At Home Group, Inc. First Quarter Fiscal 2020 Earnings...

At Home Group, Inc.

First Quarter Fiscal 2020 Earnings Conference Call

June 5, 2019

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At Home Group, Inc. – First Quarter Fiscal 2020 Earnings Conference Call, June 5, 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

Peter S. G. Corsa, President and Chief Operating 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

John Heinbockel, Guggenheim Securities

Jonathan Matuszewski, Jefferies

Brad Thomas, KeyBanc Capital Markets

Zachary Fadem, Wells Fargo Securities

Chuck Grom, Gordon Haskett & Co.

Curtis Nagle, Bank of America Merrill Lynch

Anthony Chukumba, Loop Capital Markets, LLC

Sumit Sharma, Berenberg Bank

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

Operator:

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

will be in listen-only mode. A brief question-and-answer session will follow the formal presentation. If

anyone should require Operator assistance during the conference, please press star, zero from your

telephone keypad. Please note that this conference is being recorded.

I’ll now hand the conference over to Bethany Perkins, Director of Investor Relations. Ms. Perkins, you

may now begin.

Bethany Perkins:

Thank you, Rob. Good morning, everyone, and thank you for joining us today for At Home’s First Quarter

Fiscal 2020 Earnings Results Conference Call. Speaking today are Chairman and Chief Executive Officer

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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

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, 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 net income, and 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 morning, everyone, and thank you for joining us to discuss our results for the

first quarter of Fiscal 2020. Q1 was a challenging quarter for us. We faced unusually adverse weather

across most of our footprint which led to a competitive, highly promotional spring across the industry.

Favorability in new store (inaudible) and solid productivity in our non-comp stores enabled us to deliver

nearly 20% net sales growth despite a comp store sales decrease of 0.8%.

We delivered $0.03 of adjusted EPS, at the low end of our outlook. Jeff will walk through the puts and

takes of our 3.4% adjusted operating margin as well as our updated guidance in a few minutes.

While we continued to deliver over 80% of our net sales at full price, we proactively took seasonal

markdowns earlier this year due to the lighter weather-related demand which impacted our Q1

profitability. We’re taking swift action on additional markdowns in Q2 and Q3 to ensure we have the

freshest and most competitive assortment in the industry. Although the adverse weather continued into

the second quarter, we’ve been pleased with the rebound in our business as weather has improved.

However, in light of the soft start to the year and recent industry trends, the related markdowns, and the

impact of recent tariffs which I’ll discuss shortly, we’ve decided to take a more cautious view of the

remainder of Fiscal ‘20. As such, we’re taking down our outlook today. This is not an action we take

lightly, and we are disappointed. But we’re laser-focused on driving this business to its full potential, and I

continue to have confidence in our everyday low-price model and the progress we’re making against our

strategic priorities, and we have several initiatives in place to drive growth this year.

From a merchandising standpoint, I’m excited about our upcoming category reinvention and the second

half seasonal assortment. As a reminder, we refresh portions of our assortment every year to add

incremental newness and elevate our visual merchandising. These category reinventions create more


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opportunities for us to highlight that there’s always something fresh and exciting about the At Home

assortment, giving our customers a reason to buy again and again.

Our Fiscal ‘19 and ‘20 product reinventions continue to outperform the chain and our Q2 lamp reinvention

is off to a very strong start. The strength we’ve seen in reinvented accent rugs, window treatments, and

bath tells us updated textiles are resonating with customers. As a result, we plan to pull forward additional

bedding reinventions into this year.

I'm also excited about our seasonal assortment for Halloween, harvest, and Christmas that will be arriving

in our stores this summer. Over the past five years, we’ve driven a cumulative comp of more than 25% in

Q4 and have solidified our position as the holiday headquarters for our customers. We look forward to

meeting all their seasonal decorating needs again this year.

From a marketing standpoint, in Q1 we increased brand awareness once again, and our loyalty program

continues to grow, and it’s at 4.8 million members currently. We’re driving more traffic to our website and

our e-mail outreach is engaging more customers than ever. We’re very encouraged by the early results of

our comprehensive Perfect One campaign which gives our customers confidence that with At Home

selection and value, she will find the perfect product at the perfect price. We’re reaching out to customers

across both digital and traditional channels, and we love the positive return we’ve seen from our digital

and direct mail efforts.

With our growing loyalty program, we’re learning more and more each day about what works. In the back

half of the year, we’re refining our media mix to shift even more of our advertising investments into the

highest return channel.

I also continue to be very pleased with our new stores which continue to deliver very strong productivity.

We opened 11 new stores in Q1, and we’re especially pleased with the performance of our first California

store. Our Real Estate and New Store Opening teams executed flawlessly, and actually opened new

stores in the first quarter, earlier than planned, driving top line favorability. We’re on track to open two-

thirds of our Fiscal 2020 class by the end of Q2 which should be a back-half tailwind for us versus last

year.

Finally, we’re making important progress towards our fourth quarter buy online, pickup in store test. We

rolled out a store-level inventory visibility to the entire chain in Q1, ahead of schedule; gathered all of our

requirements; and identified our key external partners to support the test. If anything, the weather-related

softness in Q1 and early Q2 has strengthened our results to test and evaluate this omnichannel

opportunity.

Before I turn the call over to Peter, I want to touch on the recent developments and trade negotiations

between the U.S. and China. We mitigated the initial 10% tariff on Chinese imports through a combination

of value engineering, negotiated price reductions, and strategically retail price increases without a

material impact on our business. While we were prepared to intensify our approach if tariffs were to

increase to 25%, our initial Fiscal ‘20 guidance assumed no further increases from last year. With tariffs

now raised to 25%, we have an even sharper focus on collaborating with our product partners to mitigate

the increased costs. We’ll be leveraging both our substantial growth and the movement in the exchange

rate to offset as much of the tariff as possible.

Because we will not pass along the additional price increases to our customers, there’ll be some

increased costs that we cannot mitigate. We are incorporating that unmitigated portion into our margin

outlook today. As always, we remain committed to giving our customers an incredible value and the

broadest, freshest assortment in the industry.


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Now, I’ll turn the call over to Peter Corsa, our President and Chief Operating Officer, to drill into some of

our operational initiatives. Peter?

Peter S. G. Corsa:

Thanks, Lee. Good morning, everyone. I’d like to start off by discussing our inventory growth in the first

quarter. Heading into Fiscal ‘20, our plan called for a step-up in inventory to support new store growth and

opening those stores earlier this year. As Lee shared, we have been really pleased with the cadence and

performance to date of our Fiscal ‘20 stores. We also strategically began the year in a strong position to

take advantage of seasonal opportunities that were under-inventoried in the first half of last year.

With both the weather and the resulting promotional environment working against us, we exited the

quarter with more product than we expected. We are taking swift markdown actions that will result in

additional margin pressure in Q2 and Q3, before inventory normalizes in the fourth quarter. Despite the

weather-related challenges, I’m proud of our Store and Distribution Center teams for getting product

quickly through the DCs, to the store, and out to the sales floor for our customers.

Speaking of the DC, by the end of Q1, we ramped our second distribution center in Carlisle, Pennsylvania

to support more than 100 stores. I couldn’t be more pleased with our team for an incredibly smooth

launch, delivering the second DC not only on-schedule but under budget as well. As we continue to open

new stores across the country, we will allocate those stores between our Plano and Carlisle distribution

centers to optimize freight costs.

From a product standpoint, we also continue to be pleased with our efforts around product development

and direct sourcing. We remain on track to exit Fiscal ‘20 directly sourcing about 15% of our purchases,

signifying excellent progress on our journey to approximately 30% penetration in the next few years.

Finally, I want to give a quick update on the shrink discussion we began last quarter. In response to the

unexpected increase in shrink we recorded in the fourth quarter last year, we increased the operational

focus of our entire field organization. This effort included more attention to store preparation, count

processes, and staffing. Based on the early reads from recent inventory counts, our overall efforts appear

to be driving shrink improvements. We’re continuing to pursue these efforts and will update you again

next quarter as we count our next cohort of stores.

With that, I’d like to turn the call over to our CFO Jeff Knudson who will update you on our Q1

performance and our outlook for both Q2 and the full year. Jeff?

Jeffrey R. Knudson:

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

earnings release which is posted to our Investor Relations website. I would also encourage you to review

the supplemental slides we posted to the site last quarter, as well as the non-GAAP reconciliations

included in today’s release that illustrate our non-GAAP results as if the news lease accounting standard

had been effective in Fiscal ‘19. If the standard had been effective last year, it would’ve impacted

adjusted operating income by approximately $14 million.

We estimate that it’ll impact adjusted operating income in Fiscal ‘20 by $15 million to $16 million. While

the standard reduces reported earnings, both the underlying cash flows of the business and our analysis

of real estate opportunities on a discounted cash flow business remain unchanged. 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 standard’s impact.


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Now, on to our first quarter results, our top line grew 19.6% to $306.3 million, which was slightly above

our outlook due to favorability in Fiscal 2020 store weeks versus expectations. For the quarter,

comparable store sales decreased 0.8%. As Lee mentioned, weather was a hurdle for us in Q1.

Approximately 75% of our stores are located in areas significantly impacted by weather in the first half of

the quarter. Although comps improved in the back half, weather didn’t rebound as much as we expected,

and promotional activity in this space intensified. As a result, we took some unplanned markdowns that

drove nearly 100 basis points of gross margin pressure in Q1.

Gross profit increased 3.3% to $88.1 million while gross margin rate decreased 450 basis points to

28.8%. Adjusting for the new lease standard, gross margin decreased 360 basis points on an apples-to-

apples basis. In addition to the 100 basis points of incremental markdowns, costs associated with

opening our second distribution center were a headwind of 115 basis points or 35 basis points favorable

to our outlook. In line with the expectations we shared with you in March, the balance of the Q1 gross

margin decline was due to non-product costs and nearly 50 basis points of deleverage from our Fiscal ‘19

and ‘20 sale-leaseback transactions.

Adjusted SG&A increased 210 basis points to 24.8% of net sales, primarily driven by the timing of

increased store label expenses within the year, preopening expenses due to opening our new stores

earlier in Fiscal ‘20, and increased advertising to support our growing brand awareness. Adjusted

operating income declined to $10.3 million, and adjusted operating margin contracted 570 basis points to

3.4% due to the factors I just mentioned.

Overall, our adjusted operating margin came in slightly below our outlook of 3.5% to 3.7%. Product

margin contraction more than offset favorability in second DC costs and advertising expenses, the latter

of which is due to timing within the year. Interest expense increased to $7.8 million due to higher interest

rates and increased borrowings to support our growth.

We recognized $4.2 million of income tax expense in the first quarter with a 23.4% effective tax rate and a

25% adjusted effective tax rate. In Q1 last year, our adjusted effective tax rate of 0.6% included $4.2

million of tax benefit related to stock-based awards. In Q1 Fiscal ‘20 we actually had nominal tax expense

related to non-IPO exercises. As a reminder, our adjusted metrics exclude both the cost and the tax

benefit of stock options related to our IPO. In total, we delivered $0.03 of adjusted EPS in the first quarter

of Fiscal ‘20.

Turning to our outlook, we’re revising our expectations to reflect a lower sales outlook, incorporating a

soft start to the year, and recent industry trends; higher-than-expected markdowns due to Q1 softness;

the recently announced 25% tariffs and their expected margin impact; and higher freight costs year-over-

year. In terms of the top line, we now expect net sales to grow 18% to 19% to a range of $1.37 billion to

$1.39 billion, including full-year comp store sales of plus or minus 1%. We expect an acceleration in the

two-year comp between the first-half and back-half of the year due to the merchandising and marketing

drivers we described.

As a reminder, our previous adjusted operating margin guidance of 8.5% to 8.7% incorporated 90 to 100

basis points of headwind from the second DC, but was otherwise flat to prior-year margins. Given the Q1

cost favorability, we now expect the second DC will be a full-year operating margin headwind of

approximately 80 to 90 basis points or $0.13 to $0.15 of EPS. From a cadence standpoint, the dollar

impact of the second DC is similar across the first three quarters before decreasing in Q4 due to the

benefit of lapping its preopening costs in Fiscal ’19 SG&A and the realization of freight savings. As we’ve

said before, once fully ramped we expect the second DC to generate meaningful transportation

efficiencies over time.


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Versus our previous guide, our revised adjusted operating margin outlook of 6.6% to 6.9% reflects

approximately 190 basis points of incremental pressure; about 100 basis points relates to lower-than-

expected product profit in Q1, the impact of markdowns primarily in Q2 and less so in Q3, and the new

tariff exposure that Lee described. Fixed costs deleverage on lower sales expectations and higher-than-

expected freight rates make up the balance of the headwind.

We are now assuming $33 million of interest expense and an effective tax rate of approximately 23%

before considering the tax impact of certain stock-based compensation events, resulting in $44 million to

$48.5 million of adjusted net income. Based on approximately 66 million diluted shares, we expect

adjusted EPS of $0.67 to $0.74.

As I mentioned last quarter, we expect that Q4 will be our strongest quarter due to the timing dynamics of

the second DC, new store preopening costs, non-product costs in gross margin, and the lapping of

significant tax benefits from stock award exercises in the first three quarters of Fiscal ‘19. As a result, we

expect approximately two-thirds of our Fiscal ‘20 adjusted earnings per share will be generated in Q4.

Drilling down to the second quarter, our comp store sales outlook of plus or minus 1% incorporates tough

weather at the beginning of May and the subsequent recovery in two-year comp trends. We plan to open

13 stores versus 9 last year, and generate $340 million to $345 million in net sales, representing 18% to

20% net growth year-over-year. From a profitability standpoint, we are assuming a gross margin decline

of 320 to 360 basis points.

First, we estimate approximately $3.5 million or 100 basis points of incremental costs on the second DC;

second, we expect 100 basis points of product margin pressure driven by increased markdowns, primarily

related to seasonal inventory. Store level occupancy costs will increase about 50 basis points from sale-

leaseback transactions that occurred in the prior 12 months. The remainder of the gross margin decline is

triggered by fixed cost deleverage on lower sales growth year-over-year, particularly in occupancy and

depreciation. We expect Q2 SG&A rates to be roughly flat as preopening expense leverage offsets our

advertising investment.

All-in, we expect 6.2% to 6.6% adjusted operating margins and $9.5 million to $11 million of adjusted net

income. Assuming approximately 66 million shares outstanding, our Q2 adjusted EPS outlook is $0.14 to

$0.17.

Finally, we remain on track to open our largest new store class to date at 36 gross and 32 net new stores,

representing 18% growth for the year. We plan to open two-thirds of these stores in the first half of this

year, and we now expect roughly 90% of our Fiscal ‘20 mix will be second-generation locations and

purchases. As a result, our assumptions for net capital spend have decreased slightly to $200 million to

$220 million. We continue to pursue efforts to reduce our capital spend and improve our free cash flow

profile by exploring and build-to-suit and buy-to-suit financing alternatives, managing our new store

capital outlay and focusing on procurement and payment terms.

The depth of our pipeline, strong productivity of our new stores, and strategic opportunities we have in

both merchandising and marketing give us a lot of confidence in our business and the 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. Overall, we weren’t pleased about revising our full-year guidance, and I’m disappointed

that we broke our streak of 20 consecutive quarters of positive comp store sales. However, we’re moving


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quickly to get into a cleaner inventory position in the second half of the year and deliver more freshness in

the assortment. Giving customers a compelling value is at the core of what we are and we’re committed

to our everyday low-price model as we continue to expand our market share. We’re also making

necessary infrastructure investments in Fiscal 2020 to support our foundation and position us for the long

runway growth ahead of us.

Finally, I’d like to thank our team members for their continued hard work and dedication to these

initiatives. Their support drives our business forward every day.

With that, Operator, please open the line to questions.

Operator:

Thank you. We’ll now be conducting a question-and-answer session. If you’d like to ask a question,

please press star, one on your telephone keypad, and 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 keys. One moment please while we poll for questions.

Thank you. Our first question today comes from the line of John Heinbockel with Guggenheim. Please

proceed with your question.

John Heinbockel:

Lee, a couple of things. Let me start with, though this not a comp story, right, there’s been last year-and-

a-half a lot more variability than we may have seen before. Do you do think something has changed in the

microenvironment or the competitive environment, or—because I don’t detect anything that has changed

in your stores? Maybe touch on that because I don’t know if it’s just solely—you know, we get these

macro air pockets in weather or has something changed in the environment you’re looking at?

Lewis L. Bird, III:

Well, John, weather was a big headwind for us in three out of the last four years for Q1, and so we’re

more susceptible to it based on our product mix. With a brick-and-mortar retailer, with seasonal products

you are going to be more susceptible as well. That was a big issue. I would say retailers and more online

penetration have less impact in this. We saw that in Q1 with weather; we saw that in the air pocket in Q4.

So, that is an issue with our footprint, but we also value our footprint; we think that’s a competitive

advantage—we can have the largest assortment in-store. We are, though, positioning ourselves for the

omnichannel test in the back-half of the year and that helps us. These situations help us think through

those requirements to our business and what’s possible and what’s necessary to meet the needs of our

customers to be able to find the largest assortment at the best prices. We’re still super pleased with our

pricing. We’ve got the best prices in the industry against everyone, brick-and-mortar and online, but we’ve

got to be mindful of these situations, especially when weather hits you this way.

I would also say that recent industry trends have been softer. We hadn’t really felt it until Q1, I mean,

honestly, and we had plus-five comp in Q3 last year, so don’t forget that. What I’d say is we hadn’t felt it

until this quarter. What I’d say is that that was a 12% two-year stack in Q3 and an 8% stack in Q4. I would

say that we are pleased with the recent trends that we’re seeing in our business now in Q2 now that the

weather has improved, but we do want to be mindful and realistic about what we’re seeing in the

business. What I’d say is I’m pleased of our position as a value player. That puts us in the best position in

situations and times like this. We did grow 20% in the first quarter. That means we’re taking share, and I

like that, and we still see lots of opportunity in our business from marketing analytics to help us get


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sharper; the loyalty and credit card we’re just starting to get benefits from it from understanding our

customer better; and there’s still a lot of opportunity in our merchandising to get stronger and better.

I still see opportunities in our business. I don’t want to say that it was all weather in everything, but I would

tell you, it was a very difficult weather period for us so we have work to do on our end as well.

John Heinbockel:

It sounded like, at least when you thought about the 25% tariff last year, that you thought there was some

pricing flexibility you had. Is what’s changed, the fact that the comp cadence has been choppier and you’d

rather not take pricing in that environment, or is there something else that—because I think that’s a little

bit of a change in your thinking, no?

Lewis L. Bird, III:

Well, it wasn’t a change in our thinking. For the first 10% we did take some prices and we—because we

did do a whole market—and as you know, we do comp shopping every month. We do it by department,

and each of our teams look at the competitors, not only monthly but quarterly. We look at where our price

positioning was, and we felt like there was price opportunity there, slight price opportunity, so we took it.

But we took it as far as we could and maintained our low price leader position.

Now that the tariffs have gone up, we don’t believe we can take more price to continue to be the low price

leader, so we’re going to have to and we are working directly with our supply base, even as we speak, to

go get cost savings to help mitigate some of that. But some of that we’re going to have to get pinched

with in our margin to maintain that position. It’s just a decision on our part, in part too because of our

comps. We certainly need to drive sales, and to do that over the long-term we know the model for us is

having the lowest prices and the largest assortment in the industry, and we felt like we’ve gone as far as

we could with price with the last movement.

John Heinbockel:

Okay. Thank you.

Lewis L. Bird, III:

Thank you, John.

Operator:

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

questions.

Jonathan Matuszewski:

Great. Thanks for taking my questions. I guess just could you help us better understand the thinking

behind the current 2Q comp guide? I may have missed it, but is that based on trends quarter-to-date, or

does it assume an improvement from quarter-to-date trends? I guess, similarly, for the revised annual

guide, part of that is, of course, driven by the late 1Q results, but any thinking in how that down one to up

one forecast was formed; is that baking in an even more intensified competitive landscape, ahead or does

that assume current category trends persist throughout the year? Any more color on kind of 2Q and the

full-year comp guide would be helpful. Thanks.


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Lewis L. Bird, III:

Sure, Jonathan. I’ll cover Q2 and I’ll let Jeff cover the full-year guide. For Q2 we had weather in the first

few weeks of the month of May, we won’t get that back, so we’ve assumed that that’s just gone. But we

have seen really nice progress since then, since the weather rebounded. It’s just been a really tough

weather season for us, honestly, for the first half of Q1 and then the first two weeks of May, and we have

a disproportionate concentration of seasonal during that time. But we have seen nice rebound in our

business since that first two weeks of May. We’re encouraged by that. What we’ve assumed in our

guidance is we don’t get it back, but the recent trends will continue until the end of the quarter.

When I think about where things were overall, I do like where the rebound has been lately, but we just

wanted to be realistic about the quarter. Then for the year, Jeff?

Jeffrey R. Knudson:

Yes. Then on a full-year basis, as we said, we do expect an acceleration in our two-year stack

performance in the back half. We are very confident in our strong fall and holiday assortment and then we

also have the reinventions in play in the back part of the year in lamps, entertainment, textiles that Lee

also mentioned is his prepared remarks, so there would be some slight acceleration in the two-year

trends into Q3 and Q4 implied in that guide, Jonathan.


Okay. That’s helpful. Then just a quick follow-up for the BOPIUS pilot coming up in 4Q; is there anything

baked into your assumption for that kind of test? I guess as we think to maybe when it potentially gets

more rolled out next year, how do you kind of foresee that impacting overall comp trends and consistency

and things like that? Thanks.

Lewis L. Bird, III:

Sure. All the costs associated with the tests are built into our guidance, and we’re not assuming any

upside. It’s a small test. We’re talking about roughly 30 stores, and it’s in the back part of Q4, so it’s not

an impact on the top line, but the costs associated with being prepared for that are already built into our

guidance. What we really want from buy online, pick up in store is the more seamless access for our

customer. We think it might even help us insulate just a little bit from weather and that’s a prudent thing to

do. But as we’ve said before, the only reason and way that we would do this—and the test will help us

tease this out—is, is this going to be a good thing for our business and our business model. It’s not just a

revenue play, it’s actually to make sure that it actually helps protect earnings and doesn’t harm earnings,

and also creates better access for the customer because we still want to deliver low prices; we still want

to create a treasure hunt environment, whether that be online or in stores; and protect our financial

returns.

In the past number of years, we’ve laid the tracks for this. This is not something we’re just suddenly

coming up with. Over three years ago we put the Demandware platform online, put all of our products

online; we put product recommendations out there; inventory visibility rolled out earlier this year, actually

quite early. So, all the test’s pre-work has been done, has been invested and that’s in the guidance, and

we’ll see. We’ll know from the test. What we’re going to do is we’re going watch it for the first part of next

year; we’ll let you know how that test goes; and then if we like the results and our customer is

appreciative of it, then we’ll roll it out.



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That’s helpful. Thank you.

Lewis L. Bird, III:

You bet. Thanks, Jonathan.

Operator:

Our next question is from the line of Brad Thomas with KeyBanc. Please proceed with your questions.

Brad Thomas:

Hey, good morning. Thanks for taking my questions. I wanted to ask about same-store sales. I guess just

thinking about the last five years you guys have just done a great job of driving comps. It does feel like

the industry has really gotten a lot softer; this doesn’t seem to be just an At Home issue. But I guess my

question is, Lee, how do you think about positioning the business and you change maybe the investments

you make, how you spend, how you make decisions if the new normal for At Home is perhaps slightly

negative to slightly positive comp story over the near term rather than that more consistent comp store

that we’ve seen in the past? How might that change the investments and decisions you’re making every

day?

Lewis L. Bird, III:

Sure. Well, first, what I would say is we’re continuing to focus on delivering low single digits same-store

sales growth quarter in and quarter out. We wanted to revise our guidance to give you what we’re seeing

in the business and to be prudent with our outlook. We’ve always tried to be as transparent as we can

based on the situations we’re facing.

I can’t overemphasize the impact that weather had for us. The first part of the year is more weather

sensitive than the rest of the year for us. Overall, if you look at our comps over the last four or five years,

you’ll see Q1 and Q2 have been more choppy that the back half of the year. There’s work that we can do

to help that, though, I would tell you that, so we’re focused on that. We have seen an intensifying effort

around promotions in the industry and we think that the industry is getting softer. But we actually grew

20% at a time where maybe the industry was softer, so we are taking share. But in a world where there

may be less growth in the industry and it’s a share game, we’re focused on gaining share. There are

things that we can do to do that, but remember that we’ve always committed to be a low single-digit comp

model for all the reasons we’ve explained in the past.

We’re focused on our reinventions, our assortments, refining our media mix, and leveraging the loyalty

program that we put in place. I would say if you think about, if the industry and the economy were to be

less certain, I’ll put it that way, we’re going to be very prudent about that. We would be thoughtful about

that. We don’t see that. We’re just letting you know that the industry is a little bit softer and more

promotional than we’ve ever seen, and as a result of that, we’re going to be more mindful of that in our

guidance, but it’s not going to stop us from being on the offense because we want to take share during

this time.

Brad Thomas:

Great. Then just a housekeeping on tariffs, could you just remind us for this year what percent of your

purchases you think are exposed to the List 3 tariffs underway right now, and what that might go up to if

List 4 is enacted?


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Lewis L. Bird, III:

What we said along the way is we’ve shared externally that more than 50% of our products are imported.

We’ve shared what the impacts of each of those tariffs have been thus far. In the first round of tariffs

we’ve said we’ve covered it ourselves through a few slight price increases. This round of 25% obviously

was a big move in tariffs and we didn’t want to pass that onto our customers since we’ve built that into our

margins. What I would say is I’m also pleased with our progress on direct sourcing to help us offset some

of these increases and go other places for sourcing.

One thing that I mentioned in my prepared remarks was the fact that we’ve pulled in a few textile

reinventions in the back half of the year. That’s because of the progress we’ve made on direct sourcing.

Those reinventions in top of bed are actually direct sourced items that will come into our assortments

faster at a lower cost to help us be price competitive. We’re mindful of what the tariffs are going to do;

we’re mindful of our footprint. We’re working on that and we’ve tried to be as thoughtful in our guidance

with you as possible. Let’s you know that that 25%, from 10% to 25%, has eclipsed our margin

performance for the year.

Brad Thomas:

Got you. Thank you, Lee, and good luck.

Lewis L. Bird, III:

Thanks so much, Brad.

Operator:

The next question is from the line of Zach Fadem with Wells Fargo. Please proceed with your questions.

Zachary Fadem:

Hey, good morning. First question for Peter, appreciate the update on shrink, but curious if there’s any

clarity you can provide on the specific drivers of the issue, whether the impact was more at the store level

versus the supply chain level, and then what you’re doing to mitigate the impact going forward. Then also

with respect to the numbers, could you just talk about what you’re baking in for the impact of shrink in the

gross margin guide for Q2 and the rest of the year?

Peter S. G. Corsa:

Yes. Sure, Zach. I’ll start with the shrink analysis that we did. We did an extensive analysis. We brought in

a cross functional team across both the field organization and the corporate organization and, really,

there’s no obvious drivers that we saw. We suspect that it’s the elevated inventory that contributed to that

so we went back and we doubled down and put our field operational focus, and we added a processes,

added more prep for the counts and getting ready than we’d done in the past. We’re still processing our

recent counts, but what we’re seeing is encouraging and our overall efforts seem to be working.

Jeffrey R. Knudson:

Yes. Zach, this is Jeff. Then on the outlook, our outlook on shrink hasn’t changed from our last call. Once

we took the elevated shrink hit in Q4 of last year, that has a percentage of sales that remains consistent

with our outlook for Fiscal Year ’20. As Peter said in the counts, we counted over 40 stores in Q2 and


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those counts were consistent with our expectations and we still feel good about that percentage of sales

for the full year.

Zachary Fadem:

Okay. Then once again you touched on the BOPIUS pilot. Curious if you could talk about logistics there,

whether you think this is something you could actually execute without a margin drag. Then just bigger

picture on the category, curious if there’s any indication that your customers are pivoting even more

online; any thoughts on the evolution there?

Peter S. G. Corsa:

Sure. Zach, on the BOPIUS test, the way that we’re going to operate and execute that is an in-store

model. Our intention is that will not hurt gross margins and operating margin dollars. That’s our intention.

That’s how we’re measuring it. We’re expecting this to be a revenue driver to help our customers have

more access to our assortment without having to shop the entire store and commit to coming in the store

because they can commit some time online to pre-shop and order that way and then swing by and pick it

up. Our store labor then will have to do the picking and then we’ll reserve the product for them to come

and pick that up. We believe, and our intention would be, that that would create extra visits (phon) and

that would create more revenue. Even with the incremental labor in the store, that the margins to dollars

won’t be hurt, we hope it’ll accretive but what we’re essentially saying is we want to protect the downside,

that it won’t be dilutive that way either.

When I think about evidence of customers pivoting online, I’ll remind you we grew 20% in the first quarter.

If the industry is choppy right now, we’re taking the share. Maybe our comps were—and they were—

slightly negative, 0.8%, we still grew 20%, and the overall industry didn’t grow. From our indication, the

industry traffic certainly in the overall industry probably could’ve been slightly down. The traffic was down

from what we have heard (phon) from other indicators in the industry, but our indications are the industry

itself was maybe down flat to slightly down, but we grew 20%. We grew share.

We do know that people—when we do customer research, they all pre-shop online. That’s why our

assortment is our online. That’s why I like our competitive position versus other players’. Some of the

other discounters in our space don’t even have an online assortment. They just have in-store assortments

so you don’t even know what’s there. Now, there’s inventory visibility so they know how much is there to

make it worth your trip.

I’m really pleased with our competitive positioning. I think the test will help us see if we add more value to

our customer without any harm to our shareholders.

Zachary Fadem:

Got it. Appreciate the thoughts.

Peter S. G. Corsa:

Yes. Thanks, Zach.

Operator:

The next question is from the line of Chuck Grom from Gordon Haskett. Please proceed with your

question.


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Chuck Grom:

Hey. Thanks. Good morning. Just on the change to the top line guide of low singles to now flattish, just to

play Devil’s Advocate, it still implies a pretty big step up from the two-year (phon) to get there. I’m just

wondering, Lee, if you can just dive into some of the drivers supporting that improvement because there’s

certainly a lot more negative macro factors out there than positive. Then just as a follow-up to that for Jeff,

can you help us with the sensitivity on margins? If the comp guide were to come in a point below what

you’re modeling now, what can that do to the margins for the year?

Then my second question is just with regards to the total gross margin guide. You changed it by about

170 basis points. Can you dissect that between the markdowns you took in the first quarter and what your

expectations are for 2Q and 3Q, and then also what the impact is going to be from the List 3 change?

Thanks.

Lewis L. Bird, III:

Okay. Chuck, that’s a lot. We’ll parse it out amongst our team here to answer the questions. The first

one—and if we miss them, then just let us know, and we’ll make sure we answer them on the call right

that.

The first one was the confidence in the comp guide for the year based on Q1 and the first part of Q2,

what gives us confidence there’ll be an acceleration, if I get that right, acceleration in comp trend; did I get

that right?

Chuck Grom:

Yes. That’s correct.

Lewis L. Bird, III:

Okay. What I would say is when we look at the outlook, now that the weather is behind us, what we’ve

assumed in the outlook for the rest of the year is the trends won’t be much different than what we are

experiencing right now. We’re not looking for this back half big hockey stick, the trends inside of our

business overall. We also have got things loaded for us for the back half of the year around reinventions,

so we have more in the back half than we had in the first half.

We also know that we’re known as a holiday headquarters for Halloween, harvest, and Christmas. That’s

less weather sensitive product as well and less weather sensitive time of year. We also know that we’ve

got really nice traction in some areas of our marketing efforts, and we believe that those adjustments that

we’ll make in the back half of the year will prove to be effective to help us outperform versus some of the

performance in the first part of the year thus far.

That’s what we’re thinking of how we’re going to improve from what we said in the first part of the year.

Jeff, next question?

Jeffrey R. Knudson:

Yes. Jack, on the leverage point, what I would say is if you think about the 190 basis point change in our

adjusted operating margins, about 100 of that is coming from gross profit. I’ll come back because I think

that was your third question on the piece parts there. The remaining 90 basis points was about 50 basis

points in fixed cost deleverage and the remainder coming in increased domestic freight rates. If you think

about it, we had about a 2 point comp change at the midpoint that then drove that 50 basis points of


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deleverage, so that should give you a good sensitivity on where we can leverage at that low single digit

comp.

On the 100 basis points on the margin side, I would say that roughly about half of that is impacted by

seasonal; that’s the impact of the Q1 100 basis points as well as the Q2 piece that we see. The 100 basis

points in Q2 is about 50 on the full year and then the remaining 50 basis points is split pretty equally

between the tariffs and then the markdowns we’ll be taking into Q3.

Chuck Grom:

That’s very helpful. Then just, Lee, I mean, I'm not sure if you want to talk and give a little bit more

granular on May and into June here, but just (inaudible), it might help you guys just to frame out maybe

what you exactly saw in the first couple of weeks of May and then what you’re seeing now just to lend

some confidence in that back half for you (phon).

Lewis L. Bird, III:

Yes. I can just tell you the first part of May was tough weather. I mean, you can read the weather reports;

you can talk to people around the whole Midwest. Remember, we have a very large Midwest and

Southeast footprint. We opened our first store in California and our first store in Washington state in the

past three months. The middle of the country got a whole lot of weather. Check about all the flooding,

check about tornadoes and all that, and the first weeks of May had the same experiences as the first half

of Q1. We couldn’t avoid it. Our footprint is just what it is.

What I would tell you is since that time we like where the trends are. We like where we’re performing on a

one-year and two-year stack. When we think about the rest of the year, we expect ourselves to perform at

those levels.

Chuck Grom:

Okay, guys. Thanks very much.

Lewis L. Bird, III:

Thank you.

Peter S. G. Corsa:

Thanks, Chuck.

Operator:

The next question is from the line of Curtis Nagle with Bank of America Merrill Lynch. Please proceed with

your question.

Curtis Nagel:

Good morning and thanks for taking my question.

Lewis L. Bird, III:

Good morning, Curtis.


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Curtis Nagle:

Good morning, Lee. Just out of curiosity, would you guys consider—like is this volatility in results

(inaudible) continue? Sorry about that. Can you hear me, guys?

Lewis L. Bird, III:

Yes. We can now.

Curtis Nagle:

Sorry. Okay. Great. My question is just given if volatility in results does continue, I guess given the

growing leverage, given what’s going on with overall industry growth, would you consider cutting back

store growth?

Lewis L. Bird, III:

Yes, Curtis. What I would say is we’re disappointed to break our 20 consecutive quarters of same-store

sales growth. That’s one quarter and it’s 0.8% negative. Obviously, this is—and if you think about school,

Peter, and I talked about this this morning—this is like a midyear grade; this isn’t the full year. We’ve got a

lot of the year left. We only measure ourselves on—we give interim updates on quarters, and we measure

ourselves on years, and we’ve got a lot of the year to go. If I saw that new store performance was waning

at the same time that comps were choppy, that would be different. The new store performance is doing

fantastic. Its’ meeting our expectations. Our teams are opening up the stores even earlier, that’s how we

were able to outperform on our sales line in that area to help offset the miss in comps.

Our new stores are performing very well. We like the ROI on those. We like their cash flow playbacks on

those stores. We had a negative 0.8%, not worse than that, and it’s only in one quarter. We hope you

think about measuring us, not on quarters but on years and multi-years. We told at the beginning of the

year this is going to be a year of non-linear investments. We were going to have to put some investments

in for a DC; we’re also going to put some non-linear investments in around (phon) marketing to help drive

brand awareness because that was our biggest opportunity. We’ve said that was one of the biggest three

areas of opportunity to grow this business and take this business from 180 stores to 600 stores.

We’re doing that, and you’d want us to do that. You’d want us to think about the long-term and the short-

term at the same time. Obviously, we’re disappointed with our short-term comp performance, me more

than anybody. I mean, I’ve been for 6.5 years. This is the first quarter that it’s just been that bad. I take

that personally. Our team does. Peter and I have been here the longest, and we take this very personally.

We’re working on it. We feel really good about where the trends are today. We look forward to updating

you over the course of this next year, along the way spending time with you, even (phon) helping you see

more deeply into our business. But I would tell you it was one quarter, it is a tough quarter, we’ve given a

more realistic guide to the year to be more thoughtful, but we really still like our new store performance.

We’ll look at it over the course of the year, and then we’ll continue to review it. We’ll be thoughtful about

those decisions, and if we see something that we don’t like over the course of multi-quarters to the point

of the year, then obviously we’ll be more realistic and more thoughtful about that.

Curtis Nagle:

Got it. Where should we leverage to be by the end of the year? I guess what’s your ABL capacity at this

point?


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Jeffrey R. Knudson:

The ABL capacity is consistent with where it’s been, and the availability will all be in the Q later today, but

it’s not any demonstrably different that where we were at the end of the year. Then from a leverage

standpoint, obviously with a takedown in the EBITDA, it’ll tick up a little bit towards the end of the year,

but, still, we would expect it to be just slightly above three times.

Curtis Nagle:

Okay. Thank you very much.

Lewis L. Bird, III:

All right. Thanks, Curtis.

Operator:

The next question is from the line of Anthony Chukumba with Loop Capital. Please proceed with your

questions.

Anthony Chukumba:

Good morning. Thanks for taking my question. You talked about the fact that 75% of your stores were

affected by bad weather, and you’re not the only people talking about weather. I guess my question was

what was the comp performance in the 25% of the stores that were not impact by weather? I’m assuming

those comp positive, but if you can give us any color in terms of the magnitude even just directionally as a

comp of those unaffected stores, I think that would be helpful. Thank you.

Lewis L. Bird, III:

Anthony, this is Lee. There were hundreds of basis point improvement versus the stores that were

affected by weather. The nice thing is in retail you get a lot of data. We can look at stores’ performance by

region by weather area, and we can see where stores were not affected by weather versus the stores that

were. We saw hundreds of basis points improvement where the weather was better and more appropriate

for that time of year.

Anthony Chukumba:

Got it. That’s helpful. Thanks so much.

Lewis L. Bird, III:

Thanks, Anthony.

Peter S. G. Corsa:

Thanks, Anthony.

Operator:

Our next question is from the line of Sumit Sharma with Berenberg. Please proceed with your questions.


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Sumit Sharma:

Hi. Thank you for taking my question. Just clarifying the last comment, did you say hundreds of basis

points? But my main question is with regards to BOPIUS. I guess you mentioned that your products are

on demand wear and your customer pre-shops a lot. We also know that you guys get a higher share of

site than some of your peers. The operations and the logistics aside, what could be your biggest concern

on the BOPIUS program or test? I'm just trying to figure out what could stop you from rolling it out.

Lewis L. Bird, III:

Sure. Okay, Sumit. On the first one it’s hundreds, plural hundreds, basis points improvement. I'm sorry if I

wasn’t clear on that. On BOPIUS, we’re going to do the test. For us, we love our demand wear platform.

We bought that a long time ago because we knew it could potentially transect for us later. We have seen

great interest in our website and people are spending a lot of time on our website, so the visitation is

great and the amount of age (phon) views is great. They’re going not just to our site for store location and

looking at it for items, they’re comparing items, they’re spending time on the site, and then we can

actually—if you were to view that on a mobile device, we can actually see if that mobile device came in

the store, and that mobile device has a phone number, and that phone number then is your loyalty

number. Then we can see if you bought. That data has been super helpful for us to see. Viewing turns to

visitation turns to a transaction. That gives us confidence that people will actually then buy online and

come up and pick it up in store because we have all that data.

The way we’re looking at it is the lifetime value the customer for buy online, pickup in store. I'm going to

make something up for a second and say—let’s say the average customer, for this customer let’s say

Bethany spends $300 in our store this year, and she comes in four times a year. Now with BOPIUS we’ll

launch her transactions so we’ll see that Bethany, our Head of IR, spent, not $300 but $400, and she

came in the store three times a year but bought online three other times during the year, swung by and

picked up; now we’ve picked up $100 in revenue. Then we’ll look at the profitability of that transaction

compared to the labor that was required and see was that an accretive transaction for us.

If that’s an accretive transaction for us and we got more share of wallet from Bethany, then, hey, this is a

good thing. But if we find out that Bethany, who used to spend $300 now without buy online, pick up in

store, with buy online, pick up in store spends $250 and visits the store only once and bought the three

other times online and those were smaller transactions than normal, then obviously that wasn’t a good

thing to do, and you wouldn’t want us to do that. We’re capitalists at heart, and so we’re going to want to

make the best financial outcome.

Obviously, we must not have met her expectations because now she’s buying less than she was before,

so that was a disappointment for the customer who would’ve been a disappointment for our shareholders.

That’s how we’re looking at it. We’ll be thoughtful about it. The nice thing about a test, in retail you have

all these stores you can test it out. We can test it out in multiple markets. We’ll let you know where those

store tests are so you can, if you want to be a part of that, and if you live in that area, you should try it out

and check it out. It’s certainly going to be something we’ll check out ourselves personally. Then we’ll let

you know how that test goes, and if it’s a good test, we’ll roll it and we’ll feel good about it.

Sumit Sharma:

Thank you for that. If I could squeeze another one in, with regards to the increased freight costs, I know

you mentioned that 90 bps of the margin squeeze was because of cost deleverage as it increased freight

costs. With the opening of the second DC, how much of that freight cost gets mitigated or offset? Another

way of asking this is how much of the freight cost has increased, and is it just logistics inflation? Was it

something that could be mitigated once the DC is fully operational?


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Peter S. G. Corsa:

Yes. This is Peter. What I’d say is in Fiscal 2019 we were really pleased because we stayed out of the

spot market, and we leveraged both our third-party volume as well as our increasing volume. With

initiatives like floor loading were able to mitigate most, if not all, of the rising freight costs that affected the

industry last year. However, we do continue to see inflation primarily on the domestic side and outbound

transportation, specifically between our Plano DC and some of our longer-run stores. Based on our

footprint and location of new stores, rates per shipment are coming in higher than we thought.

We’re continuing to see the benefits of floor loading and our second DC, but, unfortunately, increased

freight rates continue to outpace those savings. Over the longer-term we do expect that by adding the

second distribution center, we’ll benefit from having our new stores closer to the DC to minimize our stem

(phon) miles. As we add new stores to the next couple of years, we’ll allocate them between Plano and

Carlisle and make sure that we’re optimizing those stem miles. All of that has been incorporated into our

guidance going forward.

Sumit Sharma:

Thank you so much.

Lewis L. Bird, III:

All right. Thanks, Sumit.

Operator:

Thank you. We’ve reached the end of the question-and-answer session. I’ll now turn the call over to

management for closing remarks.

Lewis L. Bird, III:

All right. Well, thanks again for joining us this morning. We’re excited about the opportunities in front of us

and the long-term potential of this business and the long-term growth potential as we look forward. We

look forward to talking to you in the coming days and weeks as well. Take care.

Operator:

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

participation.


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