At Home Group, Inc. Second Quarter Fiscal 2020 Earnings ...investor.athome.com/~/media/Files/A/At-Home-IR-V2/... · Curtis Nagle, Bank of America Merrill Lynch P R E S E N T A T I

At Home Group, Inc.

Second Quarter Fiscal 2020 Earnings Conference Call

September 4, 2019

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At Home Group, Inc. – Second Quarter Fiscal 2020 Earnings Conference Call, September 4, 2019

C O R P O R A T E P A R T I C I P A N T S

Bethany Perkins, Director, Investor Relations

Lewis L. Bird, III, Chairman of the Board and Chief Executive Officer

Jeffrey R. Knudson, Chief Financial Officer

C O N F E R E N C E C A L L P A R T I C I P A N T S

Brad Thomas, KeyBanc Capital Markets

John Heinbockel, Guggenheim Securities

Daniel Hofkin, William Blair

Jonathan Matuszewski, Jefferies

Chuck Grom, Gordon Haskett & Co.

Simeon Gutman, Morgan Stanley

Curtis Nagle, Bank of America Merrill Lynch

P R E S E N T A T I O N

Operator:

Greetings. Welcome to the At Home Second Quarter Fiscal 2020 Earnings Call. At this time, all

participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

If anyone should require operator assistance during the conference, please press star, zero on your

telephone keypad. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Bethany Perkins, Director of Investor Relations.

Bethany Perkins:

Thank you, Dana. Good afternoon everyone and thank you for joining us today for At Home’s Second

Quarter Fiscal 2020 Earnings Results Conference Call. On the call today are Chairman and Chief

Executive Officer Lee Bird; President and Chief Operating Officer Peter Corsa; and Chief Financial Officer

Jeff Knudson. After the team has made their formal remarks, we will open the call to questions.

Before we begin, I need to remind you that certain comments made during this call may constitute

forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor

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provisions of the Private Securities Litigation Reform Act of 1995. In particular, statements about our

outlook and assumptions for financial performance for Fiscal Years 2020 and 2021, and our long term

growth targets, as well as statements about the markets in which we operate, expected new store

openings, real estate strategies, potential growth opportunities, future capital expenditures, future cash

flows and the expected impact of tariffs are forward-looking statements. Such forward-looking statements

are subject to both known and unknown risks and uncertainties that could cause actual results to differ

materially from such statements. Those are referred to in At Home’s press release issued today and in

filings that At Home makes with the SEC. The forward-looking statements made today are as of the date

of this call and At Home does not undertake any obligation to update any forward-looking statements.

Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call, such as

Adjusted EBITDA, adjusted operating income, pro forma adjusted net income and pro forma adjusted

earnings per share. A reconciliation schedule showing the GAAP versus non-GAAP financial measures is

available in At Home’s press release issued today. If you do not have a copy of today’s press release,

you may obtain one by visiting the Investor Relations page of the website at investors.athome.com. In

addition, from time to time, At Home expects to provide certain supplemental materials or presentations

for investor reference on the Investor Relations page of its website.

I will now turn the call over to Lee. Lee?

Lewis L. Bird, III:

Thank you, Bethany. Good afternoon everyone and thank you for joining us to discuss our results for the

second quarter of Fiscal 2020. When we last spoke in early June I shared that our first quarter results

were impacted by cold and wet weather than continued into Q2. I am pleased that we navigated the

unseasonable conditions in the first part of May and saw two-year trends in our business rebound

afterwards. Including our results for the first two weeks of May, our Q2 comp store sales were modestly

positive. We also successfully expanded our store base during the quarter, surpassing an important

milestone by opening our 200th store. Our teams worked diligently to sell through seasonal inventory and

we’re making significant progress towards our fourth quarter goal of inventory growth in line with sales.

We remain extremely pleased with the performance of our recently opened second distribution center and

as expected we will see freight efficiencies help offset its operating costs beginning in the fourth quarter.

Drilling further into Q2, we are pleased that sales of $342.3 million and a modest comp decrease of 0.4%

were within our expectations. We opened 13 new stores and drove strong sales growth of nearly 19%,

representing our 22nd straight quarter of at least high teens revenue growth. Comps in nearly every

department improved sequentially from Q1 to Q2 and outside our weather impacted patio assortment, our

reinvention and visual merchandising efforts continue to drive growth.

Gross margin was in line as our teams made significant progress clearing through higher levels of patio

and garden products as we described last quarter. Our store continues to make it easier for customers to

shop by consolidating clearance items within each department. Store level and district level leadership

teams emphasize markdown compliance, cleanliness and sharper merchandising within the store. As a

result, standards have improved alongside inventory levels. Our targeted efforts to control shrink and

execute clean, accurate inventory counts have been very effective as well. Overall, we narrowed

inventory growth in Q2 while positioning ourselves to support an exciting back half seasonal assortment

and we’re laser-focused on rightsizing our inventory by the end of Fiscal 2020.

During Q2 we put a substantial effort around our tariff mitigation strategy. Trade negotiations with China

are incredibly fluid but let me briefly recap our actions over the last year to mitigate the dollar impact of

Chinese tariffs.


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First, when tariffs on Lists 1 through 3 went into effect last September at 10%, we worked closely with our

product partners, took selective price increases and absorbed the tariffs with no material margin impact.

Next, as those items were elevated to a 25% tariff this summer, we committed to sharing the incremental

impact with our product partners. We reaffirmed that as part of our EDLP strategy we would monitor the

market and be slow and tactical in taking price increases as an offset. We have seen market prices come

up in Q2 and we have begun surgically increasingly certain prices as a result.

Then, List 4 tariffs were announced at 10%. This round is disproportionately weighted to our seasonal

items on List 4B, the majority of which will already be in stores when most of the tariffs take effect in

December. Therefore, we do not expect List 4 tariffs to materially impact our Fiscal 2020 profitability. We

are proactively working on solutions for the nonseasonal items covered by List 4. In recent months, our

merchant teams have met with over 400 product partners to review tariffs mitigation and country

diversification plans and we asked our List 4 suppliers to fully absorb the tariff impact. Our interactions

have been positive so far and our partners brought creative and practical solutions to help At Home

remain a price leader and deliver strong, profitable growth. We also have made progress diversifying

outside of China. Our direct sourcing program, which has nearly doubled in volume in the last 12 months

and should exit this year at 15% penetration will help us continue to diversify over the next three years.

We’ve also identified numerous supply chain enhancements to help us manage tariff risks going forward.

Finally, we continue to monitor pricing trends and we’ll take surgical pricing increases where appropriate.

We are still assessing the additional 5% tariff increase announced less than two weeks ago, but we are

confident that the disciplined and comprehensive approach we have refined over the last year will help us

mitigate dollar impacts as well.

As we look to the future, we believe that as a low-price leader, we are well positioned to take share in the

market. While softer industry traffic has continued to play a role in our Fiscal ’20 performance, we are

being very proactive in analyzing our business and refining our playbook for the back half of the year to

drive offsets.

First, from a marketing standpoint, we are reallocating our media mix in Q3 and Q4 to lean into digital

outreach and direct mail. These channels have been our most efficient and successful at driving store

traffic. All of our digital programs, including social media, search and CRM drive positive returns. With our

Insider First loyalty program doubling its membership in the last 12 months and reaching more than 5

million members by its second anniversary, we continue to focus on increasingly targeted messaging.

Within our direct mail program, our Fall Look Book and Black Friday mailers are reaching more

households and we’re increasing our emphasis on recent movers.

From a merchandising standpoint, we recently rolled out a new program we call EDLP Plus, which is

intended to both highlight our already low product prices and improve the sell-through of our planned

markdowns. We are bundling our weekly Flash Find deals into our existing twice annual clearance into a

new strategy. EDLP Plus will feature longer and more category focused customer events executed on a

rolling 12-month basis. This process enables store teams to focus on one department at a time,

refreshing it and consolidating markdowns before marketing the exciting event to our customers. While

it’s still very early on, our pilot categories have demonstrated improvements in both comp sales and

clearance sell-through. In the medium term, we’re also digging into opportunities to further refine our

business and drive comp store growth, such as evaluating our mix of good, better and best products,

exploring product price point analysis and customer sensitivity and elevating the quality in lower priced

items to increase our value proposition.


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We also recognize that customers continue to shift dollars online, therefore, we continue to build out

omnichannel capabilities that leverage our 200-plus stores across nearly 40 states. We are on track to roll

out our buy online pick in up store test in this Q4, and based on results, we could launch it in a broader

group of stores by the end of Fiscal 2021. These and other initiatives are part of a multi-quarter journey to

reaccelerate our comp performance and we will update you on learnings and solutions as we generate

further insights.

Our comp performance this year has been below our own standards, but it motivates us to be better and

do better. Our commitment to generate long-term shareholder value is unwavering. At its core we have a

great business model. We grew from $364 million to nearly $1.2 billion in sales over six years while

delivering very healthy profit margins at both the store and consolidated level. Our concept is highly

differentiated with a customer value proposition focused on the dual pillars of largest selection and lowest

prices. We showcase more than 50,000 unique and constantly refreshing items in a big box format, but

over 70% of our products being private label or exclusive to At Home and over 80% of our net sales at full

price, we offer unmatched breadth and depth in a one-stop self-help shopping experience that gives the

customer to see, touch and feel the product. We enable customers to easily mix and match and truly

make their house a home.

Utilizing our low-cost structure, we are committed to being the low price leader in the marketplace. The At

Home brand is only five years old and with only 17% unaided brand awareness and a $65 average

basket, the upside opportunity remains significant.

Our new stores have produced strong returns over the past six years as well and we continue to see

significant white space opportunities across the country. Our real estate strategy is both flexible and

opportunistic, enabling us to move into second generation boxes as well as new build. Because of the

ample supply and low demand, on average we pay $6 per square foot in rent, which helps us deliver

strong Adjusted EBITDA margins. On average, our new stores pay back in less than two years and

generate more than $2 million in first-year store level Adjusted EBITDA. Our older stores are strong as

well. In Q2, stores older than three years delivered positive comps above the chain average. Our pipeline

of new stores remains as attractive as ever. In fact, we’ve already approved all of our locations for Fiscal

2021. We have the potential to nearly triple our existing footprint and the future is bright as we drive

toward our long-term goal of 600-plus stores.

With that long-term growth in mind, over the past three months we have been thoroughly analyzing our

business, benchmarking ourselves and our performance and reflecting upon shareholder feedback. As a

result, we have reassessed our growth rate. Going forward, our priority is to balance store expansion and

profitability alongside leverage improvement and free cash flow. Compared to our existing long-term

target of high teens unit growth rate, we will now target 10% store growth in each of the next three years.

Through this balanced approach we expect to strengthen our balance sheet and generate positive free

cash flow. The change will begin with Fiscal 2021 and flow through the rest of our financial targets, which

Jeff will discuss in greater detail.

Our Executive team and Board of Directors are tightly aligned that moderating our store growth rate is the

best way to improve liquidity, reduce leverage, ensure consistent growth and ultimately drive long-term

shareholder value.

Where our growth rate may be changing, our growth strategy is not. We continue to have full confidence

in the strength of our business model and our long-term potential of at least 600 stores.

With that, I would like to turn the call over to our CFO Jeff Knudson, who will update you on our Q2

performance and our outlook for Q3 in Fiscal 2020. Jeff?


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Jeffrey R. Knudson:

Thank you, Lee, and good afternoon everyone. As a reminder, additional information is available in our

earnings release which is posted to our Investor Relations website and which includes reconciliations

illustrating our non-GAAP results as if the new lease accounting standards had been effective in Fiscal

2019. Our discussion of adjusted metrics on the rest of this call will be on a lease adjusted basis with

Fiscal 2019 results recast to illustrate the standards impact. I would also refer you to the Investor

Presentation we posted which includes the updated growth targets that I will discuss shortly.

First, I will address our second quarter results. Our top line grew 18.7% to $342.3 million, which was in

line with our guidance. Comparable store sales decreased 0.4%, also within our expectations given

unseasonably cold and wet weather at the beginning of May. On a two-year stacked basis, comps of

2.4% accelerated during the quarter and improved 230 basis points over Q1.

Second quarter gross profit increased 3.1% to $100.4 million while gross margin rate decreased to

29.3%. Adjusting for the new lease standard, gross margin decreased 360 basis points at the low end of

our outlook. As expected, gross margin was impacted by incremental markdowns, the operating costs of

our second distribution center which opened earlier this year, increased occupancy costs from sale

leaseback transactions executed in the last 12 months and fixed cost de-leverage on lower year-over-

year sales growth. We have been executing additional markdowns in Fiscal ’20 to sell-through clearance

products and we are pleased with the amount of patio and garden inventory we cleared during Q2. We

significantly reduced inventory growth from 44.1% in Q1 to 31.7% in Q2 and we continue to expect

sequential improvement in Q3. We remain on track to have inventory grow in line with sales in the fourth

quarter.

Adjusted SG&A of $75.4 million improved 50 basis points to 22% of net sales. We expected a flat

adjusted SG&A rate heading into the quarter but timing of store labor costs drove favorability that will

reverse in Q3.

As a result of these factors, we delivered a 6.8% adjusted operating margin, above our outlook of 6.2% to

6.6%. Q2 adjusted operating income declined to $23.2 million, interest expense increased to $8.2 million

due to increased borrowings to support our growth and higher interest rates.

We recognized $3.2 million of income tax expense in the second quarter with a 23.5% adjusted effective

tax rate. In Q2 last year, our adjusted effective tax rate of 9.1% included $3.8 million of tax benefit related

to non-IPO stock-based awards.

In total, we are pleased to deliver $0.14 of pro forma adjusted EPS in the second quarter of Fiscal ’20.

From a liquidity standpoint, we executed a $75 million accordion feature on our asset based lending

facility in June and ended the quarter with total liquidity of $146.2 million.

Looking to the back half of this year, we are reiterating our EPS guidance for the full year but expect to

see a couple of timing shifts between the quarters. As I mentioned earlier, we shifted about $0.02 of store

labor expense from Q2 into Q3 to support the timing of freight processing and other store projects. Based

on the current sell-through rate, we also estimated that planned everyday markdown representing about

$0.02 of EPS drag will pull forward into Q3 from Q4. As we have previously shared, Q4 will generate the

majority of Fiscal ’20 earnings per share due to timing dynamics around the second DC’s rollout, new

store preopening costs, nonproduct costs and gross margin, and the lapping of significant tax benefits

from stock award exercises in the first three quarters of Fiscal ’19.


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Drilling down to our third quarter guidance, we plan to open 12 gross and nine net new stores and

generate $312 million to $317 million in net sales, representing 17% to 19% growth year-over-year.

Our comp store sales outlook is down 2.5% to down 0.5%. Last year, our 5.2% Q3 comp was the

strongest of Fiscal 2019 and included an estimated 120 basis point tailwind from lapping hurricanes in the

prior year. Adjusting for last year’s hurricane tailwind, on a two-year basis our Q3 comp outlook is a

positive 1.5% to 3.5%. We are assuming adjusted operating margin of 1.9% to 2.4% or a lease adjusted

decline of roughly 400 basis points at the midpoint. Our outlook incorporates 110 basis points of second

DC costs, the markdowns I mentioned earlier and fixed cost deleverage, primarily in occupancy. To a

lesser extent, we expect margin headwinds from the higher freight rate and tariff impact we flagged last

quarter and increased occupancy costs from sale leaseback transactions. All in, we expect an adjusted

net loss of $1.0 million to $2.5 million. Assuming approximately 65 million shares outstanding, our Q3

outlook calls for a pro forma adjusted loss of $0.01 to $0.04 per share.

For the full year, we are flowing through our Q2 top line results and the continued performance of our new

and non-comp stores as we narrow our Fiscal 2020 sales outlook. We now expect net sales in a range of

$1.373 billion to $1.388 billion, still representing 18% to 19% growth. Our updated full year comp store

sales outlook of down 1.5% to a positive 0.5% incorporates current trends as well as a range of outcomes

for Q4. Our guidance implies and acceleration in the two-year comp stack trend from the first half to the

second half of the year due to weather improvement, a refined marketing spend and our EDLP Plus

initiative.

That said, we are pleased to reaffirm our outlook for gross margin, adjusted operating margin and pro

forma adjusted EPS. We continue to expect adjusted operating margins of 6.6% to 6.9% in Fiscal 2020,

which incorporates 80 to 90 basis points of net margin headwind from the second DC along with the

impact of markdowns, higher freight rates, some fixed cost deleverage and tariffs that have been

announced to date.

We are lowering our Fiscal ’20 interest expense outlook to $32.5 million due to reduced interest rates. We

expect a slightly higher adjusted effective tax rate at 23.5% and a slightly lower diluted share count of

approximately 65 million shares.

With adjusted net income of $44 million to $48 million, our pro forma adjusted EPS outlook of $0.67 to

$0.74 remains unchanged.

Our Fiscal 2020 net capital outlook is $55 million lower to reflect an additional sale leaseback transaction

that we expect to execute this fall as well as a reduction in capital spend for planned Fiscal 2021 opening.

We continue to pursue efforts to reduce our capital outlay and improve our free cash flow profile by

exploring build to suit and buy to suit financing alternatives, executing on capital reductions in our second

generation site through value engineering, strategic procurement and a refined market-by-market

approach, while also focusing on working capital improvement.

As Lee touched upon in his opening remarks, after a thorough analysis of our strategic priorities we are

refining our vision with a heightened focus on delivering positive free cash flow next year. As a result, we

plan to moderate our new store growth rate to 10% in each of the next three years to enable us to

improve the balance of new store growth and profitability on the one hand with free cash flow and

reduced leverage on the other. A reduced growth rate has the added benefit of mitigating the

cannibalization that is a byproduct of our opportunistic real estate model and creating bandwidth for our

teams to lean into critical organic initiatives including omnichannel opportunities, direct sourcing

penetration, and enhancing our marketing and loyalty program.


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Our revised top and bottom line growth targets for Fiscals ’21 through ’23 are as follows: new store

growth of 10% and same store sales growth of 1% to 2% translating to overall net sales growth of low

double digits, and adjusted EPS growth in the low to mid teens.

Enabled by these new assumptions, we are establishing targets for our balance sheet for the first time as

a public company. I shared earlier this year that we plan to be free cash flow neutral in Fiscal 2021. We

now plan to drive positive free cash flow in Fiscal ’21 and beyond. We also expect sequential annual

improvement in our adjusted leverage ratio with an ultimate target of less than 2.5 times. We feel that

emphasizing free cash flow, enhancing our liquidity and strengthening our balance sheet as enabled by

our lower growth rate are key to supporting our initiatives and driving consistent shareholder returns over

the long term. The depth of our pipeline, strong productivity of our new and older stores and the strategic

opportunities we have in both merchandising and marketing continue to give us confidence in our

business model and a longer term potential for 600-plus stores.

With that, I’ll now turn it back over to Lee for his final remarks.

Lewis L. Bird, III:

Thank you, Jeff. In summary, our business model is strong and we’re well positioned to capture market

share and capital on our significant white space opportunity. In the near term, we’re refining our marketing

approach and leaning into growth initiatives like our newly introduced EDLP Plus strategy to reaccelerate

comps and continue to grow total sales. The health of our inventory continues to improve and we are

excited about the rollout of our buy online pick up in store test this year to better enable us to meet our

customers’ needs no matter how they shop. I’d like to thank our team members for their continued hard

work and dedication to these initiatives as we grow our business.

Our focus is on delivering value for our team members, our customers and ultimately our shareholders.

Looking beyond Fiscal 2020, we are confident that these growth initiatives along with a stronger balance

between store growth, profitability and free cash flow generation are the right path forward to generating

that long-term value.

We are excited about the future for At Home and look forward to updating you on our progress in future

quarters.

Dana, please open the line for questions.

Operator:

At this time we will be conducting a question-and-answer session. If you would like to ask a question,

please press star, one on your telephone keypad. A confirmation tone will indicate your line is in the

question queue. You may press star, two if you would like to remove your question from the queue. For

participants using speaker equipment, it may be necessary to pick up your handset before pressing the

star keys.

Our first question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed

with your question.

Brad Thomas:

Good afternoon. Thanks for taking my question. I was hoping we could just first talk about some of the

recent trends that you’ve seen in the business. You addressed this a bit in the prepared remarks, Lee, but


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just curious how your assessment of the state of the industry and the pace of your operations has evolved

as you reflect on another quarter that the industry continues to experience some weakness here.

Lewis L. Bird, III:

Sure, Brad. What I would say is the marketplace feels choppier, but that’s the same as we saw in Q1. No

change from what we experienced in Q1. The sector is seeing traffic challenges, down 4% in Q2 and

which was down 5% in Q1. What we’re focused on is what we can control. We’re determined to get our

business back in shape and so we’ve put a discerning eye on our business. We’ve been working on

offsets. We’ve adjusted as I mentioned our marketing mix. We outlined and executed already outlining

and rolling out an EDLP Plus approach to highlight the great prices we already have because we are an

everyday low price leader, and also to get better sell-through on our clearance. We focused on inventory

management; we’re making progress there, and we’ve been investing in omnichannel and we’re excited

about the launch of that in Q4.

As you noticed, you may have noticed, we maintained the midpoint of our FY ’20 sales outlook which

means that our non-comp stores and our new stores are outperforming, which says that we’re continuing

to drive share and performing with these new stores, and we are targeting positive comps to start in Q4

this year.

Brad Thomas:

That’s helpful. I wanted to ask a follow-up about the decision to slow the pace of growth. Very clear what

you’re trying to expect out of this, but I was hoping you could give a little more color around how we

should think about what the cap ex levels may be next year with the slower pace of growth and what

potential benefits, if any, we may see to margins next year given a little bit slower pace of growth.

Lewis L. Bird, III:

Sure, Brad. I’ll start and Jeff will finish on that.

We’ve been analyzing our business and we spent a lot of time benchmarking our peers. How have the

high-growth retailers set up their business for sustained growth and profitability, which is our intention as

well, and we’ve also been listening and talking to investors. We clearly see from our benchmarking that

investors, and more importantly from our peer group, we’re seeing that a more balanced approach is the

approach for sustainable high-growth retailers. So, by focusing on not only growth and profitability, which

we have strong profitability—even in our worst year, we’ve got great profit margins. We need to balance

that with being free cash flow positive to pay and fund for that growth and reduce our leverage, to deliver

long-term shareholder value.

That’s what we’ve done by moderating our growth and the capital impact, Jeff, do you want to cover that?

Jeffrey R. Knudson:

Yes, sure. You’ve always saw a change in our Fiscal ’20 cap ex guidance. There was a gross reduction

of—$65 million on the net side with $50 million in sale leasebacks and then pulling out $15 million as it

relates to the Fiscal ’21 vintage. As it relates to next year, we still do have a strong pipeline. We have

over 15 stores that are currently owned so we will be able to continue our sale leaseback payments as we

move into next year. As we get further into this year, we’ll provide more specifics on the cap ex guidance

for Fiscal ’21.


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As it relates to the operating margins, there’s obviously a lot of dynamics in play as it relates to Fiscal ’21.

We do have some tailwinds next year as it relates to lower markdowns. We’ll start to see efficiencies from

the second distribution center as well as direct sourcing, but obviously with the tariff wrap and the

elevated tariffs that were just announced a week and a half ago, we also have some freight rate impact as

well as the sale leaseback. So, as it relates to Fiscal ’21 margins, the tariff situation is very fluid right now.

We’re still working, as Lee said in his prepared remarks, to mitigate the dollar impact of those tariffs and

as that plays out over the next couple of weeks and months we’ll get back to you later in the year with

specifics around next year’s margins.

Brad Thomas:

That’s helpful. Thank you very much.

Lewis L. Bird, III:

Thanks, Brad.

Operator:

Our next question comes from the line of John Heinbockel with Guggenheim Securities. Please proceed

with your question.

John Heinbockel:

Let me start with EDLP Plus. Is the current rug event an example of that? Then, when you think about the

execution of it, is the idea that, I don’t know how many times a year but multiple times a year—I don’t

know if it’s every quarter—a category will be highlighted and promoted for several weeks at a time. Is that

the idea behind the execution?

Then, is sort of the reason that EDLP doesn’t kind of work as well in this space because it just happens to

be a promotional space and you need to do that to generate customer interest?

Lewis L. Bird, III:

John, the EDLP Plus approach is a double-down on everyday low price, so it’s not a departure from that,

to give us credit for what we already do, but also to enhance an emphasis around events to highlight

those categories themselves.

We started with our home org event in the beginning of August. This started back in the beginning of

August. We did home org, then we did furniture and those were targeted events highlighting full priced

items, our Flash Finds and then also identifying and showing our clearance department. They were

preceded by a department clean-up for those departments, so our teams clean up the department, made

sure everything was priced appropriately, easy to shop and then we had the organization event, then we

had the furniture event, now we have the rug event. The rug event actually matches up to an approach

we’re using now when you have retail sale time periods. Think about Labor Day and Fourth of July and

Memorial Day and Presidents’ Day. Those are highly promotional. Those will be times we’re going to lean

a little bit into the promotion side but not change our model, but just highlight that. Then, that will be for a

short period of time and then we’ll roll back into the next event as well. That’s going to be our model.

You’ll see that. We’re pleased with the performance against that on full priced selling, which is our

primary emphasis, and clearance of our markdowns. We like that but it’s not a departure of the model. It

actually just allowing us to just freshen the store over time and you’ll see starting in January the next level

of this through piloting, refining it, getting it better. Once we get out of Christmas, we’ll be able to add


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another level of EDLP Plus from an in-store experience that will show even stronger to highlight these

product categories.

John Heinbockel:

Okay, thanks. Then just long term, sort of to tag on the last question, when you look at the three-year

target, I don’t think—at least I always thought because next year has an extra week and you get the

recapture of some of this year’s cost pressures, the three year is not meant to be—it’s meant to be a

target; it’s not meant to be sort of an algo for each year. Next year, I assume would differ from that a bit.

Then if I think about your leverage target, it looks to me like you probably need over that three-year period

to pay down somewhere, $200 million to $250 million of debt. Again, it depends how fast you grow

EBITDA, but that’s sort of $200 million plus, Jeff, is that fair? Is that a fair target?

Jeffrey R. Knudson:

Yes, it’s close, John. That’s right.

John Heinbockel:

Okay.

Lewis L. Bird, III:

On the target…

Jeffrey R. Knudson:

Those, we did not factor in the 53rd week next year, John, into those targets. Those are on a 52-week

comparable basis and we have thought about those as longer term targets but each year operating within

those parameters as well.

John Heinbockel:

Okay. Thank you.

Lewis L. Bird, III:

Thanks, John.

Operator:

Our next question is from the line of Daniel Hofkin with William Blair. Please proceed with your question.

Daniel Hofkin:

Good afternoon. I apologize if you answered this already, but just as it relates to the tariff impact, which

you’ve talked about as being not much for the List 4B for this year given when you’ll have the product in,

but can you characterize that for next year what that’s likely to be based on what you know now, and then

I have a follow-up question.

Lewis L. Bird, III:


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From a tariff standpoint, what we’ve said is basically List 1 though 3 obviously had 25 basis points baked

into our back half for those, for Lists 1, 2, 3 at the 25%, because remember our inventory turns slowly and

so it’s through the turn of the inventory. List 4 is more weighted towards seasonal product which they’ll be

in the stores already so we don’t expect a material impact on FY ’20.

Now, from an FY ’21, we’ve been working very closely with our supply partners. We actually—we’ve met

with 300 of our product partners, not only in the U.S. we brought our top 100 suppliers in, but then we

went to China, we went to Vietnam and India and met with our product partners in product partner

summits and required them to come to those meetings prepared to discuss creative and practical

solutions of offset these tariffs. Now, this is obviously before the 5% incremental increase on top of the

10% that we knew in List 4, but they came back with great plans. We’ve been working through those

plans. We’ve also told them that they had to eat List 4, the cost of List 4 but then—so we’ve been working

on a very disciplined approach to mitigate the impact of our tariff and I would say right now it’s too soon to

give FY ’21 margin percent. We’re confident in EPS growth of outpacing sales growth next year, and

that’s incorporated the impact of those tariffs going forward.

Daniel Hofkin:

Okay. As it relates to your comments before and the question earlier about the overall environment, it’s

not really clear that the consumer is spending less or is spending less on value, so it implies that there’s

some more competition. I’m just curious where you think that’s coming from and how this sort of EDLP

Plus strategy, how you think that will help more going forward.

Lewis L. Bird, III:

Sure. I would say that the promotional environment and the competition is no different really than what we

saw in Q1. It’s not different from them but it is different than it was a year ago, so it’s more promotional. I

would say what we’ve found too is we’re not a high-low player. We’ve realized that since the marketplace

is promotional we’re not getting credit for the low prices we already have, so this EDLP Plus program is

really more to highlight the prices we have in the store, both out of store and in-store more clearly to our

customer, to be clear on our website how our prices are lower than the competition and the expect to be

lower than the competition.

What we’re trying to do is highlight categories, be clear about the price and then when there is a

clearance customer out there, to be a little bit more open and transparent and inviting to our customer to

go buy the clearance. We make it too hard for them to find the clearance in our stores so we’re trying to

make it easier for them to find it, buy it so we can sell through faster, and that’s how we’re going to

approach it. That allows us to continue to have 80% of our sales at full price. That allows us to be

profitable and continue to grow and take share because, by the way, the marketplace may be choppy but

we are taking share. When we’re growing 18%, 19% in a quarter when the marketplace is going

backwards, we’re a share-taker.

Daniel Hofkin:

Where do you feel like—okay, so understood regarding that, but will you be reducing your prices during

sort of in a pulsed way in line with when others run promotions? Companies that are not on an EDLP or

are more on a high-low type of system?

Lewis L. Bird, III:


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No. I think what we’re going to do is what we always do. Our prices are below other people’s sales prices,

they just don’t see it sometimes. They’re not noticing it because there’s a lot of noise out there about the

promotion or the ad and the they don’t spend the time to go look at ours, and we don’t make it clear to

them the value that we offer. So, we’re trying to make sure our prices are sharp, we’re focused on making

sure we are the lowest price out there, but at times where it is highly promotional we may have an offering

that’s more consistent to what they have - which we were doing before but may not have been timed at

the same time that they were doing theirs. For example, our rug event that we’re having right now is an

event that we bought into. We bought volume for rugs to expect a higher velocity selling period and then

highlight that value. While other people are talking about their offer, we have ours. It’s not the first time

we’ve done a rug offer but it’s the first time we’re doing it over Labor Day to get credit while other people

are promotional as well.

It’s just to sync up with the industry at a time that they’re doing that, but it’s not changing our model; it’s

just getting credit for what we’re already doing.

Daniel Hofkin:

Okay. Thank you. Good luck.

Lewis L. Bird, III:

Thank you.

Operator:

As a reminder, if you would like to ask a question, please press star, one on your telephone keypad.

Our next question is from the line of Jonathan Matuszewski with Jefferies. Please proceed with your

question.

Jonathan Matuszewski:

Great. Thanks for taking my questions. I guess just for the 3Q guide, you cited some soft industry traffic in

2Q, so just curious kind of what your expectations are for 3Q. Are you expecting industry traffic for the

category to worsen, stay the same or improve? I guess, how have trends been shaping quarter-to-date

relative to your comp guidance range?

Jeffrey R. Knudson:

Jonathan, when we think about our comp trends going into Q3, remember we do have a tough compare.

Had a 5.2 from last year that has 120 basis points from the hurricane in Fiscal ’18. So, on a two-year

stack basis, those trends are pretty consistent with where we ran in Q2 fi you look at the midpoint and

that’s how we—so we don’t see any dramatic shifts from a traffic standpoint or moving into Q3.

When we look at those traffic trends that Lee talked about and the down 4% Q2 off of 5% Q1, I would say

that we are outpacing the industry from a traffic standpoint, and when we you exclude the cannibalization

impact we are happy with where our traffic is trending right now.


Great, that’s helpful. Then, I guess, just on the select price increases, I know you mentioned you’d be

doing them surgically. If you could just elaborate there a bit, that would helpful. Anything you could share


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in terms of maybe just the blended level of increases you’re looking to take. I’m sure it varies by category

but maybe just, you know, how much price you’re looking to pass on and how that level of increase

compares relative to what you’re seeing the industry do. Thank you.

Lewis L. Bird, III:

Sure. We comp shop every other week. Our teams spend their Friday’s comp shopping every other week

by item to know what the competition is doing from a price standpoint. We’re super methodical about it.

Now, Lists 1, 2, 3 last year had no meaningful financial impact on those price increases we made, those

surgical increases. We focused on the value proposition. We focus on being the low-price leader. We

may see where there’s an opportunity to take price, we may decide just to monitor where that price is. We

may see where we actually need to increase the quality to make sure the value is there, so we’re working

on that.

We’ve been slow and very tactical to take price. Some people had some questions around that approach

after Q1 with us because we said we weren’t going to take price just yet because I would tell you that

goes against our model. We need to be slow to take price because we need to be the low-price leader out

there and when we do take price we do look at offsetting margin dollar impact, not the margin percent

impact.

Since Q1, the Q1 results were announced, we have taken targeted price increases this past summer, but

our goal always is to maintain price leadership and we’re working our suppliers and we’re using direct

sourcing. We continue to find offsets in our supply chain to keep our prices low.


That’s helpful. Just a quick follow-up to those select price increases that you have taken, have you seen

any material unit degradation?

Lewis L. Bird, III:

On the Lists 1, 2, 3 that we had starting last year, we have not. We’ve been able to protect the revenue

on that, but I would say it’s too soon on the most recent price increases; we’re just going to keep watching

them.


Thank you.

Lewis L. Bird, III:

Thanks, Jon.

Operator:

Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your

question.

Chuck Grom:


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Good afternoon. Just on the second quarter gross margins, Jeff, can you just unpack for us in a little bit

more granularity the four negative factors that you called out? Then, when we look ahead to the third

quarter, can you just hold our hands on exactly what you’re thinking for the gross margin line?

Jeffrey R. Knudson:

Sure. On the Q2 gross margins, again, they were in line with our expectations. We had 85 basis points of

unfavorability from the second DC, 50 basis points on sale leaseback, deleverage within our occupancy

that came in as expected, and the remainder was from markdowns and fixed cost deleverage on

occupancy. Again, we were pleased with the amount of inventory we were able to move with those

markdowns and the operating margins, when you exclude the timing of the store labor, came in, again,

within our guided range for Q2.

Moving to the full year, again, we reiterated our full year gross margin and operating margin outlook.

There is some timing element on those markdowns between Q4 and Q3, but our full year outlook remains

the same from the last call.

Chuck Grom:

Any color for the third quarter specifically on the gross margin line? I know you gave an operating margin

target; I’m just wondering how we should get there in terms of those components that you’ve just laid out

for the second quarter.

Jeffrey R. Knudson:

It’s predominantly within the gross margin. There’s a little bit of SG&A benefit in Q3 but the vast

majority—and it’s the same drivers we’ve been talking about. You do have the introduction of the tariff

impact in Q3 that wasn’t in Q2 that we had talked about on the last call, but it’s the second distribution

center, it’s the markdowns and it’s the sale leaseback and occupancy deleverage on the lower sales

growth is really the drivers.

Chuck Grom:

Okay. That’s helpful. Then when we think about next year, it sounds like you’re trying to set the table that

some of the benefits you’re going to see from cycling some of the markdowns and distribution costs are

going to be offset potentially by the tariff wrap. I mean you probably don’t want to peg an operating

margin target for next year but should we think about kind of flattish as what you guys are thinking at a

preliminary rate at this point in time?

Jeffrey R. Knudson:

You know, Chuck, that’s exactly why we didn’t give an operating margin. With the last tariff increases

being announced a week and a half ago and how we mitigate those, and again, we’re always trying to

mitigate the dollar impact and not the rates and how those dynamics are going to play out between gross

and operating margins, we just need time to work through the process that we’ve established over the last

year to mitigate those tariffs and we’ll get back to you with more details on how we see Fiscal ’21 margins

playing out, but again, I would reiterate that we do feel good about the mid to low teens adjusted EPS

growth.

Chuck Grom:

Okay, great. Thanks and good luck.


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Operator:

Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your

question.

Simeon Gutman:

Hi Lee. Hey Jeff. I wanted to ask about the sales environment. If you look back the last six or so quarters,

they’ve mostly been bumpy. There’s been some reasonable reasons why, weather, not enough seasonal

merchandise. We had some Black Friday bumpiness. In Q3, you have a tough compare, which you’re

lapping. Q4, I think the implied midpoint is around a flat. I just want to step back and try to diagnose

what’s changing. Is it the business moving online? Yes, the backdrop has gotten weaker. I think

merchandising may have gotten stale—I don’t know if you’d go as far and say that—store conditions, etc.,

just to se can try to establish some chain of what’s going to get better as we move back into next year.

Jeffrey R. Knudson:

I’ll start with the implied comp for Q4 around—it’s slightly better than flat, Simeon, is where we are for Q4.

We did take with our Q2 results and the outlook for Q3, with that tougher compare, we did take the full

year down 50 basis points, the prior guide, so our full year is down 1.5% to up 0.5%. That is reflective of

the current environment and the trends we’re seeing. We did say on the last call that we did see the two-

year stack stabilizing as we move through the back half. When you look at our Q2 results and then our

Q3 guide adjusted for the hurricane impact that’s in that two-year stack that’s how it’s playing out and we

saw the weather impact in the first half, and to continue to drive traffic and improve our comp trends,

that’s why we’re going after the marketing initiatives that Lee talked about and redirecting some of that

spend as well as the time that we’ve spent on the EDLP Plus initiative.

I’ll let Lee chime in.

Lewis L. Bird, III:

Yes, Simeon. For us, as you know because you’ve been with us now for, gosh, over four or five years of

talking about this business and learning about this business and sharing back and forth ideas. We’ve

walked stores together. This is not a comp story. It’s never been a comp story. Now, obviously we expect

of ourselves positive comps, so don’t get me wrong, and we’re not pleased with our performance; I’m

certainly not pleased with the performance that we’ve delivered in Q1 and Q2, but I would tell you it’s

never been a comp story.

We have new stores that come in that are highly productive. They have no comp waterfall, so we don’t

have that tailwind that other retailers have. We have to get through it with blocking and tackling and

actually have to overcome that second year which is a tougher year for us of a new store. But, I would

say that—and we’ve delivered positive comps and we expect that of ourselves. The first half of this year

was a weather challenge and I would tell you now that we’ve been able to stabilize our two-year stack

and by the back half of the year those have come in towards this new guidance range of a 1 to 2 comp,

and that’s what you should expect of us. And we’re mindful of the environment with that expectation as

well. We said it’s choppier. It was not choppier three years ago or four years ago and so now it’s

choppier.

It’s not necessarily about other factors that you had mentioned. Obviously, yes, online is a factor. That’s

been a factor since I’ve been in the business for six and a half years. Obviously we’re working an online

approach. We’ve been doing that for four years now. Now we’re bring up buy online pick up in store.


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We’ve always said that we were going to do that ecommerce our way, which means let’s do this

profitably—other people don’t—and so we’re focused on that.

We’re just mindful of our model. We’re mindful of the environment but we expect positive comps. We

expect positive comps for ourselves obviously next year and obviously for the fourth quarter, the midpoint

of our Q4 expectation is a positive comp as well.

Simeon Gutman:

My follow-up, just two parts—they’ll be unrelated. Do you need to speed up or do you want to speed up

online any quicker than the rough timetable that we’ve talked about? I think it’s buy online pick up in store

through at some point the end of next year.

Then the unrelated part, just some of the merchandising changes that the business has embarked on, a

new person helping with trend, product, display. Can you just walk through them and what you’re seeing

thus far with some of the changes you’ve made?

Lewis L. Bird, III:

Yes. I’m excited about those. Let me start first with your first question around our omnichannel approach.

As you know, first and foremost it’s always about the customer and for us we continue to get research

from our customer where the vast majority of all sales in this category are still done in physical brick and

mortar stores and they’re looking for price, selection and see, touch and feel. That’s what we offer in our

store today. We feel we’ve got a very compelling offering in our EDLP Plus approach will help highlight

our already existing great prices and our selection and then be able to highlight categories themselves.

We do know that customers are increasing their spend online over the past number of years and we’ve

been on a multi-year journey. We’ve been thoughtful about this. Other people rushed way too fast and

blew up their businesses on that. We’re not going to do that. We had a demand where four years ago we

put our product online, we put a recommendation engine in about a year and a half ago, we put all the

inventory online by store this spring, so all of our stores have visibility by store for their inventory so you

can exactly see the item you want and how much is in each particular store near your home.

We’ve added partners to that platform to be ready for our buy online pick up in store, so we’ve added our

OMS partner and a credit card partner as well so that we’re ready for that, to do this test in Q4 as we see

that perform, we intend to then roll that out to a number of stores, a larger scale by the middle of next

year. By the end of next year we should have that fully built and then we’re using the store as the basis of

our omnibusiness. You should expect of us as we look at it, what’s the next capability is same day

delivery from store because our stores are warehouses, over 200 of them, so how do we get that to the

customer on the same day, and then how do you ship from store? From those existing warehouses, using

those existing inventory pools, that should help our inventory turn faster to meet our customers’

expectations. That should allow us to continue to deliver low prices to our customer and the financial

returns while preserving the treasure hunt approach for our customer and still delivering profitability.

We’re going to be thoughtful about it. I don’t feel like we need to pick up the pace because when you go

faster sometimes you don’t execute as well, and you know us to be thoughtful and we’re going to do that

and deliver a good outcome.

Now, in the merchandising part, I’m excited about the changes and enhancements we’ve made in

merchandising. Chad Stauffer is our chief merchant. He’s been in the seat for now three months. He and I

are completely aligned on our approach to EDLP Plus. He’s been with the Company for over a year. He

joined us about 18 months ago and ran the everyday business and the progress we’re seeing in the


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everyday business afforded us the confidence to promote him into the chief merchant role and now he’s

running the whole thing. The EDLP Plus was actually his and Ashley Sheetz, our chief marketing officer’s

co-developed idea and they’re the ones co-executing this, and I think they’re doing a brilliant job of

planning it and putting the plans in place, executing thoughtful tests and enhancing that program

throughout the back half of this year to see the full experience by our Q1.

We’ve added and enhanced our Trend department. We have our new head of trend and design has been

at West Elm and Anthropologie. We’re thrilled with Christian and his efforts. He’s just brilliant and we love

his work and the way he’s thinking about how do we take our archetype to the next level? He’ll be actually

previewing all of that with our Board just next week, with our approach.

I like where we’re taking Trend. We’re taking those trend insights through each and every one of our

departments. We’re making sure that we build assortment plans based on what we’re seeing in Trend.

We make sure that we have the most current and appropriate styles in our assortment and then we take

this comp shopping every other week to make sure our prices reflect what we need them to be.

Then, on top of that, you should know that we’ve been adding members of our team to the inventory

side—merch planning to help us better buy and better plan our inventories so we’re sharper and smarter

with our inventory investment but we don’t get into the situations that we’ve had historically around

inventory. We’ve become better and better as a retailer.

Simeon Gutman:

Thanks, Lee.

Lewis L. Bird, III:

Thanks, Simeon.

Operator:

Our next question is from the line of Curtis Nagle with Bank of America. Please proceed with your

question.

Curtis Nagle:

Good evening. Just a quick question on the changed expectation on the leaseback. It was 75, not 125. I

guess what drove the change, is that a pull forward from perhaps next year or is it something else?

Jeffrey R. Knudson:

I would think about it as a preliminary step or migrating step to our build to suit and buy to suit model.

These are actually going to be a handful of stores that are all recent Fiscal Year ’20 openings and an

opportunity. Typically, we would sale leaseback a store after it had 12 months of operating performance

and we were able to do a handful of stores that all have opened within the last quarter or so. This, with

our track record of executing sale leasebacks, this will allow us to transition more fully next year to our

build to suit and buy to suits on our ground-up sites.

Curtis Nagle:

Okay. Thanks very much.


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Lewis L. Bird, III:

Also, Curtis, it’s just the confidence that our partners on that side, the REIT, have in our business and

also in the stores themselves. They know our stores. They owned a number of them. We’ve worked with

them for a number of years and they feel comfortable to not wait the year and we feel as well comfortable

in not waiting the year because our stores have been so predictable right out of the gate.

Curtis Nagle:

Okay. That makes sense. Thanks very much for the clarification.

Lewis L. Bird, III:

Thanks, Curtis.

Operator:

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn

the call back to Lee Bird for closing remarks.

Lewis L. Bird, III:

All right. Well, thank you again for joining us this afternoon. We’re excited about the opportunities in front

of us and the long-term growth ahead, and we look forward to talking to you in the coming days and

weeks. Take care.

Operator:

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your

participation.


Documents

At Home Group, Inc. Second Quarter Fiscal 2020 Earnings ...investor.athome.com/~/media/Files/A/At-Home-IR-V2/... · Curtis Nagle, Bank of America Merrill Lynch P R E S E N T A T I