Shannon Devine - ICR Melissa Reiff - Chief Executive Officer Jodi Taylor - Chief Financial and Administrative Officer.

Steve Forbes - Guggenheim Securities Matthew McClintock - Barclays Capital Joshua Siber - Morgan Stanley Matt Fassler - Goldman Sachs Daniel Binder - Jefferies.

Greetings and welcome to The Container Store First Quarter Fiscal Year 2017 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms.

Shannon Devine of ICR. Thank you, Ms. Devine. You may begin..

Good afternoon, everyone and thanks for joining us today for The Container Store's first quarter and full fiscal year 2017 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 annual report on Form 10-K filed with the SEC on June 1, 2017.

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 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, Shannon and thank you all for joining our call today. I'm happy to share the highlights of our first fiscal quarter performance and then I'll review the progress we're making against many of our key initiatives. Jodi will then share our financial results in more detail and discuss our outlook.

First quarter fiscal '17 results were largely as we expected from both the top and bottom line perspective, with our Custom Closets business continuing to contribute positively to our sales and profitability.

In addition, just like we experienced in Q4 of fiscal '16 and Q1, we saw ongoing notable improvement in our sales from our other product categories versus what we experienced in the first three quarters of fiscal '16.

In first quarter '17, our Comp store sales improved as the quarter progressed moving into slightly positive territory by June and continuing into July, our first month of Q2.

Our results reflect some of the benefits of the key sales revitalizing initiatives we are working on that include many test-and-learn activities as well as the savings and efficiency program we launched last year and continue to build upon this year.

Our first quarter consolidated net sales were 183.1 million, a 3.2% increase compared to the same period last year. Comp store sales for the first quarter were down 1.2%, with the timing Easter Shift contributing 70 basis points to this decline.

Elfa's third-party sales were down 1.2%, primarily due to the negative impact of foreign currency translation of 7.2%. We're pleased with our leadership changes at Elfa, Sweden and attempt to further strengthen our collaboration and synergies between Elfa and the Container Store.

From a bottom line perspective, loss per share in the first quarter was $0.16, compared to a loss per share of $0.04 in first quarter last year. On an adjusted basis, loss per share was $0.11 in this year's first quarter, compared to an adjusted loss per share of $0.09 in first quarter last year.

This year's first quarter included an approximate $0.01 per share negative impact from the Easter timing shift and Jodi will discuss this in more detail in just a moment.

Before I speak about our progress and some of our key initiatives, I want to mention that you may have seen our recent announcement that we've launched a refinancing of our senior secured term loan facility that's due in 2019 and our revolving credit facility that's due in 2020.

Our transaction is currently in market and we're targeting to close in mid-August. We'll update you further once final details are known. Last quarter, I outlined on our call, our four-part optimization plan that we're executing against, as well as the central elements of our mid to long term strategic plan. I'd like to give you a few updates now.

We're on track with our projected savings for our four-part optimization plan and as a reminder we estimate annual savings of approximately $20 million, of which approximately 12 million to 15 million is expected to be realized this fiscal year.

We expect to incur 9 million to 11million in cost or approximately $0.12 to $0.14 per share in the first half of this fiscal year, with the associated benefits heavily weighted to the second half of fiscal 2017. All of this was and continues to be reflected in our full year outlook that we're reiterating today.

We've also made progress around the central elements of our strategic plan and they include customer experience and our new stores. Our first fiscal '17 new store opened in Cleveland, Ohio during our first quarter and we were very pleased with the opening sales performance.

We plan to open a total of four stores this fiscal year plus one store relocation. Our Albuquerque, New Mexico store opened early in second quarter on July 8. We were delighted to see the customer response during grand opening weekend and to date. We tested a slightly different grand opening marketing strategy and are pleased with the results.

As a reminder, the Albuquerque store is 18,000 square feet, which is approximately 25% smaller than our typical size store and it's a part again of our many test-and-learn plans as we explore new layouts and formats for our stores. Another area of focus for us has been the redesign of our flagship Dallas store.

As many of you are aware, we're deep into this project with the top tier design firm to create what we call, the Container Store of the future today. We're working through many details and decisions as well as the related timeline for the project and we'll share more as we have the full picture.

We do expect hopefully to launch the project in the very near future. Among other strategic changes this redesign will most certainly place appropriate focus and presence around our Custom Closets. And we will evolve, tweet and refine this redesign utilizing what we learned and applying those learning's to existing and future store.

As we look beyond fiscal 2017, we envision our real estate expansion plan in specific markets to be one that utilizes formats that potentially look different than our historical 25,000 square foot size store.

Developing new formats that optimize space, store productivity and profitability while continuing to deliver outstanding customer service and experience is the overarching goal of our store format test-and-learn efforts. I do want to emphasize however that we have been and are very pleased with the performance of our new store.

This work we're undertaking reflects our belief that there is an opportunity to enhance and maximize new store performance even further. Our products, our Custom Closets business continues to be a key focus contributing 50 basis points to our first quarter comp.

As a reminder, we defined our Custom Closets business to include TCS Closets, Elfa, our Closet department products and installation services.

New products are the life blood of our business and in mid-June, we launched a beautiful collection of new Elfa products in all stores and online and I'm happy to share that the customer response already has been very encouraging.

These new and exclusive products include solid wood door fronts, and frames, something that our customers have been asking for that will give them the option to completely conceal closing and accessories behind these sophisticated and innovative doors as compared to the more open look of our traditional office solution.

Both auctions are for the flexibility and functionality that Elfa is known for. The mutual development at Elfa new product is and always has been critical to our growth and success at our consolidated business and we will continue our focus and strategy on developing further new Elfa products.

Specific to our merchandize campaigns, we made several changes during the first quarter. We replaced our traditional office campaign with the kitchen campaign and we replaced our traditional spring organization campaign with the Closet essentials campaign.

We're currently in the middle of another new merchandize campaign we call are customer favorites. We will continue to add freshness and newness to our merchandizing and marketing campaigns where it makes sense for us to do so.

Additionally, during May and June, we also repeated the free installation offer on Elfa purchases over $750 and we repeated our annual travel campaign. Overall, customer reaction to our refreshed merchandize and marketing campaigns have been positive.

We're continuing our work in close collaboration with a third-party on a consumer insight project, merchandize and cost of goods project and a skew rationalization and pricing strategy project. It is still too early to share more specifics on this.

However, I can assure you that we plan utilize all the Intel we learn to improve all initiatives and priorities, including our Dallas flagship store redesign and our strategic plan going forward, that impacts every area of our business.

Customer acquisition and retention, we're continuing to see a positive impact on sales from our media mix primarily from increased spending in digital channels like display and search and affiliates and product listing ads and emails.

Based on the recommendations from our media mix model, we're testing ways to increase spend further in digital channels and closely monitoring the performance to see the impact on sales. At the same time we are exploring methods that will optimize our traditional channels like direct mail, billboard, newspaper and national magazine.

In addition, we are super excited to announce that on August 7, we begin a national television campaign on both HGTV and DIY Cable Network. A 30 second commercial will air on HGTV and DIY network during their hit shows and generate 69 million impressions or views on HGTV and 27 million impressions on DIY Network through November 5.

The TV commercial is part of an integrated partnership that includes sponsoring the 2017 DIY Network Ultimate Retreat Home, selling HGTV magazine in our stores, running full page print ads in the magazine through January as well as emails and digital banner ads. We believe in this partnership and really look forward to updating you as it progresses.

And with our POP program we now have over 5.1 million customers who've enrolled and we continue to use this valuable customer data in an even more targeted fashion now that we have the program in place for about three years.

This includes ongoing efforts around targeted offers to lapse customers, which again had a positive impact on our sales during Q1. We've also made several enhancements to the program to increase engage.

We launched a new online interface that allows our POP stars to both easily access their perks that they have earned and quickly see when they'll expire. We improved our POP spin and get offers by allowing POP stars to redeem their earned perks two days after earning instead of waiting until the first day of the following month.

We saw an increased in redemption of the perk from this change resulting in incremental sales. Our online business or direct-to-customer during first quarter increased 20.1% compared to last year, as our digital marketing investment and refreshed merchandize and marketing campaigns resonated well with our online customers.

Total websites generated sales, which includes direct-to-customer but also click and pickup and deliver increased 26.7% during first quarter. Again, we're channel agnostic, but of course we'll continue to make necessary and compelling improvements to our site and invest in its look, feel, navigation and other enhancements.

Investing in our people, moving on to the heart of our organization, our employees, as announced on our fourth quarter call, we completed the very difficult step of eliminating certain positions throughout our company that we just didn't need any longer due to our operational efficiency gains.

And top of this was, it was the right decision and we made sure that we treated every effected employee in a caring, compassionate and generous way.

We sensed that had extensive communication with all employees and we believe they understand why this decision was made and then it was the right thing to do for the ongoing success of our company and all stake holders. I believe that overall moral is good.

We're also pleased that we were able to announce the list of our wage freeze a few months ago, but the resuming of wage increases effective this September.

In summary, we're pleased to have delivered first fiscal quarter '17 financial results that were right in line with our expectations and we're particularly encouraged by the improving Comp store sales we experienced as the quarter progressed, leading again to a slightly positive comp sales in June, with these positive comp sales continuing in July.

We're making good progress against our key initiatives. We have much work still to do and we look forward to building on our progress throughout the remainder of the fiscal year and beyond as we continue to execute on our sales and efficiency initiatives and work to fully optimize our profitability.

Now, I'll hand it over to Jodi to go through our financial results and outlook in more detail..

Thank you, Melissa and good afternoon everyone. For the first quarter ended July 1, 2017, our consolidated net sales were $183.1million, which was up 3.2% compared to the prior year period. Sales for The Container Store retail business were up 3.6% to $167.1 million, primarily due to new store sales.

Our first quarter comp store sales were down 1.2% with the Easter shift contributing 70 basis point of this decline. Custom Closets continued to positively contribute to our comp store sales performance with a 50 basis point comp contribution to our first quarter.

As Melissa mentioned, our comp store sales improved as the quarter progressed, moving into slightly positive territory in June and continuing positive in July, the first month of our fiscal second quarter.

We entered the quarter with 87 stores and approximately 2.2 million of gross square footage as compared to 80 stores and approximately 2 million of gross square footage at the end of the first quarter of the fiscal 2016.

Now, turning to Elfa International AB, Elfa's third-party net sales were down 1.2% in US dollars, primarily due to the negative impact of foreign currency translation of 7.2%, partially offset by higher sales in Russia. In the first quarter consolidated gross profit dollars decreased by at least 103.6 million.

Consolidated gross margin declined 240 basis points compared to the prior year period. We anticipated a decline in gross margin during the first quarter as we did not expect to see the benefits of the cost of goods or product we outlined in our optimization plan until the second half of the year.

Gross margin of the Container Store retail business was down 210 basis points reflecting primarily sales mix factors. From that standpoint we saw strong customer response to our refresh campaigns and experienced a nice increase in business-to-business sales.

While the combined impact of the sales and exchange has had a negative gross margin impact of approximately 135 basis points, we are pleased that our refresh campaigns are resonating with our customers and ultimately drive a greater portion of sales than anticipated.

Similarly business-to-business sales, which have a lower SG&A structure and strong bottom line contribution, represent a compiling long-term opportunity for us and we are very encouraged by the early traction we are seeing with business-to-business.

In addition to sales mix factors, gross margin to Container Store retail business was also negatively impacted by higher costs associated primarily with our installation services business. We have modified our installation model which has resulted in a higher cost of goods, but partially offset by lower SG&A expenses associated with these services.

Elfa gross margin was down 310 basis points primarily due to an increase in raw material cost, specifically steel and aluminum during the quarter. Elfa more than made up this shortfall through other business efficiencies to deliver an increase in its operating profitability during the quarter.

Now moving on to SG&A, as a percentage of sales, consolidated SG&A increased 80 basis points to 32.8% in the first quarter of fiscal '17 as compared to the prior year period.

This is primarily due to the reversal deferred compensation expense realized in first quarter of fiscal '16, which resulted in 220 basis points of year-over-year SG&A deleverage in first quarter fiscal '17.

This 220 basis points in deleverage as a result of the prior period benefit was partially offset by a 140 basis point improvement in SG&A expense as a percentage of sales.

This improvement was primarily due to the ongoing benefits of our 2016 savings and efficiency program, federal payroll savings and some marketing cost efficiencies combined with lower self-insurance cost during the quarter, partially offset by deleverage on our fixed occupancy cost associated with our negative 1.2% comp store sales as well as increased other SG&A costs.

As a reminder we expect the benefits of our 2017 optimization plan to be realized largely in the second half of this fiscal year. New store preopening expenses increased this quarter to approximately 1.4 million from 1.1 million in the first quarter of last year.

We opened one store in Cleveland, Ohio in the current year period compared to one store opening in the prior year period.

The increase year-over-year is primarily attributable to a shift in timing of new store openings, as we incurred some prior opening costs in first quarter of '17 associated with the opening of the Albuquerque store in July 8, 2017, which occurred early in our fiscal second quarter.

We incurred 3.5 million in severance related cost associated with our optimization plan in the first quarter of this year. Our net interest expense in the first quarter of fiscal '17 was 4.2 million, up slightly from the prior year period. The effective tax rate for the quarter was 37.4%, compared to 33.3% in the first quarter of last year.

The increase in the effective tax rate is primarily due to a shift in the mix of projected domestic and foreign earning. Our net loss for the quarter was 7.7 million or $0.16 per share as compared to a net loss of 2.1 million or $0.04 per share in the first quarter of last year.

On an adjusted basis the net loss was 5.5 million on $0.11per share as compared to a adjusted net loss of 4.2 million or $0.09 per share in the first quarter of last year. The net loss per share and adjusted net loss per share in the first quarter of fiscal '17 include a negative impact of approximately $0.01 per share from the Easter shift.

As a reminder first quarter has historical been a loss quarter at TCS, since this is our lowest quarter for sales and further in Q1 this year we are burdened with the optimization plan cost for which the associated benefits will be realized in the second half of the year.

Now turning to our balance sheet, we ended the quarter with 7.2 million in cash, 324.6 million in outstanding borrowings, net of deferred financing cost, which was down 13.4 million from the same time last year and combined availability on revolving credit facilities and cash on hand of approximately $87.7 million.

We ended the quarter with inventory up just 0.8% despite the increase in stores opened from 80 at the end of the first quarter last year to 87 at the end of the first quarter this year. On a per store basis, inventory levels at TCS were down 8.7%, with the decline partially due to improved inventory management.

Given that our first quarter results were largely in line with our expectations, we are reiterating our outlook for fiscal '17.

As a reminder that outlook called for consolidated net sales between $830 million and $850 million, 4 planned new store openings, comp store sales decrease in the low single digit range, EPS of $0.25 to $0.35 based on a weighted average of 49 million diluted shares outstanding.

This EPS outlook is inclusive of $0.12 to $0.14 of cost per share as well as $0.15 to $0.19 of benefits per share associated with our optimization plan. On an adjusted basis, EPS is therefore expected to be $0.37 to $0.49 per share.

We continue to expect TCS and consolidated operating margin improvement in fiscal '17 is driven by our SG&A savings and efficiency program, of which we expect to realize some benefits in fiscal '17 as well the impact of the optimization plan.

We still expect our tax rate for the full fiscal '17 to be approximately 39% and our annual interest expense, our using forward LIBOR rates but not assuming a debt refinancing between now and year-end, to be approximately $18 million. CapEx is still expected to be approximately $33 million.

As Melissa mentioned, we are currently in market with the refinancing of our senior secured term loan facility due in 2019 and our revolving credit facility due in 2020. The proposed term loan refinancing includes a full year tenure extension and will result in an increase in the interest rate.

While we don't know at this time how much that increase will be, we're provide an update once final details are announced. Looking to the second quarter specifically, we anticipate incurring approximately $0.07 to $0.09 per share in optimization plan cost associated with third-party assistance for the next phase of our savings and efficiency efforts.

These anticipated costs are expected to be recorded in SG&A during the second quarter. In summary, we're pleased with our first - that our first quarter top and bottom line financial performance was largely in line with our expectations.

There remains more work to be done but we're very encouraged by the progress we're making with our test-and-learn efforts and all of our strategic work. We look forward to updating you on the second quarter fiscal '17 earnings call. Thank you. Now I'd like to turn the call back over to Michelle, so that we can open up the line for questions.

Michelle?.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Steve Forbes with Guggenheim Securities. Please proceed with your question..

Good afternoon..

Hi, Steve..

I wanted to focus on gross margin and I guess maybe the change in gross profit dollars during the quarter, so the mix impact you called out during the call here was that related to category mix or channel mix and I guess where there promotional changes that you also mentioned planned and can you just comment on how your pop members responded to those changes during the period?.

Sure. Steve, we did expect a meaningful decline in our gross margin for first quarter because we knew that the benefits from the optimization plan around cost of goods would not be seen until later in the fiscal year. As far as your question about category versus channel, it's a combination frankly.

The decline was a combination of channel between retail and business to business, business to business as I mentioned we saw some strong growth there and while that has a strong contribution from a bottom line perspective, they have a lower SG&A structure. They did have a - they do have a slightly lower gross margin profile.

Additionally, we saw good success around our refreshed merchandise campaign, so that a greater portion of our sales within retail and online were driven by campaigns and that that resulted in some degradation to gross margin percent.

All of that combined just to clarify it a bit from a sales mix perspective was about 135 basis point impact on the gross margin at TCS during the quarter.

Also just as a reminder we don't expect to see the impact again from our vendor cost concessions that we're doing until later in the year and that's really part of that broader project and business to business I mentioned has a lower cost structure..

And then just as a follow up right because I think gross profit dollars here were down for the first time I guess in recent history that we have.

So how does all those changes right impact your thought process about managing gross profit dollar growth for the rest of the year just given what you're seeing right in the business and how the customers are responding and so forth. If you can try to help us out there that'd be great..

Absolutely, Steve. We would expect to continue to see some headwinds from sales mix with growth in the lower gross margin categories around business sales and installation services.

And it's always also going to be possible that our refreshed merchandising marketing test-and-learn activity may resonate more strongly than we anticipate and particularly strongly than the category or the campaign of the prior year but we would fully expect that any such increase should come with incremental gross profit dollar generation and bottom line profit contribution.

Remember again, we don't expect that gross margin savings from the optimization plan to be seen until the second half of the fiscal year and we expect that to help mitigate product mix and service cost to gross margin as we look at the full fiscal '17.

And then longer term, you're absolutely right, we're going to be focused on driving gross profit dollars and not just gross margin percent particularly when we've got components of our business that like business sales to have a lower gross margin percent but a lower SG&A base to offset..

Thank you..

You're welcome..

Thank you. Our next question comes from the line of Matt McClintock with Barclays. Please proceed with your question..

Hi. Yes, good afternoon everyone..

Hi, Matt..

Hi, Matt..

I was wondering if we could focus a little bit on comps, seems encouraging signs here as the comps sequentially improved throughout the quarter and going into the following quarter.

Could you talk a little bit about what actually drove that? What was the underlying either product, success products or was it the campaigns or what actually drove that improvement from your perspective?.

Right. Matt, first of all, I just wanted to say that we did not change our promotional cadence to drive the results that we have recognized.

And honestly it wasn't just one thing, it was a combination of many things, many changes that we are making across really the whole business that specifically in merchandising and marketing and visual presentation.

And frankly Matt, it's also the hard work and focused work I think really the entire organization and our team in terms of just really doing everything that we say we're going to do, doing it quickly, execute against our strategy effectively and just working really, really hard these past 12 months.

And it is true, we are encouraged but it is still really too early particularly given the uncertain retail backdrop that we just want to be prudent with our outlook that's why we're reiterating it, but we are encouraged and we will continue to test and learn and continue to try new things and see what happens..

Okay. And then as a follow up kind of separate topic but Albuquerque, it's been open for a little less than a month.

Can you maybe talk about your experience to date in that store on how that might be different than some store openings in the past and maybe initial like takeaways that you've drawn from that store opening?.

Right. And again it opened in July 8, so it's fairly obviously - it hasn't been opened very long but as I said in my remarks Matt we're really pleased with the opening of the store and it's exceeding our expectations to date.

We did - it is a smaller store format, it is 25% less with 18,000 square feet however all departments are represented but they're less SKUs and perhaps some products you buy online or you click and pick up and pick it up in the store.

But the grand opening strategy, we did a couple things different this year with Albuquerque that we want to test one, was we partnered with a local PR agency that really offered us and we partner with them on a real integrated an outreach program to all different kinds of media. So we have a lot of support there, really got the buzz out.

We also did a private custom closet VIP event one day or one afternoon for insurancers and bloggers and professionals and we feel like that was successful because Albuquerque a lot of people were not familiar with that. So those were two big things that we did differently.

We also did some radio and we got really great reaction from the media in terms of TV. So they were out at the store on grand opening weekend, which was great.

And for this store typically in the past we have done - we always partner with a nonprofit and we did here as well to a charity called the Garrity Group, but in the past what we've done is a pretty, pretty, pretty fun, pretty wonderful grand opening party on a Thursday night that's a private event also for the nonprofit and our employees and customers.

And this year, we did for Albuquerque we decided not to try that, we were going to not do that, we were going to try something different and we were pleased. We're very pleased with the results. It's a really good team there and so far so good..

Perfect. Thanks a lot for that color..

Thank you, Matt..

Thank you..

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

Good afternoon. It's Joshua Siber on for Simeon..

Hi, Joshua..

Hey. So you have a good purview into discretionary high ticket spending.

Can you describe the spending environment you're seeing and any read through to how the consumer spending patterns are changing?.

Let me start it. I mean I think we can tell you that we saw some solid ongoing growth come from our Custom Closets part of our business, which would be our higher ticket part of our business.

So I think we're of the opinion that the customer is still spending and as long as you give them a good service experience and have the right products and all the other elements to take, they're still buying..

I mean we don't break out kind of the cost drivers, but we're saying across the board that the current metric is improving and it's not just ticket and transactions but it is traffic is improving albeit still very challenging.

So we're pleased particularly that our customer is not only shopping TCS Closets or Custom Closets in general, but as I said in my remarks the other product categories are also continuing to improve, which is really, really, really important because that's part of our many key differentiators.

We sell solutions and we want to sell all the other product solutions and completion products around an organized pace..

Okay. So my follow up you mentioned good service experience.

I'm curious on the payroll reductions, how much of that is that the corporate and how much of it is in stores and customer facing?.

It's zero customer facing, but Jodi if you want to go ahead and talk more?.

Yeah, I mean I think that's the key, Melissa..

Yeah..

When we did our position eliminations and any of our SG&A efficiency efforts that we have done, it has not been around customer facing, payroll allocation, we are making sure that that's preserved where we are cutting is behind that, it's really through efficiencies that we're gaining throughout our entire business through just as Melissa said hundreds of actions in task force and other efforts that we have underway throughout the whole company to make ourselves even more efficient..

Okay. And just one unrelated one on the digital marketing, you mentioned you're stepping it up.

Are you concerned at all that you might be alienating your core customer by moving more towards online or do you see that the core customer actually does browse online and then come into the stores?.

Absolutely, the latter, I mean absolutely the latter..

Okay. Thank you very much..

Customers do lots of research online first and then coming and we certainly were agnostic channel wise to us..

And certainly we know that for a fact because of again we're in the middle still of a really deep customer inside project with a third party as I mentioned and we're learning that that is indeed a fact which I think it is for a lot of retailers..

Okay. Thank you for the color..

Thanks so much..

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

Thanks so much and good afternoon. My first question is just -.

Hello..

Hi.

Just want to try to put some tighter contours around the performance of closets, if you can give us a sense as to what could growth look like and just to make sure we're still talking on the same category terms that we have been in prior quarters, did the growth accelerate, decelerate similar to last quarter?.

Absolutely, I can answer that for you, Matt..

Thanks..

We did see very, very comparable growth in our closet categories this quarter that we had seen.

So you heard us talk about our Custom Closets contributing 50 basis points and Melissa mentioned that that includes everything we define as Custom Closets for the last few quarters which is TCS Closets, which not surprisingly is the largest driver because that is still not a mature product line as well as Elfa related services and our closet completion department that showed 50 basis points of growth.

We think it's going to be more helpful for you this fiscal year, we actually provide that full category of sales metric which is over 40% of our sales at the Container Store versus just TCS Closets, but I can tell you TCS Closets grew at a comparable rate to what it had in Q4.

Remember that it was in all stores as of December of 2015, so we've now anniversaried being up against any store that had no sales from the prior year before they got the launch into their store..

Okay. Understood. And then I know you touched on some elements of this, but you obviously have the investments in your restructuring and then the anticipated benefits of the restructuring and I know that the first part of the year of the fiscal year is tilted towards the cost.

Can you just remind us if you gave us a number on the expenses that you booked against an annual total and whether you started to make headway on any of the benefits to date just we can serve attractive progress of this initial initiative?.

Absolutely. We still have the same expectations that we laid out last quarter. So we're expecting the benefit to be $12 million to $15 million to impact fiscal '17. Annualized, we expect those to be approximately $20 million.

We expect those benefits to be very heavily weighted to the second half of the year and to be split relatively evenly between SG&A and cost of goods. On the cost side, we did incur approximate $3.5 million or $0.05 a share in first quarter. Out of the total, we expect to incur for the year of $9 million to $11 million.

All those costs are currently expected to be incurred in the first half of the fiscal year. The second quarter is expected to incur $0.07 to $0.09 which is about $5.5 million to $7.5 million of the remaining expenses..

So the severance is the totality of the cost and it sounds like any benefits derived so far from the restructuring have been de minimus..

That's exactly right, Matt..

Got it. Thank you for clarifying. Appreciate it..

Sure..

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

Hi, thanks. It's Dan Binder. Just wanted to go back to the sales revitalization efforts, could you just give a little more detail around what you did specifically and I know you said you expected the gross margin decline. It was probably a little bit more than the rest of us were expecting.

Can you give us a little bit more color on how to think about gross margin levels through the balance of the year? And then finally you mentioned a B2B was the lower margin category, how big is that business today?.

I can answer the B2B and then we'll go backwards with your I think it's maybe three questions in there I think Dan if I got it right..

Yeah..

But B2B, online only rich which of course is direct-to-consumer, we were up 20.1% in Q1, but the whole web generated which includes direct-to-consumer plus Click & Pick Up and deliver we were up 26.7%.

And through it we believe that these were driven by again what we talked about our refreshed merchandising marketing campaigns and we also had a higher allocation of marketing spend to these visual channels that I talked about like affiliates and product listing ads, etcetera, etcetera. So online, we're pleased with that growth.

Again as Jodi said earlier and I said it in opening remarks, we're channeling agnostic but we certainly are going to continue to invest in our online business and in our online sites..

And then Matt on - I'm sorry, Dan on the B2B side, it's still not a significant portion of our total sales but it is growing at a greater rate than the rest of the company and we do think it has a large business opportunity for us. So B2B is something that we're committed to and have put more resources around.

So we do expect this year to continue to see some ongoing growth from that channel..

Because we have in-house, Dan, sales team for B2B as well as we're partnering with manufacturing sales representative firms around the country. So we're going to be focusing on hospitality and new home construction and contractors and hospitals and schools etcetera..

And then Dan around the sales revitalization, Melissa probably want to add to this, but it's a combination as Melissa said of many, many things, but certainly the reallocation and it's not incremental but reallocation spend that we're doing between traditional channels and digital channels and marketing is driving some quantifiably increased sales and that really is also in tandem with refreshing merchandise campaigns.

So it all is kind of playing together. Additionally, the POP program which was launched almost exactly three years ago into all of our stores now has over 5.1 million customers in that program. Now that it's been three years.

I think we mentioned this on the fourth quarter call and that has continued as we expected in the first quarter where we are able to really have some great data now, with some key patterns we can differentiate amongst our discern, among our customers, so that we can then approach any customer who's falling out of pattern and with a slight discount incentive to come back and reengage.

So again we are able to quantify significant sales there as well. So, it's not any one particular thing it's a wide variety of efforts that are driving the improvement in comps that we are seeing.

And then on the gross margin front, all of that kind of mixed together goes to the discussion that I think we had earlier which is we would expect that the sales mix will continue to persist as we go through the rest of the fiscal year where we will see a greater portion of sales that are weighted to B2B and also we - there should be some mix headwind there that we see as the rest of the year proceeds.

And then additionally there is always the possibility that our refreshed merchandize marketing customer and campaign offers may resonate greater and drive maybe more incremental gross margin dollars and sales than we envisioned that slightly impact the gross margin percent.

But again the gross margin savings from our optimization plan, we are just wrapping that project up that we referred to this month and so we will start purchasing at lower costs and that will flow through our inventory as it turns about four times a year the remainder of the year. So that's only going to benefit us in the second half of the year.

So again we do believe that that should offset the impact of product mix and services that we see to gross margin for this fiscal year and as we pivot forward we are going to - we need to stay focused on gross profit dollars not just percent..

Great, thanks.

If I could just sneak one last one in, back to college categories, how are they performing since we are in the heat of that season?.

Yeah. And we just finished this past weekend our college program and our product offering and we are very encouraged with what we saw..

That's another great example Melissa, where we're really trying new things and seeing success where we partnered with a third-party agency and use social media and our digital channels very, very heavily and have seen some good success..

And we changed the marketing habit this year. Again we have made a lot of changes. We are testing and learning on so many fronts and the college one we are very pleased with..

Thanks..

Thank you. This concludes our question-and-answer session. I would like to turn the call back over to Melissa Reiff, for closing remarks..

Thank you, Michelle. And I just want to thank, Jodi and I thank you all so much for your interest and we really do look forward to updating you on our progress at our second earnings quarter call. Thanks, so much..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..