| Satish Malhotra | executive |
| Jeffrey Miller | executive |
| Katharine McShane | analyst |
Greetings, and welcome to the Container Store Second Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce 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 Second Quarter Fiscal Year 2024 Earnings Results Conference Call.
Speaking today are Satish Malhotra, Chief Executive Officer; and Jeff Miller, Chief Financial Officer. After Satish and Jeff have made their formal remarks, we'll open the call to questions.
Before we begin, I would like to remind everyone that certain matters discussed in today's conference call are forward-looking statements relating to future events, management's plans and objectives for the business, including the transaction of Beyond and the future financial performance of the company that are subject to risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect results are referred to in the Container Store's press release issued today and in our annual report on Form 10-K filed with the SEC on May 28, 2024, as updated by our quarterly reports on Form 10-Q and other public filings with the U.S. Securities and Exchange Commission. 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 the 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 on the Container Store's press release issued today. A copy of today's press release and investor deck may be obtained by visiting the Investor Relations page of the website at www.containerstore.com. I will now turn the call over to Satish. Satish?
Thanks, Caitlin, and thank you all for joining us. I'll begin today's discussion with a review of our second quarter performance and progress we are making to drive improvements across the business, including our exciting new strategic partnership with Beyond. Then Jeff will discuss the details of the quarter's financial results before we open up the call to questions.
While we are still contending with a challenging macro and industry backdrop, we are encouraged by the improvements we are seeing in our top line trends as compared to earlier this year.
For the second quarter, year-over-year comparable sales declined 12.5%.
However, we continue to see relative outperformance in custom spaces, and achieved another quarter of sequential improvement in general merchandise trends. Traffic also improved, partly due to increased promotional activity, which, while putting pressure on profitability, allowed us to move slower-moving products. This also enabled us to engage more effectively with customers seeking compelling value offerings. Within general merchandise, we believe our efforts to stabilize the business are gaining traction, particularly through improving in-stock levels of our core SKUs that continue to resonate with customers while also delivering innovation and newness across the assortment. Earlier this fall, we introduced our new Everything Organizer drop front shoebox at Sneaker Con, the world's premier sneaker event. This elevated version of a long-time customer favorite features crystal-clear 360-degree views, a magnetic closure, 4 corner feet stable stacking and a tuck-away door for easy access and was met with great enthusiasm at the event.
As we move into the holiday season, we look forward to showcasing this new product and this year's curated selection of stocking stuffers, gift wraps, boxes and storage solutions.
While we are optimistic about our holiday campaign, we have taken a more disciplined approach with tighter inventory buys around our seasonal items, maintaining our focus on top-performing SKUs. Post holiday season, we are excited about the expected front feature display of our highly sought after Everything Organizer Collection. Developed in collaboration with professional organizers, this collection is designed to optimize any space, simplify organization and seamlessly complement any office space. We plan to expand the product line with additional SKUs for the kitchen and closet as well as introducing it to the bath category.
Additionally, we entered into a new licensing partnership with our manufacturer, which is expected to expand the Everything Organizer Collection internationally beginning in the new calendar year.
Now turning to custom spaces.
As noted in our press release, our reported comparable store sales metric reflect only delivered sales.
However, when we assess comp trends based on operational demand, custom spaces orders placed but not yet delivered, we were up 4.5% compared to the prior year. This relative strength in custom spaces is partly due to the newness we have introduced over the past few quarters.
For example, we are seeing more and more customers choosing Garage+ by Elfa to transform their crowded garages and to organized, aesthetically pleasing spaces that meet their storage needs. Similarly, the Decor+ be Elfa continues to also gain traction, offering innovative modular wall hanging solutions with elevated design options that create a built-in look at exceptional value while maximizing space. Last week, we launched a new campaign partnership with fashion designer and TV personality, Tan France, where he transformed 2 of his kids' spaces with Elfa Decor+ and the necessary general merchandise completion products, highlighting the durability and versatility of the line.
Looking ahead, we are excited to continue rolling out innovative products for customer spaces.
Our next launch will introduce a more affordable premium wood closet in a box system designed for easy do-it-yourself installation. Building on our success and expertise in custom spaces and Elfa metal box solutions, this new product offers 9 versatile configurations for closets up 6 feet. We believe customers will appreciate its elevated premium design and flexible options throughout their homes. Organization should be effortless and this do-it-yourself solution empowers customers to creatively personalize how they organize their spaces.
With the recent decline in interest rates, we are also optimistic about the future of our premium custom space offering, Preston, which continues to demonstrate strength despite the current macroeconomic climate.
We are pleased to see improvements in our conversion rates for Preston as well as in our ability to sell more spaces at a higher average space value when compared to the same period last year.
Additionally, we are looking forward to the newly announced strategic partnership with Beyond. We believe this partnership will strengthen our capabilities by leveraging Beyond's data analytics to improve our lead management and conversion model while offering customers additional financial solutions to support their purchases. This is just one aspect of the partnership with Beyond that we believe will enhance our capabilities, expand our reach and deepen our relationship with customers. Through the licensing of the iconic Bed Bath & Beyond brand, we expect to enhance our store format and general merchandise offering to drive increased traffic across our businesses.
Our customers are also expected to benefit from Beyond's global loyalty program, multiple payment solutions and ancillary insurance and protection products.
In addition, we plan to utilize Beyond's growing data platform to enhance our marketing strategies and reduce customer acquisition and retention costs. We plan to integrate our customer spaces offering across beyond portfolio of e-commerce banners as well as other ventures where Bed Bath & Beyond future licensed stores exist thereby creating expanded distribution of our iconic custom spaces offering. I would now like to take the opportunity to acknowledge our teams for their unwavering commitment and exceptional customer service. Despite the challenging economic conditions, our teams, from the support center and distribution centers to our designers and stores, have remained dedicated and focused on advancing our strategy and supporting initiatives.
While external economic factors are beyond our control, our focus remains on managing what we can, providing the excellent customer service we are known for, controlling expenses and capital, progressing on our initiatives, including stabilizing the General Merchandise business and positioning ourselves for when the market conditions become more favorable. And now I'll turn the call over to Jeff to discuss our financial results in more detail. Jeff?
Thank you, Satish, and good afternoon, everyone.
As Satish reviewed, while still challenged, our second quarter results reflect another quarter of sequential improvement compared to the prior quarter with ongoing relative strength within custom spaces.
For the second quarter, consolidated net sales decreased 10.5% year-over-year to $196.6 million. By segment, net sales for the Container Store retail business were $186.8 million, a 10.4% decrease compared to $208.5 million in the prior year. The decrease is inclusive of a comp store sales decrease of 12.5%, driven primarily by the 18.7% decline in our general merchandise categories, which negatively impacted comp store sales by 1,200 basis points. Custom space comp store sales decreased 1.5% compared to last year and negatively impacted comp store sales by 50 basis points.
As a reminder, our comp store sales are reported on a GAAP basis and represent delivered sales. When looking at custom spaces comps from an operational demand standpoint, orders placed but not delivered were up 4.5% in Q2, representing a modest year-over-year trend improvement from the 2.9% we saw for the same metric in Q1. It has been a while since we have referenced this operational demand comp metric. The delta between operational demand and reported comps for custom spaces this quarter is evidenced by the increased unearned revenue from $18.3 million last year to $21.8 million this year, largely as a result of a year-over-year shift in timing of custom space orders placed versus delivered to customers. Sales from noncomparable stores were a net benefit to total TCS sales of 210 basis points.
For the second quarter fiscal 2024, our online channel decreased 13.7% year-over-year. And our website-generated sales, which includes curbside pickup, decreased 7.9% compared to last year. Website-generated sales represented a total of 22.4% of TCS net sales in Q2, which is 60 basis points higher than 21.8% in Q2 of last year. Elfa third-party net sales of $9.8 million decreased 12.9% compared to the second quarter of fiscal 2023.
Excluding the impact of foreign currency translation, Elfa third-party net sales decreased 16.2% year-over-year, primarily due to a decline in sales in the Nordic markets. From a profitability standpoint, our consolidated gross margin for Q2 decreased 210 basis points to 55.5% compared to 57.6% last year. By segment, TCS gross margin decreased 260 basis points compared to last year, primarily due to increased promotional activity and unfavorable mix in Q2 of this year, partially offset by freight tailwinds. Elfa gross margin increased 250 basis points compared to last year, primarily due to price increases to customers. Consolidated SG&A dollars decreased $4.1 million or 3.7% to $105.2 million compared to $109.3 million in Q2 last year.
As a percentage of net sales, SG&A increased 380 basis points year-over-year to 53.5%. The increase is primarily due to deleverage of fixed cost associated with lower sales and increased marketing spend in the second quarter of fiscal 2024. In the second quarter, we recorded a $3.4 million long-lived asset impairment related to one underperforming store and a store which had been identified for closure in fiscal 2024. Also in the second quarter, we recorded $3.5 million of other expenses, which is primarily due to legal and professional fees related to the strategic alternatives review as well as employee retention costs incurred in the second quarter of fiscal 2024.
Our net interest expense in the second quarter of fiscal 2024 increased to $6 million compared to $5.2 million in the second quarter of last year. The year-over-year increase is primarily due to higher borrowings on the revolving credit facility and higher year-over-year interest rates on our term loan during Q2. The effective tax rate for the second quarter was 21.5% compared to negative 2.6% in the second quarter of last year. The increase in the effective tax rate was primarily related to the impact of discrete items on a pretax loss in the second quarter of fiscal 2023, which drove the effective tax rate negative. Net loss for the quarter on a GAAP basis was $16.1 million or $4.85 per share as compared to a GAAP net loss of $23.7 million or $7.17 per share in the second quarter of last year. Adjusted net loss was $10.7 million or $3.23 per share as compared to last year's adjusted net income of $0.4 million or $0.11 per diluted share.
Our adjusted EBITDA decreased to $3.9 million in the second quarter this year compared to $17 million in Q2 last year.
Turning to our balance sheet. We ended the quarter with $66.1 million in cash, $232 million in total debt and total liquidity, including availability on our revolving credit facilities of $96.5 million.
As you know, we have faced challenges due to softening demand and increased price sensitivity affecting our financial performance.
In addition to the significant expenses incurred as a part of our review of strategic alternatives and refinancing of our credit facilities, all of which have placed pressure on our ability to comply with the leverage ratio covenant in our term loan facility.
As previously communicated, earlier this month, we amended our senior secured term loan facility to waive the testing of consolidated leverage ratio covenant for the second quarter of fiscal 2024, among other things.
In addition, our revolving credit facility under which we had $71 million outstanding at the end of the quarter, matures in 1 year. In light of these factors, you will see the addition of going concern language in our Form 10-Q for the second quarter of fiscal 2024.
We are actively collaborating with our lenders to amend or refinance these facilities and consummate the equity investment transaction with Beyond, which we believe would improve our financial situation. We ended the quarter with consolidated inventory down 12% compared to the second quarter of last year. The decline reflects a concerted effort to tightly manage inventory in the current environment and is primarily the result of fewer inventory units year-over-year and lower freight costs held in inventory. And TCS on a unit basis, on-hand inventory was down approximately 17% year-over-year driven by general merchandise categories. Capital expenditures were $15.3 million in the first half of fiscal 2024 versus $22 million in the first half of fiscal 2023.
As a reminder, we plan to spend approximately $20 million to $25 million of capital in fiscal 2024.
We are continuing to prioritize investments in our stores and technology this year. We've opened one store, closed one store during the second quarter of fiscal 2024.
For the remainder of fiscal 2024, we plan to open 2 more new stores and have made the strategic decision to close our store in Chicago and Chicago South Loop. We closely monitor the productivity of our stores and decided it was not in the company's best interest to renew the lease when it ends in February of 2025. Free cash flow used in the first half of fiscal 2024 was $10.6 million versus $1.3 million in the first half of fiscal 2023.
As noted in our press release, we're not providing financial guidance at this time. With respect to Q3, we have seen a challenging start to the period largely due to the difficult comparison to last year, which benefited from the very successful Elfa anniversary sale. That said, we have continued to see sequential improvement in general merchandise. And as Satish reviewed, we believe we are taking the right steps to stabilize that business.
We are controlling the aspects of the business we can control and continue to work diligently to aim to position the company for long-term success. This concludes our prepared remarks. I'll now turn it over to the operator to begin the Q&A session for questions.
[Operator Instructions ] Our first question comes from Kate McShane with Goldman Sachs.
I wondered if I could start with the mix within general merchandise, maybe what is trending better, if there's anything that's trending worse? And if you could give a little bit more commentary on quarter-to-date, which I think you said was sequentially a little bit better.
Yes. Kate, I'll take the first part of that question. Definitely, we are seeing sequential improvement in our general merchandise and it's primarily thanks to our getting back in stock in our core SKUs. We've seen a positive momentum in Water Hyacinth, for example, now that we're back in stock there, but also seeing tremendous growth in our Everything Organizer Collection, as I had mentioned earlier, where it continues to do well. It's actually up 40% over the prior quarter and up 50% compared to the same period last year. And that's why we are super excited about our ability to be able to have the Everything Organizer have a front feature expression post holiday where we can continue to introduce those additional SKUs in kitchen and closet as well as the new launch that we have planned within bath. It's actually one of the reasons we decided to also work with our vendor to now license the Everything Organizer collection internationally because we think that there is decisively a significant demand outside of the U.S. into other countries as well.
Okay. And then I had a mechanical question with regards to the demand comp. It sounds like the demand comp for custom space has improved sequentially. Could you maybe talk about when your comp catches up to the demand comp or maybe better asked, like what is typically the delivery time or the amount of time between order placed and order delivered?
Yes, Kate, this is Jeff. Thanks for the question. When we look at the custom space order, it depends on the particular line would drive your average install time frame. I would say an Elfa product line would be anywhere between 2 weeks to a month. It could be longer depending on the customer's project time line. But Preston's a little bit longer of a time line. Typically, that's around 4 to 6 weeks from the order placement time.
Okay. And is Preston becoming a bigger part of the mix, part of the reason why you're seeing this gap occur again?
No, I wouldn't necessarily say that Preston is becoming a bigger part of the mix at this point yet. Elfa is still the large part of our custom base's offering. And typically, when we see growth in the business, especially at the end of the quarter, we'll see an increase of our unearned revenue or prepaid sales at the end of a quarter like that.
Okay.
Okay. And then my last question is just with regards to Elfa.
You mentioned the challenging start to Q3 because you're lapping the successful Elfa anniversary sale. Can you just remind us what you are doing with the Elfa brand this year versus last year?
In terms of the campaigns that we have?
Yes.
Yes. This is Satish.
So as we mentioned, we decided to actually split the Elfa campaign into kind of 2 halves, which is a new way for us to create kind of a sense of urgency than we had normally done in the past where we would essentially just have one long campaign. The durations of the campaigns are actually the same in terms of the number of days, but we just put a pause in the middle so that we could conclude kind of Part A of the campaign as we were ramping up the end of the quarter and then wait a period before we then start the second part of the campaign.
In addition, as a reminder, this time last year, we were also -- we had an anniversary sale, and so we're comping over that difference of a discount rate.
We have reached the end of our question-and-answer session. This concludes today's teleconference.
You may disconnect your lines at this time. Thank you for your participation.