At Home Group Inc. Announces Third Quarter Fiscal 2018 Financial Results

PLANO, Texas, Nov. 29, 2017 /PRNewswire/ --

• Q3 net sales grew 25%; comparable store sales increased 7.1%
• Q3 operating income rose 106%; adjusted operating income¹increased 61%
• Q3 EPS strengthened by $0.07 to $0.04; pro forma adjusted EPS¹ grew 133% to $0.07 from $0.03
• Raises fiscal 2018 outlook for net sales, comparable store sales and EPS

At Home Group Inc. (NYSE: HOME), the home décor superstore, today announced its financial results for the third quarter ended October 28, 2017.

Lee Bird, Chairman and Chief Executive Officer, stated: "This quarter we once again demonstrated the exciting momentum in our business. We are driving strong results across a variety of price points and style archetypes, indoor and outdoor décor, everyday and seasonal product categories, and new and existing stores across the country. Our new store growth of 18%, combined with our merchandising and marketing initiatives, drove net sales growth of 25% and our 14th consecutive quarter of over 20% percent net sales growth. Additionally, we delivered our 15th consecutive quarter of positive comparable store sales increases with 7.1% growth, marking our third straight quarter of acceleration on a two-year comparable store sales basis. Driven by our top line outperformance and industry-leading profitability, we more than doubled year-over-year pro forma adjusted EPS to $0.07, enabling us to raise our full year outlook while continuing to reinvest in the expansion of our business."

For the Thirteen Weeks Ended October 28, 2017

• Net sales grew 24.8% to $213.0 million from $170.7 million in the quarter ended October 29, 2016 driven by the net addition of 22 stores since the third quarter of fiscal 2017 and a comparable store sales increase of 7.1%. Excluding the net impact of Hurricanes Harvey and Irma, we estimate that comparable store sales would have increased 8.3%.
• We expanded our footprint by opening eight new stores in the third quarter of fiscal 2018. We ended the quarter with 144 stores in 33 states, which represents an 18.0% increase in store count since October 29, 2016.
• Gross profit increased 21.9% to $62.7 million from $51.4 million in the prior year period. Gross margin of 29.4% decreased 70 basis points from 30.1% in the third quarter of fiscal 2017 driven by targeted price reductions on discontinued inventory primarily related to category reinventions, an increase in outbound freight and increased occupancy costs driven by our third quarter fiscal 2017 and 2018 sale-leaseback transactions. These factors were partially offset by the nonrecurrence of prior year distribution costs associated with strategic investments in incremental inventory and leverage of store occupancy costs achieved through sales growth.
• Selling, general and administrative expenses ("SG&A") increased 13.1% to $51.8 million from $45.8 million in the prior year period primarily driven by an 18.0% increase in store count since the quarter ended October 29, 2016.
• Adjusted SG&A¹, which excludes nonrecurring costs incurred in conjunction with our IPO, increased 14.1% to $48.3 million compared to $42.4 million in the third quarter of fiscal 2017. We improved adjusted SG&A¹ as a percentage of net sales by 210 basis points to 22.7% primarily by leveraging labor and corporate overhead expenses, partially offset by an increase in preopening expenses driven by the number and timing of new store openings.
• Operating income increased to $9.3 million compared to $4.5 million in the third quarter of fiscal 2017. We drove 170 basis points of operating margin expansion to 4.4% of net sales primarily by leveraging operating expenses, partially offset by a decrease in gross margin.
• Adjusted operating income¹ increased 60.7% to $12.8 million from $7.9 million in the third quarter of fiscal 2017. We drove 130 basis points of adjusted operating margin¹ expansion to 6.0% of net sales primarily by leveraging operating expenses, partially offset by a decrease in gross margin.
• Interest expense increased $0.4 million to $5.6 million compared to $5.2 million in the third quarter of fiscal 2017.
• Income tax expense was $1.3 million based on an effective tax rate of 35.6% compared to a tax benefit of $1.5 million and an effective tax rate of 44.8% in the third quarter of fiscal 2017. Our strategic restructuring drove the decrease in the effective tax rate for the third quarter of fiscal 2018.
• Net income in the third quarter of fiscal 2018 was $2.4 million compared to a net loss of $1.9 million in the prior year period, which included a $2.7 million loss on extinguishment of debt in the third quarter of fiscal 2017.
• Pro forma adjusted net income¹ grew 149.7% to $4.5 million compared to $1.8 million in the third quarter of fiscal 2017.
• EPS improved to $0.04 compared to $(0.03) in the third quarter of fiscal 2017. We grew pro forma adjusted EPS¹ by 133.3% to $0.07 from $0.03 in the third quarter of fiscal 2017. We estimate that business interruption from Hurricanes Harvey and Irma impacted EPS and pro forma adjusted EPS by approximately $0.01 during the third quarter of fiscal 2018.
• Adjusted EBITDA¹ increased 42.3% to $32.1 million compared to $22.6 million in the third quarter of fiscal 2017.

For the Thirty-nine Weeks Ended October 28, 2017

• Net sales grew 23.7% to $656.9 million from $531.1 million in the thirty-nine weeks ended October 29, 2016 driven by the net addition of 22 stores since the third quarter of fiscal 2017 and a comparable store sales increase of 6.9%.
• Gross profit increased 20.9% to $207.6 million year to date from $171.8 million in the prior year period. Gross margin of 31.6% decreased 70 basis points from 32.3% in the same period of fiscal 2017 primarily due to distribution costs associated with strategic investments in incremental inventory and increased occupancy costs driven by our third quarter fiscal 2017 and 2018 sale-leaseback transactions, partially offset by leverage of store occupancy costs achieved through sales growth.
• SG&A increased 21.3% to $152.2 million from $125.4 million in the thirty-nine weeks ended October 29, 2016. The increase is primarily driven by an 18.0% increase in store count since October 29, 2016, a $4.7 million increase in advertising as we continue to grow consumer awareness of the At Home brand, a $3.9 million increase in stock-based compensation costs partially related to our IPO and a $1.6 million increase in preopening expenses driven by the timing of new store openings.
• Adjusted SG&A¹, which excludes nonrecurring costs incurred in conjunction with our IPO, increased 17.5% to $143.3 million year to date compared to $122.0 million in the prior year period. We improved adjusted SG&A¹ as a percentage of net sales by 120 basis points to 21.8% primarily by leveraging labor and corporate overhead expenses, partially offset by higher advertising and preopening expenses to support our growth plans.
• Operating income increased to $50.9 million year to date compared to $43.4 million in the prior year period. Operating margin decreased 50 basis points to 7.7% primarily driven by distribution costs associated with strategic investments in incremental inventory and advertising as well as by stock-based compensation costs associated with our IPO, which we partially offset by leveraging labor and corporate overhead expenses.
• Adjusted operating income¹ increased 27.6% to $59.8 million year to date from $46.8 million in the prior year period. We drove adjusted operating margin¹ expansion of 30 basis points to 9.1% of net sales by leveraging labor and corporate overhead expenses, partially offset by a decrease in gross margin and higher advertising expenses to support our growth plans.
• Interest expense improved to $15.9 million year to date from $21.9 million in the prior year period primarily due to the repayment in full of our $130.0 million second lien term loan in the third quarter of fiscal 2017 utilizing net proceeds from our initial public offering ("IPO").
• Income tax expense was $13.0 million year to date compared to $7.0 million in the first three quarters of fiscal 2017. The effective tax rate was 37.2% in both periods.
• Net income was $22.0 million year to date compared to $11.8 million in the prior year period, which included a $2.7 million loss on extinguishment of debt in the third quarter of fiscal 2017.
• Pro forma adjusted net income¹ grew 44.3% to $27.5 million year to date compared to $19.1 million in the prior year period.
• EPS increased to $0.35 year to date compared to $0.21 in the prior year period. We grew pro forma adjusted EPS¹ by 41.9% to $0.44 from $0.31 in the thirty-nine weeks ended October 29, 2016.
• Adjusted EBITDA¹ increased 23.7% to $115.2 million year to date compared to $93.1 million in the prior year period.

Sale-leaseback Transaction

In September 2017, we entered into a sale-leaseback transaction pursuant to which we sold six properties for a total of $62.6 million and contemporaneously leased them back for cumulative initial annual rent of $4.2 million, subject to annual escalations.

Balance Sheet Highlights as of October 28, 2017

• Net inventories increased 12.0% to $277.8 million compared to $248.1 million as of October 29, 2016 driven primarily by an 18.0% increase in the number of open stores.
• Total liquidity (cash plus $86.8 million of availability under our revolving credit facility ("ABL Facility")) was $97.0 million.
• Total debt was $308.8 million compared to $302.4 million as of October 29, 2016. There was $185.2 million outstanding under the ABL Facility as of October 28, 2017.

Outlook & Key Assumptions

Chief Financial Officer Judd Nystrom stated: "We are so pleased with our continued momentum in the third quarter and fourth quarter to date that we are raising our fiscal 2018 net sales outlook to $939 million to $944 million, which reflects, in part, an annual comparable store sales increase of 5.7% to 6.0%. As a result of our top line outperformance, we will continue to invest in the long-term health of our business through initiatives such as direct sourcing, from which we expect to generate product savings to reinvest in lower prices, brand awareness and product quality over time.  Our team members continue to drive strong results, and we anticipate that incremental incentive compensation will have a $0.01 to $0.02 effect on EPS in the fourth quarter. We are also raising our fiscal 2018 pro forma adjusted EPS outlook to $0.77 to $0.79 from the $0.73 to $0.75 previously provided."

For fiscal 2018, we expect:

• Net sales of $939 million to $944 million, representing annual growth of 23%, based on 28 gross and 26 net new store openings and an assumed comparable store sales increase of 5.7% to 6.0%.
• Gross margin consistency with fiscal 2017 and modest operating margin expansion.
• Net income of $41.9 million to $43.4 million and EPS of $0.66 to $0.68 based on assumptions of a 37.5% annual effective tax rate, interest expense of $21.5 million and diluted weighted average shares outstanding of 63.5 million.
• Pro forma adjusted net income¹ of $48.6 million to $49.9 million², representing annual growth of 33% to 37%, and pro forma adjusted EPS¹ of $0.77 to $0.79.
• Net capital expenditures of $110 million to $130 million, net of approximately $110 million of assumed sale-leaseback proceeds.

For the fourth quarter of fiscal 2018, we expect:

• Net sales of $282 million to $287 million based on 5 new store openings and an assumed comparable store sales increase of approximately 4.0%, which would represent an 11.1% increase on a two-year comparable store sales basis.
• Gross margin expansion of approximately 120 basis points primarily driven by product margin expansion.
• Net income of $19.9 million to $21.4 million and EPS of $0.31 to $0.33 based on an assumptions of a 37.5% annual effective tax rate, interest expense of $5.6 million and diluted weighted average shares outstanding of 63.7 million.
• Pro forma adjusted net income¹ of $21.1 million to $22.4 million² and pro forma adjusted EPS¹ of $0.33 to $0.35.
• Sale-leaseback proceeds of approximately $45 million to $50 million.

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¹ Represents a non-GAAP financial measure. For additional information about non-GAAP measures, including reconciliations to the most directly comparable financial measures presented in accordance with GAAP, please see "Non-GAAP Measures" below.
² Projected pro forma adjusted net income for fiscal 2018 excludes an estimated pre-tax adjustment of $10.7 million in non-cash stock-based compensation related to the special one-time IPO bonus grant.

Conference Call Details

A conference call to discuss the third quarter fiscal 2018 financial results is scheduled for today, November 29, 2017, at 4:30 p.m. Eastern Time. Investors and analysts interested in participating in the call are invited to dial 877-407-0789 (international callers please dial 201-689-8562) approximately 10 minutes prior to the start of the call. A live audio webcast of the conference call, together with related materials, will be available online at investor.athome.com.

A recorded replay of the conference call will be available within two hours of the conclusion of the call and can be accessed both online at investor.athome.com and by dialing 844-512-2921 (international callers please dial 412-317-6671). The pin number to access the telephone replay is 13672432. The replay will be available until December 6, 2017.

Terminology

We define certain terms used in this release as follows:

"Adjusted EBITDA" means net income (loss) before interest expense, net, loss from extinguishment of debt, income tax provision (benefit) and depreciation and amortization, adjusted for the impact of certain other items permitted by our debt agreements, including certain legal settlements and consulting and other professional fees, costs associated with new store openings, relocation and employee recruiting incentives, management fees and expenses, stock-based compensation expense and non-cash rent.

"Adjusted Net Income" means net income (loss) adjusted for losses incurred due to the modification or extinguishment of debt, certain one-time expenses associated with our IPO and the registration of shares of our common stock on behalf of our majority stockholders, non-cash stock-based compensation related to a special one-time IPO bonus grant and the tax impact of such adjustments.

"adjusted operating income" means operating income adjusted for certain one-time expenses associated with our IPO and the registration of shares of our common stock on behalf of our majority stockholders as well as non-cash stock-based compensation related to a special one-time IPO bonus grant.

"adjusted SG&A" means selling, general and administrative expenses adjusted for certain one-time expenses associated with our IPO and the registration of shares of our common stock on behalf of our majority stockholders as well as non-cash stock-based compensation related to a special one-time IPO bonus grant.

"comparable store sales" means, for any reporting period, the change in period-over-period net sales for the comparable store base, beginning with stores on the second day of the sixteenth full fiscal month following the store's opening. When a store is being relocated or remodeled, we exclude sales from that store in the calculation of comparable store sales until the second day of the sixteenth full fiscal month after it reopens. Our estimation of the comparable store sales impact of Hurricanes Harvey and Irma is based upon our analysis of comparable store performance before, during and after the hurricanes and includes estimates of revenue foregone during associated temporary store closures, reduced operating hours and business interruption periods as well as the positive impact of stronger economic recovery in the affected areas.

"EPS" means diluted earnings per share.

"GAAP" means accounting principles generally accepted in the United States.

"pro forma adjusted net income" means Adjusted Net Income adjusted for interest on indebtedness repaid during the periods presented, the tax impact of adjustments to Adjusted Net Income and the normalization of income tax rates to reflect comparability between periods. 

"pro forma adjusted EPS" means pro forma adjusted net income divided by pro forma diluted weighted average shares outstanding. 

"pro forma diluted weighted average shares outstanding" means diluted shares outstanding on a pro forma basis after giving effect to the shares of common stock issued in the IPO as if it had occurred at the beginning of the periods presented.

"Store-level Adjusted EBITDA" means Adjusted EBITDA, adjusted further to exclude the impact of certain corporate overhead expenses, which we do not consider in our evaluation of the ongoing performance of our stores from period to period.

Forward-Looking Statements

This release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can generally identify forward-looking statements by our use of forward-looking terminology such as "anticipate", "are confident", "assumed", "believe", "continue", "could", "estimate", "expect", "intend", "may", "might", "on track", "plan", "potential", "predict", "seek", "should", or "vision", or the negative thereof or other variations thereon or comparable terminology. In particular, statements about our outlook and assumptions for financial performance for fiscal 2018, as well as statements about the markets in which we operate, expected new store openings, our real estate strategy, potential growth opportunities and future capital expenditures and our expectations, beliefs, plans, strategies, objectives, prospects, assumptions or future events or performance contained in this document are forward-looking statements.

We have based these forward-looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those factors described in "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended January 28, 2017, as filed with the Securities and Exchange Commission ("SEC") on April 5, 2017, may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements contained in this release are not guarantees of future performance and our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from the forward-looking statements contained in this release. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we operate, are consistent with the forward-looking statements contained in this release, they may not be predictive of results or developments in future periods.

Any forward-looking statement that we make in this release speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this document.

About At Home Group Inc.

At Home, the home décor superstore, is focused on providing customers with the broadest assortment of home décor products to suit every room, every style and every budget. With a wide assortment of over 50,000 items throughout our stores, At Home enables customers to express themselves and create a home that reflects their personality and style. Our differentiated merchandising strategy allows us to identify trends and then value engineer products to provide the aesthetics our customers want at attractive price points. Our highly efficient operating model seeks to drive growth and profitability while minimizing operating risk, ultimately allowing us to deliver exceptional value to our customers. We utilize a flexible and disciplined real estate strategy that enables us to successfully open and operate stores across a wide range of formats and markets. We believe that our broad and comprehensive offering and compelling value proposition combine to create a leading destination for home décor. As of November 29, 2017, At Home operates 149 stores in 34 states and is headquartered in Plano, Texas. For more information, visit investor.athome.com.

-Financial Tables to Follow-

Non-GAAP Measures

Certain financial measures presented in this release, such as comparable store sales, Adjusted EBITDA, adjusted SG&A, adjusted operating income, Adjusted Net Income, pro forma adjusted net income, pro forma diluted weighted average shares outstanding, pro forma adjusted EPS and Store-level Adjusted EBITDA, are not recognized under GAAP.

We present comparable store sales, which is not a recognized financial measure under GAAP, because it allows us to evaluate how our store base is performing by measuring the change in period-over-period net sales in stores that have been open for the applicable period. We present Adjusted EBITDA and Store-level Adjusted EBITDA, which are not recognized financial measures under GAAP, because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance, such as interest, depreciation, amortization and taxes, as well as costs related to new store openings, which are incurred on a limited basis with respect to any particular store when opened and are not indicative of ongoing core operating performance. We present adjusted SG&A, adjusted operating income, Adjusted Net Income, pro forma adjusted net income, pro forma diluted weighted average shares outstanding and pro forma adjusted EPS, which are not recognized financial measures under GAAP, because we believe investors' understanding of our operating performance is enhanced by the disclosure of selling, general and administrative expenses, operating income, net income, diluted weighted average shares outstanding and earnings per diluted share adjusted for nonrecurring charges associated with events such as our IPO and refinancing transactions.

You are encouraged to evaluate each of these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating our non-GAAP measures, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in such presentation. Our presentation of non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the presentation of our non-GAAP financial measures in the future, and any such modification may be material. In addition, comparable store sales, Adjusted EBITDA, adjusted SG&A, adjusted operating income, Adjusted Net Income, pro forma adjusted net income, pro forma diluted weighted average shares outstanding, pro forma adjusted EPS and Store-level Adjusted EBITDA may not be comparable to similarly titled measures used by other companies.

Comparable store sales, Adjusted EBITDA, adjusted SG&A, adjusted operating income, Adjusted Net Income, pro forma adjusted net income, pro forma diluted weighted average shares outstanding, pro forma adjusted EPS and Store-level Adjusted EBITDA have limitations as analytical tools and you should not consider them in isolation, or as a substitute for analysis of our results as reported under GAAP. We compensate for these limitations by relying primarily on our GAAP results and using comparable store sales, Adjusted EBITDA, adjusted SG&A, adjusted operating income, Adjusted Net Income, pro forma adjusted net income, pro forma diluted weighted average shares outstanding, pro forma adjusted EPS and Store-level Adjusted EBITDA only as supplemental information.

AT HOME GROUP INC.
Supplemental Information - Reconciliation of GAAP to Non-GAAP Financial Measures
(in thousands, except share and per share data)
(Unaudited)

The tables below reconcile the non-GAAP financial measures of adjusted SG&A, adjusted operating income, Adjusted Net Income, pro forma adjusted net income, pro forma diluted weighted average shares outstanding, pro forma adjusted EPS, Adjusted EBITDA and Store-level Adjusted EBITDA to their most directly comparable GAAP financial measures.

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SOURCE At Home Group Inc.