SodaStream International Ltd. (Nasdaq: SODA) is a classic case of a widely anticipated initial public offering that didn’t pan out. 

Since bursting onto the scene in a late-2010 IPO, the carbonated soda machine maker received considerable investor buzz before eventually succumbing to unrealistic growth expectations. 

On many occasions, the firm’s stock rallied on turnaround hopes or buyout rumors. Yet as the chart below shows, SodaStream never evolved into a profitable long-term investment.

But more than just an unfortunate tale, SodaStream provides a crucial lesson on how to avoid repeating history by being alert for other stocks headed down a similar path — such as The Container Store Group, Inc. (NYSE: TCS). Like SodaStream, the Container Store is a once-hot IPO that has become a perilous value trap.

After much pre-IPO hype, The Container Store saw its shares double in its trading debut in 2013. The stock tacked on further gains in ensuing months, but has since fallen more than 60% from the January 2014 high. 

As a business, The Container Store bears no resemblance to SodaStream, offering a range of household storage containers and organization systems. But it has the same problem. Product demand just isn’t sufficient to generate the rapid long-term growth that was initially thought possible.

This may at first seem like an implausible explanation for The Container Store’s woes. In the United States, by far the company’s largest market, consumers love to acquire goods, and many make it a priority to maximize storage space.
 
#-ad_banner-#But as it turns out, consumers don’t need the chain’s discretionary products on a frequent basis. The company doesn’t sell necessities such as food, fuel or other staples. This is especially true of bigger-ticket storage and organization-related items like bathroom cabinetry, closet organizers and food storage systems for the kitchen.

One of the most obvious signs of limited demand: After nearly four decades in existence, The Container Store has only 70 locations, spread across 25 states.  Leading high-growth retailers have been known to open that many stores in a quarter, and they typically operate thousands of locations nationwide.

Customer demographic data paint a telling picture of demand, too. These show the typical The Container Store customer only shops at the store two or three times a year, and even the most active shoppers only visiting around four times annually. 

Another limit on demand: customers tend to be mostly female. Despite offering an assortment of storage products that can be found in garages, most men buy such items elsewhere. 

In addition, the company only holds appeal for the top 18% of income earners, as it mainly attracts college-educated consumers with a household income of $110,000. Yet even these potentially bigger spenders only shell out about $60 per store visit.

Despite their relative wealth, The Container Store customers are likely put off by the company’s premium prices, which support a higher-pay policy (store employees often earn double the typical retail wage). While most items are priced under $20, they’re still often substantially more expensive than the same or comparable products sold by mass merchandisers and discounters. Most shoppers will opt for the cheaper-priced item regardless of what income group they’re in.

There’s probably not much that can be done to alleviate The Container Stores’ pricing disadvantage. Product acquisition costs are rising even faster than revenue, and overall operating costs are climbing steadily, too. To make room for significant price reductions, the company would need to compromise its higher-pay policy. That’s unlikely to happen

After going public, The Container Store delivered steady, but unremarkable, revenue growth of about 8% annually, as well as strong gross margins. But the firm has yet to establish a sufficient track record of healthy profit growth or of solid operating or net margin expansion.

Moreover, results for the fourth quarter of fiscal (February) 2014, reported in April, show The Container Store headed in the wrong direction. Sales rose just 3%, to $224 million, from the year-ago quarter and fell significantly short of Wall Street estimates. The per-share profit of $0.24 represented only a slight year-over-year gain and was also well below expectations.

Comparable-store sales or “comps” were a major letdown, dropping nearly 1% in the fourth quarter and more than 1% for the fiscal year overall. Management issued tepid current-year guidance, which included just 2%-to-4% revenue growth, a high probability of zero profit growth and comps of 0%-to-minus 2%.

Risks To Consider: Falling comps are a big concern, as they suggest that The Container Store might not grow at all without opening new stores. Yet growth is weak even with the half dozen or so locations being added each year.

Action To Take –> As with SodaStream, investors vastly overestimated The Container Store’s potential. They’re learning the hard way that a business based on household storage and organization may be a limited niche proposition at best, particularly as executed by The Container Store.

The firm lacks the mass appeal needed for a turnaround, and current initiatives mainly target an already limited audience.

Despite steep losses, shares of the Container Store still trade for 35 times earnings and have plenty of downside left. At this point, investors should simply leave the stock to the short sellers.

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