Ladies and gentlemen, greetings and welcome to The Container Store’s Fourth Quarter Fiscal Year 2018 Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this program is being recorded.

It is now my pleasure to introduce your host, Caitlin Churchill of Investor Relations. Thank you. You may begin..

Good afternoon, everyone, and thanks for joining us today for The Container Store's fourth quarter and fiscal year 2018 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. These 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 May 31, 2018.

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. A copy of today's press release may be obtained by visiting the Investor Relations page of the website at www.containerstore.com. I will now turn the call over to Melissa.

Melissa?.

We are committed to expanding our private label business in key departments like closet, kitchen and storage. We have formalized a strategic initiative with cross-functional collaboration to execute on this opportunity. John Gehre and team have been working closely with our key vendor partners across the globe to facilitate and execute this strategy.

His team is also focused on speed to market for all new product introductions, as well as removal of any underperforming products in our assortment.

Additionally, we continue to see opportunity on how we merchandise our products, particularly key products that help accomplish projects, and are working to always make sure that the inventory levels are maintained on the shelves.

We continue to carefully assess and analyze our campaigns to ensure maximum effectiveness, and have made a number of improvements and adjustments in our decisions for a campaign and how we approach our campaigns.

Specifically, we have addressed how much inventory we need to send to a store at the start of a campaign and the products we feature front and center in our stores and online.

We will continue to evolve and improve our merchandising and marketing approach to campaigns, as John Gehre and Melissa Collins, our Chief Marketing Officer, work very closely and collaboratively together.

And speaking of marketing and Melissa Collins, one of our key 2018 learnings was our low customer awareness when it comes to our Custom Closets offering.

To make substantial progress toward our goal of Closet Domination, we intend to increase customer awareness by making significant incremental marketing investment that is directed entirely towards building awareness of our Custom Closets product offerings.

We believe this will result in more customers thinking of The Container Store for their Custom Closets solutions. This incremental marketing investment will be supported in-store, online, and in all our marketing messages accompanied by a strategic promotional calendar for the entire year.

Additionally, we will continue to leverage our growing POP! program, with a focus on customer acquisition, retention and engagement. Furthermore, our media mix model will continue to influence our marketing spend allocation decisions throughout the year. Our trade program, which was redesigned and launched in fiscal 2018.

We intend to grow our trade program through new important partnerships with professional organizers, architects and interior designers. We have seen a nice traction with this updated program, particularly around The Container Store Custom Closets.

During fiscal 2019, we plan to participate in select national trade shows throughout the year, engage with national interior design organizations, conduct personal events with top interior designers in key cities, and continue to promote our brand in trade publications. With regards to our systems and infrastructure.

By far one of our biggest initiatives this year, is the opening of our second distribution center in Aberdeen, Maryland. This is a $23 million CapEx project for which we incurred half of the CapEx in fiscal 2018 and will incur the balance this year.

Jodi will review with you the anticipated impact of this on our fiscal 2019 financial results in just a moment. And while we anticipate expense headwinds in fiscal 2019 associated with the opening of our new distribution center, next year, in fiscal 2020, this new distribution center is expected to generate material freight savings.

We anticipate net -- sorry, we estimate net annualized savings of approximately $6 million, along with much improved customer service delivery times for our stores and online orders. This project is progressing on time and on budget.

We also have a number of technology initiatives in fiscal 2019, including planning enhancements to our website, improving our web-based design tools for Custom Closets, and various other infrastructure activities including cloud migration of primary systems.

And just a brief mention about tariffs, as I know there has been so much in the press of late about this and it’s ever-changing. But please note that our fiscal 2019 outlook assumes that the 10% tariffs remain.

However, we continue to be proactive and we’re taking a number of preemptive actions to mitigate the impact of tariffs, including adjusting the country of origin to maximize gross profit and quality, as well as seeking opportunities to reduce costs in our structure.

This includes going direct-to-factory, negotiating lower costs, taking advantage of moving exchange rates, or bringing in new vendors. We also believe that our pricing work will be helpful in allowing us to determine where to pass along any needed price increases.

And finally, next week, we will begin selling a group of products developed in partnership with The Home Edit, a fabulous organization business based in Nashville, Tennessee that uses The Container Store products in many of their client’s homes.

The Home Edit has over 1 million Instagram followers and has worked with many A-list celebrities to bring storage and organization to their lives. We are also proud to sell their book -- their new book, The Home Edit in our stores and on our website, and look forward to our future partnership with them.

In conclusion, we are delighted with our Q4 results and our strong end to fiscal 2018, including the operational progress we made across so many areas of the business.

And in fiscal 2019, we are excited about the opportunities that lie ahead, as we continue to realize our vision of being a beloved brand and the first choice for customized organization solutions and services. And in closing, I want to thank our incredible employees.

I am so appreciative and so grateful for their contributions and dedication this past year. It’s inspiring, and I thank them for their leadership and their commitment in making The Container Store all it can be. Yes, I am encouraged about the future of The Container Store for all of our stakeholders.

I’ll now turn the call over to Jodi to discuss our financial results and outlook in more detail.

Jodi?.

Q2 and Q3 up approximately $1.5 million each and Q4 up approximately $500,000; additionally, with regards to the approximate $4 million of net costs associated with our second distribution center, we currently expect that headwinds will be realized in Q1 to Q3, and then we expect to begin to realize the associated freight benefits leading to a slight tailwind in Q4.

As a result, given the cadence of these investments, we currently expect -- or anticipate EPS to be down in both Q1 and Q2, relatively flat in Q3 and up in Q4. In summary, we are very pleased with our Q4 sales and financial performance.

Our focus on our strategic priorities, including a strong focus on Custom Closets, is having a positive impact and becoming more evident in our results. Thank you. Now, I'd like to turn the call back over to the operator so that we can open the line for questions.

Adam?.

Thank you very much. Ladies and gentlemen, we will now be conducting our Q&A session. [Operator Instructions] Our first question comes from the line of Matt McClintock from Barclays. You are now live..

Good afternoon. This is Cait [ph] Howard on for Matt. Thanks for taking my questions. First, congratulations on the quarter, very impressive. I know you pride yourselves on testing and learning and have done a great job with that.

So, I was wondering, was there any aspect of testing and learning in the stores with the rebranded and new Custom Closets lines? And if so, could you share what some of those learnings were? And as the new line has been introduced to the stores, how has that changed space allocation within the store?.

It’s Melissa. And yes, it has been an incredible year of test and learning, that is for sure. And we have made some change with the launch of the Avera line, some visual display changes, some additions in our stores.

And we are continuing to test and learn visual merchandising, as I said in some of my remarks, and we're going to be rolling the successes of that out to all stores, we hope this year. So, it's a focus for us, as you can tell from the remarks that Jodi and I made.

And we just continue to tweak and learn and make decisions quickly and execute and try new things and it's paying off..

And my second question is with the success of KonMari and even with the success of the digital marketing campaign over the last year, are you able to track new customer acquisition, whether that be through POP! Stars stores and -- or other ways? And can you give us any color into the magnitude of that over the last -- the near term?.

Yes. We are able to track new customer acquisition. As I said in my remarks, we're delighted with the improvement that we made in our POP! Stars, that 22% increase. And the KonMari method certainly had an impact on that, a positive impact. It's hard to really quantify the impact of the Marie Kondo effect.

But, we did see an increase in other product category -- other product categories, as well as Custom Closets. And we feel that the KonMari effect definitely helps with those other product categories’ successes..

Great. And just final question for me. In terms of the private label product offering, I know you touched on that during the call.

But, can you remind us if you've communicated how broad that reach will be, or said another way, I guess, how deep you can go with that assortment or what aspects of the assortment you guys are targeting?.

Right. Sure. Well, we learned from our customer insights work that we did that our brand is incredibly strong. And many, many, many customers from the survey communicated that when they walk in our stores, they think that everything is The Container Store brand. So we know that there's a huge opportunity for private label and for global sourcing.

And we are going to take that as deep and as broad as we can. We're specifically going to focus in the beginning on closets, and storage and kitchen. But, we think there is tremendous opportunity. And I think you could tell from our remarks, we've got a lot of things moving kind of parallel simultaneously.

And that's a really exciting -- they're all exciting, but that's a really major focus for us..

Great. Thank you so much. And again, congrats on the quarter. .

Thank you so much..

Thank you. [Operator instructions] Our next question comes from the line of Steven Forbes from Guggenheim Securities. Your are now live..

Good afternoon. I guess, I wanted to start with the Custom Closets, right, given the fourth quarter performance and the new product line mentioned in the release. So, maybe if you can, discuss what your outlook is for the holistic offering, right, Custom Closets as a whole for 2019.

And maybe expand on the interplay between the Avera and Laren line at the store level, inclusive of how I guess you trained or how the store associates are really going to educate the consumer about those -- the different offerings and really drive conversion?.

Hi, Steve. This is Jodi. We've really tried to emphasize extensively training as we rolled out Avera, and make sure that our stores were clear how to approach a customer from the beginning because we need to ensure what their needs truly are to kind of drive them into the right product line.

And so, there's a series of questions and approach that they take with each customer. And certainly, we have seen early on in our sales that customers are buying different kinds of product lines in the same transaction. So, it may be that they're choosing in Avera line to go in one room and elsewhere to go in another.

So, there's -- it's really been a very holistic training effort. The design tool that we've created, you heard about us announcing it in Q3 or launching it in Q3. We expanded it further in Q4 to add Avera to it. So, it's very easy for the stores to simplistically work with the customer and shift them between the product lines.

Laren --just to be clear, Avera and Elfa remain fee-based products whereas the Laren line is 100% customizable to a space. The Laren line is completely no excuses whatever is the limit. So, there's a little bit of a distinction in that way.

But, I feel like the stores have been very well trained to be able to assist the customers whatever makes the most sense for their space..

And remember, Steve, it's just been rolled out to all stores. So, as I said in my remarks, so far, the response has been very positive and very enthusiastic, but it's just still so new. We just launched in all stores last month..

And as a follow-up, can you -- you mentioned the learnings, right, from the redesigned Dallas -- the Dallas store and I think it was storage, office, closet, kitchen and so forth.

Can you expand on that? I guess, what were those learnings? And why only limited to six additional stores this year?.

Well, we actually wanted to do more than that. And the learnings, it’s in laundry, office kitchen, the most of those storage. It's just made a huge impact in the convenience and ease of the customer and shopping in those stores with the tables upfront, lower fixturing, so you can really see the store, it's just more manageable.

And we're just trying to roll out as fast as we can all the successes from all these learnings. And that's in addition to taking at least 10 stores and increasing the Custom Closets presence, more displays, more of their displays, more Elfa Classic displays and solutions and décor.

So, we're just trying to be very smart, very -- I wouldn’t just say prudent, we're just trying to be really smart about it and make sure that we roll out those successes as fast as we can see..

And Steve, just to be a little bit more specific. There are certain attributes of these learnings that we rolled into the six stores, and they are going over the course of really just a couple of months here into all stores. And that includes we just finished doing some changes to the laundry area.

Office will happen in June where will we take in the attributes that we found successful, rolling those into all stores, and then kitchen in July. So, we definitely have some plans to take some of the key learnings and put them into all stores as quickly as possible and as efficiently as we can..

And bath....

And bath [multiple speakers] as well. So, we are putting into -- all of them, what makes sense as quickly as we can..

Exactly..

Thank you. Ladies and gentlemen, we have no further questions in queue at this time. I'd like to turn the floor back over to management for closing..

Thank you all so much. We appreciate your interest and once again support of The Container Store. And we look very forward to our next earnings call to give you a complete update on where we are. Have a wonderful day..

Thank you. Ladies and gentlemen, this does conclude our teleconference for today. You may now disconnect your line at this time. Thank you for your participation. And have a wonderful day..