At Home Group Inc. First Quarter Fiscal 2019 Earnings ...investor.athome.com/~/media/Files/A/At-Home-IR-V2/documents/home-fy19... · I'm pleased to announce that we achieved net sales

At Home Group Inc.

First Quarter Fiscal 2019 Earnings Results Conference Call

June 7, 2018

1

ViaVid has made considerable efforts to provide an accurate transcription. There may be material errors, omissions, or inaccuracies in the

reporting of the substance of the conference call. This transcript is being made available for information purposes only.

1-888-562-0262 1-604-929-1352 www.viavid.com

At Home Group Inc. – First Quarter Fiscal 2019 Earnings Results Conference Call, June 7, 2018

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, Chief Executive Officer and President

Peter S. G. Corsa, Chief Operating Officer

Judd T. Nystrom, 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

Dan Binder, Jefferies

John Heinbockel, Guggenheim Securities

Matthew McClintock, Barclays

Matthew Fassler, Goldman Sachs

Daniel Hofkin, William Blair & Company

Zachary Fadem, Wells Fargo

Simeon Gutman, Morgan Stanley & Co.

Curtis Nagle, Bank of America Merrill Lynch

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

Operator: Greetings, and welcome to the At Home First Quarter Fiscal 2019 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 IR. Bethany Perkins: Thank you, Jeremy. Good afternoon, everyone, and thank you for joining us today for At Home’s First Quarter Fiscal 2019 Earnings Results Conference Call. Speaking today are Chairman, Chief Executive

http://www.viavid.com/

2



1-888-562-0262 1-604-929-1352 www.viavid.com


Officer and President, Lee Bird, Chief Operating Officer, Peter Corsa, and Chief Financial Officer, Judd Nystrom. 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 provisions of the Private Securities Litigation Reform Act of 1995. In particular, statements about our outlook and assumptions for financial performance for fiscal year 2019, 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 and future capital expenditures 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, adjusted and 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 first quarter of fiscal 2019. I'm pleased to announce that we achieved net sales growth of 21%, representing our 16th consecutive quarter of over 20% net sales growth. Despite weather-related headwinds, we drove yet another positive comp store sales increase, which we’ve done now for 17 straight quarters. For the first quarter, we delivered a 0.9% comp, which represents a 6.7% increase on a two-year basis. As with many retailers, the weather curtailed our Q1 comp performance in colder climate areas in the Outdoor, Patio and Garden category, resulting in comps falling short of our quarterly expectation. In spite of the unexpected weather impact, our confidence has not wavered. Across our footprint, our Indoor Home Furnishings and Décor categories showed strength. In warm weather markets, our stores delivered a 4% comp store sales increase during the quarter. You’ve heard me say before the weather evens itself out over the year, and momentum returned to both our cold markets and our outdoor products as the weather normalized. Beyond the top line, we continued to invest in our strategic priorities, while delivering a 63% increase in pro forma adjusted EPS to $0.31. We’re excited about the many opportunities in our business to better serve our customers in both new and existing markets with our fresh value priced home décor assortments. Speaking of our customer, we continue to focus on making her our top priority, which is the basis of our growing loyalty and credit card program. Enrollment in both Insider Perks and the Credit Card program has far exceeded our expectations since launching just nine months ago. On our last earnings call, I shared with you that at the end of the fiscal 2018 we already had 1 million Insider Perks members. Today, I'm pleased to share with you we now have enrolled 2 million members. Both our Insider Perks members and our Credit Card customers are spending more per trip than non-members. We’re already leveraging insights with each of these programs to improve our customer communication. Our efforts are in their infancy, but we are very pleased with the results we’re seeing thus far.


3



1-888-562-0262 1-604-929-1352 www.viavid.com


One of the best ways to drive positive customer interactions is by having compelling in-stock assortment at attractive price points. In the first quarter we continued to focus on using our space to our advantage to carry the right aesthetic for every customer, while also leaning into the most popular trends. In our Outdoor categories, we covered all the core styles more thoroughly than ever before. On a broader basis, contemporary and modern farmhouse looks once again slowed above-plan strength, especially in Scandinavian-inspired items and the exclusive Shanty2chic line that we launched just in the fourth quarter last year. In addition to having a trend-inspired assortment, we know that continuously introducing new products is one of the differentiating strengths of our business that customers love. We add more than 20,000 new items to our offering every year and are focused on driving substantial newness ever quarter. As a result of our initiatives in this area, new items drove even more of our Q1 sales than last year. Overall, the breadth, variety and freshness of our assortment gives us confidence in our fiscal 2019 top line growth. Our new store productivity was another highlight for Q1. First year performance continues to increase, illustrating the proven affordability of our real estate strategy. We kicked off the first quarter with a significant milestone, opening our 150th store, and expanded into a variety of new markets. In the Northeast, we opened stores in Rochester, New York and Allentown, Pennsylvania; in the Midwest we entered Lafayette, Indiana and Dayton Ohio; and we increased our southern presence with a new store in Augusta, Georgia. We also densified existing markets in Detroit, Chicago, and Orlando. Finally, our fiscal 2018 class of new stores continued to exceed our expectations in their first quarter. In terms of our fiscal 2019 class, three quarters of this year’s new stores are now opened or are under construction. We have improved half of our fiscal 2020 new store class. As I mentioned last quarter, our pipeline has never been deeper and we continue to identify promising first- and second-generation new store sites. To support this exciting growth, we’re preparing to open our second distribution center in fiscal 2020, which Peter will touch on next on today’s call. In addition to expanding our footprint, broadening customer awareness of the At Home brand is one of our biggest strategic priorities. By raising our targeted marketing spend to 3% of sales this year, we are supporting a more comprehensive approach in our priority markets. Our ongoing analysis of these markets, which contribute more than 70% of our sales volume, gives us confidence that our investments are paying off. In fact, our unaided brand awareness is already ahead of our fiscal 2019 full year internal target. In Q1, our spring marketing mix combined both traditional and digital media. Our customer outreach included direct mail catalog, digital radio, outdoor billboards, and Google search advertising. Our planned fiscal 2019 social media spend is nearly seven times last year’s budget and has already generated more than 50 million brand impressions in the first quarter alone. In addition to this support, many of our key markets are benefiting from the spring TV campaign which focuses on At Home’s ability to serve the home décor enthusiast with endless possibilities for any budget. We are significantly amplifying our TV coverage from last year, while also enhancing our ability to differentiate customer messaging across media channels. Our website traffic has increased more than 50% and our email outreach has engaged 70% more customers year-over-year. Overall, we’re very pleased with the outcomes we’re seeing and we will continue to expand our marketing capabilities in order to better fuel our business. Next I’d like to talk about our team members who remain an instrumental part of driving our business forward. On the fourth quarter call, I laid out our initiatives over the past five years, from incentive compensation plans to our family-focused store closings on Thanksgiving, Christmas and Easter, that established At Home as a great place to work and grow. We’re proud of the employee-focused culture that can grow with us on our journey towards 600-plus store potential. Through initiatives like our Store Director Plus program, we were able to recognize high-performing leaders in our stores, enable them to develop by training our new stores on the standard processes. Our store director and field training programs grow more robust every year. As a testament to the success of these programs, first year sales and profitability in our new stores has strengthened each year, as well.


4



1-888-562-0262 1-604-929-1352 www.viavid.com


As we grow, we generate more opportunities for field leadership to take on newly created district and regional manager roles, as well. By training and cultivating these team members now, we’re developing the internal talent we need to continue to grow and scale our business. With that, I’d like to turn it over to Peter Corsa, our Chief Operating Officer, to talk about our operational progress. Peter? Peter S. G. Corsa: Thank you, Lee. Good afternoon, everyone. Scaling our business while enabling a great self-help shopping experience for our customers is a top priority of ours. Operationally, we focused on conversions by using new merchandising processes and signage to help customers navigate the store. Our end caps and vignettes continue to highlight decorating trends and unbeatable value to drive results year-over-year. We also applied insights from our successful Christmas tree signage to improve our spring patio and garden presentation for customers. Signage improvements in several other categories have made it easier for our customers to shop large items, while at the same time keeping our low labor model intact. Behind the scenes, we continue to proactively invest in systems, processes and procedures to ensure solid execution of our growth plans. One of those investments, as Lee mentioned, is our second distribution center opening next year. We’ve chosen an ideal second-generation property in Pennsylvania and we plan to implement the same proven cross-stock capabilities and automation currently used in our Texas-based distribution center. We’re working with our third-party transportation and product partners to coordinate purchase orders between Texas and Pennsylvania in a way that maximizes container utilization and minimizes transportation and associated costs. We are relentless at identifying cost savings and efficiencies to invest in our growth, while maintaining our focus on profitability. At the end of Q1, we implemented floor loading at our distribution center. We have since rolled it out to approximately 90 stores, and will take a measured approach as we expand it to the remaining fleet. When we eliminate the use of pallets for moving product from our DC to our stores, we significantly increase the availability of capacity of each trailer. As a result, we can reduce the number of trailer trips, plan store labor more efficiently, and get products to the sales floor faster. Additionally, floor loading is the steppingstone to enhancing our inventory visibility, which over time will enable customers on our website to easily see what’s in-store. We’ve also worked over the past year to streamline receipt volume at our current distribution center during peak times, which generates labor planning benefits, as well. Finally, direct sourcing is a key initiative that we expect to yield cost savings over time, as we expand the program and diversify our product partner base. We are already realizing product cost benefits from both new and current product partners, and we expect to deliver gross margin expansion this year. Ultimately, continuous process improvements, like direct sourcing, receipt smoothing and floor loading our margin-driving tools that help us mitigate costs for the second distribution center and improve our value proposition through lower prices and better quality. With that, I’d like to turn the call over to Judd, who will walk through our financial performance and discuss our outlook for the remainder of fiscal 2019. Judd? Judd T. Nystrom: Thank you, Peter. Good afternoon, everyone. Before I begin my prepared remarks, I want to remind you that additional information, including our outlook for the second quarter and fiscal year 2019, is available in our earnings release on the Investor Relations page of our website. We are pleased to deliver our 17th consecutive quarter of positive comparable store sales despite April’s challenging weather, that has been well communicated by other retailers. Our indoor and everyday product categories delivered a double-digit increase on a two-year basis. Extremely strong new store


5



1-888-562-0262 1-604-929-1352 www.viavid.com


productivity during our first quarter demonstrated that our highly portable concept continues to resonate in both new and existing markets. Overall, we delivered our 16th consecutive quarter of net sales growth above 20%. From a profitability standpoint we are also very pleased to deliver 68% growth in pro forma adjusted net income and $0.31 of pro forma adjusted EPS versus $0.19 in the same quarter last year. As Lee highlighted, the abnormally cold and wet spring weather proved to be a headwind for us. The comp spread between our warm and cold market in Q1 was approximately 900 basis points, which was more than double what we observed in Q1 last year. The spread between those markets was magnified for our outdoor and our seasonal categories during the first quarter. That said, we believe weather tends to even itself out over 12 months and we feel very confident in the strength of our underlying business. Our first quarter gross margin was 33.3%. We expected the increased occupancy costs from our sale leaseback transactions over the past 12 months would be a modest margin headwind in Q1, but we would achieve gross margin expansion for the full year. Snow removal expenses were five times larger year-over-year, resulting in above-plan occupancy costs and approximately 20 basis points of the 60 basis point gross margin decrease in Q1. However, due to the product margin tailwinds we are already driving from our direct sourcing initiative, we continue to expect gross margin expansion for the full year of fiscal 2019. Consistent with our long-term philosophy, we plan to reinvest the majority of our gross margin improvement this year in lower prices, store labor, new stores and a second distribution center to support our growth. Aside from the new DC, our biggest investment this year will be ramping up our marketing spend from 2.7% to 3% of net sales to support our substantial brand awareness opportunity. This incremental spend is more heavily weighted to the first half of fiscal 2019 to build our brand awareness. In the first quarter alone, the increased investment in marketing expense year-over-year drove substantially all of our 110 basis points of de-levered and adjusted operating margin. Weather-driven new store delays generated pre-opening expense favorability, which partially offset our Q1 marketing investment. Q1 interest expense of $5.8 million increased versus last year due to a combination of higher borrowings to support our growth, as well as an increase in interest rates over the past 12 months. I want to emphasize that despite a rising interest rate environment, our credit profile is actually improving. In fact, Standard & Poor’s upgraded our corporate family ratings to a B+, our term loan rating to investment grade, and our recovery rating to a 2 during the quarter as a result of our continued strong performance, as well as the continued decrease in our sponsor ownership. Our first quarter tax rate decreased significantly in fiscal 2019, due in part to the approval of the Tax Act of December 2017, which reduced federal statutory income tax rates. Our underlying effective tax rate was 23%, but the tax benefit from stock option exercise further reduced our rate to 0.3%, compared to 38.9% in Q1 last year. Our reported rate was significantly better than the 16.5% rate we provided in our first quarter outlook at the end of March, which reflected approximately $1.5 million in stock option exercise benefits, or $0.03 of incremental pro forma adjusted EPS. We ended the first quarter with $4.3 million of pro forma option benefit, or $0.07 of pro forma adjusted EPS, which was $0.04 better than we expected. As a reminder, our pro forma results and outlook exclude certain items that we do not consider to be representative of our ongoing performance, including both the expenses and the tax benefit associated with options granted at our IPO, and the CEO equity grant approved in the second quarter of fiscal 2019, which is disclosed in our 10-Q filed earlier today. As a new public company, our stock option history and, therefore, our history of estimating the related proceeds is relatively short. We will continue to refine our methodology as we move through the year, but we currently estimate that the full year tax benefit from stock option award exercises will be $18million, contributing to a fiscal 2019 effective tax rate of 14.5%. Due to our expectation for an even lower tax rate this year, we’re increasing our outlook for full year pro forma adjusted EPS to $1.25 to $1.30 per share, assuming 66 million weighted average diluted shares outstanding.


6



1-888-562-0262 1-604-929-1352 www.viavid.com


At the midpoint of our outlook, fiscal 2019 would represent our third consecutive year of greater than 40% pro forma earnings growth. Fiscal 2019 net sales and comparable store sales guidance remains unchanged. We expect that the strength of our new and existing stores in the balance of the year, coupled with gross margin expansion from direct sourcing benefits, will offset the impact of the comp store weak occupancy costs from the adverse Q1 weather I described earlier. Turning to the second quarter, we plan to open 11 new stores, including one relocation, in addition to the nine new stores and two relocations for Q1. As Lee mentioned, our new stores continue to get stronger every year and are the primary driver of our 17th consecutive quarter of more than 20% top line growth. For Q2, we expect net sales of $284 million to $287 million, which implies growth of 22% to 24% over Q2 fiscal 2018. Our comp store sales outlook of 2.5% to 3% is on top of a 7.8% increase in comp store sales in the second quarter last year, resulting in a projected two-year comp of 10.3% to 10.8%. We expect to generate meaningful adjusted operating margin improvement in the second quarter, driven by significant gross margin expansion. As Peter mentioned, our direct sourcing program is driving product margin benefits. We are also lapping a 140-basis-point gross margin decline in Q2 of last year, which was driven by the distribution costs from our fiscal 2017 strategic inventory investment. We are committed to reinvesting a portion of this quarter’s gross margin expansion into store labor and our continued efforts to drive brand awareness. We also expect the timing of preopening expenses in the second quarter to partially offset improvements in gross margin. We estimate interest expense of $6 million and a 12.5% effective tax rate, which incorporates a 23% underlying tax rate plus $2.7 million of anticipated tax benefits as a result of stock option exercise. All in, we expect pro forma adjusted net income growth of 88% to 97% and pro forma adjusted EPS of $0.32 to $0.33. Consistent with our full year guidance, our second quarter pro forma outlook excludes the one-time CEO equity compensation expense, as well as any tax benefits related to options granted at IPO. In closing, I would like to thank our team members for their continued focus on our customers and our strategic initiatives. Our investments in new stores, marketing and operational processes are driving great financial outcomes, which is thanks to all of our talented and hard-working teams in the field and at the home office. We continue to have many great opportunities to propel our business forward for the long-term benefit, as well as the benefit to our customers and our shareholders. I will now turn the call back to Lee for his final remarks. Lewis L. Bird, III: Thanks, Judd. We’re excited about the opportunities in our business as we look to the second quarter and beyond. While we faced some weather-related headwinds in the first quarter, we feel great about how our business responded in May. Our industry’s vibrant and growing, and we know that our concept is resonating with home décor lovers in both new and existing markets. Our customers continue to embrace our broad assortment and everyday low prices, enabling us to take share in the expanding marketplace. Operator, please open up the line for questions. Operator: At this time, we will be conducting a question and answer session. If you’d 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’d 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 key. Our first question comes from the line of Dan Binder from Jefferies. Please proceed with your question.


7



1-888-562-0262 1-604-929-1352 www.viavid.com


Dan Binder: Thank you. I was wondering if you could just comment a little bit about traffic versus ticket. Then, in terms of the category reinvention, it sounds like that’s continued to work well for you. I think that’s comped around 10% in the past. I’m just curious how that looked this quarter and what lies ahead. Judd T. Nystrom: Dan, this is Judd, I’ll take the first one and then turn it over to Lee on the reinventions. As you know, we don’t break out by quarter what the comp components are. This quarter had some volatility that we described. I’d like to point out that when you look at the warm markets, we actually did a plus four, we’re pleased with that. We’re focused on driving all of the organic metrics. What we’d say is the abnormal unexpected weather caused us to deliver comps below our expectations. When we look at kind of the composition of it, as I highlighted, the warm markets comped four, and we like the composition of the organic metrics in those markets. New stores outperformed and when you look at, despite the weather, indoor and everyday categories, were very, very strong overall for us, ahead of what we expected. Outside of that, I’ll turn it over to Lee on the reinventions. Lewis L. Bird, III: Thanks. Dan, on reinventions, you know that that’s a strategy we’ve been implementing for over five years now. It continues to allow us to have newness in the stores. This year’s reinventions are about the same percent of the assortment as we’ve had over time, we always assume it’s about 15 percent plus of the assortment. The first part of the year included new cushions, which we’re really pleased with the assortment, it was a whole lot of newness, that we had put in a lot of fashion assortment. We improved the quality of our cushions, as well. So, we’re pleased with that, expanded premium and larger sizes, more fashion prints. We also launched an expanded assortment of dining sets and we’re pleased with the outcome of that. In the back of the year, you’ll see some more around accent runs and bath, as well as wall art in the back half. So, we’re looking forward to continuing to see the implementation of our reinventions. But, I would also say one other thing that I mentioned my prepared remarks, was outside of reinventions we wanted to improve the amount of newness we had in the store, so not just reinventions but the assortment itself, the areas that weren’t being reinvented. So, we increased the newness level to the highest that we’ve seen, and we saw great outcomes from that, and that allows us to continue to differentiate our assortment versus the competition. Dan Binder: Great. Thanks. Lewis L. Bird, III: Thanks, Dan. Operator: Our next question comes from the line of John Heinbockel from Guggenheim Securities. Please proceed with your question. John Heinbockel:


8



1-888-562-0262 1-604-929-1352 www.viavid.com


Two things, guys. Let me start with what’s the timeframe for store level inventory availability to customers, when will that be out there, either partially or completely rolled out? Lewis L. Bird, III: John, this is Lee. Our intention is to test that in the back half of this yea. We need floor loading to be able to have the inventory be scanned in at the store level, so that we know exactly when it’s in the store versus when it’s in transit. At that point, because we have Demandware platform, we have and ability to plug in the inventory. We’re doing all the testing now on that. We’ll test it in the back half of the year. We hope at that point, that that provides customers even more incentive and confidence to go to the store, because there’s enough inventory at the store, or they may go to different store locally and we’ll have more the items they need for that one particular shop. John Heinbockel: I know that’s a prerequisite for BOPIS, but you’ve also been sort of not convinced, right, that demand is yet there to do that. So, is BOPIS still kind of out there, sort of an undefined time for piloting that? Lewis L. Bird, III: We’ve always said we’re going to be looking at e-commerce our way, that’s been our strategy, and what I would say is our primary focus is making sure that we’re meeting the needs of the customer. We continue to do research with the customer, as we’ve mentioned before. They want the largest assortment of home décor, they want the lowest prices, they want availability now, and they want to see, touch and feel it. We have that in our store today. In fact, the newness factor has increased, so that we continue to have the freshest assortment out there. That seems to be those biggest opportunities. It’s still not even the top five requested items in our customer research. In our customer care call line, it’s not even one of the top five requested, is basically e-commerce capability. So, we’re just trying to address the top four areas. But, the things that they have mentioned is, “I wish I knew how much inventory was at my local store to make the trip worth it,” or “I want to make sure I go to the right store for what I'm looking for, if I need multiples.” So, we need to keep addressing what their issues are. In this case, it’s inventory visibility. It does provide the ability for us to go further if we want to, but right now our customers aren’t asking for it. They still love the assortment that we have today in the store, and as we increase the newness, I think it’s going to improve our competitiveness even better than now. John Heinbockel: Okay, and then just maybe lastly for Peter. When you talk about investing in labor, maybe parse that out between hours and wage rates. Is it more wage rates than hours or maybe 50/50, or what? Peter S. G. Corsa: Well, so, John—hi, John, first—what we love about our model is that it affords us the opportunity to put fixed cost leverage back into the business every year, and that really is through a combination of hours or rate or both. We’ve generated those efficiencies that enabled us to reallocate those hours where the benefits are, but our business and our customers the most. John Heinbockel: Okay. Thank you. Lewis L. Bird, III: Yes. I would (inaudible) I’ll just build on that. To Peter’s point, sometimes it is rate. Like, our average hourly rate is over $12 now. We don’t broadcast that, but it is over $12, and we have a model that we can


9



1-888-562-0262 1-604-929-1352 www.viavid.com


afford to go further in different markets just to be competitive with the market. In other cases, they may not necessarily be rate, but it is cash comp where we added a bonus for our employees, and the majority of our hourly employees received a bonus last year. On an hourly full-time basis, they received over an $1,100 bonus, and that was just new versus two years ago where they received no bonus. So, we’ll continue to invest against that. That allows us to have our turnover rate continue to drop year-over-year and now it’s practically a third of what it was when we started. John Heinbockel: Thank you, guys. Lewis L. Bird, III: You bet. Thanks, John. Peter S. G. Corsa: Thanks, John. Operator: Our next question comes about line of Matt McClintock from Barclays. Please proceed with your question. Matthew McClintock: Hi, yes, good afternoon, everyone. I guess I have two questions. The first one just on weather, the 4% increase in warm weather locations, the 900 basis point negative impact, I guess that means you’re kind of classifying roughly two-thirds of your store as warm weather and one-third as cold weather. I just wanted to understand was there any negative impact from weather even in your warmer weather regions; meaning, could that 4% been a little bit higher if there was better weather overall? That’s my first question. Judd T. Nystrom: The short answer on it is yes. When you look at our performance in warm weather markets and then you look at it by category, the Everyday actually did even better in those warm weather markets. If you look at Outdoor, meaning patio and garden, those were below the 4%. So, the short answer on it is, yes, they would’ve done better, adjusting for the mix of the business. Matthew McClintock: Thank you, that’s helpful, and then my follow-up question— Lewis L. Bird, III: I'm sorry. You’re right around the (inaudible), roughly, in terms of warm weather markets to the total fleet. Matthew McClintock: Okay, and then my follow-up question is kind of related. You had two initiatives, I think, that would have normally been pretty helpful this spring to your Patio business. One, you were adding more labor to Patio, and, two, you had the LookBook out. I know it’s going to be tough, because you had poor weather the same time, but could you judge the effectiveness of both those initiatives, the spring, and is there anything that maybe you could pull back on or maybe that you’ll do differently next time? Thanks.


10



1-888-562-0262 1-604-929-1352 www.viavid.com


Lewis L. Bird, III: Yes, I would tell you the first thing on the LookBook was the items that were highlighted in the LookBook did very well. We know that people saw it, they like it. It showed a breadth of assortments that we haven’t been able to display in other mediums, other than online, and so it allowed us to show breadth of color, allowed us to show price, and those items also we bought behind it and those did well, so we’re really pleased with that, and we’re pleased with our digital investments, as well, on marketing, and I mentioned that the outcomes, in terms of impressions, as well as email opens, as well as overall digital impressions. You ask about the investment in labor in Patio. What I would say was we got a lot of positive feedback overall from the customers that they were receiving the help that they need, which we feel a lot better about. When we asked them what are they looking for, they would like some help with some heavier items. The signage was a big plus for us, because we made it easier for them to find the item on the shelf from what the display item was in the center of the Patio area and the Patio and Garden, but then they could easily find the boxes, and then if they wanted help to get the boxes off the shelf into their car, we were more than happy to do that, and also help them understand the benefit of different product attributes, because these were trained employees in the Patio area, and we found that it was helpful overall not just to sales, because obviously the weather did put a damper on some of that in some markets, but overall the customer experience was improved, which is what we are also focused on. Matthew McClintock: Thanks a lot for the color. Best of luck. Lewis L. Bird, III: You bet. Thanks, Matt. Peter S. G. Corsa: Thanks, Matt. Operator: Our next question comes from the line of Matt Fassler from Goldman Sachs. Please proceed with your question. Matthew Fassler: Thanks so much and good afternoon. My first question relates to the sales trajectory. You held your sales for the year despite the first quarter coming in slightly below your original expectation for the reasons that you outlined. Is it your sense that there is some recapture of some of the seasonal business that you didn’t do in Q1? In other words, is some of that business deferred until later in the year and is that one of the factors embedded in the guidance? Judd T. Nystrom: Yes, Matt, this is Judd. We first start with weather evens itself out, just like Q4 where it’s tailwind, Q1 is the headwind. When you look at it over 12 months, we’ll see puts and takes. When you look at our full year guidance, our full year guidance for the top line remains unchanged, both from a comp and a total revenue. We do think some of that deferred demand will come back, some in Q2, some in Q3. In Q2, in particular, if you look at it on a two-year stack, we’re lapping the strongest quarter. Last year, we delivered a 7.8% positive comp store sales. It was the highest comp in 11 quarters. Yet, when we’re now nearly 50% of the way through the quarter, overall, what we saw was some of that demand that wasn’t there in April, it showed up in May. When you look at our outlook for this quarter, we’re actually going to


11



1-888-562-0262 1-604-929-1352 www.viavid.com


be sequentially accelerating our comps materially on a two-year basis, now to be 10.3% on the low end to 10.8% on the high end, which is above our 9% to 10% for the full year. So, you can see some of that recapture is going to happen in Q2—not all of it, some of it is going to happen in Q3, but we’ve been running this business for 5.5 years. Our Q2 outlook for two-year stacks is strong, and for the full year, it remains intact. So, we know that, again, weather will even itself out. Matthew Fassler: Great, and then Mike— Lewis L. Bird, III: Matt, let me just add one more thing on that, too, because Judd was talking about comps, which is obviously one part of the equation, but we’ve also held our full year sales. We lost store weeks because of that weather; stores had open up later. We obviously had the benefit of lower store opening costs in the first quarter, unfortunately, because they had to be pushed out. We lost store weeks for the year and we’re still getting to hold sales. That would tell you the strength of our new store openings, and our non-comp stores continue to drive great outcomes and higher than our expectations. Matthew Fassler: Thank you for that. My second question relates to the new DC that you’re currently planning. If you think past the stage of start-up and implementation, and you think operationally about regional and store-specific merchandising and speed to market, are there kind of operating benefits that you might see from having a second facility, and at what point do you think they’ll start to kick in for you? Peter S. G. Corsa: Sure, I’ll take the operating benefits first. Obviously, Matt, by opening a new DC, it gives us significant benefits, both inbound and outbound, to be closer to the stores themselves, as well as utilization and capacity, too, so it gives us the ability—we’re working right now on floor loading, too, which we mentioned. We have 90 stores that are rolled out. We’ll continue to do that throughout the organization for utilization of our containers. This will help us to open the second DC, as well as to kind of close down and eliminate some of the stem miles that we’re doing right now from having Plano go all the way to the East Coast. Lewis L. Bird, III: Matt, one other thing, from a customer standpoint, some of those stores are pretty far away from Dallas. The stores that are farther away are almost a week-and-a-half to two weeks later in the newness than the stores nearby. We want the customer to have the newest and freshest assortment available. This allows them to have that. So, if you’re in the stores in the Northeast, you’re still only a day-and-a-half or two days away from newness versus (inaudible) way. Matthew Fassler: That’s great. Then, Judd, just because the tax rate has been moving around, as we think about modeling Q3 and Q4 for the tax rate, is there a number that you would have us use at this early stage? Judd T. Nystrom: You have Q1 actual, we gave Q1 projected, and then what you should assume for Q3 and Q4 is 23% overall for the quarters. That’s really underlying company rate. There’s going to be—when you look at it overall—we’ll update you if there’s anything around stock comp assumptions. Q3, I think there’s some


12



1-888-562-0262 1-604-929-1352 www.viavid.com


modest benefit associated with it, so you might be a little bit below 23% in Q3, but overall, hopefully, that helps you a little bit. Matthew Fassler: Super helpful. Thank you so much, guys. Lewis L. Bird, III: You’re welcome, Matt. Judd T. Nystrom: Thanks, Matt. Operator: Our next question comes from the line of Daniel Hofkin from William Blair & Company. Please proceed with your question. Daniel Hofkin: Good afternoon, everyone. Just a couple of questions. First, on real estate, and you may have addressed this a little bit earlier, but anything that you’re seeing at the margin in terms of amounts of supply, the quality of it, location in terms of market size, and then mix between sort of build, acquire and lease right off the bat? That’s my first question. Lewis L. Bird, III: Sure. Well, I would say, first and foremost, as I mentioned earlier, our pipeline’s never been deeper. That tells you we’ve got more to look at, which we’re thrilled with. I would say that gives us a chance to have better quality. I would also say there continues to be not a whole lot of competition for those boxes, so that helps us in the overall pricing. We have seen a mix in more leases than buy. Before we had planned on a third, a third, a third, a third second-generation leases, a third second-generation purchases, and a third ground-up build. What we’re seeing is there’s a whole lot more leases available and people aren’t willing to sell it to us, and so we’re leasing them, and we are still building them, but as we’ve found more opportunities to do second-gen leases, we’ve pushed some of our builds out. That’s why the leases have gone down as a percentage. Now, it’s about 75% second-gen, 25% ground-up build. I would say, overall—I was on as trip this week looking at some new locations in the mid-Atlantic area. I would say the location quality continues to be a positive for us. Our team just got back from IPSE in Las Vegas. Five years ago, we had it to explain who we are. Now, five years since then, we’ve become the belle of the ball, they all want to talk to us, every developer wants to work with us. In some developments, where one would say it’s a little highbrow, they would love to have an At Home. So, we’re thrilled with who wants us to be in their centers. We are now a preferred tenant. We’re a known quantity that’s bringing people to their centers, and is a great co-tenant to others, and I would tell you that gives us a lot of opportunity to look at some great locations. Daniel Hofkin: Okay, great, and then just my follow-up question. On the direct sourcing initiative and just how you see that flowing through over time, what you’ve learned so far in the very early going, that would be helpful. Judd T. Nystrom:


13



1-888-562-0262 1-604-929-1352 www.viavid.com


Sure. Dan, this is Judd. As we highlighted, we did this work last year, this time last year, and really scoped out what’s the size of the prize. As you know, we accelerated investments last fiscal year to start the work, built the team, put people in place. We know that long-term this is going to be a huge driver for our Company and allow us to reinvest a lot in our business to strengthen our value proposition. We exited last year with virtually nothing as a percentage of our total purchases in direct sourcing, it was very small. This year, we’ll be low single digits. But, when you look at the run rate exiting this year, we’ll be higher single digits. The nice part is the momentum that we’re going to start to pick up, and what we’re seeing in terms of cost reduction is going to start to accelerate. As a result of it, what you will see is purchases that we made last year will start to hit in the second half this year. It’s about a six-month lag, because it’s over the turn of the inventory, but as you go to next year, the work that we’re doing now and we’re doing in the second half of the year are going to be tailwinds for us, that are going to help offset the cost to bringing on a new DC. Then, there’s other initiatives that we’re working on that Peter highlighted, floor loading. Floor loading will be a benefit that we’ll start to see at the beginning of next year because of the efforts of what we’re working on now that will go with the turn of the inventory. So, we feel great about both those initiatives, we’re seeing the benefits actually ahead of schedule, and it gives us a lot of confidence in our ability to continue to reinvest in our value proposition. Lewis L. Bird, III: Daniel, one other thing I’d say, just about the quality of the type of product that you get through direct sourcing, because you’re taking people out of the process, the middleman, you can actually improve their newness and the speed to market by being direct sourced, as well. So, that’s another kind of inherent benefit. It helps you later on by the freshness of the assortment available, should be then less markdowns, should be better full-priced selling, as well. That’s another competitive advantage that we want to go after. Daniel Hofkin: Great. Thanks very much and best of luck. Lewis L. Bird, III: Thank you. Judd T. Nystrom: Thanks, Dan. Operator: Our next question comes on the line of Zach Fadem with Wells Fargo. Please proceed with your question. Zachary Fadem: Hey, guys. Thanks for taking my question. Just a follow-up on both Matt’s question on weather. Two-thirds one-third’s math would suggest that comp impact of the adverse weather was about 150 basis points in the cold weather regions, or 170 or so, but for the non-comp impact, your results would suggest the new stores actually outperformed the guidance. So, I’m curious if you could talk a little bit about what the new store contribution would’ve looked like ex the impact to weather. Judd T. Nystrom:


14



1-888-562-0262 1-604-929-1352 www.viavid.com


New stores would’ve been even stronger, candidly. When we look at our productivity for the quarter, it was very strong. It was our actual fourth consecutive quarter of 90 plus percent new store productivity. We saw in markets where we did—take the colder weather markets where we added stores, they were impacted. They also impacted stores that were set to open in Q1, that are now opening in Q2. We feel good about the new store productivity. As you know, we measure it every year and we report out the results on it. Five plus years ago, when we started as a Management Team, we were delivering average unit volume of $4.2 million. Fast forward to last year, where it’s annualizing right now, and they’re at $6.7 million. We’ve seen an increase, very significant 60 plus percent. The profitability of those stores back five years ago, $1.1 million. Right now, they’re run rating and analyzing at $2.2 million, double the profitability. When we look our new stores for FY’19, that have opened already, they’re actually exceeding the pro forma, and we had higher performance because we expected more from the stores. The good news is things like brand awareness, our operational execution, our ability to find great real estate sites, our training that we do, our hiring, taking team members and promoting them from existing stores into new markets, that is working, and we’re excited about the opportunity, where we are only 160 stores today on our way to 600, and the fact that not many retailers can say that for six consecutive years their average unit volume is actually increasing each year, and we’re proud of that. Zachary Fadem: That’s really helpful, Judd. Just on the labor front, it looks like you’ve done a nice job being ahead of the curve in terms of wages versus your peers, but as you start to enter new and, in some cases, denser markets, what are the thoughts on increasing headcount on a per store basis? Do you anticipate any further uptick there as we move throughout the year? Lewis L. Bird, III: One of the things we love about our model is that we set it so that we’ve kind of looked at this impact along the way and made the changes along the way, and so we have the flexibility just cost-wise within our model to be able to adjust as we move into some of the newer markets, say the Tristate or into other parts of the country. Our process is around our lean labor model that we anticipate would stay the same from a headcount standpoint. We’ll make strategic investments where we need to on behalf of the business and we have the flexibility to do that, but we’ll keep our modeling intact as we continue to roll out across the country. Judd T. Nystrom: One thing I would add, just to quantify our efforts in that space, if you look at the last four years, our operating margins are up 150 basis points. We’ve actually de-levered wages intentionally by 40 basis points. However, when you look at the comp over that four-year period, we’re up over 20% when you look at it from where we started to where we are, yet we’ve de-levered labor intentionally, and it’s exactly what Peter’s point was, which was we’re making investments, and we use that intentionally not to leverage. So, you’ll continue to see us make investments in hours and in wages. Zachary Fadem: Quantification is always helpful. Thanks for the time, guys. Judd T. Nystrom: Thank you. Lewis L. Bird, III: You bet. Thank you.


15



1-888-562-0262 1-604-929-1352 www.viavid.com


Operator: Our next question comes from the line of Simeon Gutman. Please proceed with your question. Simeon Gutman: Thanks. Good afternoon. In our model, we have the number of store openings relatively static over the next several years, but what happens, the square footage growth slows just naturally given some of the low and large numbers. Just curious, your thoughts on the number of stores versus a particular square footage growth and if any of your thinking that changed around it. Judd T. Nystrom: Sure, Simeon. This is Judd. What we see in our long-term growth algorithm is we will grow our unit count at a high teens number. The last five years, we’ve actually been a little higher than, it’s been 20%, and we feel good about where we’ve been, but we commit the high teens. What we will see overall square footage, we’ll continue to see that in terms of the locations we’re taking. We’re going to some smaller locations overall. If you go back to where we were five years ago, our average fleet was about 120,000 square feet, and recently it’s 110,000, it’s been creeping down each quarter, and that’s because we’ve been able to find locations and still drive great average unit volumes at square footage like 80,000 to 90,000 square feet, but as we continue to invest in those stores and open new stores, we’d expect square footage to grow at a slower pace that way. But, again, as a reminder, we focus everything on a per box basis. At the end of the day, there’s a certain amount of demand in the market, and if you have 120,000 square foot store or an 80,000 square foot store, you’re going to end up with the same sales, and we’ve seen it time and time again. We’ve taken stores that are in the same actual street address, reduced the footprint, and see sales actually increase. So, our focus is finding high-quality locations, ensuring our economic model is intact, opening the stores perfectly, and delivering a great customer experience. Simeon Gutman: Thanks for that. Then, at fully stored—I know this is way down the store—how many DCs are planned? I don’t know if you have a long-term roadmap. I want to ask that in context, have you quantified—I feel like there’s some numbers floating around on the direct sourcing benefit, and I think you mentioned that those benefits could help offset the cost of opening these DCs. So, just thinking about that in relation to some of the savings from direct sourcing flowing through or just off-settings some of the expansion over time? Lewis L. Bird, III: Yes, Simeon, this is Lee, and Peter will cover some of that, too, on the DC footprint. Overall, we’re going to continue to look at optimizing our business and we’re looking—we always balance everything between transportation cost, speed to market, and overall labor cost. Right now, we know a second distribution center, it’s the right thing for us to do. We’ll look at our footprint three years from now. Remember, we’re primarily a second-generation real estate store footprint, too, so it’s a little trickier for us to look what our footprint will be three years out and project what that will be based on where our stores are going to be, we look closer in—and, by the way, we did take second-generation box for our DC, which makes it a lot more affordable, as well. There are available boxes and there may be more available boxes in the DC network. So, we always look at least three years out. We look five to six years out in terms of need, but we only look three years out in terms of the actual footprint, because it’s a bit dynamic for us. Judd T. Nystrom:


16



1-888-562-0262 1-604-929-1352 www.viavid.com


On your question around direct sourcing and DC cost, here’s what I’d tell you to give you some color. We’re obviously working on a lot of things that are going to be tailwinds in terms of gross profit. Peter talked about floor loading. We talked about direct sourcing. Those will be natural tailwinds to the business and it’s a result of efforts that we’re focused on today. We know that we’re going to have a nonlinear increase in DC-related costs, right? So, think of another building with more rent and more people. That said, when you look at it overall, the number of miles we’re going to drive, because it’s going to be in the Northeast, to the stores, it’s going to—to Lee’s earlier point, we’re going to have newness in the store faster, we’re going to have less stem miles, we’re going to reduce our transportation costs, we’re going to be able to bring in product inbound, that’s going to save time and money, and when you factor all those together, we feel we have enough initiatives in place to mitigate the cost of bringing on that second DC, but we’re always identifying operational improvements that we can focus on that are going to help deliver sustainable growth and allow us to reinvest back in the business. Peter S. G. Corsa: One thing we really haven’t shared much around that second DC, is we learned a lot around running a DC with this first one. We’ve automated it. We actually used another location in the Dallas area to house and accumulate our new store inventory and then send it all to a store at once. In the new distribution center in Pennsylvania, we’ll actually do both of those in the same building. So, we’ll be a lot more efficient in our Pennsylvania facility than we are even in the Dallas facility. When we grow, we think about how can we reduce the overall cost of operation every time we move forward, and in this case with the DC, the second-gen box, it’s accumulation center and it’s a (inaudible) DC all in one building. Simeon Gutman: Great. Thanks, guys. Operator: Our next question comes from the line of Curtis Nagle from Bank of America Merrill Lynch. Please proceed with your question. Curtis Nagle: Great. Thanks very much for taking the questions. Just, I guess, a quick one on the loyalty program. You doubled that to 2 million in the span of a quarter. It sounds like it’s going terrifically. Just out of curiosity, do you guys know, I guess, what penetration of your total customer base that might comprise and where you think that could go over time? Lewis L. Bird, III: Curtis, this is Lee. Like we said, we’re in the early innings. The nice thing is we’re starting to capture on every transaction, or most transactions, their loyalty number. I would say the field is learning to do that too. We’ve never had a loyalty program before. So, as we’ve captured their loyalty number, we can start to see the penetration of loyalty customers per transaction. I would say we only have five months in on those 1 million members, and the 2 million members has been over for nine months, and we obviously picked those extra million up in the past three months. So, there’s not enough data points to start sharing that yet, but I would say that we’re starting to see people return, we’re starting to see what’s in their basket. We’re starting to then understand if we had more visits by a customer. We can then tailor their message going forward to what they’ve added in their basket by style, type and preference. We think at this point going forward, we’ll be more and more relevant to them going forward. But, we do like what we’ve seen. Obviously, the basket for the loyalty member is modestly higher. The Credit Card program is much higher. It’s an evolving program. It will get better over time. Curtis Nagle:


17



1-888-562-0262 1-604-929-1352 www.viavid.com


Great, very good to hear, and then just a follow-up for Judd. I guess, could you clarify, I guess, why the benefit from the options is staying in the operating tax rate, but you’re stripping it out of the operating results. I guess, does it have something to do with what’s considered one-time and what’s not? Just any clarification on that would be very helpful. Judd T. Nystrom: Sure. There are few things moving around. Number one was our CEO equity grant and adjusted out. It’s not representative of our core operations because the way it was structured. It’s focused on retention and focused on making sure that we align it with shareholder interest, in terms of the value Lee is going to get is solely going to be based on improvement and it’s based on the stock price of where that grant is, and nothing is typically—you get a certain percentage that’s vested in each year. In this case, it’s 100% vested year four. So, that’s the logic. If you go back to our IPO grant, there will be a component as redemptions occur in the future, where we’re going to add back the benefit associated with that, but that’s how we treated it naturally before. We’re doing that, we’re matching that one-to-one. In structuring it the way we did, we actually save from a tax perspective and avoid the 162-M that would happen in the future. So, part of this was structuring it that way just to position us to have the least amount of tax exposure, because in future years you actually can’t deduct some of that. So, that was part of our consideration overall, as well. Curtis Nagle: I see. Okay, got it. Thanks very much. Judd T. Nystrom: Thanks, Curtis. Peter S. G. Corsa: Thanks, Curtis. Operator: Ladies and gentlemen, we have reached the end of the question and answer session. At this time, I’d like to turn the call back over to Management for closing remarks. Judd T. Nystrom: Great. Well, thanks again for joining us today. We’re excited about the growth ahead and we look forward to talking to you in the next coming days and weeks. Operator: This concludes today’s conference. You disconnect your lines at this time. Thank you for your participation.


Documents

At Home Group Inc. First Quarter Fiscal 2019 Earnings ...investor.athome.com/~/media/Files/A/At-Home-IR-V2/documents/home-fy19... · I'm pleased to announce that we achieved net sales