Company Name: At Home Group Inc. (HOME) Event: ICR Conference 2018 - - PDF document

Company Name: At Home Group Inc. (HOME) Event: ICR Conference 2018 Date: January 8, 2018

John Heinbockel: Analyst, Guggenheim Securities, LLC Okay, we're going to get started. My name is John Heinbockel from Guggenheim Securities. I’m very pleased to introduce the management team of At Home this afternoon. Not public a very long time, but I think it was very clear in the time that they have been public is that this is a uniquely positioned somewhat disruptive business right in a challenging sector, but a business that is taking share doing so profitably and doing so with a very interesting model. We're going to talk to or hear from the architect of that model, Lee Bird, the CEO of the company; and also CFO, Judd Nystrom; Bethany Perkins is here as well. So with that let me turn it over to Lee. Lewis L. Bird: President, Chairman & Chief Executive Officer Hello everybody. I have the opportunity to talk a little bit about our company. So I'm looking forward to it. First you get the legal disclosure just to kind of get that out of the way, the Safe Harbor statement. So let's talk about the company. So it's a highly differentiated retail concept. It's only home décor, it's in a big box over 100,000 square feet, 50,000 unique items, it's for all styles, for every room and budget. You can see on the right hand side the images of the type of styles that we cover in our store. If you think about the assortment itself, low prices – lowest prices in the industry, we've got just a fantastic operating model, low cost operating model. If you think about how we get that low cost operating model, low labor, really low real estate cost gives us great economics overall. Cash on cash return is very strong, less than two year paybacks. And the real estate opportunity is from a 149 stores to over 600 stores. The way that we win, if you think about our model overall, we win first and foremost by having the right leadership team in our company. We’ve got leaders that have been at other retailers that are $4 billion or more in terms of revenue. So they've seen scale retail before and each of them have run that function somewhere else when they came to us. And we take that leadership team and we built the models that would help us to be differentiated. First and foremost about breadth and depth of assortment, we've got 20,000 new items in our store, 50,000 SKUs overall- a whole lot of units- so something new 400 new items every single week in the store.

If you think about overall from the price standpoint, our price is the lowest in the industry. We're always going to be lower than other people’s sales prices. I’ll show that to you in just a little bit. About $15 average retail, $65 basket. I talked about the labor model overall, talked about the real estate cost being industry-leading low real estate cost, because we look at a second generation model, so we take other people's boxes. So think about when other retailers are closing like this past week retailers announced store closures. We can take those closures, be selective about which ones we’re interested in based on our market plan and then move in with great economics and have a really strong payback on those stores. The financial performance has been strong. We had 20% revenue growth for the past five years. We have about 20% earnings growth at the store level, Store level EBITDA. About 15% EBITDA growth at the corporate level, but that’s because we had some non-linear investments in the first couple of years while we are a private company to help us scale, to build a platform for us to grow. But since we’ve been a public company and actually a year before public company so for the past 2.5 years or so have been growing earnings faster than sales, so well over 20% as well. When we went public last August – a year ago August, so about 18 months ago on the New York Stock Exchange, we committed to five key metrics that we were going to come back and report to on a regular basis, store growth, comp store growth, operating income growth, net income growth. And you can see the commitments overall from a high teens store growth, we’ve been able to deliver that or higher. From a comp store sales growth, we said low-single digits, last year was about a 4%, this year to Q3 was a 7%, – about a 7%, 6.9% comp. So you can see, we've got – we're getting stronger. Overall sales growth we've said high teens, we've been growing in the low-20%s. Our operating income growth we had committed to about 20%, we've been in the mid-20%s. And net income growth we said about 25% net income growth, we’ve been growing in the mid-40%s. So we've delivered on each and every one of those targets in fact exceeded those targets since we've been public. So what makes us special? What makes this company special and – and this business model special? First and foremost, we have got a great industry. Overall it's $200 billion in size, so nice size market. It’s growing about 3% a year. It's highly fragmented too though. If you look at who's playing in the market, take Wal-Mart and Target, they're about 18% of the market, take them out because they've got a little bit of home décor in a lot of stores. The pure play folks after that are low – mid-to-low single digits in terms of share, so highly

• fragmented. You don't have to take anybody out of the industry to gain share or grow your

business, but the people that are growing are the value players. And that's where we play especially, we lean into value. And the online players Wayfair and Amazon are only about 5% of the market. So it's a lot of brick-and-mortar performance and it's really around value that's winning.

We've asked a customer how – what were you looking for in home décor? What's the most important things that you're looking for from a retailer, whether that be online or in-stores? The first and foremost was price. So they always said price, then they want assortment and then they want to see, touch and feel it. We're talking about accent pieces around primary furniture pieces in the home. And so they want to be able to see it, make sure it all matches. And we offer that in our store with 20,000 new items in the store. We got $15 average retail, $65 basket, so we're talking about very low basket value overall, which has been relatively flat for the past couple of years. We've been able to offer more and more value, more items in the basket the past couple years. So we're offering more and more value. And this allows them to get what they want the first time without any hassles, no commissioned sales force and they can have a treasure hunting shopping experience and then take it home today. We have a low brand awareness though. We – the company that I inherited was named Garden Ridge, we rebranded it about a year later to At Home. So the brand is only four years old this month in fact. And so we've got low brand awareness in our existing markets, 11% roughly unaided brand awareness in existing markets, so only a third of the Home Goods or a quarter of a Target. But when you ask our customers or anybody in this sector where do they intend to shop? We have the highest intent to shop. So once they know about us, they love us and want to come back. So there's an opportunity, let's just let more people know about it. So on the right hand side of this chart you can see our advertising spend. When I started we spent zero percentage of sales, no money on advertising. Once we rebranded, we started spending money against the brand. Now we spend roughly about 3% of sales on the brand, build brand awareness, mostly in digital media, but also we just launched a TV campaign this past year just to get the word out about

• ur brand. So huge opportunity with that.

We win on price. Every single day we focus on being a low-price leader. Here's just a couple

• examples. And we're below everybody at the sales price. So some people say can you beat the
• nline players? Well, here's a couple examples. In furniture, for example, Amazon just launched

the Rivet brand just recently. And our prices are half of the Rivet price for this example, for this

• sofa. If you also consider their entire assortment, we're at least 30% lower than the Amazon
• price. On the right hand side, you can see the Wayfair umbrella. You can see we're well below

the Wayfair sale price. The top selling barstool for Frontgate, we're half of the sales price for that front gate barstool at their sale price. We're half of that Pier 1 pillow as well. We're a quarter of the West Elm price for that table. And if you look at the mirror, we're about a third of the price of the Target price. So we focus on being the low price leader, every day low price. What's winning in retail, you just saw the Floor & Décor presentation, they’re just killing it in retail, other players that are winning in retail are the value players. So they're growing plus 20%. We're growing plus 20%, very few people are growing at that same. There’s the two of us and there's other people in the mid-teens and after that there's some single-digits, but the

• verall retail index, you can see is less than 5%. So value is winning. So we win on price we are a

value player, we've got a huge opportunity from a scale standpoint. So how we going to grow? Store count, first and foremost. We've got 149 stores in 34 states. We've been growing a little over 20% unit growth over the past five years. So we have 149

• stores. We are only about 25% of full potential though a ton of whitespace to continue to grow.

On the right hand side, you can see the chart that shows the map of the United States. That map shows where we've opened stores, different colors show different years, so two years ago,

• ne color, last year the previous color. And then also this past year, you can see quite portable.

We've had proof points for example at D.C. two years ago and then Philadelphia area this past year and then we're going to in the New York metro area this coming year. We use those as proof points for example. So it's really portable, works in every single market that we've

• pened up stores.

The stores make money from the time they open up. So $5.5 million is the performance of a leased store, $7.5 million in its first year sales, 25% four-wall EBITDA and cash flow paybacks are two years or less. You make over $6 million in revenue in that first year in a store on average when you combine those two, that's up from $4 million just when we started about four years ago and we make $1.8 million in this first year and EBITDA up from $1.1 million. So a 60% increase in performance. So while we've been opening stores, our new store performance is growing which is unique in retail, typically you don't see that type of growth and we continue to focus on opening them up stronger and then also we focus on comp store sales. Because if you don't comp, you don't have the right to open up new stores, so we're focused always on delivering same-store sales growth. We've got a multi-pronged approach to grow, product strategies include reinventions to update an entire department or a category. We do those on a very regular basis, inventory getting the right inventory at the right store at the right time, huge opportunity, we're continuing to focus on making sure that that happens. From a customer standpoint, we launched a loyalty program and a credit card program just this past fall. This is the first time we're going to have CRM data to help us really kind of be more focused the way we speak to our customer. And then if you think about the brand, I mentioned brand awareness is a huge opportunity. So we put efforts against each one of these to drive consistent performance. We've been able to drive over 5-comps every single quarter for the past number of quarters. In fact we've had 15 consecutive quarters of same-store sales growth and 14 consecutive quarters of 20% sales growth or more. I mentioned brand awareness, the opportunity to drive brand awareness and continue to drive traffic to our stores. We spend most of our advertising digitally. So we’d want to digitally enable

• sales. If you think about how people come to the decision of what they're going to do in terms
• f renovating or decorating they go online to get ideas. And so that's where we spend our

money- Instagram, Pinterest, Facebook and so on. And Houzz and those other partners are great partners. And so we bring our products to life online, if you think about even though

we're not an online player per se, we spend our money online because that's where people get their ideas. We've had huge increases in our page views from our customers. If you think about 40 million page views in the third quarter alone, significant increases on our e-mail database- we have

• ver 3.6 million people in our e-mail database and that's more than double than it was when

we went public. And we want to – what we want to do is convert those e-mail customers over to loyalty customers so we can get more information because when they become a loyalty member we get their name and their home address, their cell phone number, their birthday. So we can actually give them a birthday gift along the way. We can use that information to match up the transaction to them and then we can be more focused, in a way, to communicate. We've been really focused on the millennial customer, when I started five years ago low single-digits was our penetration from millennials overall. And now over 30% of our customers are under the age of 30, and that's the fastest growing segment. We focus on them from back to campus all the way through every chapter in their life and then it’s been a real success for us. So with that, I'll turn it over to Judd to talk about the financial highlights. Judd T. Nystrom: Chief Financial Officer Thanks, Lee. So overall, we've been on a journey over the past five years. Lee talked about our differentiated value proposition in our strategies to drive long-term growth. I wanted to give you a brief update on our financial results. And then talk a little bit about a growth algorithm and what we're focused on over the next few years. If you look at our past performance, when Lee joined the company five years ago last month, we hired an executive team. I started about a month after Lee joined. And we've been focused and committed to driving long-term growth while making the investments to continue to be able to deliver this long-term. If you look at it from a top line perspective, net sales have grown at a 21% compounded annual growth rate over the past five years, that's driven by two things. Number one driving positive comp store sales, as Lee said, we get the permission to drive to open new stores when we drive positive comp store sales. The team has been focused and committed to doing that and overall coupled with our 20% new unit growth, we’ve been able to grow our top line at a 21% compounded annual growth rate. Store level EBITDA has been growing nicely as well. If you look at it over the past five years, it's grown at a 20% compounded annual growth rate and that's while making investments in things like marketing, store labor and so forth to be able to fuel that growth. All-in adjusted EBITDA has grown at a 15% compounded annual growth rate. When you look at it over the last few years, last three years have all been 20 plus percent growth in adjusted EBITDA. We had to make some investments that were non-linear in nature before when we were a private company knowing that we were going to be growing at a 20 plus percent store count over the foreseeable future. So as a result of that we made those investments to be able to be positioned to deliver consistent growth.

So you might ask how are we doing from a comp store sales perspective, if you look at the last four years. We've driven positive comp store sales in each of the years. If you look at fiscal year 2015, we drove an 8.3% comp store sales increase and that was aided by the rebranding from Garden Ridge to At Home which contributed roughly 500 basis points to the growth. We've been able to drive a three-plus percent comp over the next several years. So if you look at fiscal year 2016, we really focused on getting good-better-best inventory in our system and improving our assortment. And as a result of that we drove a 3.9% comp for that fiscal year. Last fiscal year, we drove a 3.7% increase and that was really driven by two things. Number one, the incremental low price inventory we put in the second half of the year. And two, we started gaining traction on our marketing initiatives. And as a result of that we saw our comp store sales accelerate in the second half of our last fiscal year. When we evaluate our performance, we challenged our management team to deliver more consistent comps throughout the year if you look at it on an annual basis we've been delivering that consistent comps. And as you can see, when you look at our first three quarters of the year, we've actually driven a 5.8% comp in Q1, 7.8% comp in Q2 and a 7.1% comp in Q3. So we're really pleased with that. The outlook for the fourth quarter we provided which was a 4% comp was up from previously a 1% comp. So the nice part is as we've seen two-year comp store sales on a stack basis actually accelerate from high single digits to our most recent quarter of 11% and we expect that to continue. When you look at it overall, we've been delivering consistent growth since our IPO. So Lee talked about last fiscal year, overall we ended the year with 44% pro forma adjusted net income growth. If you look at where we are on a year-to-date basis, we're consistent. We're actually at 44% growth in pro forma net income. What we've been doing is we've been focused

• n driving initiatives and investing in the business to grow our top line and accelerate that but

still increase our operating margins. If you look at the last several years, we've actually seen modest operating margin expansion and embedded in our outlook for this fiscal year, we expect the same. We've also focused on paying down debt and reducing our leverage over time. So over the past couple of fiscal years, we've actually decreased our leverage by two turns going from nearly five times levered to about three times levered and really there are a couple of drivers of that. Number one, we used our IPO proceeds to extinguish our second lien term loan, and we did that in August of 2016. In addition to that we made modest principal payments on our long- term debt coupled with increases in EBITDA has brought the leverage down over time. We expect that to continue to decrease over time. The good news, we highlighted this as well, the momentum has continued since our IPO. So when we went public, we committed to high-teens store count growth, low single-digit comp store sales, high-teens sales growth, 20% operating income growth and 25% net income

• growth. If you look at 2017 overall, we actually outperformed on all of the metrics. When you

look at our outlook- which were reaffirming our outlook for this year- we're very, very pleased with the momentum of our business. Store growth is going to increase 21% for the full year and all of those stores are open. We are operating 149 stores today. Comp store sales growth of 5.7% to 6.0%, we're very pleased with how the progress on the two-year stacks have continued to accelerate. Sales growth results in about 23% growth overall. This will be another year, what we will see modest operating margin expansion consistent with what we've seen in the prior fiscal years. And the good news is when you look at pro forma net income growth, we expect it to increase 33% to 37%, which is above our long-term growth target. So overall we've set ourselves up for a fantastic year. Now many of you have asked how should we think about that framework for next year. Now typically we would provide an outlook for next fiscal year, and we would do that in conjunction with our fourth quarter earnings release and conference call which is expected to be in March

• f this year. What we wanted to do is give you a little bit of a framework because we've had a

fair amount of questions overall how we think about next year. First and foremost what we want to tell you is we couldn't be more pleased with the momentum in the business. Second, what we would tell you overall is we expect another year where we're going to see strong top line growth. We're going to make investments in the business such as increasing our marketing spend, spending more money on store labor and so

• forth. That said, we expect our operating income dollars to grow 20% and see some modest

margin expansion. We see pro-forma adjusted net income to grow 25%, now I say that that's before tax reform. So while we haven't given specifics on tax reform, I want to give a little bit of a framework. The good news is we will be big beneficiaries of tax reform. And the reason why I say that is our

• perating margins are industry leading, we make money today and as a result of that lower tax

rate from a federal going from 35% to a stated 21% we will benefit from that. Second, from an interest perspective, we've continued, as I shared with you, to pay down debt over time, and

• ur interest expense is right now roughly $22 million. We will get the full deductibility of our

interest expense under the new tax reforms. So that will be a benefit for us. And then the third piece is, if you look at our cash taxes, what we're paying, our cash tax rate is significantly higher than our book tax rate of 37.5%. So we should see material benefits related to being able to the CapEx we're making in terms of investments, being able to deduct that in the first year with that bonus depreciation which should help our free cash flow. Several people have asked how we should think about tax rate for the year. So we expect the tax rate to flow through, but it's going to flow through overall and our best estimate, because there are some things you can't deduct such as executive compensation above $1 million, that's going to serve as a headwind from a rate perspective. We expect a mid- 20s to high-20s tax rate. We will give you more clarity on that during the fourth quarter

conference call. But I think it's important to know we are in a great position to grow the business, accelerate it, our pro forma adjusted net income of 25% before the flow through on tax overall and as I’ve said tax rate of mid-20s to high-20s overall. We will give you more on the Q4 conference call in March. The last thing I wanted to share, we've been at this journey for five years. We're passionate about what we do, we have a tremendous runway. We have investments we made in the business that are what we would characterize as a first, I mean, such as loyalty, credit card, CRM overall. We have a tremendous amount of growth opportunities being less than 25% of

• ur store potential of 149 stores going to 600. We think that's a lot of white space that we're

going to be able to take advantage of. We have an efficient operating model and we’re the low – we're the low cost provider. So the nice part is this, we made the investments but we simplified our business in a way that we can actually continue to drive long-term growth. We have a systematic approach to managing risk and operational risk and this team that we've been working together for five years has been focused on growing the business and scaling the business and driving the profitability and we couldn't be more excited to continue this journey and share with you along the way. So thanks for attending the presentation. We have a breakout session starting at 3:30. And we hope to see you there. Have a great day.