I thought the company had too much debt and poor profitability. With those two factors holding back the company, it seemed The Container Store didn't have enough growth ahead of it to drive the stock higher. In fact, since my Nov. 19 comment, the shares have lost 23%.
After the close on Tuesday, The Container Store reported a weak quarter and cut fiscal 2015 guidance. Management blamed a nationwide "retail funk" for the company's poor performance. Apparently The Container Store can't contain the losses, and it now expects it will lose a penny per share more than previously projected.
Second-quarter revenue rose just 8.6% to $173.4 million, and the "big" news was that same-store sales fell 0.8% vs. the estimate for up 2.5%. The lower store traffic forced management to slash fiscal 2015 guidance to between $820 million and $830 million.
On the call, management told investors they thought sluggish sales were because of weather and calendar shifts, but came to realize it's more than weather or the calendar. It's a full-blown retail "funk." (And I thought funk went out with the 1980s!)
Not to be outdone, on Wednesday Lumber Liquidators (LL) got funky and announced an even larger disaster. The stock dived 16% after the company warned about second-quarter results so far below consensus that it felt as if business had fallen off a cliff. Lumber Liquidators said revenue would come in at $263.1 million, well under the previous consensus estimate of $302.7 million. Earnings per share would be $0.60, which is $0.30 below what investors had expected. Same-store sales fell 7%, and management said large-ticket home-improvement projects are likely to be delayed into the fall flooring season.
None of this should have been a surprise. Just about every retailer missed expectations in March. Drugstores, discount retailers and teen outlets were some of the worst. Only Costco (COST) and The Buckle (BKE) beat the quarter.
The Container Store and Lumber Liquidators have been sliding for months. In fact, LL shares peaked back in November, and The Container Store peaked about a month before.
The year is still early for The Container Store. The company could make up the shortfall in the back half of the year by getting more promotional and trying to build store traffic. It only has 65 stores, so there is a lot of room to grow revenue by adding more locations.
Lumber Liquidators is more problematic. The company seems to have missed the summer construction season, and investors have to hope business picks up into the fall. Otherwise, the flooring season could be lost until after winter.
Right now, I would be reluctant to bottom-fish either name. There's no sense in trying to catch a falling knife.