Risk Factors Dashboard
Once a year, publicly traded companies issue a comprehensive report of their business, called a 10-K. A component mandated in the 10-K is the ‘Risk Factors’ section, where companies disclose any major potential risks that they may face. This dashboard highlights all major changes and additions in new 10K reports, allowing investors to quickly identify new potential risks and opportunities.
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Risk Factors - TCS
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Unless the context otherwise requires, references in this Annual Report on Form 10-K to the “Company,” “we,” “us,” and “our” refer to The Container Store Group, Inc. and, where appropriate, its subsidiaries.
The following discussion contains references to fiscal 2023, fiscal 2022, fiscal 2021, fiscal 2020, and fiscal 2019, which represent our fiscal years ending or ended, as applicable, March 30, 2024, April 1, 2023, April 2, 2022, April 3, 2021, and March 28, 2020, respectively.The following discussion contains references to fiscal 2022, fiscal 2021, fiscal 2020, fiscal 2019, and fiscal 2018, which represent our fiscal years ending or ended, as applicable, April 1, 2023, April 2, 2022, April 3, 2021, March 28, 2020, and March 30, 2019, respectively. All references herein to “fiscal 2023” represent the results of a 52-week fiscal year, “fiscal 2022” represent the results of a 52-week fiscal year, references to “fiscal 2021” represent the results of a 52-week fiscal year, references to “fiscal 2020” represent the results of a 53-week fiscal year, and references to “fiscal 2019” represent the results of a 52-week fiscal year.
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Summary of Risk Factors
The summary of risks below provides an overview of the principal risks we are exposed to in the normal course of our business activities:
● | An overall decline in the health of the economy and consumer spending have affected and may affect consumer purchases of discretionary items, which could reduce demand for our products and materially harm our sales, profitability and financial condition. |
● | If we are unable to source and market new products to meet our high standards and customer preferences or are unable to offer our customers an aesthetically pleasing and convenient shopping environment, our results of operations may be adversely affected. |
● | If we fail to anticipate consumer demand, or to manage inventory commensurate with demand, our results of operations may be adversely affected. |
● | Our business requires that we lease substantial amounts of space and there can be no assurance that lease terms and conditions will remain as favorable as in the past. |
● | Costs and risks relating to new store openings could severely limit our growth opportunities. |
● | Our costs have increased, and in the future may continue to increase due to factors that may or may not be controllable by us, which may negatively affect our financial results. |
● | Our operating results are subject to quarterly and seasonal fluctuations, and results for any quarter may not necessarily be indicative of the results that may be achieved for the full fiscal year. |
● | A cyber-attack or security incident impacting TCS or third-party providers’ information technology systems or confidential information may result in reputational damage, exposure to regulatory or litigation risk that may materially affect our business, financial results, results of operations, and trading prices of TCS common stock. |
● | Failure to comply with current or expanded laws and regulations relating to privacy, data protection, and consumer protection, could adversely affect our business and our financial condition. |
● | We rely upon third-party service providers to operate critical aspects of our internal and external business operations and any disruption or interference with such operations, or material non-compliance with laws and regulations by such third parties, could materially and adversely impact our business.We rely upon third-party service providers to operate many critical aspects of our internal and external business operations and any disruption of or interference with such operations, or material non-compliance with laws and regulations by such third parties, could materially and adversely impact our business. |
● | Material damage to, or interruptions in, our information systems as a result of external factors, working from home arrangements, staffing shortages and difficulties in updating our existing software or developing or implementing new software could have a material adverse effect on our business or results of operations. |
● | Failure to effectively manage our online sales, may result in reputation and operational harm. |
● | Our ability to obtain merchandise on a timely basis at competitive prices could suffer as a result of any deterioration or change in our vendor relationships or events that adversely affect our vendors or their ability to obtain financing for their operations. |
● | We rely upon independent third-party transportation providers for substantially all our product shipments and are subject to increased shipping costs as well as the potential inability of our third-party transportation providers to deliver on a timely basis. |
● | We are subject to duties, tariffs and quotas associated with foreign imports for our merchandise. We are subject to duties, tariffs and quotas associated with our dependence on foreign imports for our merchandise. |
● | Our facilities and systems, as well as those of our vendors, are vulnerable to natural disasters and other unexpected events, and as a result we may lose merchandise, incur unexpected costs or be unable to effectively service our stores and online customers. ●Our facilities and systems, as well as those of our vendors, are vulnerable to natural disasters and other unexpected events, and as a result we may lose merchandise, incur unexpected costs or be unable to effectively service our stores and online customers. |
● | Material disruptions at one of our manufacturing facilities could negatively impact production, customer deliveries and overall financial results. |
● | Product recalls and/or product liability, as well as changes in product safety and other consumer protection laws, may adversely impact our merchandise offerings, reputation, results of operations, cash flow and financial condition. |
● | We face distribution risks related to operating two distribution centers and domestic and international manufacturing facilities. |
● | We face risks related to indebtedness, that could result in a high degree of leverage on cash flow from operations to pay back debt. |
● | Our costs and financial results have changed, and in the future may continue to change because of currency exchange rate fluctuations.Our costs and financial results may change as a result of currency exchange rate fluctuations. |
● | We will require significant capital to fund our expanding business, which may not be available to us on satisfactory terms or at all. If we are unable to maintain sufficient levels of operating cash flows, we may require additional financing which could adversely affect our financial health and impose covenants that limit our business activities. |
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● | Our fixed lease obligations could adversely affect our financial performance. |
● | Disruptions in the global financial markets and rising interest rates may make it difficult for us to borrow enough capital to finance the carrying costs of inventory and to pay for capital expenditures and operating costs, which could negatively affect our business. |
● | Changes to global financial markets, including the use of benchmark interest rates, may make it difficult for us to predict our future interest expenses. |
● | Competition, including internet-based competition, could negatively impact our business, adversely affecting our ability to generate higher net sales. |
● | Our vendors may sell similar or identical products to our competitors, which could harm our business. |
● | Our business depends in part on a strong brand image. If we are not able to protect our brand, we may be unable to attract enough customers or sell sufficient quantities of our products. If we are not able to protect our brand, we may be unable to attract a sufficient number of customers or sell sufficient quantities of our products. If we are not able to protect our brand, we may be unable to attract a sufficient number of customers or sell sufficient quantities of our products. |
● | Our failure or inability to protect our intellectual property rights could diminish the value of our brand and weaken our competitive position. |
● | We depend on key executive management. |
● | If we are unable to find, train and retain key personnel that reflect our brand image and embody our foundational principles, we may not be able to grow or sustain our operations. |
● | Organized labor activities could cause labor relation issues and higher labor costs. |
● | We could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery and anti-kickback laws. |
● | There are legal claims made against us from time to time that may distract management from our business activities and result in significant liability or damage to our brand.There are claims made against us from time to time that may distract management from our business activities and result in significant liability or damage to our brand. |
● | Changes in statutory, regulatory, and other legal requirements could potentially impact our operating and financial results.Changes in statutory, regulatory, accounting, and other legal requirements could potentially impact our operating and financial results. |
● | Our total assets include intangible assets with an indefinite life, including goodwill and trade names, and substantial amounts of long-lived assets. Changes in estimates or projections used to assess the fair value of these assets, or operating results that are lower than our current estimates, have in the past and may in the future cause us to incur impairment charges that could adversely affect our results of operation. Changes in estimates or projections used to assess the fair value of these assets, or operating results that are lower than our current estimates, may cause us to incur impairment charges that could adversely affect our results of operation. Changes in estimates or projections used to assess the fair value of these assets, or operating results that are lower than our current estimates, may cause us to incur impairment charges that could adversely affect our results of operation. |
● | We may be subject to fluctuations in our tax obligations, and effective tax rates and realization of our deferred tax assets, including net operating loss carryforwards, which could result in volatility of our operating results. |
● | If third parties claim infringement of their intellectual property rights, our operating results could be adversely affected. |
● | If our operating and financial performance in any given period does not meet the guidance that we provide to the public, our stock price may decline. |
● | Substantial future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price. |
● | Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and stock price. |
● | We do not currently expect to pay any cash dividends. |
● | Our anti-takeover provisions could prevent or delay a change in control of our Company, even if such change in control would be beneficial to our shareholders. |
● | The provision of our certificate of incorporation requiring exclusive venue in the Court of Chancery in the State of Delaware for certain types of lawsuits may have the effect of discouraging lawsuits against our directors and officers. |
● | Our common stock price may be volatile or may decline. |
● | As a public company, our management is required to devote substantial time and monetary costs to compliance matters. ●We incur costs as a public company and our management is required to devote substantial time to compliance matters. |
● | We are subject to a series of risks relating to climate change and natural disasters, which may affect our worldwide business operations and financial results. |
● | Increased scrutiny of, and evolving expectations for, sustainability and ESG initiatives could increase our costs, harm our reputation, or otherwise adversely impact our business. |
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PART I
ITEM 1. BUSINESS
General
The Container Store® is the original and leading specialty retailer of organizing solutions, custom spaces and in-home organizing services in the United States and the only national retailer solely devoted to these categories. We provide a collection of creative, multifunctional and customizable storage and organization solutions that are sold in our stores and online through a high-service, differentiated shopping experience. We feature The Container Store Custom Spaces (“Custom Spaces”) exclusive products consisting of our elfa® Classic, elfa® Décor, Avera® and PrestonTM systems, which are wholly-owned and manufactured by The Container Store. Custom Spaces includes metal-based and wood-based custom space products and in-home installation services. Our customers are highly educated, very busy and primarily homeowners with a higher than average household income. Our customers crave discovery, inspiration, and solutions that simplify their lives and maximize their spaces within their homes. Our vision is to deepen our relationship with our customers, expand our reach and strengthen our capabilities, all while transforming lives through the power of organization.
We were founded in 1978 in Dallas, Texas as The Container Store, Inc. In 2007, The Container Store, Inc. was sold to The Container Store Group, Inc. In November 2013, we completed the initial public offering of our common stock (the “IPO”). Our common stock trades on The New York Stock Exchange (“NYSE”) under the symbol “TCS.” In fiscal 2022, we generated consolidated net sales of $1.0 billion. Today, our operations consist of two reportable segments:
● | The Container Store (“TCS”) consists of our retail stores, website and call center (which includes business sales), as well as our in-home services business. We operate 97 stores with an average size of approximately 24,000 square feet (18,000 selling square feet) in 34 states and the District of Columbia. We also offer all our products directly to customers through our website, responsive mobile site and app, call center, and in-home design specialists and in-home design organizers. Our stores receive substantially all our products directly from one of our two distribution centers. Our stores receive all of our products directly from one of our two distribution centers. Our first distribution center in Coppell, Texas, is co-located with our support center and call center, and our second distribution center is located in Aberdeen, Maryland. We operate the C Studio Manufacturing, Inc. (“C Studio”), (formerly known as “Closet Parent Company, Inc.”, or “Closet Works”) facility in Elmhurst, Illinois, which designs and manufactures the Company’s premium wood-based custom space product offering, and is included in the TCS reportable segment. In fiscal 2022, TCS had net sales of $991.4 million, which represented approximately 95% of our total consolidated net sales. |
● | Elfa, The Container Store, Inc.’s wholly owned Swedish subsidiary, Elfa International AB (“Elfa”), designs and manufactures component-based shelving and drawer systems and made-to-measure sliding doors. Elfa was founded in 1948 and is headquartered in Malmö, Sweden. Elfa’s shelving and drawer systems are customizable for any area of the home, including closets, kitchens, offices and garages. Elfa operates three manufacturing facilities with two located in Sweden and one in Poland. The Container Store began selling elfa® products in 1978 and acquired Elfa in 1999. Today our TCS segment is the exclusive distributor of elfa® products in the U.S. and represented approximately 56% of Elfa’s total sales in fiscal 2022. Elfa also sells its products on a wholesale basis to various retailers in approximately 30 countries around the world, with a concentration in the Nordic region of Europe. In fiscal 2022, the Elfa segment had $55.9 million of third-party net sales, which represented approximately 5% of our total consolidated net sales. In fiscal 2021, the Elfa segment had $70.9 million of third party net sales, which represented approximately 6% of our total consolidated net sales. |
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Strategic Priorities
The Container Store exists to transform lives through the power of organization. We plan to accomplish this singular vision by executing our three strategic priorities, which include: deepening our relationship with customers, expanding our reach and strengthening our capabilities. These priorities are focused on profitability and positioning The Container Store for healthy long-term growth on our path of achieving $2 billion in annual sales.
Strategic Pillar One: Deepening Our Relationship with Customers
We believe our continued focus on deepening our customer relationship, while also driving profitability, demonstrates the appeal of our brand and the strength of our offering. We believe that finding and leveraging opportunities to deepen our relationship with our customers makes them more likely to shop with us – and shop more with us – into the future.
Understanding that our customers respond best when we provide them with a compelling reason to shop, we are investing in thoughtful curations to draw in customers. We continue to seek ways to infuse more innovation, freshness and seasonal relevance in our collections and refine our assortment across categories, seeking ways to surprise and delight customers with fresh, curated product offerings that complement the home organization and storage categories.
To enhance the store experience and continually provide an Air of Excitement®, in fiscal 2022 we have invested in significant improvements to our Buy Online Pickup In-Store (BOPIS) system, simplifying the process and improving communications with customers throughout the sales journey.
Our Organized Insider Loyalty Program, which launched in calendar 2022, continues to provide tangible benefits for every tier of customer. Customers have embraced our new tiered loyalty structure, which accounted for nearly 80% of sales since launch. All levels of the program continue to have a higher-than-average ticket, with loyalty members spending approximately 57% more than non-loyalty members.
Strategic Pillar Two: Expanding Our Reach
The Container Store exists to transform lives through the power of organization – and the more lives we transform, the better for our customers and our business. We are continually working to expand our reach to attract new customers to our brand and its power to transform lives.
Expanding our reach is a key component of reaching our $2 billion annual sales goal. To that end, we opened three new small format stores in fiscal 2022, Colorado Springs, Colorado, Salem, New Hampshire and Thousand Oaks, California. We are very pleased with their initial performance. We plan to open six additional small format stores in the second half of fiscal 2023. We believe that we have attractive growth opportunities in key markets for potential expansion of an additional 76 new stores over time.
We believe our Custom Spaces business offers an important opportunity to engage more customers and grow our overall business. In fiscal 2022, we were excited to introduce new branding for The Container Store Custom Spaces that highlights the breadth of our offering both online and in our stores. This new expression of Custom Spaces allows us to push beyond custom closets and makes it clear to customers that we can transform any area of their home.
Understanding the important role that e-Commerce continues to play, we continue to invest in accelerating our e-commerce. We continue to improve both our website speed and our shipping times. Just months after launching our app, it has achieved a 4.8 rating in the Apple App Store and currently ranks in the top 200 shopping apps. We had 450,000 first-time downloads of the app, as customers responded to app-only offers, the Organized Insider Dashboard and new app features like our Drawer Organizer tool, which helps users with their drawer organization projects.
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Strategic Pillar Three: Strengthening Our Capabilities
We believe that continued effort to strengthen our capabilities is key as we strive for growth. We consistently seek ways to invest in and improve our business practices – both those that are working well, and those that could work better for us and our customers.
We have enhanced our store selling experience by rolling out new mobile express check-out to all our stores, allowing us to efficiently service more customers, and we have made notable upgrades to our Custom Spaces in-store design tool. The tool now offers new usability features, improving the overall design experience, including a 3D design view and the ability to upsell complementary general merchandise product by adding it to the design itself. In addition, during fiscal 2022, we had an average of 95 in-home design specialists, who collectively contributed approximately $75 million of total Custom Space sales, with more than a quarter of them selling over $1 million each in custom spaces. We believe the addition of the in-home designers bolsters our ability to deliver an elevated experience and provides additional sales opportunities for Custom Spaces.
As a company, we continue to appropriately prioritize certain Environmental, Social and Governance (“ESG”) issues. In fiscal 2022, we issued our first-ever Sustainability Report – and our second report is expected this summer. In the past year, we strengthened ESG KPI and reporting management for GHG Scope 1 and Scope 2 emissions. We are on track to start Scope 3 assessments in first part of fiscal 2023 to better align our strategy with global regulatory trends. We continue to invest in renewable energy, offsetting 100% of our energy use throughout our operations, including stores, distribution centers, and support center. We track our suppliers’ sustainability performance through ESG scorecards to further our overall sustainability goals. The ESG scorecards are voluntary for our suppliers. While suppliers are expected to provide supporting documentation during their scoring assessments, we do not audit our suppliers’ sustainability performance at this time. We continue to find ways to increase our use of sustainable materials in select product categories by adding additional SKU options, where possible. We have more than tripled our sustainably sourced SKUs, making progress toward our goal of increased product offerings containing sustainable SKU options.
As we continue on our path to reach $2 billion in annual sales, we will focus on these same strategic priorities to drive our future growth and address the incredible opportunity we have to continue to gain market share.
Our Key Differentiators
The Container Store Custom Spaces:
Our focus on The Container Store Custom Spaces, full complementary space completion products, and in-home services, provides a unique opportunity to drive sales through higher average ticket while differentiating the Company from other brick and mortar and online, items-based retailers. Our highly trained and experienced sales force has been selling, custom-designed and other closet solutions for over 44 years. We believe there is no other comparable retailer executing this holistic approach to custom closets. We offer the complete custom space solution—not just our full line of custom spaces including design and installation services, but the full array of organization products that accompany those spaces, as well as a national footprint with millions of customers coming through the door and visiting our online site each year. We offer the complete custom closet solution—not just our full line custom closets, but the full array of closet organization products that accompany those closets, as well as a national footprint with millions of customers coming through the door and visiting our online site each year. We design and sell The Container Store Custom Spaces in-store, in-home, online, and through our call center. We design and sell The Container Store Custom Closets in-store, in-home, online, and through our call center.
Our elfa® Classic, elfa® Décor and Avera® systems as well as other elfa® products continue to be an ever important, highly profitable and differentiating component in the growth of our Company and reflect our commitment to dominating the custom space market.Our elfa® Classic, elfa® Décor and Avera® closet lines as well as other elfa® products continue to be an ever important, highly profitable and differentiating component in the growth of our Company and reflect our commitment to dominating the custom closet market. In fiscal 2022, all Elfa-produced products accounted for approximately 31% of our TCS retail sales. Due to our vertical integration with Elfa, we have control over the sourcing and availability of elfa® Classic, elfa® Décor, and Avera®, our best selling and highest margin products. We are the exclusive distributor of Elfa-manufactured products in the United States. Approximately 25% of our fiscal 2022 TCS segment purchases were attributed to intercompany purchases from our Elfa segment.
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We have expanded our manufacturing capabilities and enhanced our premium wood-based custom space product offering with the acquisition of C Studio. On April 2, 2022 we added the PrestonTM collection to our custom space offering.
Our Shopping Experience:
We strive to create an Air of Excitement® in each of our stores across the country. You can experience the Air of Excitement® through our employees’ smiling faces and their genuine interest in a customer’s organizational projects and in the bright visual displays of products and solutions.
This is coupled with our highly personalized approach to customer service. Our employees are trained to ask questions to understand our customers’ needs. We believe that if we discover the underlying storage and organization challenges of our customers, we truly help them and hopefully improve the quality of their life. Service and selling are synonymous at The Container Store. We believe we can best serve our customers by astonishing them with personalized service and providing the solutions they most need to accomplish their organizational projects.
We are a multi-channel retailer, with a fully-integrated website, responsive mobile site and app and call center to complement our physical stores. Our website, containerstore.com, is intended to replicate the store experience offering virtually the same product assortment and providing real time inventory information for our stores, as well as certain products found exclusively online. We enhance the customer’s experience and deepen loyalty by creating consistent, relevant messages, regardless of which channel is being used. We offer free shipping on orders over $75 and our customers are able to purchase online and pick up at a store, with curbside pick-up in most markets, or request same-day home delivery in select markets. The website, mobile site, mobile app and call center sales channels combined accounted for approximately 26% of TCS net sales in fiscal 2022.
Our Stores:
We have adopted a disciplined expansion strategy designed to leverage the strength of our business model and nationally recognized brand name to successfully develop new stores in an array of markets that are primed for growth, including new, existing, small and large markets. Our current footprint of 97 stores extends to 34 states and the District of Columbia. We see the potential to add 76 new stores in key markets over time. In fiscal 2022, we opened three new stores in Colorado Springs, Colorado, Salem, New Hampshire and Thousand Oaks, California. We expect to open six new small format stores in the second half of fiscal 2023. While our current expansion focus is on domestic markets, we believe international expansion may provide additional growth opportunities for us in the future. We expect to open two new stores in fiscal 2022. While our current expansion focus is on domestic markets, we believe international expansion may provide additional growth opportunities for us in the future.
We have a strong base of profitable stores and believe that our expansion opportunities in the United States are significant. We plan to seek out strategic and profitable real estate expansion via a variety of store formats and sizes. In fiscal 2022, our new stores in Colorado Spring, Colorado, Salem, New Hampshire, and Thousand Oaks, California were designed as reduced-sized footprint stores. Our typical new store opening includes a strategic marketing plan inclusive of public relations and comprehensive training for our store employees that includes product education, solution-selling education, operational education and company culture understanding – all of which we believe enables our new stores to deliver strong sales volume more quickly.
Our Unique Product Collection:
Our merchandising philosophy is to provide a carefully curated, one-of-a-kind collection of storage and organization solutions for every area of the home, at a variety of price points. We offer over 10,000 products designed to provide customers solutions that simplify their lives and maximize their spaces within their homes. Each year, we introduce approximately 1,800 new SKUs. Our solutions-based selling approach (versus items-based) is delivered by our highly trained salespeople. We believe helping customers accomplish their organizational projects by selling solutions primarily consisting of exclusive, proprietary products differentiates us from other retailers. In fiscal 2022, over half of our annual sales came from exclusive or proprietary products, inclusive of 28% of private label products. In fact, in fiscal 2021, over half of our annual sales came from exclusive or proprietary products, inclusive of 26% of private label products.
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Currently, our stores are typically organized into 14 distinct lifestyle departments. The types of products sold in each department are as follows:
In order to offer our unique collection of products and to execute a competitive merchandising and business strategy, we work to form meaningful, long-lasting relationships with vendors from around the world. We believe these relationships benefit us in a number of ways, including providing us with an increased number of exclusive products and competitive pricing. We believe that by creatively crafting mutually beneficial vendor relationships, we foster a unique sense of loyalty among our more than 500 product vendors. In fact, 15 of our top 20 vendors have been a partner for at least 10 years and several of those vendors have been with us since our inception in 1978. For the TCS segment, our top 10 vendors, excluding Elfa, accounted for 33% of our total purchases in fiscal 2022. In order to maximize our purchasing flexibility, we generally do not enter into long-term contracts with our vendors. In fact, 16 of our top 20 vendors have been with us for at least 10 years and several of those vendors have been with us since our inception in 1978. For the TCS segment, our top 10 vendors, excluding Elfa, accounted for 40% of our total purchases in fiscal 2021. In order to maximize our purchasing flexibility, we generally do not enter into long-term contracts with our vendors.
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Environmental, Social and Governance
The Container Store recognizes the importance of our impact on people, the planet and the communities wherein we operate. It is imperative to the success of our business that we continue to learn, improve, and advance our vision in those key areas by implementing a strong and thoughtful ESG strategy.
Sustainability
The Board’s role includes overseeing the Company’s corporate sustainability strategy and enterprise risk management efforts. Our Board and its committees help to promote our Company management’s protections of our business and employees by maintaining ethical standards, governance practices, and compliance programs. The Nominating and Corporate Governance Committee of the Board of Directors governs our ESG efforts. Our General Counsel leads the ESG function and is a direct report of the Chief Financial Officer. Last year, we formed an ESG Council, led by the Senior Director of ESG, who is responsible for all ESG projects and sub-committees.
Our top priorities are to develop policies and programs that focus on the environment, social responsibility and our employees. In fiscal 2022, we continued to drive stakeholder engagement and executed against ESG strategic priorities. We utilize software to measure baseline Scope 1 and Scope 2 Green House Gas (“GHG”) emissions and energy intensity data, in accordance with the GHG Protocol. We publish available environmental data in our annual Sustainability Report. We continue to offset power usage in our stores, distribution centers, and support center with 100% renewable wind energy.
Elfa also has a sustainability program. Our Elfa-manufactured products contributed to approximately 31% of our fiscal year 2022 retail sales. Many of our Elfa-manufactured products are made from varying recycled materials.
We continue our progress towards a fair, healthy, and safe workplace, while implementing policies that promote diversity, equality, and inclusion. We believe that when we create a workplace where our colleagues are engaged, committed, and empowered, we are better positioned to create value for our company and shareholders. We believe that when we create a workplace where our colleagues are engaged, committed and empowered for the long-term, we are better positioned to create value for our company, as well as for our shareholders. We are proud of our focus on human rights across our operations and are committed to build our business on an ethical foundation. We are proud of our focus on promoting human rights across our operations – from our supply chain to our products – and are committed to build our business on a foundation of ethics.
Our Sustainability Report is available at investor.containerstore.com/corporate-social-responsibility. The information contained on our website, including our Sustainability Report, is not incorporated, by reference, into this Annual Report on Form 10-K. The information contained on our website is not incorporated by reference into this Annual Report on Form 10-K.
Human Capital Management
The Container Store was founded on basic and fundamental business philosophies about treating employees, customers, vendors, shareholders and the community with respect and dignity. It is a culture that is driven by our seven Foundation Principles® and results in an environment where the lives of everyone connected to our business are enriched and brimming with opportunity. It’s a culture that is driven by our seven Foundation Principles® and results in an environment where the lives of everyone connected to our business are enriched and brimming with opportunity.
Our customers consider us their happy place; and we recognize the importance of taking care of the employees who are responsible for creating this environment in our stores. That is why we are committed to providing a robust and ongoing training and development program. That’s why we are committed to providing a robust and ongoing training and development program. Through training, we equip our team to meet the needs of our customers, whether they work in our stores, distribution centers or the support center. Training also helps our employees become knowledgeable and trusted experts armed with intuition and trained for success.
In terms of business productivity, one of our Foundation Principles, 1 Great Person = 3 Good People® is the belief that one great person with passion, perspective and a range of experiences has the energy and drive to achieve more than three good people without those traits. Our philosophy attracts other great people, making it easy to build a dedicated team who will exceed goals and create a successful work environment. Our culture shows why we hire great people from diverse backgrounds and foster an equitable, inclusive and safe environment where everyone can thrive.
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As of April 1, 2023, we had approximately 5,100 employees, of which approximately 4,700 were TCS segment employees and approximately 400 were Elfa segment employees. Of the 4,700 TCS segment employees, approximately 2,600 were part time employees. Subsequent to year-end, the Company implemented cost management actions, including the elimination of open roles and a reduction in force. As of May 22, 2023, our employee base consists of approximately 4,800 active employees. We are committed to doing everything we can, as individuals and as a company, to enable that all of us, regardless of ethnicity, gender identity or expression, sexual orientation, age, ability, or religious affiliation have EQUAL opportunity to grow, develop and achieve our dreams.
We also know that the commitment for a diverse, equitable and inclusive culture, starts from the top, and our Chief Executive Officer, Satish Malhotra, has demonstrated his commitment by signing the CEO Action Pledge for Diversity & Inclusion (www.ceoaction.com). By taking this pledge, The Container Store has committed to actions that cultivate a trusting environment where all ideas are welcomed, and employees feel comfortable and empowered to have discussions about diversity and inclusion. These commitments include unconscious bias education, working with other companies to develop best practices, sharing our Diversity, Equity and Inclusion (“DE&I”) plans with our board of directors, as well as implementing accountability systems to track our progress.
Our commitment to equity and inclusion extends beyond our employees. We know supporting the local communities where we have stores, distribution centers and manufacturing facilities makes the communities stronger. We know supporting the local communities where we have stores and distribution centers makes the communities stronger. Therefore, we are proud to offer opportunities within our supply chain to small and diverse-owned businesses and through our philanthropy efforts focus on causes that are important to our employees and customers and align with our commitment to making a lasting social and economic impact in those communities.
You can read more and learn more about our DE&I efforts at www.containerstore.com/inclusion. The information contained on our website is not incorporated by reference into this Annual Report on Form 10-K.
Human Rights
The Container Store recognizes the importance of protecting and advocating for human rights. We are committed to ethical business practices including fair and impartial treatment of all persons regarding wages and benefits, working conditions, global labor and anti-corruption laws, and the preservation of applicable environmental standards. We strive to provide a safe, secure, and healthy environment for our employees, vendors, and customers and align our policies with guidance provided by the UN Guiding Principles on Business and Human Rights.
TCS has a zero-tolerance philosophy against modern slavery and the deprivation of a person’s liberties for personal or commercial gain. Modern slavery is a crime and a violation of fundamental human rights that takes various forms, such as slavery, servitude, forced and compulsory labor, and human trafficking. TCS is committed to eliminating acts of modern slavery from occurring within our business and will take the necessary measures to assess the effectiveness of our approach. This includes training employees who have direct responsibility for supply chain management to raise awareness and help to identify victims of modern slavery.
The Container Store will not knowingly do business with any company that engages in modern slavery or human trafficking. Our merchandise suppliers contractually agree that the finished products they sell to us, and the materials used to create them, were not produced using child or forced labor and comply with the local laws in which they operate. We conduct announced audits of select merchandise suppliers with whom we acquire goods directly from.
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Health & Safety
The health and safety of The Container Store employees and customers are vital to the health of our business. We strive to minimize injury or illness, in addition to property loss or business interruption caused by accidents, fire, or other hazards. The safer our workplace is, the more efficient and profitable our company will be.
TCS is committed to providing quality equipment, access to clean water, safe tools, and necessary protective equipment to keep employees safe. This includes providing ongoing training and the necessary resources and time required to maintain a safe place to work.
Additionally, we expect all employees to cooperate fully with our safety measures and actively participate in helping keep each other safe. All TCS employees are expected to recognize hazards, anticipate exposures and risks, and act to eliminate or control them. All TCS employees must recognize hazards, anticipate exposures and risks, and act to eliminate or control them. Our employees are expected to communicate with each other and our management team when unsafe acts are observed or if there is potential for an unsafe working environment. Through personal commitment and excellent communication, we strive to maintain a safe and productive place to work.
Manufacturing
We currently have a total of four manufacturing facilities: one domestic and three international. This important facet of our vertically integrated business enables us to control the design specifications and establish consistent levels of quality across our Custom Spaces offerings. In the TCS segment, we operate a 58,000 square feet domestic manufacturing facility in Elmhurst, Illinois which supplies our premium, wood-based custom space offerings, sold exclusively through our TCS segment under the PrestonTM brand.
In the Elfa segment, we operate three manufacturing facilities, located in Västervik, Sweden (approximately 200,000 square feet), Mullsjö, Sweden (approximately 100,000 square feet), and Koszalin, Poland (approximately 100,000 square feet). These manufacturing facilities produce our elfa® and Avera® branded products, which are sold exclusively through our TCS segment in the U.S. and also on a wholesale basis to various retailers in approximately 30 countries around the world, with a concentration in the Nordic region of Europe.
The principal raw materials that we use in manufacturing are steel and steel components, wood, laminate materials, paper, aluminum and glass. They are sourced both domestically and outside the United States. We have no significant long-term supply contracts and believe we have sufficient alternate sources of supply to prevent significant long-term disruption in supplying our operations.
Distribution
In the TCS segment, the majority of our merchandise flows through one of our two distribution centers, prior to transport to our retail stores and/or online customers. Our first distribution center is co-located with our support center in Coppell, Texas. Our first distribution center is co-located with our corporate office in Coppell, Texas. The approximately 1.1 million square foot facility was designed and constructed specifically for The Container Store and is comprised of approximately 100,000 square feet of support center space and approximately 1 million square feet of distribution center space. The approximately 1.1 million square foot facility was designed and constructed specifically for The Container Store and is comprised of approximately 100,000 square feet of corporate office space and approximately 1 million square feet of warehouse space. Our second distribution center located in Aberdeen, Maryland is approximately 600,000 square feet and is comprised primarily of distribution center space. We also operate a 58,000 square feet domestic manufacturing facility in Elmhurst, Illinois.
Our distribution centers are utilized for retail store replenishment and direct-to-customer order fulfillment. We utilize third party truckload carriers to transport all of our products to our stores and major parcel carriers for direct-to-customer order deliveries. We utilize best in class logistics technology to optimize operations and current processes for receiving, picking, packing and shipping while providing a strong foundation for future growth. We continue to strengthen our distribution centers with ongoing process and material handling improvements, as well as automation, in order to achieve even greater efficiencies in service levels and inventory management.
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Within our distribution operations, we have a culture of safety and efficiency, with a robust metric program and a commitment to continuous improvement. All processes, teams and individuals are held to high efficiency and performance standards. The locations of our distribution centers allow for improved service levels to our customers while at the same time increasing our network capacity. Our second distribution center improved service levels to our customers while at the same time increasing our network capacity. We also continue to invest in supply chain system enhancements for increased logistics network support.
Elfa utilizes a broad network of third-party carriers to deliver products from its manufacturing facilities to customers worldwide.
With employee safety as our top priority, our distribution centers follow all recommended guidelines.With employee safety as our top priority, our distribution centers follow all recommended guidelines from the Centers for Disease Control and Prevention. This includes providing sanitizing supplies throughout both facilities and continuous communication around safety expectations. This includes sanitizing supplies throughout both facilities and continuous communication around safety expectations. We will continue to follow local, state and federal guidelines to ensure the safety of our employees.
Intellectual Property
The Container Store’s trademarks, product designs and copyrighted works have significant value and as such, we vigorously protect them against infringement. Our “The Container Store®,” “Welcome to the OrganizationSM,” “Foundation Principles®,” “Organized InsiderSM,” “PrestonTM,” “Avera®,” “Contained Home®,” “elfa®,” and “Air of Excitement®”, trademarks and certain variations thereon, that are used for our product lines and sales campaigns, are registered or are the subject of pending trademark applications with the United States Patent and Trademark Office and with trademark registries of applicable foreign countries. In addition, The Container Store owns domain names, including “www.containerstore.com,” “www. closets.com” and others that include our trademarks. We also own several elfa® utility and design patents, which protect Elfa’s closet and shelving systems. We have a utility patent for TCS’s proprietary retail shopping computer systems, and design patents on select private label products. The Container Store has copyrights in our website and marketing material.
Competition
We operate within the storage and organization category which extends across many retail segments including custom spaces, housewares, and office supplies, among others. However, we are the only national retailer solely devoted to it. Storage and organization products are sold by a variety of retailers, including mass merchants, specialty retail chains, and internet-based retailers, but they devote a smaller portion of their overall merchandise assortment to storage and organization. We also compete within a highly fragmented custom closets market with national, regional and local custom closet competitors, as well as local homebuilders and contractors. One of our biggest differentiators is that we sell solutions, not items. Some of our competitors are larger and may have greater financial, marketing and other resources than The Container Store. However, we compete based on our customer service, product selection and quality, price, convenience, consumer marketing and promotional activities, and our ability to identify and satisfy emerging consumer preferences, vendor relationships, and brand recognition, among other things. In addition, we believe that the strength of our solutions-based selling with highly trained employees, exclusive offerings and vendor relationships, our passionate and loyal customer base and the quality, differentiation and breadth of our product assortment compare favorably to those of our competitors.
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Seasonality
Our unique offering of organizing solutions, custom spaces, and in-home services makes us less susceptible to holiday season shopping patterns than many retailers. Our quarterly results fluctuate, depending upon a variety of factors, including our product offerings, promotional events, store openings, the weather, remodeling or relocations, shifts in the timing of holidays, timing of delivery of orders, competitive factors and general economic conditions, including economic downturns as a result of unforeseen events such as pandemics, inflation, and supply chain disruptions, among other things. If we do not succeed in introducing and sourcing new products that consumers want to buy or maintaining good relationships with our vendors, or are unable to provide an aesthetically pleasing and convenient shopping environment or maintain our level of customer service, our sales, operating margins and market share may decrease, which would adversely impact our business, financial condition and results of operations. Accordingly, our results of operations may fluctuate on a seasonal and quarterly basis, relative to corresponding periods in prior years. In addition, we may take certain pricing or marketing actions that could have a disproportionate effect on our business, financial condition and results of operations in a particular quarter or selling season.
Regulation and Legislation
The Company is subject to various state and local laws, including labor and employment laws, laws governing truth-in-advertising, privacy laws, safety regulations, environmental and other laws, that regulate retailers and govern the operation of stores, warehouse facilities, manufacturing facilities, promotions, and the sale of merchandise. The Container Store monitors and evaluates applicable laws and believes that we are in material compliance. From time to time, there may be legal or regulatory changes that impose restrictions or requirements on the Company or our potential customers that may result in a material adverse increase to our operating costs or a decreased demand for our products or services.
The Container Store sources a significant portion of our products from outside of the United States of America. The United States Foreign Corrupt Practices Act and other applicable anti-bribery and anti-kickback laws and regulations generally prohibit companies and their intermediaries from making improper payments to non-United States officials, for the purpose of obtaining or retaining business. The US Foreign Corrupt Practices Act and other similar anti-bribery and anti-kickback laws and regulations generally prohibit companies and their intermediaries from making improper payments to non-US officials for the purpose of obtaining or retaining business. The Container Store ensures that our policies and vendor agreements mandate compliance with applicable laws and regulations.
Where You Can Find More Information
We maintain a website at http://investor.containerstore.com and make available, free of charge, through this site our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements and Forms 3, 4 and 5 filed on behalf of directors and executive officers and holders of more than 10% of our common stock, as well as any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (“SEC”). We also put on our website our Corporate Responsibility Report, the charters for our Board of Directors’ Audit Committee, Culture and Compensation Committee, and Nominating and Corporate Governance Committee, as well as our Code of Business Conduct and Ethics, which applies to all of our directors, officers, and employees, including our principal executive officer and our principal financial and accounting officers, our Corporate Governance Guidelines and other related materials. The information on our website is not part of this Annual Report on Form 10-K.
We announce material information to the public about us, our products and services, and other matters through a variety of means, including filings with the SEC, press releases, public conference calls, webcasts and the Investor
Relations section of our website in order to achieve broad, non-exclusionary distribution of information to the public and for complying with our disclosure obligation under Regulation FD.
The information disclosed by the foregoing channels could be deemed to be material information. As such, we encourage investors, the media, and others to follow the channels listed above and to review the information disclosed through such channels. Any updates to the list of disclosure channels through which we will announce information will be posted on the “Investor Relations” section of our website. Except as specifically indicated otherwise, the information found or available by hyperlink on our w