Dive Brief:
- S&P Global Ratings on Friday downgraded The Container Store’s issuer credit rating from B to B-, following “weak operating performance” in its latest quarter. The retailer’s sales fell nearly 15% in the third quarter and the company reported a net loss of $6.4 million.
- The analysts said they expect lower profitability at The Container Store due to headwinds in the consumer discretionary category and gave the retailer a negative outlook as a reflection of nearing debt maturities and possibly weaker credit metrics.
- At the same time, S&P Global Ratings also lowered its issue-level rating on The Container Store’s term loan to B-, but the firm still expects a “meaningful recovery” should the retailer default.
Dive Insight:
Shortly after The Container Store confirmed layoffs to 2.5% of its workforce and lowered its full-year outlook, the home retailer is facing declining credit ratings.
In its analysis of the retailer, S&P said the company’s free cash flow was negative $6.7 million for the first nine months of the year, better than the negative $27.7 million it reported in the same period the year prior. S&P’s adjusted leverage metric for The Container Store is projected to be up in fiscal 2023, and the ratings firm also noted that more than half of The Container Store’s liabilities are due to operating leases.
“The Container Store's revenue and profitability have continued to decline beyond expectations, and further, the company revised its fiscal 2023 guidance downward three times over the nine months ended Dec. 30, 2023,” the analysts said.
The ratings firm cited persistent headwinds, negative demand trends and an unfavorable revenue mix in pushing the retailer’s sales down 18.5% for the first nine months of the year. The home retailer has also conducted layoffs twice in the past twelve months, once in May and another time more recently. In the midst of its challenges, CEO Satish Malhotra in September agreed to take a temporary pay cut of 10% on his base salary to help pay for employee raises.
The company landed on Retail Dive’s bankruptcy watchlist this fall, with CreditRiskMonitor at the time giving it a FRISK Score of 2, which indicates a 4% to 10% chance of bankruptcy in the next 12 months. The Container Store is one of a group of home companies that flourished during the pandemic and have since struggled to hang onto those gains. Comps in its latest quarter fell nearly 17% and the retailer is projecting sales of between $842 million and $847 million for the year.
