The Container Store Group Inc. (TCS) has a financing problem, one that could jeopardize its ability to function as a going concern.
The home organization and storage retail expert entered into an agreement with lenders in October that required it to finalize a financing transaction by Nov. 15. The retailer and its lenders have been in discussions, but it did not receive the necessary lender approvals and the deadline was extended to Dec. 6. A regulatory filing with the Securities and Exchange Commission (SEC) on Friday by TCS indicated that the parties “continue to be in advanced stages of discussions with the company regarding liquidity solutions,” and that the deadline has been extended further to Dec. 31. The Friday filing contained a routine caveat that there is “no assurance” regarding the final terms of any qualified financing transaction or that TCS would be able to enter into any transaction by the Dec. 31 deadline.
The struggling TCS entered into an agreement with Bed Bath & Beyond parent Beyond Inc. this past October. Dubbed a strategic partnership, Beyond was to invest $40 million in the specialty retailer via a preferred equity transaction, and in exchange for the financial boost, the home retailer would allocate floor space at some stores for a line of co-branded products in the kitchen, bath, and bedroom categories. It was a win for Beyond since it gave it an in-store presence without any major store build out that would allow it to keep operations in line with its asset-light model.
But the Beyond deal was subject to certain conditions, including a refinancing of TCS’ credit facilities under terms acceptable to Beyond. Once completed, Beyond could have ultimately owned a 40 percent stake in TCS provided certain other conditions were met to convert preferred shares to common stock.
The Beyond deal is now in doubt, even though the parties still have until Jan. 31 to get the transaction done. After that deadline, either party can end the agreement. The e-commerce company said last month that it has concerns regarding TCS’ ability to reach an agreement with lenders on terms commercially acceptable to Beyond.
“When we signed the Purchase Agreement, we were optimistic that the Container Store would be able to secure adequate financing to support the business going forward,” Beyond’s executive chairman Marcus Lemonis said. “While we continue to believe in The Container Store’s brand and business fundamentals, the proposed financing terms we have reviewed to date fall short of what we believe is necessary to complete the transaction.” He emphasized that the two companies have an obligation to shareholders to ensure that the terms of any financing package work for both TCS and Beyond.
In an SEC filing last month, TCS said it didn’t expect a transaction to occur with Beyond based on the “previously disclosed terms.” And what else TCS said suggests that it might be moving on as it considers other possible options.
“The company remains focused on the successful execution of its strategic initiatives,” TCS said in the regulatory filing. “The company is in advanced discussions with the lenders under its existing term loan credit agreement to provide additional capital to support the company and its long-term growth and success, reflecting their continued support of the company’s business and strategic initiatives.”
In its quarterly report filed with the SEC in October, TCS raised the matter of its going-concern issue. “The persistently challenging retail environment, including reduced consumer spending in the storage and organization category and increased price sensitivity, has significantly impacted the company’s performance,” TCS said. And in reviewing future liquidity and forecasted operating results for the next 12 months, the company said that “in light of the foregoing conditions, substantial doubt regarding the company’s ability to continue as a going concern exists,” absent additional liquidity or modification to its existing credit agreement with lenders.
TCS said it had already initiated a formal review process to evaluate strategic alternatives. When companies raise the going-concern issue, neither a sale of the company nor the possibility of a bankruptcy filing can be ruled out. And on Monday, TCS common shares were suspended from trading on the New York Stock Exchange after it began delisting the stock following TCS’ failure to meet certain listing requirements.
After Bed Bath & Beyond filed its Chapter 11 petition for bankruptcy court protection in April 2023, it said it would honor its 20-percent-off coupons for just one more week. Looking at grabbing market share, both Big Lots and TCS each said they would accept the expire coupons through May 7 and May 31, respectively.
The problem with Big Lots Inc. and TCS, and even Beyond, is that all three operate in what has been a highly distressed home retail sector. Last year saw not only the Bed Bath & Beyond bankruptcy, but also Tuesday Morning for the second time, Serta Simmons, and Mitchell Gold + Bob Williams, among others.
By October 2023, Big Lots caught the radar of some credit analysts wondering it might be the next one to face retail distress. They weren’t wrong. Big Lots was sold this past September to Nexus Capital Management for $760 million after the value home retailer filed its Chapter 11 petition.
And now TCS could be in dire straits if it can’t finalize a deal with lenders for new financing. When the retailer posted second quarter results for the period ended Sept. 28, it reported a narrower net loss of $16.1 million, or $4.85 cents, versus a net loss of $23.7 million, or $7.17 a year earlier. But that’s where the good news ends. On an adjusted basis, the net loss was $10.7 million, or $3.23, versus the year ago adjusted net income of $400,000, or 11 per diluted share. Equally troubling was a 10.5 percent decline in sales to $196.6 million from $219.7 million a year ago, as well as the current quarter’s 12.5 percent decrease in comparable store sales. The retailer also said that online sales fell 13.7 percent in the quarter versus year-ago levels.
Things aren’t that much better at Beyond. The company in October cut 20 percent of the firm’s workforce as it moved toward an asset-light model. For its third quarter ended Sept. 30, the net loss narrowed slightly to $61.0 million, or $1.33 a diluted share, from a net loss of $63.0 million, or $1.39, in the same year-ago period. But the operating loss widened to $43.6 million from an operating loss of $40.9 million a year ago. Net revenue was down 16.6 percent to $311.4 million from $373.3 million.
Lemonis downplayed the perception that maybe things aren’t going well at the retailer Investor Day presentation in late October. “Our path to profitability is not as murky as the outsider may believe, because we understand what are the principal items that will drive that,” Lemonis told investors.
One move is the relaunch of its Overstock.com banner, which would allow it add back the apparel, jewelry and beauty categories to the merchandising mix, as well as move larger items such as furniture that didn’t sell on the Bed Bath & Beyond site to the liquidation nameplate. Also intriguing is a new affinity monetization plan for Beyond, heavily focused on data, that would allow Lemonis to build customer loyalty and enhance margins at the point-of-sale and checkout through affinity product offerings. Those offerings could include loyalty, credit card, warranties, shipping insurance and home services. Monetization would be through new business models and partnerships.
Lemonis has one big problem, and that’s that he still has to prove that his ideas will help maximize the revenue streams that Beyond needs.
