Greetings, and welcome to The Container Store's Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded.

I would now like to turn the conference over to your host, Caitlin Churchill, Investor Relations. Thank you. You may begin..

Good afternoon, everyone, and thanks for joining us today for The Container Store's Third Quarter Fiscal Year 2020 Earnings Results Conference Call. Speaking today are Melissa Reiff, Chairwoman; Satish Malhotra, Chief Executive Officer; and Jeff Miller, Chief Financial Officer.

After Melissa, Satish and Jeff 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, expectations regarding liquidity and goals, our anticipated financial performance, our plans in response to COVID-19 and the potential impact of COVID-19 on our business 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 17, 2020.

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?.

Thanks, Caitlin, and hello, everyone. Welcome to our fiscal 2020 Q3 earnings call. We appreciate you joining us today. We issued a press release late last month announcing my retirement March 1 of this year and the appointment of my replacement, Satish Malhotra.

We also shared in our release that we were tracking well above our expectations for our Q3 sales results. But before we share those results, I do want to tell you that I am delighted with the transition plan that Satish and I have in place. It is going smoothly, and he officially assumed the roles of CEO and President just yesterday.

So today is his second day on the job. And Satish is joining Jeff and me on this call. I will ask him to say a few words in just a moment and share some of his thoughts as he begins the journey of leading our great company into the future.

And while we only announced my planned retirement last month, the Board and I spent months preparing for this and searching for the perfect candidate for our very special and cultural leading company. We were thrilled to have found exactly what we were looking for in Satish.

He has had a very successful 21-year career with Sephora, most recently as Chief Retail and Operating Officer; and has had leadership responsibilities for stores, services, supply chain, technology, real estate and partnerships, among others. Also very important is that his values align perfectly with ours, which makes him a wonderful fit.

With our business firing on all cylinders, both financially and operationally, this is an ideal time for this transition. It has been an amazing 25 years for me with our great company, and specifically, the last four years as CEO have been rewarding challenging too, of course, but very rewarding.

I am so proud of how far we have come, the culture we have nurtured and the outstanding team that I have been privileged to lead. The ingredients for the success we are enjoying today have been years in the making. And I have no doubt that The Container Store will build on this success in the years to come under Satish's leadership.

My official retirement date is March 1, as I said, but I will remain Chairman of our Board until our annual meeting in August to further ensure a smooth transition. With that, please join me in welcoming Satish, who will say a few words before Jeff and I talk about our Q3 results.

Satish?.

Thank you, Melissa, for the kind introduction and for your unyielding support as I begin my new role. I'm very excited to be here today sitting in our headquarters in Coppell, Texas, as the newest member of The Container Team Store and have the opportunity to lead this incredible company.

As this is only my second day at The Container Store, I'll keep my comments brief. I wanted to first congratulate Melissa and the team on delivering outstanding results in Q3 and for providing such a strong foundation for me to build upon.

I’ve long admired The Container Store brand and the great success the team has had in creating, innovating and leading the storage and organization industry, including Custom Closets, which continues to have such strong momentum.

Equally important, though, is the very unique culture that has been cultivated throughout the Company's history that was particularly attractive to me. Organizational culture is critically important to building a successful business. And my 21-year tenure at Sephora served to strengthen my belief in its importance.

I'm looking forward to spending my initial weeks meeting with our teams. It will be virtually for the moment and spending time in our stores and our distribution centers. I'm also looking forward to getting to know you, our analysts and investors. Once again, I want to thank Melissa for her warm welcome and her partnership during this transition.

And with that, I will hand it back over to her..

Thanks much, Satish. I'll begin by discussing the highlights of our fiscal Q3 performance and then share the progress we are making against our strategic initiatives. Jeff will follow and share our financial results in more detail.

For the quarter, we reported record consolidated net sales of $275.5 million, up 20.5%, driven by strong growth at The Container Store as well as with our Elfa third-party business, which saw a sales increase of 13.5% compared to the prior year.

The sales we generated this quarter represent the highest sales for any quarter in our company's history to date. Our online channel also continued to be a source of strength with online sales nearly doubling versus the same time period last year.

Our strong sales performance, combined with better-than-expected SG&A leverage more than offset the freight-driven decline in gross margin. This resulted in adjusted EPS of $0.42 and compared to $0.05 in Q3 last year. From a balance sheet perspective, due to our strong financial performance, we ended the quarter with zero balance on our revolver.

We also refinanced our debt during the third quarter, reducing our senior term loan by $47 million in conjunction with the refinance and extending its maturity to January 2026.

As previously communicated, we saw a strong start to the third quarter, and this continued throughout the remainder of the third quarter, driving an almost 20% growth in Custom Closets sales and over 22% growth in sales of our other product categories.

It's really gratifying to see that we're selling solutions broadly across nearly all departments in our stores and online. And this momentum, this momentum has continued into the fourth quarter. Back to Q3 for a moment. As I said, we saw growth in other product categories, most notably kitchen, closet, storage, home office and bath.

And we were particularly pleased with our strong mini kitchen event held prior to Thanksgiving, as well as with a robust start to our annual Elfa sale, which began on December 16.

With our record-breaking Q3 sales performance, I'm very proud to report that despite the negative impact we experienced with COVID-19 earlier this fiscal year on a year-to-date basis, our consolidated sales, both at The Container Store and Elfa third-party have turned positive as of the end of Q3.

And with the strength of our current performance quarter-to-date in fiscal Q4, we expect to end fiscal 2020 with strong momentum. I attribute much of our success to-date to the great progress we have made and continue to make with our strategic initiatives.

As I mentioned, our Custom Closets business saw significant improvement growing almost 20% for the quarter. While our business has been impacted by temporary store closures and the ongoing pandemic, we have remained focused on our goals and the opportunity that we know remains with the estimated $6 billion addressable market for Custom Closets.

With installation services down year-over-year given COVID-19 restrictions, we have seen a notable increase in customers choosing DIY, do-it-yourself solutions, which are predominantly focused on our Elfa product offerings including our Elfa pre-packaged Grab & Go solutions.

We are pleased to be in a position to offer such a great range of solutions for our customers no matter the current environment or trends. And now marketing. In Q3, our POP! enrollments increased by 26% compared to the same time period last year, representing a gain of over 370,000 new POP! stars during that time.

In fact, in Q3, we recorded our highest POP! enrollments since 2005, and we have continued to see the program grow into Q4.

Following the successful partnership we have with the Home Edit, which we are excited to continue to enhance in 2021 and future years, we are thrilled to have recently launched our new co-branded product collection with Marie Kondo.

The collection, which features more than 100 sustainably sourced products launched online January 11 and in stores January 15. While still very early, customer response has been terrific. And I know Satish and Jeff will look forward to sharing much more about that on our next quarter call. Supply chain.

While there are broader industry freight dynamics that we and others are navigating, in the form of higher freight rates and container costs, port congestion and related delays our second distribution center has enabled us to deliver orders to customers faster. The benefits of this are twofold.

First, from a customer perspective, it satisfies their growing desire for quicker delivery times. And from an operational perspective, it further increases our capacity to fulfill our online orders. The additional capacity will also position us well when opening more new stores in the future.

And while on the topic of stores, we continue to have significant white space for growth, as we have discussed on previous calls. And we continue to generate learnings from our newer format stores that we will leverage when we prudently increase the pace of our openings. We constantly analyze the performance of our store fleet.

And based on this analysis, we have decided not to read the lease at our Lexington Avenue, New York City location. The store lease expires at the end of this month.

And as you can imagine, with the flight to the suburbs due to COVID, and the fact that we have a very successful store in Chelsea on Sixth Avenue, where we do believe we can transfer a nice amount of the Lexington Avenue store sales. This decision to not renew the lease is the right decision for our company.

This is an unprofitable store due to very high occupancy costs, especially as property tax rates have risen in the city. I'm very happy that we were able to transfer our employees that were interested to other store locations.

And I am, of course, sad to see this beautiful store close and to see many of the retailers around us and the vicinity also closed. But I know that we've made the right decision.

So in summary, we delivered an exceptional quarter, and I'm so pleased with our results and feel confident that all areas of our business are well positioned to continue to drive results through the end of the fiscal year and beyond.

I want to thank all of our teams again for their positive attitude this year, especially given the pandemic and for their smooth execution of servicing our customers under challenging conditions.

Our entire organization is doing an excellent job in helping our customers accomplish their projects and in meeting their elevated needs for an organized home while always prioritizing first, the safety of our customers and each other. As we look ahead, I'm excited for the next chapter of The Container Store under Satish's leadership.

I'm confident in the talent that we have across the organization and in the capabilities we have built, and I know we will continue to improve upon them. I look forward to working with Satish in the months ahead as I continue as Chairwoman until the 2021 Annual Meeting in August. Thank you.

Thank you to my incredible team and the special TCS family and to each of you on this call are supportive analysts and investors. And I also want to thank our many incredible vendors and our loyal customers who may be listening to the call today.

It really has been a privilege to serve as CEO of our company the past four years, and I wish all of you the very, very best. And with that, I'm going to turn it over to Jeff..

Thank you, Melissa, and good afternoon, everyone. Before I get into more detail regarding our results, I just want to express my deepest thanks to Melissa for everything she's done to build our company into what it is today and establish the special culture we are so proud of. While we will miss her, we know she's only a phone call away.

And as we start this new chapter, I'm excited to welcome Satish and look forward to his leadership and partnership as we continue to build on the strong success we have seen to date. As Melissa shared, we are very proud of our third quarter performance.

Our sales and earnings results significantly outperformed our expectations that factored in our conservative plans for holiday categories as well as the ongoing uncertain macro environment with COVID-19. As we look at the third quarter, consolidated net sales increased 20.5% year-over-year to $275.5 million.

As Melissa mentioned, this is the highest quarterly sales we have recorded in the history of our company. Our online channel continued its strong performance in Q3, delivering sales growth of 98.1%.

When you include curbside pickup, our website generated sales in Q3 were up 114.5%, representing a total of 28% of TCS net sales compared to 16% in Q3 last year. Online orders taken, but not shipped to customers returned to normalized levels at the end of the third quarter.

We ended the third quarter with orders taken but not shipped totaling $1.8 million, which is an improvement of $4.7 million from the end of our second quarter. By segment, net sales for The Container Store retail business increased 21% to $256.5 million compared to $212 million last year.

The strong performance from our other product categories as well as the significant improvement in Custom Closets, more than offset the underperformance of our holiday departments in Q3. Other product categories were up 22.2% in Q3, contributing 12.6% of the 21% increase in net sales.

Within other product categories, holiday departments had a negative impact of 2.8%. As you recall, we planned our holiday departments down and bought conservatively, allowing us to end the quarter in a great inventory position on seasonal products. Custom Closets sales were up 19.5% and contributed the remaining 8.4% of our sales increase.

Elfa third-party net sales increased 13.5% to $19 million. Excluding the impact of foreign currency translation, Elfa third-party net sales increased 3.3% year-over-year. From a profitability standpoint, our consolidated gross margin for Q3 was 57.9% compared to 58.8% last year.

The 90 basis point decline was slightly worse than our original expectations driven by heightened freight cost headwinds during the quarter.

By segment, gross margin at The Container Store decreased 40 basis points, primarily due to increased shipping costs as a result of a higher mix of online sales combined with incremental shipping surcharges instituted by third parties. This was partially offset by less promotional activity and favorable mix of higher-margin product sales.

Elfa gross margin increased 260 basis points, primarily due to lower direct material costs. Consolidated SG&A dollars increased 3.5% to $115.9 million compared to $112 million in Q3 last year.

As a percentage of sales, SG&A decreased by 690 basis points versus last year, primarily due to leverage of occupancy and payroll costs on higher sales during the quarter, combined with reductions in marketing costs and other expenses.

Our net interest expense in the third quarter of fiscal 2020 decreased 20.1% to $4.1 million from $5.1 million in the prior year due to lower interest rates combined with the lower principal balance on our senior secured term loan facility.

In Q3, we amended our senior secured term loan facility and incurred a loss on extinguishment of debt of about $900,000. The effective tax rate for the quarter was 29.4% compared to 43.9% in the third quarter last year. The decrease in the effective tax rate is primarily due to the impact of discrete items on higher pretax income year-over-year.

Net income for the quarter on a GAAP basis was $20 million or $0.40 per diluted share as compared to GAAP net income of $2.4 million or $0.05 per diluted share in the third quarter of last year. Adjusted net income was $20.7 million or $0.42 per diluted share as compared to last year's adjusted net income of $2.4 million or $0.05 per diluted share.

Our adjusted EBITDA increased 92.9% to $42.4 million in the third quarter this year compared to $22 million in Q3 last year. Turning to our balance sheet. As previously mentioned, during the quarter, we were very pleased to refinance our term loan, which extended the maturity to January 31, 2026.

We also reduced our overall debt balance by $47 million, bringing the aggregate principal balance to $200 billion at closing. We also extended the maturity on our revolver to 2025, and as of quarter end, we had a zero balance on our revolver.

As a result of reducing our overall debt balance in connection with our refinancing, we expect interest expense in Q4 to be approximately $4 million.

We ended the quarter with $27.9 million in cash, $191.1 million in net borrowings on our term loans and total liquidity, including availability on our revolving credit facilities of approximately $138.1 million. Our current leverage ratio is approximately 1.3 times.

The $47 million reduction in our debt balance demonstrates our commitment to use our excess cash to pay down debt. We ended the quarter with consolidated inventory down 0.4%.

Though we are seeing an improvement in our in-stock levels as compared to where we were during Q2, we were not immune to the supply chain disruptions and rising freight costs, which were prevalent across the industry. Our teams continue to navigate these headwinds, adjusting lead times where possible to minimize interruption.

We are very pleased with our strong free cash flow performance. We generated $105 million in free cash flow in the year-to-date period through Q3, up significantly from last year when we utilized $30.4 million of free cash flow. We expect our total CapEx for the fiscal year to be approximately $16 million.

And as a reminder, we deferred approximately $12 million of certain cash lease payments in the first quarter of this fiscal year. About $10 million of these cash lease payments remain deferred at the end of the third quarter, the benefit of which is reflected in our year-to-date adjusted EBITDA.

Less than half of these amounts are expected to be repaid in the fourth quarter of this fiscal year, and the remaining amounts are expected to be repaid primarily in fiscal 2021.

As we approach the end of this unprecedented year, we are very pleased with the start of fiscal Q4, with continued momentum coming out of Q3 and strength in both Custom Closets and other product categories. As a reminder, Q4 will include a 53rd week.

And given the strength of our performance quarter-to-date, combined with the benefit of the 53rd week and the fact that we'll be lapping certain pandemic-driven store closures in fiscal March, we expect Q4 sales growth to be approximately in the low to mid-20% range.

Adjusted diluted earnings per share in the fourth quarter are expected to be approximately $0.52 to $0.57, resulting in full year adjusted diluted earnings per share of approximately $1.05 to $1.10 versus $0.30 in fiscal 2019. Embedded in our Q4 earnings outlook is incremental marketing spend to support our key product launches.

Additionally, the 53rd week is expected to contribute approximately $13 million to sales and approximately $0.05 to adjusted diluted earnings per share in the fiscal fourth quarter.

In closing, as Melissa said earlier, with our business firing on all cylinders, both financially and operationally, we are looking forward to closing out fiscal 2020 strong. Overall, we believe we will come out of the pandemic and even better company with more customers, fresh product selections and a strong balance sheet.

That concludes our prepared remarks. I will now turn the call over to the operator to open up the lines for questions..

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Steven Forbes with Guggenheim Securities. Please proceed with the question..

I wanted to focus on, I guess, I wanted to start with the segment level gross margin performance, right.

You talked about the puts and takes, right, within the release and mentioned them again, but I was hoping you could help us quantify them the various drivers you mentioned? And then within Elfa, you have four consecutive quarters here at or above 40% on the gross margin line.

Is that the right level to think about going forward? Or do you foresee incremental opportunities looking out to '21 and beyond?.

Okay. Yes, Steve, this is Jeff. And looking at gross margin at the segment level, as we discussed, Container Store, we certainly saw headwinds related to the higher mix of online sales, incurring a lot more in shipping costs than we originally expected.

And the third-party surcharges we are experiencing on freight, we're much more impactful than we originally thought. And Elfa, of course, when you look at the gross margin, they have benefited through a lot of their cost saving activity over the last four quarters, as you mentioned, but I wouldn't expect it necessarily to continue.

We're in the early stages of planning fiscal 2021 right now. And we can't really speak to what fiscal '21 is going to look like, but I will say there is looking at commodity price increases, both at Container Store and Elfa there is pressure on that front.

And while there was no impact to Q3, we could see some of that come through in Q4 and certainly into fiscal '21. And as a reminder, we have historically, at Container Store, have been able to manage commodity price increases through either vendor negotiations or through price increases..

And maybe just a quick follow-up on that. If you don't want to specifically quantify the drivers.

Can you provide some color on what the segment level gross margin performance or what level is implied in the guide as we think of the models here? Because I would imagine some of those pressures, right, are going to weigh on the fourth quarter performance?.

Correct. Yes, Steve, the way we're looking at Q4, we're certainly seeing our online business -- strengthen the online business, and we'll continue to experience those increased freight cost, freight and shipping costs, not only due to the higher mix, but also due to the surcharges that we continue to incur.

So, we're thinking about Q4 right now, we see it at slightly down to flat..

Perfect. And then if I can, one additional follow up, Melissa or Satish, if you don't mind answering, as you think about the brand awareness sort of ramping right behind this year's strength. I think, you pushed out Richmond right to spring of this year.

So, I would love to just get your initial thoughts on any sort of time line, right behind the return to unit growth for the brand, right, especially just given the strength you're seeing in the top line here and taking advantage right of all the growth that you're experiencing?.

Right. Steve, it's Melissa. Yes, you're right. We're going to open Richmond at the end of this fiscal year. And then we have one more store planned for 2021. And then I feel confident in already my conversations with Satish, that he and the team will be evaluating our new store growth.

As you can imagine, this is a second day, Steve so, but Satish, you might want to add some color to that, but he will be, I know, evaluating all that and determining the investments that we're going to make in our new store growth because there is so much white space..

Yes. Thanks, Melissa. And hi, Steve, listen, I would just say it's way too early to me to be talking specifics about our approach. But rest assured, as I get into the business and really spend time with the organization, it will definitely help formulate my thinking and the plan for 2021. So just stay tuned for that..

Our next question comes from the line of Kate McShane with Goldman Sachs. Please proceed with your question..

I just to start, I was interested in one of the comments you made, Melissa, with regards to the amount of DIY you're seeing. Obviously, that's been the trend across retail as people have been home and have prevented the pros from coming inside the home because of the pandemic.

But I just wondered if you had seen a meaningful change in the cadence with regards to DIY installation at this point in time?.

Specific to installation, Kate?.

Yes..

Yes. We have seen, as I said in the remarks, installation is down year-over-year because of the pandemic. But what I'm so proud of is that we pivoted immediately with the virtual in home design and that has helped tremendously. Also, Elfa, we've been selling Elfa for 42 years, and it's a 70-plus year old company.

And not only is it a great closet solution or pantry solution, but really, the Elfa prepacks and our -- what we call our Grab-&-Go, have really, really picked up, Kate. And again, our customers are -- because they are at home. They are a really the gratification or of doing it themselves. I don't know if that's going to continue, we don't know.

But we will continue to do it for them as well, and that will include delivery and installation. And once the pandemic we get past this, we are anticipating that installation will increase for sure, and we're prepared for that..

Okay.

But there's been no real change, I assume then from what you saw maybe more in the middle of the pandemic in the summer versus now with regards to installation, it's still kind of the same?.

No, no. No significant change at all. It's just the same. Actually, I think in some ways, Kate, it's getting better. Customers are getting a little bit more comfortable with having the installers in their home practicing protocol because we are so big on safety and so making sure that that is the priority.

And so, I think some of our customers are getting much more comfortable..

Okay. Great. And then I know there's been a lot of disruption within the supply chain, which you applied also during your prepared comments.

Is there a way to quantify the impact to comp from any of the disruption that you've said you’ve seen? And could you maybe walk through how you're feeling about inventory by certain categories currently? Are there places where maybe you feel a little bit less -- there's less inventory available than other categories?.

Yes. I'll let Jeff take this, but just one comment. I don't know how to quantify the impact from the supply chain. I don't know how to do that. But I can tell you that we are in great shape in terms of inventory for our Elfa sale, which began in the middle of December 18 and goes through February 23. And we're in very good shape there.

And all the other product categories, like every other retailer, we've been chasing this inventory across the board, but you can look at the results, and our team has done an excellent job with that. So I mean, Jeff, I don't know if you can quantify it, but I don't know how to do that..

I think it's really difficult to quantify, just simply because there's a lot of different factors at play in how we address it. I mean in areas -- I'm sorry, I hope --.

That's okay..

Whether it'd be disruption in the freight lines or in the manufacturers, I mean, we are dealing with vendors negotiate -- we're negotiating with our different vendors. We're also seeing situations where customers may come in, they may not have the product they want because of the disruption, but they're picking and choosing something else.

From a business standpoint, it's really hard to --.

To quantify. I think that's a really great point. Because, Kate, the strength of our assortment, if a customer comes in looking for one specific solution or even a specific item, we have other opportunities and other options for them, and they're taking advantage of it.

And our supply chain team has done a great job in really adding lead times to try and build more safety stock. So even though inventory has been on my mind constantly, and I worry about it, I feel very confident that we are -- and for the most part, a very good shape.

I mean, we're going to continue due to some things we can't control to chasing some inventory. But overall, I think we've done a really good job. And again, I think the results speak for that..

Okay. If I could just maybe sneak in one last question. Just going back to the question. I know with the CEO transition, that there's going to be a lot of decisions being made going forward. So when we think about your investment spend for 2021, just in the context of what you just experienced as a company throughout this pandemic.

Is there any kind of shift or reprioritization of how you're thinking about your CapEx, your investment spend this year?.

Kate, and I don't think Satish can address this either being number two day on the job. We just don't know yet. We're right in the midst of planning 2021, and I've shared all my thoughts with Satish. Now he and the team are going to take it from here. And it's a lovely position we're in.

I would personally -- my personal opinion, I would assume that our CapEx is going to increase because we're going to look at more investment, whether it's new stores or whether Satish and the team decided focused on digital or technology or whatever, because we have so much opportunity ahead but I can't comment.

Satish, I don't think you can either right?.

No, no. It's just too early. And I actually look to spend a lot of my next coming weeks early into the months really just listening and learning as much as possible to make that very decision..

Right. Yes. I'd just like to add to that. As always, we're always going to be looking to invest our money where we get us return, whether it's paying down debt or expanding our business and making striking a good balance between the two.

And of course, fiscal '20, when you look at it, we have a very low amount of CapEx just because of COVID, And I would expect CapEx levels will return to normalized levels for '21..

Jeff, you're choking, take another drink. I hope that answered, Kate.

Did that answer your question?.

Yes..

Our final question comes from the line of Tami Zakaria with JP Morgan. Please proceed with your question..

Hi, thank you so much for taking my question and congrats on excellent results. So my first question is around Custom Closets. I think you mentioned it grew about 20% in the quarter.

So I was wondering how much of that is driven by volume versus ticket? Meaning, was it any price increase driven? Or it was just pure volume driving that impressive growth?.

Tami, there were not any price increases. We're very, very pleased by Custom Closets and the growth. It has been driven mostly from Elfa because, of course, we can install it for the customer or the customer can install Elfa. Now Avera and Laren, we have to install, as you'll recall, Tami. So, yes, we're very pleased with it.

And as I said, we've begun the Elfa sale and so far so good with the Elfa sale. So, we've got a lot of momentum and expecting things to continue..

Got it. That's super helpful. And then if I could switch to the Leg income store, so any detail around the revenue impact from closing that? And how much do you expect to recapture through the Chelsea location.

And on the rent side, how much do you expect to say when the lease expires?.

Yes. The lease expires at the end of this month, as I said in my remarks. And I hesitate to give a percentage of what we think transferred to Sixth Avenue. But we're encouraged.

And I have to say that the closing of that store, which was our Tami, as you'll recall, I was -- I think we all were just incredibly proud of the team and the way that we close that store and sold down the merchandise the way we communicate with our customers.

We had a lot of customers coming -- still continue to come in, and so they'll be shopping at Sixth Avenue in Chelsea. So I'm encouraged by that. As I said, the store was unprofitable because the occupancy was so high. So, there just wasn't another decision.

And it was sad for all of us because that's kind of the jewel box, we call it, they're at Lexington 58, but it's the right decision for the Company. It's the right decision for the short, mid and long term..

Got it.

So no quantification around how much rent you might say after closing it?.

No..

Got it. Got it. And then one last one from me.

So, the freight pressures, is that primarily the last mile? Or is it coming from the import of goods from overseas, like where is the freight pressure mostly happening?.

It's Tami, it's all over the place. It's the first being the shipping costs that we pay for our direct-to-consumer business, the higher mix of online sales, we're incurring much more because of the volume plus the third-party carriers are charging us surcharges on top of that.

And then, of course, in the freight lanes over the water, there's all kinds of disruption in that freight category. And we're incurring much more cost on that front as well. So, we're seeing it both in shipping costs and the cost to get our goods to us..

Yes..

And really, I think one of the reasons for that driver is, we do have contracted rates, but even those rates have gone up and because of the volumes that we're doing, much higher than expected, we're having to go into the spot market, and of course, that's much higher than our contracted grades..

Got it. Sorry, one last one. So, the shipping charges that are -- is it fair to say the past quarter was probably the peak of the surcharge headwind. And now that the holiday volume has sort of died down that all charge driven pressure is probably saw the peak in the past quarter and should wane as we look ahead.

Is that fair to say?.

Tami, we have not seen any reduction in the surcharges since the holidays. The third-party carriers are still charging them..

We haven't seen that abate yet, Tami, and just don't know..

And with that, we reached the end of our question-and-answer session. And I would like to turn the floor back over to management for any closing remarks..

Well, I just want to say thank you so much for joining us today. And again, I appreciate all your support of The Container Store over the years. And again, congrats Satish and just take it from here and just let this company soar because the opportunities are just incredible. So good luck to everybody..

Thank you..

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