store closings fitting into that plan?.

Yes, great question. Well, Matt we certainly, as I have said in the remarks, we do not feel that we are an over-stored retailer at all and we still feel like there is a nice runway for the future of opening new stores. But we feel it’s a balance. And our priority right now, among many is to learn from this NorthPark remodel.

And what we learn from there, we are going to apply with our existing stores and that’s going to – that will evolve over time as we remodel our existing stores. But not mutually exclusive to that is also looking for the right opportunity to open new stores in the right market with the right format.

And we are going to learn that through all of the initiatives and all of the partnering that we are doing with third-party companies to help us with that, because we don’t know whether it’s a custom closet store or whether it’s a 15,000 foot store with custom closets and all of our other product categories.

The SKU rationalization work will come into play there, so we just – we are pushing a lot of things forward and we will continue to open new stores. And we do have the four that are confirmed for this year and we have some others on the plans – in plans for the following years..

Okay.

And then just following-up on the pricing work that you are doing now, can you elaborate on where you are finding the biggest gaps today, whether it’s across categories or across the channels and I am just wondering, is there a negative effect on sales initially from adjusting your pricing before you can actually start to see the volume benefit?.

Yes..

Seth, we really are so early into that project that I don’t think we can speak specifically at all.

I think that from – I can tell you from a high level, we believe that we are going to obviously be most focused on making sure whatever we do has as minimal of impact to sales as possible or those won’t be probably for us the right decisions, also making sure we continue to – don’t lose what makes The Container Store special, which is a great, broad assortment of unique products.

And then also, we will just make sure that we continue to do that with a great focus on generating incremental gross profit dollars..

So that’s what it’s about..

That’s what it’s about..

The gross profit dollars, maximizing all the gross profit dollars. We will be thoughtful with that..

Okay. And then just one final question, in terms of the comp performance this quarter, it was nice to see continued benefit from closets. Also, I think you cited improvements in other product categories as well.

Can you elaborate on that a little bit more, where you are seeing that improvement come from, because it was a nice improvement from the third quarter? Thanks..

Yes. We were really excited about that because that’s been a focus of ours. And we really think that our efforts around digital marketing and revitalizing our lapsed customers really had – we know it had a strong impact to that.

And again, I think the changes that we have made in our – from our – with our paid media, that had made a – we just shifted dollars. We just allocated dollars differently. That had a huge impact on other product categories in our store. And then again, the new spring campaigns that I talked about and the visual updates.

I think it’s a combination of all of that that had an impact as well as our Elfa sale ended February 28 and our customers have taught us for 38 years, they just procrastinate. They wait till the last minute. So that had a favorable impact in March as well and for the quarter..

Okay, great. Thanks very much and best of luck..

Thank you so much..

Thank you, Seth..

Our next question is from Matt Fassler from Goldman Sachs. Please go ahead..

Thanks a lot. It’s Matt Fassler and Katie Price at Goldman. We have two questions. The first relates to the thinking about the improvement in sales that you saw.

What categories are really getting incremental traction for you and any commonalities that you see among them?.

Honestly, Matt, it’s across the board. It really is. There is not one specific channel or department. We have just seen a nice across-the-board improvement, which really obviously resulted in an improvement in Q4..

Got it.

Second question, can you give us some color on the online business, your online business and experience that you had in Q4?.

Yes. Online, we have been pleased. We have seen some improvement in online. And again, we attribute this to a lot of things. But specifically, our focus, like I said earlier, around this digital marketing. And remember, we are a channel agnostic company.

We don’t care where she buys, but we do – we will continue to invest in content and site improvement and navigation in our online business. So we are not – that’s a focus as well..

So you are saying that you think – oh, go ahead, sorry..

I am sorry. I was just going to add specifically, if you look at website-generated sales for the fourth quarter, those were up 12.8%. So that’s basically online plus Click & Pickup..

And for the year, I think they were up about 3.5%. So we are seeing some improvement in online..

And the Click & Pickup or buy online, pickup in store metrics within overall, did that gain share over the course of the quarter or is that pretty consistent with where it had been?.

It did, because if you look at online only for fourth quarter, those were relatively flat trends, just down – just barely down. Yet the website generated was up 12.8%..

Got it. Thank you so much, ladies. Appreciate it..

You’re welcome, Matt. Thanks..

[Operator Instructions] And our next question comes from Dan Binder from Jefferies. Please go ahead..

Thank you. Just given the initiatives that you have laid out today, I am just trying to reconcile that with the low single-digit decline in comp that you are expecting for the year.

Just curious, is that – do you sort of view that as conservative and how are things looking in May thus far relative to your plans?.

Yes. Hi, Dan. We thought obviously a lot about our outlook. And we really feel like that our ‘17 outlook is broadly in line with our actual performance that we delivered in ‘16.

So yes, we are giving a prudently conservative guidance that we believe is – responsibly balances kind of our best view of the tailwinds and the headwinds as we are seeing it right now. So, TCS Closet – well, let me go back, digital marketing, for example, is a tailwind for sure, which we have talked about.

And we like those early results that we are seeing. TCS Closets, on the other hand, while still expected to be a comp it will be a comp tailwind, but will not likely be the 150 bps that it contributed in 2016. So because most of the 2016 benefit was from not having it rolled out across the entire store base in the prior year.

So given that, plus it’s just a tough environment, tough retail environment, tough backdrop out there, we feel like that we have considered everything and budgeted inventory and expenses and we are using prudent comp expectations. And as you can see, we expect that our actions are going to significantly impact the bottom line..

Can you talk a little bit about what you are seeing now that you have lapped the rollout of TCS Closets? What you are seeing in closet transactions per store? And has the ticket held up at that $10,000 level, I think, that you’ve highlighted in the past?.

Yes.

The ticket – the average ticket is definitely held and what’s the basis points, Jodi?.

Yes, we saw – and remember, Dan, that Q4 was the first quarter where it was in all stores last year. So there was no benefit from being up against the store that didn’t have it. We still saw a 60 basis point benefit in Q4.

So we are definitely still seeing growth in TCS Closets and we are gradually selling more of them to more customers and also continuing to hold the average ticket strong..

And then on gross margin, just given the nature of the efficiencies that you had at Elfa this quarter, are they sustainable? What types of gross margin benefits were you seeing? And then given your pricing initiatives or also considering your pricing initiatives, how do you view longer term gross margins directionally? Do you think they sort of stabilized a couple 100 basis points lower? Do they – do you think you can keep these current levels longer term? Any color there would be helpful..

I can speak more to how we think about it in the shorter term here in fiscal ‘17 first. We do expect, at both TCS and on a consolidated basis to see some improvement in the gross margin primarily driven by this 2017 optimization plan we have just discussed. It will be weighted though heavily to late in fiscal ‘17.

On Elfa specifically, while we do expect to still see some ongoing efficiencies from their production efficiency efforts that they are doing, we are seeing some of their direct material costs rising. And so we expect that those efforts will be largely negated through direct material cost changes.

So we are expecting currently for Elfa’s gross margin to decline slightly for the full year primarily when you net all that together related to the direct material costs..

Okay, thanks..

Thanks, Dan..

Thank you. This concludes the question-and-answer session. I’d like to turn the floor back over to management for any closing comments..

I just want to say thank you again for your interest and attention today on the call. And Jodi and I will really look forward to talking with you next quarter..

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