Strong quarter from TCS with revenue accelerating to +30.4% as the company heads into its easiest compare in fiscal 1Q21. 4Q EPS beat by 25% and management guided up 1Q to $0.09 vs the street at $0.03. Business momentum remains strong. TCS is benefitting from stimulus like all of retail as well as “nesting” habits for consumers stuck at home, but clearly these trends have not subsided even well after peak quarantine time. We think there are trends around home organization being a regular activity that aren’t going away and we see housing turnover likely to continue as we get some re-urbanization post pandemic. The Netflix shows that made home organization more popular have new seasons coming in summer and fall 2021, keeping TCS products/solutions top of mind. We think management is guiding conservatively on both 1Q and the year and we’re coming out a $0.15 cents for 1Q.
This was the first call for new CEO Satish Malhotra. The messaging was a bit 'meh', like being the "best version of itself". Not exactly an inspiring investment story. There were some good tidbits on businesses changes and outlook. The company recently put in place Afterpay, the industry leader in buy now pay later, which should help drive conversion for younger consumers that like to use the Afterpay service. There were some hints at unit growth opportunity with the CEO noting a new VP of Real Estate being hired, but comments were concentrated around smaller format stores and potential shop in shop offerings at other retailers vs the pure new market opportunity that this company has with just 94 stores. There are new investments around tracking and driving customer experience, and the partnership with Instacart for same day delivery. All are steps in the right direction, but not as powerful as we’d like to hear. We do have to admit, that given the recent business strength, high uncertainty around how the upcoming fiscal year will look, and his newness with the company and category, it's not an easy or great time to lay out a high conviction long term plan. So it seems for now the CEO is focused on improving the current systems and offerings vs outlining a big growth story. He did set a goal of doubling TCS’s revenue, but without a clear timeline to that target. The specifics of a long term plan are perhaps an arrow left in the quiver for the future.
We still like TCS Long as we see continued business momentum near term, a growing niche category, and long term unit growth optionality driving earnings upside. For 2021 we’re at EPS of $1.15. The potential for Leonard Green sales has likely applied some pressure on the multiple. However, we think given the growth potential, this should trade at least around mid to high teens or $17-$22. We see Tail EPS power of $2.00+ with Tail stock upside to $30-$40, keeping in mind that post-IPO this stock hit $46.61. It could be valued there again if the company can deliver the growth.
