Edgar Filing: Container Store Group, Inc.

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended November 30, 2013

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From to

Commission File Number: 001-36161

THE CONTAINER STORE GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware		26-0565401
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

500 Freeport Parkway Coppell, TX		75019
(Address of principal executive offices)		(Zip Code)

(972) 538-6000

(Registrant’s telephone number, including area code)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	o		Accelerated filer	o
Non-accelerated filer	x	(Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The registrant had 47,922,842 shares of its common stock outstanding as of December 31, 2013.

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TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Unaudited Consolidated Balance Sheets as of November 30, 2013, March 2, 2013, and November 24, 2012	3

	Unaudited Consolidated Statements of Operations for the Thirteen and Thirty-Nine Weeks ended November 30, 2013 and November 24, 2012	5

	Unaudited Consolidated Statement of Comprehensive Income (Loss) for the Thirteen and Thirty-Nine Weeks ended November 30, 2013 and November 24, 2012	6

	Unaudited Consolidated Statement of Shareholders’ Equity for the Thirty-Nine Weeks ended November 30, 2013	7

	Unaudited Consolidated Statements of Cash Flows for the Thirty-Nine Weeks ended November 30, 2013 and November 24, 2012	8

	Notes to the Unaudited Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	36

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51

Item 3.	Default Upon Senior Securities	52

Item 4.	Mine Safety Disclosures	52

Item 5.	Other Information	52

Item 6.	Exhibits	53

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The Container Store Group, Inc.

Consolidated balance sheets (unaudited)

(In thousands)	November 30, 2013		March 2, 2013		November 24, 2012
Assets
Current assets:
Cash	$	10,822	$	25,351	$	19,875
Accounts receivable, net	28,088		25,536		24,380
Inventory	105,124		82,443		96,106
Prepaid expenses and other current assets	24,297		21,284		20,359
Forward contracts	—		1,103		615
Deferred tax assets, net	1,505		1,505		1,203
Total current assets	169,836		157,222		162,538
Noncurrent assets:
Property and equipment, net	150,142		141,177		136,901
Goodwill	202,815		202,815		202,815
Trade names	241,138		241,940		255,100
Deferred financing costs, net	10,188		8,745		9,114
Other assets	841		921		834
Total noncurrent assets	605,124		595,598		604,764
Total assets	$	774,960	$	752,820	$	767,302

See accompanying notes.

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The Container Store Group, Inc.

Consolidated balance sheets (unaudited) (continued)

(In thousands, except share amounts)	November 30, 2013			March 2, 2013			November 24, 2012
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable	$	57,365		$	54,334		$	52,867
Accrued liabilities	57,211			52,330			53,429
Income taxes payable	496			2,650			1,398
Secured revolving credit, Sweden	16,679			13,482			17,027
Current portion of long-term debt	8,975			9,023			8,878
Total current liabilities	140,726			131,819			133,599
Noncurrent liabilities:
Long-term debt	342,863			276,348			293,711
Deferred tax liabilities, net	89,837			87,770			88,366
Deferred rent and other long-term liabilities	24,252			23,508			22,227
Total noncurrent liabilities	456,952			387,626			404,304
Total liabilities	597,678			519,445			537,903

Commitments and contingencies (Note 7)

Shareholders’ equity:
Common stock, $0.01 par value, 250,000,000 shares authorized, 47,922,842 shares issued and outstanding at November 30, 2013; 3,528,280 shares authorized, 2,942,326 shares issued and 2,929,466 shares outstanding at March 2, 2013; 3,528,280 shares authorized, 2,942,326 shares issued and 2,928,490 shares outstanding at November 24, 2012	479			29			29
Preferred stock, $0.01 par value:
Senior cumulative; no shares authorized, issued or outstanding at November 30, 2013; 250,000 shares authorized, 202,480 shares issued and 202,196 shares outstanding at March 2, 2013; 250,000 shares authorized, 202,480 shares issued and 202,200 shares outstanding at November 24, 2012	—			2			2
Junior cumulative no shares authorized, issued or outstanding at November 30, 2013; 250,000 shares authorized, 202,480 shares issued and 202,196 shares outstanding at March 2, 2013; 250,000 shares authorized, 202,480 shares issued and 202,200 shares outstanding at November 24, 2012	—			2			2
Additional paid-in capital	852,698			455,246			455,121
Accumulated other comprehensive income	716			2,713			965
Retained deficit	(676,611		)	(223,830		)	(225,924		)
Treasury stock, no shares, 13,426, and 14,394 shares as of November 30, 2013, March 2, 2013, and November 24, 2012, respectively	—			(787		)	(796		)
Total shareholders’ equity	177,282			233,375			229,399
Total liabilities and shareholders’ equity	$	774,960		$	752,820		$	767,302

See accompanying notes.

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The Container Store Group, Inc.

Consolidated statements of operations (unaudited)

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
(In thousands, except share and per share amounts)	November 30, 2013			November 24, 2012			November 30, 2013			November 24, 2012
Net sales	$	188,298		$	175,416		$	531,716		$	489,732
Cost of sales (excluding depreciation and amortization)	75,359			71,302			218,176			202,463
Gross profit	112,939			104,114			313,540			287,269

Selling, general, and administrative expenses (excluding depreciation and amortization)	88,797			81,715			257,870			237,022
Stock-based compensation	14,641			157			14,854			157
Pre-opening costs	1,827			2,137			5,761			6,573
Depreciation and amortization	7,569			7,336			22,620			21,825
Restructuring charges	111			2,056			472			4,365
Other expenses	869			335			1,495			817
(Gain) loss on disposal of assets	(4		)	92			70			87
(Loss) income from operations	(871		)	10,286			10,398			16,423

Interest expense, net	5,782			5,131			16,856			16,021
Loss on extinguishment of debt	128			4			1,229			7,333
(Loss) income before taxes	(6,781		)	5,151			(7,687		)	(6,931		)

Provision (benefit) for income taxes	2,705			(1,711		)	2,487			(4,708		)
Net (loss) income	$	(9,486	)	$	6,862		$	(10,174	)	$	(2,223	)

Less: Distributions accumulated to preferred shareholders	(15,597		)	(22,456		)	(59,747		)	(65,410		)
Net loss available to common shareholders	$	(25,083	)	$	(15,594	)	$	(69,921	)	$	(67,633	)

Basic and diluted net loss per common share	$	(1.39	)	$	(5.32	)	$	(8.78	)	$	(23.08	)

Weighted-average common shares outstanding - basic and diluted	18,036,633			2,928,964			7,965,089			2,929,928

See accompanying notes.

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The Container Store Group, Inc.

Consolidated statements of comprehensive income (loss) (unaudited)

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
(In thousands)	November 30, 2013			November 24, 2012			November 30, 2013			November 24, 2012
Net (loss) income	$	(9,486	)	$	6,862		$	(10,174	)	$	(2,223	)
Unrealized gain (loss) on financial instruments, net of taxes of $(171), $(420), $(0), and $(427)	17			(511		)	(1,104		)	(116		)
Pension liability adjustment	(16		)	5			18			9
Foreign currency translation adjustment	1,283			(43		)	(911		)	(1,227		)
Comprehensive (loss) income	$	(8,202	)	$	6,313		$	(12,171	)	$	(3,557	)

See accompanying notes.

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The Container Store Group, Inc.

Consolidated statements of shareholders’ equity (unaudited)

(In thousands, except share			Common Stock				Senior Preferred					Junior Preferred					Additional Paid-In			Accumulated Other Comprehensive			Accumulated			Treasury Stock					Total shareholders’
and per share amounts)	Par value		Shares		Amount		Shares		Amount			Shares		Amount			Capital			Income			Deficit			Shares		Amount			equity
Balance as of March 2, 2013	$	0.01	2,942,326		$	29	202,480		$	2		202,480		$	2		$	455,246		$	2,713		$	(223,830	)	(13,426	)	$	(787	)	$	233,375
Net loss			—		—		—		—			—		—			—			—			(10,174		)	—		—			(10,174		)
Payment of distributions to preferred shareholders			—		—		—		—			—		—			—			—			(295,813		)	—		—			(295,813		)
Exchange preferred shares for common shares			30,619,083		306		(202,182	)	(2		)	(202,182	)	(2		)	146,479			—			(146,781		)	—		—			—
Issuance of stock in initial public offering, net of costs			14,375,000		144		—		—			—		—			236,877			—			—			—		—			237,021
Tax effect of initial public offering costs			—		—		—		—			—		—			70			—			—			—		—			70
Additions of treasury stock			—		—		—		—			—		—			—			—			—			(737	)	(53		)	(53		)
Retirement of treasury stock			(13,567	)	—		(298	)	—			(298	)	—			(827		)	—			(13		)	14,163		840			—
Fractional shares payout			—		—		—		—			—		—			(1		)	—			—			—		—			(1		)
Stock-based compensation			—		—		—		—			—		—			14,854			—			—			—		—			14,854
Foreign currency translation adjustment			—		—		—		—			—		—			—			(911		)	—			—		—			(911		)
Unrealized loss on financial instruments, net of taxes of $0			—		—		—		—			—		—			—			(1,104		)	—			—		—			(1,104		)
Pension liability adjustment, net of amortization			—		—		—		—			—		—			—			18			—			—		—			18
Balance as of November 30, 2013	$	0.01	47,922,842		$	479	—		—			—		—			$	852,698		$	716		$	(676,611	)	—		—			$	177,282

See accompanying notes

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The Container Store Group, Inc.

Consolidated statements of cash flows (unaudited)

	Thirty-Nine Weeks Ended
(In thousands)	November 30, 2013			November 24, 2012
Operating activities
Net loss	$	(10,174	)	$	(2,223	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	22,620			21,825
Stock-based compensation	14,854			157
Loss on disposal of property and equipment	70			87
Deferred tax expense (benefit)	1,540			(6,891		)
Noncash interest	1,367			1,092
Noncash refinancing expense	851			4,843
Other noncash items	86			—
Changes in operating assets and liabilities:
Accounts receivable	(2,667		)	(3,745		)
Inventory	(22,748		)	(24,936		)
Prepaid expenses and other assets	(2,506		)	(5,346		)
Accounts payable and accrued liabilities	7,804			20,579
Income taxes payable	(1,531		)	(70		)
Other noncurrent liabilities	634			1,723
Net cash provided by operating activities	10,200			7,095

Investing activities
Additions to property and equipment	(32,117		)	(37,078		)
Proceeds from sale of property and equipment	408			297
Net cash used in investing activities	(31,709		)	(36,781		)

Financing activities
Borrowings on revolving lines of credit	50,098			62,527
Payments on revolving lines of credit	(46,694		)	(56,555		)
Borrowings on long-term debt	120,000			290,000
Payments on long-term debt	(53,580		)	(287,437		)
Payment of debt issuance costs	(3,662		)	(9,842		)
Proceeds from issuance of common stock, net	237,021			—
Payment of distributions to preferred shareholders	(295,826		)	—
Purchase of treasury shares	(53		)	(189		)
Net cash provided by (used in) financing activities	7,304			(1,496		)
Effect of exchange rate changes on cash	(324		)	(106		)
Net decrease in cash	(14,529		)	(31,288		)
Cash at beginning of period	25,351			51,163
Cash at end of period	$	10,822		$	19,875
Supplemental disclosures of non-cash activities:
Exchange of outstanding preferred shares for common shares	$	551,145		$	—

See accompanying notes.

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The Container Store Group, Inc.

Notes to consolidated financial statements (unaudited)

(In thousands, except share amounts and unless otherwise stated)

November 30, 2013

1. Nature of business and summary of significant policies

Nature of business

Description of business

The Container Store, Inc. was founded in 1978 in Dallas, Texas, as a retailer with a mission to provide customers with storage and organization solutions through an assortment of innovative products and unparalleled customer service. As of November 30, 2013, The Container Store, Inc. operates 63 stores with an average size of approximately 19,000 selling square feet in 22 states and the District of Columbia. The Container Store, Inc. also offers all of its products directly to its customers through its website and call center. The Container Store, Inc.’s wholly owned Swedish subsidiary, Elfa International AB (“Elfa”) designs and manufactures component-based shelving and drawer systems that are customizable for any area of the home. elfa® branded products are sold exclusively in the United States in The Container Store® retail stores, website, and call center and Elfa sells to various retailers and distributors primarily in the Nordic region and throughout Europe on a wholesale basis. In 2007, The Container Store, Inc. was sold to The Container Store Group, Inc. (the “Company” and formerly known as TCS Holdings, Inc.), a holding company, of which a majority stake was purchased by Leonard Green and Partners, L.P. (“LGP”), with the remainder held by certain employees of The Container Store, Inc.

On October 31, 2013, the Company’s board of directors approved a 5.9-for-one stock split of its existing common shares. All share and per share information has been retroactively adjusted to reflect the stock split.

On November 6, 2013, the Company completed its initial public offering (“IPO”). In connection with its IPO, the Company issued and sold 14,375,000 shares of its common stock at a price of $18.00 per share. Upon completion of the IPO, the Company received net proceeds of $237,021, after deducting the underwriting discount of $17,466 and offering expenses of $4,263. On November 6, 2013, net proceeds of $205,813 from the IPO were applied as follows: (i) a distribution was made to all 140 holders of the Company’s 12% Senior Cumulative Preferred Stock (the “Senior Preferred Stock”) (including LGP and 130 of its current and former employees), which reduced the liquidation preference of such shares until such liquidation preference was reduced to $1,000.00 per share and (ii) a distribution was made to all 140 holders of the Company’s 12% Junior Cumulative Preferred Stock (the “Junior Preferred Stock”) (including LGP and 130 of its current and former employees), which reduced the liquidation preference of such shares. On November 8, 2013, net proceeds from the IPO of $31,000 were used to repay a portion of the outstanding borrowings under the Senior Secured Term Loan Facility (as defined below). The remaining $208 of net proceeds from the IPO was used for other operating activities.

On November 6, 2013, the Company exchanged each outstanding share of its Senior Preferred Stock and Junior Preferred Stock for 30,619,083 shares of its common stock (the “Exchange”). You may refer to Note 9 of these financial statements for further information regarding the Exchange and other shareholders’ equity transactions during the period.

Seasonality

The Company’s business is moderately seasonal in nature and, therefore, the results of operations for the thirty-nine weeks ended November 30, 2013 are not necessarily indicative of the operating results of the full year. Demand is generally the highest in the fourth fiscal quarter due to Our Annual elfa® Sale, and lowest in the first fiscal quarter.

Summary of significant policies

These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes as of and for the fiscal year ended March 2, 2013 included in the Company’s final prospectus, dated October 31, 2013 and filed with the Securities and Exchange Commission (“SEC”) on November 1, 2013 (the “October 31, 2013 Prospectus”), constituting part of the Company’s Registration Statement on Form S-1, as amended (Registration No. 333-191465), and filed with the SEC.

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Basis of presentation

The accompanying unaudited condensed consolidated financial statements include The Container Store Group, Inc. and its wholly owned subsidiaries. All significant intercompany accounts, transactions, and balances have been eliminated in consolidation. The financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and applicable rules and regulations of the SEC regarding interim financial reporting. The consolidated balance sheets as of November 30, 2013 and November 24, 2012, the consolidated statements of operations and the consolidated statements of comprehensive income (loss) for the thirteen and thirty-nine weeks then ended, the consolidated statements of shareholders’ equity and the consolidated statements of cash flows for the thirty-nine weeks then ended have been prepared by the Company and are unaudited. In the opinion of management, the interim financial statements reflect all normal recurring adjustments necessary to present fairly the financial position at the balance sheet dates and the results of operations for the periods presented. The consolidated balance sheet as of March 2, 2013 has been derived from the audited consolidated balance sheet for the fiscal year then ended.

Fiscal Year

The Company follows a 5-4-4 fiscal calendar, whereby each fiscal quarter consists of thirteen weeks grouped into one five-week “month” and two four-week “months,” and its fiscal year ends on the Saturday closest to February 28th.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with Financial Accounting Standards Board Accounting Standards Codification (“ASC”) No. 718, Compensation-Stock Compensation, which requires the fair value of stock-based payments to be recognized in the consolidated financial statements as compensation expense over the requisite service period. Compensation expense based upon the fair value of awards is recognized on a straight line basis, net of forfeitures, over the requisite service period for awards that actually vest. Stock-based compensation expense is recorded in the stock-based compensation line in the consolidated statements of operations.

The Company estimates the fair value of each stock option grant on the date of grant based upon the Black-Scholes option-pricing model. This model requires various significant judgmental assumptions in order to derive a final fair value determination for each type of award including:

· Expected Volatility — The expected volatility incorporates historical and implied volatility of comparable public companies for a period approximating the expected term.

· Expected Dividend Yield — The expected dividend yield is based on the Company’s expectation of not paying dividends on its common stock for the foreseeable future.

· Risk-Free Interest Rate — The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and with a maturity that approximates the expected term.

Foreign Currency Translation

The functional currency of the Company’s foreign operations is the applicable country’s currency. The functional currency for the Company’s wholly owned subsidiary, Elfa, is the Swedish krona. All assets and liabilities of foreign subsidiaries and affiliates are translated at period-end rates of exchange. Revenues and expenses of foreign subsidiaries and affiliates are translated at weighted-average rates of exchange for the period. Realized gains and losses on purchases of inventory are included in cost of sales. All other realized gains and losses are included in selling, general, and administrative expenses in the consolidated statements of operations. Unrealized gains and losses are reported as cumulative translation adjustments through other comprehensive income (loss). The rates of exchange from Swedish krona to U.S. dollar were 6.5, 6.5, and 6.7 as of November 30, 2013, March 2, 2013, and November 24, 2012, respectively. The carrying amounts of net assets related to Elfa and subject to currency fluctuation were $151,950, $142,840, and $163,520 as of November 30, 2013, March 2, 2013, and November 24, 2012, respectively.

Management Estimates

The preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

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Reclassifications

Certain prior period amounts have been reclassified in order to provide consistent comparative information. These reclassifications do not materially impact the unaudited consolidated financial statements for the prior periods presented.

2. Long-term debt and revolving lines of credit

On April 6, 2012, The Container Store, Inc.’s debt was refinanced. In connection with the refinancing, a new $275,000 Secured Term Loan Facility (the “Senior Secured Term Loan Facility”) was entered into. The Senior Secured Term Loan Facility replaced the previously existing $125,000 secured term loan and $150,000 of senior subordinated notes. In addition, a new $75,000 Revolving Credit Facility (the “Revolving Credit Facility”) was entered into replacing the previously existing $75,000 asset-based revolving credit facility (these transactions are referred to collectively as the “Refinancing Transaction”). The Company recorded expenses of $7,333 in fiscal 2012 associated with the Refinancing Transaction. This amount consisted of $1,655 related to an early extinguishment fee on the senior subordinated notes and $4,843 of deferred financing costs where accelerated amortization was required. The Company also recorded legal fees and other associated costs of $835.

On April 8, 2013, The Container Store, Inc. executed an amendment to the Senior Secured Term Loan Facility (the “Increase and Repricing Transaction”). Under the amendment, borrowings under the Senior Secured Term Loan Facility were increased to $362,250. Borrowings under the amended Senior Secured Term Loan Facility accrued interest at a new lower rate of LIBOR + 4.25%, subject to a LIBOR floor of 1.25% and the maturity date remained as April 6, 2019. Additionally, the amendment eliminated the senior secured leverage ratio requirement. The amendment did not eliminate the restrictions on the ability of the Company’s subsidiaries to incur additional liens and indebtedness, make investments and dispositions, pay dividends or make other distributions, make loans, prepay certain indebtedness and enter into sale and lease back transactions. The Company recorded expenses of $1,101 during the thirty-nine weeks ended November 30, 2013 associated with the Increase and Repricing Transaction (all of which was incurred in the first quarter of 2013). The amount consisted of $723 of deferred financing costs where accelerated amortization was required. Legal fees and other associated costs of $378 were also recorded. You may refer to Note 9 in these interim financial statements for a discussion of the $90,000 distribution payment to senior preferred shareholders that was funded by the increased borrowings.

On November 8, 2013, net proceeds of $31,000 from the IPO were used to repay a portion of the outstanding borrowings under the Senior Secured Term Loan Facility.

On November 27, 2013, The Container Store, Inc. executed a second amendment to the Senior Secured Term Loan Facility (the “Repricing Transaction”). Under the amended Senior Secured Term Loan Facility, borrowings accrue interest at a new lower rate of LIBOR + 3.25%, subject to a LIBOR floor of 1.00% and the maturity date remained as April 6, 2019. The second amendment did not eliminate the restrictions on the ability of the Company’s subsidiaries to incur additional liens and indebtedness, make investments and dispositions, pay dividends or make other distributions, make loans, prepay certain indebtedness and enter into sale and lease back transactions. The Company recorded expenses of $128, where accelerated amortization was required, during the thirteen weeks ended November 30, 2013 associated with the Repricing Transaction.

Long-term debt and revolving lines of credit consist of the following:

	November 30, 2013			March 2, 2013			November 24, 2012
Secured term loan, U.S.	$	329,439		$	272,938		$	273,625
Secured term loan, Sweden	2,864			5,812			6,570
Secured revolving credit, U.S.	14,000			—			15,000
Mortgage and other loans	5,535			6,621			7,394
	351,838			285,371			302,589
Less current portion	(8,975		)	(9,023		)	(8,878		)
	$	342,863		$	276,348		$	293,711
Secured revolving credit, Sweden	$	16,679		$	13,482		$	17,027

3. Inventory

The components of inventory are summarized below:

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	November 30, 2013		March 2, 2013		November 24, 2012
Raw materials	$	5,011	$	5,657	$	6,404
Work-in-progress	1,618		1,983		1,948
Finished goods	98,495		74,803		87,754
	$	105,124	$	82,443	$	96,106

4. Net income (loss) per share

Basic net income (loss) per common share is computed as net income (loss) available to common shareholders divided by the weighted average number of common shares outstanding for the period. Net income (loss) available to common shareholders is computed as net income (loss) less accumulated distributions to preferred shareholders for the period.

The following is a reconciliation of net income (loss) available to common shareholders and the number of shares used in the basic and diluted net loss per share calculations:

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	November 30, 2013			November 24, 2012			November 30, 2013			November 24, 2012
Numerator:
Net (loss) income	$	(9,486	)	$	6,862		$	(10,174	)	$	(2,223	)
Less: Distributions accumulated to preferred shareholders	(15,597		)	(22,456		)	(59,747		)	(65,410		)
Net loss available to common shareholders	$	(25,083	)	$	(15,594	)	$	(69,921	)	$	(67,633	)

Denominator:
Weighted average common shares outstanding — basic and diluted	18,036,633			2,928,964			7,965,089			2,929,928

Basic and diluted net loss per common share	$	(1.39	)	$	(5.32	)	$	(8.78	)	$	(23.08	)

Antidilutive securities not included:
Stock options outstanding	319,190			—			140,527			—

5. Pension plan

The Company provides pension benefits to the employees of Elfa under collectively bargained pension plans in Sweden, which are recorded in other long-term liabilities. The defined benefit plan provides benefits for participating employees based on years of service and final salary levels at retirement. The defined benefit plans are unfunded and approximately 2% of Elfa employees are participants in the defined benefit pension plan. Certain employees also participate in defined contribution plans for which Company contributions are determined as a percentage of participant compensation. The Company contributed $2,117 and $2,281 for defined contribution plans in the thirty-nine weeks ended November 30, 2013 and November 24, 2012, respectively.

6. Income taxes

The Company’s effective income tax rate for the thirty-nine weeks ended November 30, 2013 was (32.4%) compared to 67.9% for the thirty-nine weeks ended November 24, 2012. The effective income tax rates fell below the federal statutory rate in 2013 primarily due to $5,707 of tax expense resulting from a valuation allowance recorded on the IPO-related stock-based compensation deferred tax asset recorded in the third quarter and $719 of tax expense resulting from a valuation allowance recorded on deferred tax assets of certain foreign subsidiaries of the Company. The effective income tax rates exceeded the federal statutory rate in 2012 primarily due to decreases in the valuation allowance on deferred tax assets and a $3,742 tax benefit recorded in 2012 related a reduction in statutory Swedish tax rates and special economic zone incentives in Poland.

7. Commitments and contingencies

In connection with insurance policies, The Container Store, Inc. has outstanding standby letters of credit totaling $2,986 as of November 30, 2013.

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The Company is subject to various legal proceedings and claims, including employment claims, wage and hour claims, intellectual property claims, contractual and commercial disputes and other matters that arise in the ordinary course of business. While the outcome of these and other claims cannot be predicted with certainty, management does not believe that the outcome of these matters will have a material adverse effect on the Company’s business, results of operations, or financial condition on an individual basis or in the aggregate.

8. Stock-based compensation

In fiscal 2012, the Company implemented the 2012 Stock Option Plan of The Container Store Group, Inc. (“2012 Equity Plan”). The 2012 Equity Plan provides for grants of nonqualified stock options and incentive stock options. On October 31, 2013, the Company’s board of directors approved the modification of 240,435 outstanding stock options granted under the 2012 Equity Plan to provide for immediate vesting. The Company recognized approximately $1,594 of compensation expense in the thirteen weeks ended November 30, 2013 related to the modification of these stock options.

On October 16, 2013, the Company’s board of directors approved the 2013 Incentive Award Plan (“2013 Equity Plan”). The 2013 Equity Plan provides for grants of nonqualified stock options, incentive stock options, restricted stock, restricted stock units, deferred stock awards, deferred stock units, stock appreciation rights, dividends equivalents, performance awards, and stock payments. There were 3,616,570 shares reserved for issuance under the 2013 Equity Plan.

On October 31, 2013, the Company granted 2,622,721 nonqualified stock options under the 2013 Equity Plan to its directors and certain of its employees. The stock options granted were approved by the Company’s board of directors and consisted of nonqualified stock options as defined by the IRS for corporate and individual tax reporting purposes. There were 1,666,066 options granted that immediately vested upon closing of the IPO on November 6, 2013. The remaining stock options granted will vest in equal annual installments over 7 years. The Company recognized $13,008 of compensation expense in the thirteen weeks ended November 30, 2013 related to the 2013 Equity Plan options granted.

Stock-based compensation cost is measured at the grant date fair value and is recognized as an expense in the consolidated statements of operations, on a straight-line basis over the employee’s requisite service period (generally the vesting period of the equity grant). The Company estimates forfeitures for option grants that are not expected to vest. Stock-based compensation cost recognized in the thirteen and thirty-nine weeks ended November 30, 2013 totaled $14,641 and $14,854, respectively. Stock-based compensation cost recognized in the thirteen and thirty-nine weeks ended November 24, 2012 totaled $157. As of November 30, 2013, there was a remaining unrecognized compensation cost of $7,916 (net of estimated forfeitures) that the Company expects to be recognized on a straight-line basis over an average remaining service period of approximately 6.9 years.

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The following table summarizes the Company’s stock option activity during the thirty-nine weeks ended November 30, 2013:

	Shares		Weighted- average exercise price		Weighted-average contractual term remaining
			(Per share data)		(In Years)
Balance at March 2, 2013:	244,064		$	17.01	—
Granted	2,622,721		$	18.00	—
Exercised	—		—		—
Canceled	(7,627	)	$	17.49	—
Balance at November 30, 2013	2,859,158		$	17.92	9.81

The aggregate intrinsic value of the 2,859,158 stock options outstanding is $65,112. The Company has 1,906,017 exercisable stock options as of November 30, 2013 with a weighted average exercise price of $17.88 and an aggregate intrinsic value of $43,485.

The fair value of stock options is estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted-average assumptions:

· Expected Term — The expected term of the options represents the period of time between the grant date of the options and the date the options are either exercised or canceled, including an estimate of options still outstanding. The Company utilized the simplified method for calculating the expected term for stock options as we do not have sufficient historical data to calculate based on actual exercise and forfeiture activity.

· Expected Volatility — The expected volatility incorporates historical and implied volatility of comparable public companies for a period approximating the expected term.

· Expected Dividend Yield — The expected dividend yield is based on the Company’s expectation of not paying dividends on its common stock for the foreseeable future.

· Risk-Free Interest Rate — The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant and with a maturity that approximates the expected term.

The following table summarizes the weighted-average assumptions used to measure the grant date fair value of the non-qualified stock options granted under the 2013 Equity Plan using the Black Scholes option pricing model for the thirty-nine weeks ended November 30, 2013:

	Thirty-Nine Weeks Ended
	November 30, 2013
Expected term	5.7 years
Expected volatility	48.28	%
Risk-free interest rate	1.49	%
Expected dividend yield	0	%

9. Shareholders’ equity

Common stock

On August 16, 2007, the Company issued 2,942,326 shares of common stock (giving effect to the stock split discussed below) with a par value of $0.01 per share at a price of $17.01 per share. The holders of common stock are entitled to one vote per common share. The holders have no preemptive or other subscription rights and there are no redemptions or sinking fund provisions with respect to such shares. Common stock is subordinate to any preferred stock outstanding with respect to rights upon liquidation and dissolution of the Company.

On October 31, 2013, the Company’s board of directors retired 13,567 shares of common stock (giving effect to the stock split discussed below) held in treasury.

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On November 6, 2013, the Company completed its IPO. In connection with its IPO, the Company issued and sold 14,375,000 shares of its common stock at a price of $18.00 per share. Upon completion of the offering, the Company received net proceeds of approximately $237,021, after deducting the underwriting discount of $17,466 and offering expenses of $4,263.

Preferred Stock

On April 9, 2013, the Company paid a distribution to holders of its Senior Preferred Stock in the amount of $90,000. Refer to Note 2 for a discussion of the Increase and Repricing Transaction whereby $90,000 of additional secured term loans were executed to fund this distribution. There were zero, $382,847, and $357,908 cumulative preferred share distributions in arrears as of November 30, 2013, March 2, 2013 and November 24, 2012, respectively. These distributions in arrears were not declared by the board of directors and, therefore, have not been accrued on the accompanying consolidated balance sheets as of March 2, 2013 and November 24, 2012. The distributions in arrears were eliminated as of November 6, 2013 through the Distribution and the Exchange, discussed below.

On October 31, 2013, the Company’s board of directors retired 298 shares of Senior Preferred Stock and 298 shares of Junior Preferred Stock held in treasury.

On November 6, 2013, in connection with the completion of the Company’s IPO, a distribution in the aggregate amount of $205,813 (the “Distribution”), was paid from the net proceeds of the offering, (i) first, to all 140 holders of the Company’s Senior Preferred Stock (including LGP and 130 current and former employees of the Company), which reduced the liquidation preference of such shares until such liquidation preference was reduced to $1,000.00 per share and (ii) second, the remainder was distributed to all 140 holders of the Company’s Junior Preferred Stock (including LGP and 130 current and former employees of the Company), which reduced the liquidation preference of such shares.

On November 6, 2013, the Company consummated the Exchange, pursuant to which the Company exchanged the liquidation preference per outstanding share of its Senior Preferred Stock and Junior Preferred Stock, after giving effect to the payment of the Distribution, for 30,619,083 shares of its common stock. The amount of common stock issued in the Exchange was determined by dividing (a) the liquidation preference amount of such preferred stock by (b) the IPO price of $18.00 per share. On an as adjusted basis to give effect to the Distribution and prior to the Exchange, the liquidation preference per share of its outstanding Senior Preferred Stock was $1,000.00 and the liquidation preference per share of its outstanding Junior Preferred Stock was $1,725.98.

Following the Exchange, the Company has no outstanding preferred stock.

10. Accumulated other comprehensive income (loss) (AOCI)

A rollforward of the amounts included in AOCI, net of taxes, is shown below for the thirty-nine weeks ended November 30, 2013:

	Foreign currency forward contracts			Minimum pension liability			Foreign currency translation			Total
Balance at March 2, 2013	$	1,545		$	(972	)	$	2,140		$	2,713
Other comprehensive income (loss) before reclassifications, net of tax	(560		)	18			(911		)	(1,453		)
Amounts reclassified to earnings, net of tax	(544		)	—			—			(544		)
Balance at November 30, 2013	$	441		$	(954	)	$	1,229		$	716

Amounts reclassified from accumulated other comprehensive income (loss) for the foreign currency forward contracts category are generally included in cost of sales in the Company’s consolidated statements of operations. For a description of the Company’s use of foreign currency forward contracts, refer to Note 11.

11. Foreign currency forward contracts

The Company’s international operations and purchases of its significant product lines from foreign suppliers are subject to certain opportunities and risks, including foreign currency fluctuations. The Company utilizes foreign currency forward exchange contracts in Swedish krona to stabilize its retail gross margins and to protect its domestic operations from downward currency exposure by hedging purchases of inventory from its wholly owned subsidiary, Elfa. In the thirty-nine weeks ended November 30, 2013, the Company used forward contracts for 87% of inventory purchases in

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Swedish krona. All of the Company’s currency-related hedge instruments have terms from 1 to 12 months and require the Company to exchange currencies at agreed-upon rates at settlement. The counterparties to the contracts consist of a limited number of major domestic and international financial institutions. The Company does not hold or enter into financial instruments for trading or speculative purposes. The Company records its financial hedge instruments on a gross basis and generally does not require collateral from these counterparties because it does not expect any losses from credit exposure. The Company does not have any material financial hedge instruments that do not qualify for hedge accounting treatment as of November 30, 2013, March 2, 2013 and November 24, 2012. The Company records all foreign currency forward contracts on its consolidated balance sheets at fair value. Forward contracts not designated as hedges are adjusted to fair value through income.

The Company accounts for its foreign currency hedge instruments as cash flow hedges, as defined. Changes in the fair value of the foreign currency hedge instruments that are considered to be effective, as defined, are recorded in accumulated other comprehensive income (loss) until the hedged item (inventory) is sold to the customer, at which time the deferred gain or loss is recognized through cost of sales. Any portion of a change in the foreign currency hedge instruments’ fair value that is considered to be ineffective, as defined, or that the Company has elected to exclude from its measurement of effectiveness, is immediately recorded in earnings as cost of sales. The Company recorded the fair value of its unsettled foreign currency forward contracts as cash flow hedges, resulting in zero, $1,103, and $615 total current asset in the consolidated balance sheet as of November 30, 2013, March 2, 2013, and November 24, 2012, respectively.

The Company recorded $441 in accumulated other comprehensive gain at November 30, 2013, all of which represents unrealized gains that have been recorded for settled forward contracts related to inventory on hand as of November 30, 2013. The Company expects the unrealized gain of $441, net of taxes, to be reclassified into earnings over the next 12 months as the underlying inventory is sold to the end customer.

12. Fair value measurements

Under generally accepted accounting principles, the Company is required to a) measure certain assets and liabilities at fair value or b) disclose the fair values of certain assets and liabilities recorded at cost. Accounting standards define fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. Fair value is calculated assuming the transaction occurs in the principal or most advantageous market for the asset or liability and includes consideration of non-performance risk and credit risk of both parties. Accounting standards pertaining to fair value establish a three- tier fair value hierarchy that prioritizes the inputs used in measuring fair value. These tiers include:

· Level 1—valuation inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

· Level 2—valuation inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

· Level 3—valuation inputs are unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are determined using model-based techniques that include option pricing models, discounted cash flow models and similar techniques.

As of November 30, 2013, March 2, 2013, and November 24, 2012, the Company held certain items that are required to be measured at fair value on a recurring basis. These included cash, the nonqualified retirement plan, and foreign currency forward contracts. Cash consists of cash on hand. The nonqualified retirement plan consists of investments purchased by employee contributions to retirement savings accounts. Foreign currency forward contracts are related to the Company’s efforts to manage foreign currency fluctuation on purchases of inventory in Swedish krona. The Company’s foreign currency hedge instruments consist of over-the-counter (OTC) contracts, which are not traded on a public exchange. See Note 11 for further information on the Company’s hedging activities.

The fair values of the nonqualified retirement plan and foreign currency forward contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, the Company has categorized these items as Level 2. The Company has consistently applied these valuation techniques in all periods presented and believes it has obtained the most accurate information available for the types of contracts it holds.

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The following items are measured at fair value on a recurring basis, subject to the disclosure requirements of ASC 820 at November 30, 2013, March 2, 2013, and November 24, 2012:

Description		Balance Sheet Location	November 30, 2013		March 2, 2013		November 24, 2012
Assets
Cash	Level 1	Cash	$	10,822	$	25,351	$	19,875
Nonqualified retirement plan	Level 2	Prepaid expenses and other current assets	3,200		2,569		2,326
Foreign currency hedge instruments	Level 2	Forward contracts	—		1,103		615
Total assets			$	14,022	$	29,023	$	22,816
Liabilities
Nonqualified retirement plan	Level 2	Accrued liabilities	3,207		2,582		2,338
Total liabilities			$	3,207	$	2,582	$	2,338

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The fair values of long-term debt were estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements (Level 3 valuations). As of November 30, 2013, March 2, 2013, and November 24, 2012, the carrying values and estimated fair values of the Company’s long-term debt, including current maturities, were:

	November 30, 2013
	Carrying value		Fair value
Secured term loan, U.S.	$	329,439	$	329,439
Secured term loan, Sweden	2,864		2,959
Secured revolving credit, U.S.	14,000		14,000
Other loans	5,535		5,521
Total	$	351,838	$	351,919

	March 2, 2013
	Carrying value		Fair value
Secured term loan, U.S.	$	272,938	$	261,718
Secured term loan, Sweden	5,812		5,864
Other loans	6,621		6,675
Total	$	285,371	$	274,257

	November 24, 2012
	Carrying value		Fair value
Secured term loan, U.S.	$	273,625	$	262,406
Secured term loan, Sweden	6,570		6,628
Secured revolving credit, U.S.	15,000		15,000
Other loans	7,394		7,464
Total	$	302,589	$	291,498

13. Segment reporting

The Company’s reportable segments were determined on the same basis as how it evaluates the performance internally. The Company’s two reportable segments consist of TCS and Elfa. The TCS segment includes the Company’s retail stores, website and call center, as well as the installation services business. These operating segments have been aggregated into a single reportable segment based on the similar customer base that they share, the fact that the merchandise offered is largely the same, and also because they are closely integrated logistically and operationally.

The Elfa segment includes the manufacturing business which produces the elfa® brand products that are sold domestically exclusively through the TCS segment, as well as throughout Europe. The intersegment sales in the Elfa column represent elfa® product sales to the TCS segment. These sales and the related gross margin on product recorded in TCS inventory balances at the end of the period are eliminated for consolidation purposes in the Corporate/Other column. The net sales to external customers in the Elfa column represent sales to customers outside of the United States.

Amounts in the Corporate/Other column include unallocated corporate expenses and assets, intersegment eliminations and other adjustments to segment results necessary for the presentation of consolidated financial results in accordance with generally accepted accounting principles.

In general, the Company uses the same measurements to calculate earnings or loss before income taxes for reportable segments as it does for the consolidated company. However, interest expense and loss on extinguishment of debt related to the domestic secured term loan and revolver is recorded in the Corporate/Other column.

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Thirteen Weeks Ended November 30, 2013	TCS			Elfa		Corporate/ other			Total
Net sales to external customers	$	163,744		$	24,554	$	—		$	188,298
Intersegment sales	—			27,455		(27,455		)	—
Interest expense, net	13			288		5,481			5,782
Earnings (loss) before income taxes (including $14,641 stock-based compensation) (1)	(3,188		)	8,855		(12,448		)	(6,781		)
Assets(2)	612,351			141,074		21,535			774,960

Thirteen Weeks Ended November 24, 2012	TCS		Elfa		Corporate/ other			Total
Net sales to external customers	$	147,722	$	27,694	$	—		$	175,416
Intersegment sales	—		23,459		(23,459		)	—
Interest expense, net	28		282		4,821			5,131
Earnings (loss) before income taxes (including $157 stock-based compensation) (1)	9,313		5,478		(9,640		)	5,151
Assets(2)	588,436		158,958		19,908			767,302

Thirty-Nine Weeks Ended November 30, 2013	TCS		Elfa		Corporate/ other			Total
Net sales to external customers	$	466,543	$	65,173	$	—		$	531,716
Intersegment sales	—		47,414		(47,414		)	—
Interest expense, net	45		723		16,088			16,856
Earnings (loss) before income taxes (including $14,854 stock-based compensation) (1)	13,771		7,480		(28,938		)	(7,687		)
Assets(2)	612,351		141,074		21,535			774,960

Thirty-Nine Weeks Ended November 24, 2012	TCS		Elfa		Corporate/ other			Total
Net sales to external customers	$	418,071	$	71,661	$	—		$	489,732
Intersegment sales	—		39,826		(39,826		)	—
Interest expense, net	85		760		15,176			16,021
Earnings (loss) before income taxes (including $157 stock-based compensation) (1)	22,752		1,360		(31,043		)	(6,931		)
Assets(2)	588,436		158,958		19,908			767,302

(1) The Corporate/Other column includes $128 and $4 loss on extinguishment of debt for the thirteen weeks ended November 30, 2013 and November 24, 2012, respectively. The Corporate/Other column includes $1,229 and $7,333 loss on extinguishment of debt for the thirty-nine weeks ended November 30, 2013 and November 24, 2012, respectively.

(2) Tangible assets and trade names in the Elfa column are located outside of the United States. Assets in Corporate/Other include assets located in corporate headquarters and distribution center, and include deferred tax assets and fair value of forward contracts.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary note regarding forward-looking statements

This report, including this Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations.

These forward-looking statements speak only as of the date of this report and are subject to a number of risks, uncertainties and assumptions described in the “Risk Factors” section of this Quarterly Report on Form 10-Q. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein after the date of this report, whether as a result of any new information, future events or otherwise.

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Overview

We are the leading specialty retailer of storage and organization products in the United States. We are the original storage and organization specialty retailer and the only national retailer solely devoted to the category. Our goal is to help provide order to an increasingly busy and chaotic world. We provide creative, multifunctional, customizable storage and organization solutions that help our customers save time, save space and improve the quality of their lives. The breadth, depth and quality of our product offerings are designed to appeal to a broad demographic, including our core customers, who are predominantly female, affluent, highly educated and busy.

Our operations consist of two reporting segments:

· The Container Store (“TCS”), which consists of our retail stores, website and call center, as well as our installation services business. As of November 30, 2013, we operate 63 stores with an average size of approximately 19,000 selling square feet in 22 states and the District of Columbia. We also offer all of our products directly to customers through our website and call center. Our stores receive all products directly from our distribution center co-located with our corporate headquarters in Coppell, Texas.

· Elfa, which 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 four manufacturing facilities with two located in Sweden, one in Finland 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. Elfa also sells its products on a wholesale basis to various retailers in more than 30 countries around the world, with a concentration in the Nordic region of Europe.

How we assess the performance of our business

We consider a variety of financial and operating measures in assessing the performance of our business. The key measures we use to determine how our business is performing are net sales, gross profit, gross margin, and selling, general and administrative expenses. In addition, we also review other important metrics such as comparable store sales, average ticket and Adjusted EBITDA.

Net sales

Net sales reflect our sales of merchandise plus other services provided, such as shipping, delivery, and installation, less returns and discounts. Net sales also include wholesale sales by Elfa. Revenue from our TCS segment is recognized upon receipt of the product by our customers or upon completion of the service to our customers. Elfa segment revenue is recorded upon shipment.

The retail and wholesale businesses in which we operate are cyclical, and consequently our sales are affected by general economic conditions. Purchases of our products are sensitive to trends in the levels of consumer spending, which are affected by a number of factors such as consumer disposable income, housing market conditions, stock market performance, consumer debt, interest rates, tax rates and overall consumer confidence.

Our business is moderately seasonal. As a result, our revenues fluctuate from quarter to quarter, which often affects the comparability of our interim results. Net sales are historically higher in the fourth quarter due primarily to the impact of Our Annual elfa® Sale, which begins on December 24th and runs into early February each year.

Gross profit and gross margin

Gross profit is equal to our net sales less cost of sales. Gross profit as a percentage of net sales is referred to as gross margin. Cost of sales in our TCS segment includes the purchase cost of inventory less vendor rebates, in-bound freight, as well as inventory shrinkage. Costs incurred to ship or deliver merchandise to customers, as well as direct installation costs, are also included in cost of sales in our TCS segment. Elfa segment cost of sales from manufacturing operations includes direct costs associated with production, primarily material and wages. The components of our cost of sales may not be comparable to the components of cost of sales or similar measures by other retailers. As a result, data in this report regarding our gross profit and gross margin may not be comparable to similar data made available by other retailers.

Our gross profit is variable in nature and generally follows changes in net sales. Our gross margin can be impacted by changes in the mix of products sold. For example, sales from our TCS segment typically provide a higher gross margin than sales to third parties from our Elfa segment. Gross margin for our TCS segment is also susceptible to foreign currency risk as purchases of elfa® products from our Elfa segment are in Swedish krona, while sales of these products are in U.S. dollars. We mitigate this risk through the use of forward contracts, whereby we hedge purchases of inventory by locking in foreign currency exchange rates in advance.

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Selling, general and administrative expenses

Selling, general and administrative expenses includes all operating costs not included in cost of sales, stock-based compensation, or pre-opening costs. For our TCS segment, these include all payroll and payroll-related expenses, marketing expenses, all occupancy expenses (which include rent, real estate taxes, common area maintenance, utilities, telephone, property insurance, and repair and maintenance), costs to ship product from the distribution center to our stores, and supplies expenses. We also incur costs for our distribution and corporate office operations. For our Elfa segment, these include sales and marketing expenses, product development costs, and all expenses related to operations at headquarters. Depreciation and amortization is excluded from both gross profit and selling, general and administrative expenses. Selling, general and administrative expenses includes both fixed and variable components and, therefore, is not directly correlated with net sales. The components of our selling, general and administrative expenses may not be comparable to the components of similar measures of other retailers. We expect that our selling, general and administrative expenses will increase in future periods with future growth and in part due to additional legal, accounting, insurance, and other expenses that we expect to incur as a result of being a public company, including compliance with the Sarbanes-Oxley Act.

New store pre-opening costs

Non-capital expenditures associated with opening new stores, including rent, marketing expenses, travel and relocation costs, and training costs, are expensed as incurred and are included in pre-opening costs in the consolidated statement of operations.

Comparable store sales

A store is included in the comparable store sales calculation on the first day of the sixteenth full fiscal month following the store’s opening, which is when we believe comparability is achieved. When a store is relocated, we continue to include sales from that store in comparable store sales. Sales from our website and call center, which are included in our net sales for all periods discussed below, are also included in calculations of comparable store sales.

Comparable store sales allow us to evaluate how our retail store base is performing by measuring the change in period-over-period net sales in stores that have been open for fifteen months or more. Various factors affect comparable store sales, including:

· national and regional economic trends in the United States;

· changes in our merchandise mix;

· changes in pricing;

· changes in timing of promotional events or holidays; and

· weather.

Opening new stores is an important part of our growth strategy. As we continue to pursue our growth strategy, we anticipate that a significant percentage of our net sales will come from stores not included in our comparable store sales calculation. Accordingly, comparable store sales are only one measure we use to assess the success of our growth strategy.

Average ticket

Average ticket for any period is calculated by dividing (a) net sales of merchandise from our TCS segment for that period (regardless of whether such net sales are included in comparable sales for such period) by (b) the number of transactions for that period comprising such net sales. Historically, the average ticket for our elfa® department has been significantly higher than our overall average ticket.

Adjusted EBITDA

EBITDA and Adjusted EBITDA are key metrics used by management, our board of directors and LGP to assess our financial performance. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In addition to covenant compliance and executive performance evaluations, we use Adjusted EBITDA to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures.

We define EBITDA as net income before interest, taxes, depreciation, and amortization. Adjusted EBITDA is calculated in accordance with the Senior Secured Term Loan Facility and the Revolving Credit Facility and is the basis for performance evaluation under our executive compensation programs. Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of certain items, including

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certain non-cash and other items, that we do not consider representative of our ongoing operating performance. For reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, see “Results of Operations.”

Note on Dollar Amounts

All dollar amounts in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are in thousands, unless otherwise stated.

Results of Operations

The following data represents the amounts shown in our unaudited consolidated statements of operations expressed in dollars and as a percentage of net sales and operating data for the thirteen and thirty-nine weeks ended November 30, 2013 and November 24, 2012 (categories that are only applicable to our TCS segment are noted with (*) and to our Elfa segment with (+)). For segment data, see Note 13 to our unaudited consolidated financial statements.

	Thirteen weeks ended						Thirty-Nine weeks ended
	November 30, 2013			November 24, 2012			November 30, 2013			November 24, 2012
Net sales	$	188,298		$	175,416		$	531,716		$	489,732
Cost of sales (excluding depreciation and amortization)	75,359			71,302			218,176			202,463
Gross profit	112,939			104,114			313,540			287,269
Selling, general and administrative expenses (excluding depreciation and amortization)	88,797			81,715			257,870			237,022
Stock-based compensation	14,641			157			14,854			157
Pre-opening costs*	1,827			2,137			5,761			6,573
Depreciation and amortization	7,569			7,336			22,620			21,825
Restructuring charges+	111			2,056			472			4,365
Other expenses	869			335			1,495			817
(Gain) loss on disposal of assets	(4		)	92			70			87
(Loss) income from operations	(871		)	10,286			10,398			16,423
Interest expense, net	5,782			5,131			16,856			16,021
Loss on extinguishment of debt*	128			4			1,229			7,333
(Loss) income before taxes	(6,781		)	5,151			(7,687		)	(6,931		)
Provision (benefit) for income taxes	2,705			(1,711		)	2,487			(4,708		)
Net (loss) income	$	(9,486	)	$	6,862		$	(10,174	)	$	(2,223	)

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	Thirteen weeks ended						Thirty-Nine weeks ended
	November 30, 2013			November 24, 2012			November 30, 2013			November 24, 2012
Percentage of net sales:
Net sales	100.0		%	100.0		%	100.0		%	100.0		%
Cost of sales (excluding depreciation and amortization)	40.0		%	40.6		%	41.0		%	41.3		%
Gross profit	60.0		%	59.4		%	59.0		%	58.7		%
Selling, general and administrative expenses (excluding depreciation and amortization)	47.2		%	46.6		%	48.5		%	48.4		%
Stock-based compensation	7.8		%	0.1		%	2.8		%	0.0		%
Pre-opening costs*	1.0		%	1.2		%	1.1		%	1.3		%
Depreciation and amortization	4.0		%	4.2		%	4.3		%	4.5		%
Restructuring charges+	0.1		%	1.2		%	0.1		%	0.9		%
Other expenses	0.5		%	0.2		%	0.3		%	0.2		%
(Gain) loss on disposal of assets	0.0		%	0.1		%	0.0		%	0.0		%
(Loss) income from operations	(0.5		)%	5.9		%	2.0		%	3.4		%
Interest expense, net	3.1		%	2.9		%	3.2		%	3.3		%
Loss on extinguishment of debt*	0.1		%	0.0		%	0.2		%	1.5		%
(Loss) income before taxes	(3.6		)%	2.9		%	(1.4		)%	(1.4		)%
Provision (benefit) for income taxes	1.4		%	(1.0		)%	0.5		%	(1.0		)%
Net (loss) income	(5.0		)%	3.9		%	(1.9		)%	(0.5		)%
Operating data:
Comparable store sales growth for the period (1)*	4.7		%	4.3		%	3.6		%	5.2		%
Number of stores open at end of period*	63			58			63			58
Average ticket*	$	61.49		$	58.62		$	58.86		$	56.02
Non-GAAP measures (2):
Adjusted EBITDA (3)	$	24,103		$	22,456		$	56,822		$	52,595
Adjusted net income (4)	$	5,195		$	5,288		$	5,669		$	4,201
Adjusted net income per common share - diluted (4)	$	0.11		$	0.11		$	0.12		$	0.09

(1) In fiscal 2012, the Company’s fiscal year included 53 weeks. As a result, sales recorded in weeks twenty-seven through thirty-nine of fiscal 2013 are comparable to weeks twenty-eight through forty of fiscal 2012, and weeks one through thirty-nine of fiscal 2013 are comparable to weeks two through forty of fiscal 2012 in the comparable store sales growth percentages in this table.

(2) We have presented certain non-GAAP measures as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. These non-GAAP measures should not be considered as alternatives to net income (loss) as a measure of financial performance or cash flows from operations as a measure of liquidity, or any other performance measure derived in accordance with GAAP and they should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. These non-GAAP measures are key metrics used by management, our board of directors and LGP to assess our financial performance. These non-GAAP measures are frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In evaluating these non-GAAP measures, you should be aware that in the future we will incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of these non-GAAP measures should not be construed to imply that our future results will be unaffected by any such adjustments. Management compensates for these limitations by relying on our GAAP results in addition to using non-GAAP measures supplementally. Our non-GAAP measures are not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.

(3) EBITDA and Adjusted EBITDA have been presented as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as they do not reflect certain cash requirements such as tax payments, debt service requirements, capital expenditures, store openings and certain other cash costs that may recur in the future. EBITDA and Adjusted EBITDA contain certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized.

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A reconciliation of net (loss) income to EBITDA and Adjusted EBITDA is set forth below:

	Thirteen weeks ended						Thirty-Nine weeks ended
	November 30, 2013			November 24, 2012			November 30, 2013			November 24, 2012
Net (loss) income	$	(9,486	)	$	6,862		$	(10,174	)	$	(2,223	)
Depreciation and amortization	7,569			7,336			22,620			21,825
Interest expense, net	5,782			5,131			16,856			16,021
Income tax expense (benefit)	2,705			(1,711		)	2,487			(4,708		)
EBITDA	$	6,570		$	17,618		$	31,789		$	30,915
Management fees(a)	167			250			667			750
Pre-opening costs*(b)	1,827			2,137			5,761			6,573
IPO costs*(c)	764			—			1,170			—
Non-cash rent(d)	(44		)	433			658			1,739
Restructuring charges+(e)	111			2,056			472			4,365
Stock-based compensation(f)	14,641			157			14,854			157
Loss on extinguishment of debt*(g)	128			4			1,229			7,333
Foreign exchange (gains) losses(h)	(191		)	(563		)	(176		)	(119		)
Other adjustments(i)	130			364			398			882
Adjusted EBITDA	$	24,103		$	22,456		$	56,822		$	52,595

(a) Fees paid to LGP in accordance with our management services agreement, which terminated upon closing of our IPO.

(b) Non-capital expenditures associated with opening new stores and relocating stores. We adjust for these costs to facilitate comparisons of our performance from period to period.

(c) Charges incurred in connection with our IPO, which we do not expect to recur and do not consider in our evaluation of ongoing performance.

(d) Reflects the extent to which our annual GAAP rent expense has been above or below our cash rent payments due to lease accounting adjustments. The adjustment varies depending on the average age of our lease portfolio (weighted for size), as our GAAP rent expense on younger leases typically exceeds our cash cost, while our GAAP rent expense on older leases is typically less than our cash cost. Although our GAAP rent expense has exceeded our cash rent payments through our last fiscal year, as our lease portfolio matures we expect our cash rent payments to exceed our GAAP rent expense, beginning in fiscal 2013.

(e) Includes charges incurred to restructure business operations at Elfa, including the sale of a subsidiary in Germany and a manufacturing facility in Norway in fiscal 2012, as well as the relocation of certain head office functions in sales and marketing from the Västervik, Sweden, manufacturing location to the group headquarters in Malmö, Sweden in fiscal 2012, which we do not consider in our evaluation of our ongoing performance.

(f) Non-cash charges related to stock-based compensation programs, which vary from period to period depending on timing of awards. We adjust for these charges to facilitate comparisons from period to period.

(g) Loss recorded as a result of the repayment of the then outstanding term loan facility and senior subordinated notes in April 2012, and the amendments made to the Senior Secured Term Loan Facility in April 2013 and November 2013, which we do not consider in our evaluation of our ongoing operations.

(h) Realized foreign exchange transactional gains/losses.

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(i) Other adjustments include amounts our management does not consider in our evaluation of our ongoing operations, including costs incurred in preparations for our IPO and other charges.

(4) Adjusted net income and adjusted net income per common share — diluted have been presented as supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define adjusted net income as net loss available to common shareholders before distributions accumulated to preferred shareholders, stock-based compensation and other costs in connection with our IPO, restructuring charges, impairment charges related to intangible assets, losses on extinguishment of debt, and the tax impact of these adjustments and other unusual or infrequent tax items. We define adjusted net income per common share — diluted as adjusted net income divided by the number of fully diluted shares outstanding as of the end of the current fiscal period (i.e. November 30, 2013), assuming those shares were outstanding at the beginning of all periods presented. We use adjusted net income and adjusted net income per common share — diluted to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures.

A reconciliation of the GAAP financial measures of net loss available to common shareholders and diluted net loss per common share to the non-GAAP financial measures of adjusted net income and adjusted net income per common share - diluted is set forth below:

	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	November 30, 2013			November 24, 2012			November 30, 2013			November 24, 2012
Numerator:
Net loss available to common shareholders	$	(25,083	)	$	(15,594	)	$	(69,921	)	$	(67,633	)
Distributions accumulated to preferred shareholders(a)	15,597			22,456			59,747			65,410
Stock-based compensation(b)	14,602			—			14,602			—
IPO costs*(c)	764			—			1,170			—
Restructuring charges+(d)	111			2,056			472			4,365
Goodwill and trade name impairment+(e)	—			—			—			—
Loss on extinguishment of debt*(f)	128			4			1,229			7,333
Taxes(g)	(924		)	(3,634		)	(1,630		)	(5,274		)
Adjusted net income	$	5,195		$	5,288		$	5,669		$	4,201

Denominator:
Weighted average common shares outstanding — diluted	18,036,633			2,928,964			7,965,089			2,929,928
Adjust weighting factor of outstanding shares(h)	30,778,609			44,993,878			40,850,153			44,992,914
Adjusted weighted average common shares outstanding - diluted	48,815,242			47,922,842			48,815,242			47,922,842

Adjusted net income per common share - diluted	$	0.11		$	0.11		$	0.12		$	0.09

(a) Distributions accumulated to preferred shareholders in arrears were eliminated as of November 6, 2013 through the Distribution and Exchange and are not considered in our evaluation of ongoing performance.

(b) Non-cash charges related to stock-based compensation programs incurred in connection with our IPO, which we do not consider in our evaluation of our ongoing performance. This amount includes $13,008 of stock-based compensation expense incurred as a result of the 2013 Equity Plan stock option grants. It also includes $1,594 of stock-based compensation expense related to the modification of options granted as part of the 2012 Equity Plan to provide for immediate vesting.

(c) Charges incurred in connection with our IPO, which we do not expect to recur and do not consider in our evaluation of ongoing performance.

(d) Includes charges incurred to restructure business operations at Elfa, including the sale of a subsidiary in Germany and a manufacturing facility in Norway in fiscal 2012, as well as the relocation of certain head office functions in sales and marketing from the Västervik, Sweden, manufacturing location to the group headquarters in Malmö, Sweden in fiscal 2012, which we do not consider in our evaluation of our ongoing performance.

(e) Non-cash charges related to impairment of intangible assets, primarily related to Elfa, which we do not consider in our evaluation of our ongoing performance. We did not record impairment charges in the periods presented.

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(f) Loss recorded as a result of the repayment of the then outstanding term loan facility and senior subordinated notes in April 2012, and the amendments made to the Senior Secured Term Loan Facility in April 2013 and November 2013, which we do not consider in our evaluation of our ongoing performance.

(g) Tax impact of adjustments to net (loss) income, as well as the exclusion of a tax benefit recorded in the third quarter of fiscal 2012 as a result of a reduction in the Swedish tax rate from 26.3% to 22.0%, which we do not consider in our evaluation of ongoing performance.

(h) Calculated based on assumption that the number of fully diluted shares outstanding as of the end of the current fiscal period (i.e. November 30, 2013) were outstanding at the beginning of all periods presented.

Thirteen Weeks Ended November 30, 2013 Compared to Thirteen Weeks Ended November 24, 2012

Net sales

The following table summarizes our net sales for the thirteen weeks ended November 30, 2013 and November 24, 2012:

	Thirteen Weeks Ended November 30, 2013		% total		Thirteen Weeks Ended November 24, 2012		% total
TCS net sales	$	163,744	87.0	%	$	147,722	84.2	%
Elfa third party net sales	24,554		13.0	%	27,694		15.8	%
Net Sales	$	188,298	100.0	%	$	175,416	100.0	%

Net sales in the thirteen weeks ended November 30, 2013 increased by $12,882, or 7.3%, compared to the thirteen weeks ended November 24, 2012. This increase is comprised of the following components:

	Net sales
Net sales for the thirteen weeks ended November 24, 2012	$	175,416
Incremental net sales increase (decrease) due to:
Comparable stores (including a $774, or 10.2%, increase in online sales)	6,347
New stores	8,756
Elfa third party net sales	(3,140		)
Other	919
Net sales for the thirteen weeks ended November 30, 2013	$	188,298

This increase in net sales was driven by comparable store sales growth of 4.7%, which is primarily attributable to an increase in the comparable average ticket of 5.8%, which more than offset a 1.0% decrease in transactions. In addition, comparable store sales growth benefited from the anniversary of Hurricane Sandy and the timing shift of our Annual Shelving Sale. These benefits were offset slightly by the later Thanksgiving holiday and Cyber Week that resulted in some sales shifting into the fourth quarter of fiscal 2013. New store net sales increases are due to eight incremental stores, three of which were opened in fiscal 2012 and five of which were opened in the first thirty-nine weeks of fiscal 2013. These increases were partially offset by the $3,140 decline in Elfa segment third party sales. Elfa’s third party sales were impacted negatively by the sale of an unprofitable German subsidiary in the fourth quarter of fiscal 2012, as well as continued weakness in the Nordic market.

Gross profit and gross margin

Gross profit in the thirteen weeks ended November 30, 2013 increased by $8,825, or 8.5%, compared to the thirteen weeks ended November 24, 2012. The increase in gross profit was primarily the result of increased sales, as well as improved margins on a consolidated basis. The following table summarizes the gross margin for the thirteen weeks ended November 30, 2013 and the thirteen weeks ended November 24, 2012, respectively, by segment and total. The segment margins include the impact of inter-segment sales from the Elfa segment to the TCS segment:

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	Thirteen Weeks Ended
	November 30, 2013		November 24, 2012
TCS gross margin	58.9	%	59.1	%
Elfa gross margin	40.5	%	38.8	%
Total gross margin	60.0	%	59.4	%

TCS gross margin declined 20 basis points in the thirteen weeks ended November 30, 2013 as compared to the thirteen weeks ended November 24, 2012. The decline in TCS gross margin is primarily due to higher inter-segment cost of sales in our elfa® department, as the U.S. dollar weakened as