At Home Group Inc.
12/2/2020 - 11:00 AM EST
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At Home Group Inc.
December 2, 2020
11:00 AM EST
Simeon Gutman: | Hi everyone, good day from wherever you are. I guess I'm in the middle of Time Square |
here in New York City. Not really. This is Simeon Gutman, Morgan Stanley's hardline, | |
broadline and food retail analyst and it is our pleasure to welcome At Home to our | |
Morgan Stanley Global Consumer and Retail Conference for this fireside chat. We are | |
joined by Chairman and CEO, Lee Bird, CFO, Jeff Knudson and Arvind Bhadtia, VP of | |
Investor Relations. | |
We do have an open queue, a question and answer for investors. I'll be seeing those, I | |
can chime in with those questions throughout. Very quick and some important | |
disclaimer, for important disclosures, please see the Morgan Stanley Research Disclosure | |
website at www.morganstanley.com/researchdisclosures. If you have any questions, | |
please reach out to your Morgan Stanley sales representative. Thank you, Lee, Jeff and | |
Arvind for being with us today. I'm going to start broad question for you, Lee, sort of | |
this COVID overview question but I'll ask it in this way, why is Home not just a | |
pandemic winner, what's the future look and what were some of the things that were | |
happening even pre-COVID to think about it? | |
Lee Bird: | Sure, Simeon, thanks for having me today and having our team here today to talk about |
At Home and the great results we're delivering. You know, we're not just a pandemic | |
winner though, I'm grateful for the situation we find ourselves in, people are spending | |
more time at home and working from home but we're gaining meaningful share during | |
this time. We're taking share from weaker competitors, we're adding new customers and | |
our At Home 2.0 initiatives are resonating. | |
We think about gaining meaningful share, our revenue growth has been much faster than | |
the industry, nearly two to four times the industry depending on the dataset that you look | |
at. Q2 revenue grew 51%, Q3 revenue 47% so that's significant versus the industry. | |
We're taking share from weaker competitors. The data we're seeing is we're leaning into | |
a category where other people have maybe underperformed or had a lead in the category | |
and that has -- we're taking some serious share from those folks; also, people are closing | |
their doors and we're taking disproportionate share from them. We've been adding new | |
customers, the significant portion of our growth isn't just the sector growth itself but it's | |
actually new customer growth and the data we're seeing, you know, we're having -- |
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adding so many new customers and they're actually joining the loyalty program. So our | |
loyalty membership as up 42% in Q3 and 44% in Q2 and now we have 8.3 million | |
members. | |
And the last part that's driving our growth is our At Home 2.0 strategies. As many of you | |
have followed our company, last year was a step back year for us, unfortunately, we | |
looked at our business, took a hard look at our performance and made some adjustments | |
and things that are working in this At Home 2.0 strategy is the reinventions of significant | |
higher than chain average, that any EDLP events now that creates campaign management | |
to drive people into the store more often, we've had ten that have been very successful. | |
Omni channel got launched this year and it's just getting started. | |
Inventory positions will improve into next year and the balance sheet is stronger than | |
ever now with our liquidity being down which gives us a lot of cash to be able to use to | |
deploy for future opportunities as well. So that's why we're outperforming the industry. | |
Simeon Gutman: | Thanks Lee. Maybe I'll just paraphrase that answer, so obviously there's new customers |
coming into the store, your reinventions seem like they were gaining better traction even | |
pre-pandemic. You're more Omni channel and obviously inventory position. I guess do | |
you -- when is your expectation of like this current backdrop, how far do you think this | |
current backdrop continues, and I think others are thinking about maybe the first part or | |
middle part of next year. Just curious on that expectation and then when we're going to | |
have to see these proof points play out? | |
Lee Bird: | Yeah, we see this momentum going all the way through at least to the middle of next |
year. That's as far as we can see right now and those are the inventory decisions that | |
we're making. That first half of next year, if you add Q1 and Q2 together, which were | |
two very different quarters for us, we closed stores in Q1, reopened them strongly in Q2 | |
but you take them together and it was a 0.3% comp for those two periods together and we | |
feel like we can beat those numbers and drive great performance, we'll be in a better | |
inventory position from an everyday standpoint, we'll be in a really strong position from a | |
seasonal standpoint. The macro trends will continue to work in our favor, we don't think | |
that a vaccine will be broadly available, people will continue to be working from home. | |
There's a recession will continue that works in our favor as a value player. So all of those | |
things work in our favor to see strong growth, at least through the middle of next year and | |
then after that obviously we're just starting to look a what our inventory plans are for the | |
back half. | |
Simeon Gutman: | Got it, okay. I'm going to kind of zoom in a little bit on the near-term. You reported |
your third-quarter earnings last night which were preannounced. One of the questions | |
that we talked about, which might be worthwhile discussing again is the rate of change, | |
the momentum from the second quarter into the third quarter. Your business is taking | |
share in both instances, it was running at, call it, robust levels in the 40's in the second | |
quarter and I think, I'm sorry, in the third, and I think we're looking at somewhere in the | |
high teens for the fourth quarter. | |
And so to what extent, or what's changing, if anything, and again, respecting the fact that | |
it still means lots of share gain in both periods but is there anything changing? Are you | |
being careful because there's some type of pull-forward that's happening in the beginning | |
part of the quarter. Are there issues around inventory just to reconcile those two -- the |
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trends sequentially? | |
Lee Bird: | Sure, well we're not seeing a moderation from our Q3 exit rates. So what we saw in Q3 |
we exited in the everyday business which is about 60% of our business historically in Q4 | |
which is lower than the full-year average but we were in the low 30's for everyday in Q3 | |
and we haven't seen moderation at all. We had expected that to moderate, we had said in | |
our pre-announcement before, a few weeks ago, that we thought it might moderate. | |
We're not seeing that, we're not expecting that now for the whole quarter; everyday trends | |
continue to be strong and so that 30 -- those 30's comps, we believe, will go through the | |
entire quarter and that's about 60% of the business. | |
Now, the 40% of the business, the seasonal business, it exited in the mid single digits | |
with Q3. We had a fantastic Christmas selling in Q3 and performance in Q4 has been | |
just fan -- just phenomenal. Strong early demand, customers were buying earlier, I think | |
we've seen that in the consumer sector overall that the Christmas season got started | |
earlier and has been an elongated and certainly for us we actually had a strong black | |
Friday weekend, weekend, as well. Some people didn't but we had a very strong one | |
from a traffic standpoint. | |
But the inventory for seasonal is finite though. So our expectations are for low single | |
digit comps and seasonal and that hasn't changed but that remembers 40%. So when you | |
put those two together, that's how you get to the mid to high teens for the comp | |
standpoint. But as we exit Q4, we think as we look at those everyday trends of being in | |
the 30's, that we think -- we think we've got great momentum to leave the quarter and | |
then we won't be inventory constrained from a seasonal standpoint for Q1. | |
Simeon Gutman: | Yeah, that's great. That really preempted my next question which I didn't want to put |
words in your mouth but you said it, if this -- if these conditions continue, right, we're | |
pre-vaccine at least in the first quarter, potentially in the second quarter of 2021, thinking | |
-- everyday I think you're saying you can't think about our business in everyday | |
momentum holding up, I don't know if you're putting a dart in the 30% number or not, | |
but then how important do the seasonal categories mix in as we go into the first half of | |
the year? | |
Lee Bird: | Everyday is about 75% of our business overall and so think about that for the first half as |
well being 70% to 75% and inventory position is going to be much better than even we | |
found ourselves in, in Q2 and Q3 when we had the exit rate at the 30's. We were -- our | |
inventory was down 20% year-over-year. Our inventory position is gaining strength | |
throughout the fourth quarter so we'll start the first quarter very strong in the inventory | |
position; we think that that will allow us to be prepared for a really strong Q1 and Q2 for | |
everyday. Patio and garden is setting actually early, four weeks earlier than last year for | |
us, so by mid-January it will be set in our stores. So, it will give us a great chance to start | |
out the season strong; if weather trends are in our favor at least across the south, | |
southeast and southwest part of the U.S. where we have a lot of our stores maybe earlier | |
patio garden sales will be strong. So we believe the macro environment will also | |
continue to be strong for us and as a reminder, we are comping over only a 0.3%. So we | |
like the momentum going in and we like the inventory position we'll have to be able to | |
meet that demand. | |
Simeon Gutman: | Yep. I want to ask about market share and I'll ask this one, and we do have a question |
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from the audience and it will tie in but I'll wait for this one. The question is, this outsized | |
growth that you've seen and there's clear market share gains, I don't see any data that | |
suggests the markets growing anywhere close to what you're growing, where do you | |
think this market share is coming from? | |
Lee Bird: | Yeah, you know, I would say, we're clearly gaining meaningful share, as you mentioned. |
We're growing faster than the industry; several times faster. The landscape has evolved | |
in this sector. A lot of marginal and weaker players are finding it difficult to survive or | |
1500 stores in our sector are permanently closely so Pier 1, 900 stores, Tuesday Morning, | |
200 stores, J.C. Penney, which has a very large soft home business, 200 to 300 stores. | |
Bed Bath & Beyond, a couple hundred stores, a lot of specialty players including [Sur La | |
Table] is going to be closing their stores. So, 1500 stores out versus this year where they | |
were still operating and winding down. Next year they won't even be in the equation. | |
Then you take, obviously, the macro backdrop of a recession, but the things that we're | |
also doing is we're looking at how we're gaining share and where we're gaining it from | |
and what we did last year was we reduced prices and we improved our product | |
assortment and we created new collaborations that created unique product that created | |
newness in our stores so people came to us. And then we also have a large format store | |
that people feel more comfortable shopping in than small specialty boxes. We have | |
100,000 square feet so people feel a lot more comfortable social distancing. Then you | |
add Omni channel where we didn't even have that last year so people feel a lot more | |
comfortable shopping online, swinging by doing curbside, contactless curbside pickup or | |
local delivery. All of those things are driving outsized share and we feel like all of those | |
things will be in the same situation next year. | |
Simeon Gutman: | Okay, thanks for that, Lee. So, I'm going to go to the audience webcast. This question |
was -- is related to what I just asked and we actually have a few more so I'll stick with | |
these for a bit. So, the question first for you, Lee, is are you able to analyze spending for | |
the existing active and new loyalty customer and their basket size to say what core sales | |
are versus pandemic related one-time spend? Is this possible? | |
Lee Bird: | Well, we do a number of things. We can double click into our transactions and see how |
many of those were from existing customers and do they come more often and spend | |
more? Which is, yes, yes, on both of those. And then how much of that is new | |
customers? And I mentioned before, we had a lot of new customer growth. | |
But what we've done with our loyalty program is we enhanced the benefits for our loyalty | |
program to make people feel the need to join more clearly. So last year and this year, we | |
had flash finds which are special buys which we offer once a week that sell out quickly | |
and then the black Friday deals which are available over the course of a week and a half | |
or so. This year, those same offers were available but the price -- the lowest price | |
available to those, to customers, was only if you were a loyalty member. So, loyalty -- | |
people joined the loyalty program to access those lower prices. By joining, we can see | |
their transactions and what we saw was existing customers did come in more often | |
between Q2 and Q3 than we've seen historically. | |
We also saw them spend more as well but when we did research around Share of Wallet, | |
what we found was yes, they came in more often but it's because they actually spent less | |
with other retailers and spent more with us. So, their spend was slightly elevated but it |
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was disproportionate to us and other people saw less visits when we saw more visits. So | |
we're able to tease that out, which is great, we now have our loyalty data in deciles and | |
we're using CRM team, we wanted to triple the size of our CRM team in the past two | |
months so now we're going to work on getting those new customers that are in our | |
program up each decile; going to take it from two visits a year to three or three to four, or | |
whatever, and so we're using that data to drive outcomes going forward. | |
Simeon Gutman: | Great. And this is somewhat related and your answer to the previous question touched on |
this, do you think that the share gains that you've seen to-date are enough to offset what is | |
-- could be a shift back towards experiences? So, consumers spend back towards | |
experiences. This part I think you did partially answer. Who are the big share donors | |
trying to gauge the cushion that the share gains provide into next year? | |
Lee Bird: | Yeah, I would say having all of these extra customers help you if there was a decrease in |
the sector demand by having a much larger customer base we can actually build a strong | |
business and if there's demand that comes off, we now have all those new customers to | |
work with and have them offset some of the reduction in traffic. But we're not seeing | |
that reduction in traffic. Other people are. You can look at the data out there and see that | |
some of the specialty players and mass players in our sector are actually gifting share and | |
there's a few of us that are outperforming and we happen to be one of the only retail- | |
centered businesses that have Omni channel that's growing at the rate that we are; other | |
people are ecommerce only and we're doing it in a very profitable rate as well because | |
our EBITDA margins are incredibly strong and this year has been exceptionally strong. | |
Simeon Gutman: | Great, the next question is still from investors. How big is online shopping, so not a store |
visit which I assume that means a shipping to home usage by customers since | |
implemented? | |
Lee Bird: | You know, the percentage of Omni channel sales has changed week by week and |
sometimes it's based on people's -- by case counts that we've seen, it's sometimes based | |
on what we've seen in the holiday season that started to increase not just by case counts | |
but I think just preference to not being a store. We included in our Omni channel sales, | |
buy online, pick up in stores, so they do come in the store and we appreciate that because | |
there's a large add-on rate to that. Buy online curbside pickup, so they don't come into | |
the store, they just swing out front and we bring it to their car and it's contactless, they | |
just open the trunk and we put it in the back. Or local delivery where they buy it online | |
and it's delivered next day starting at $10.00 with our delivery partner pickup and now | |
Postmates. | |
When you take all three of those, they become a nice portion of our business. Some | |
weeks it's bigger, some weeks it smaller. For us the most important thing is we're | |
meeting the customer the way they want to shop and the way they feel most comfortable | |
shopping. | |
Simeon Gutman: | Great. One more from the queue. This will get into something we were going to talk in a |
little bit but the -- how big of a sales lift could you get in 2021 from much fresher, | |
everyday inventory, since Fiscal 2021 was strong but allowed you to sell out a lot of | |
some of the, let's say, less fresh inventory? | |
Lee Bird: | Well, inventory positions were down 30% in Q2 for everyday which is, as I mentioned, |
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70 -- roughly 70%, 75% of our business. And then -- so that's lost, that's lost sales and | |
then another down 20% in Q3. And we believe by the end of the year there will be about | |
just slightly down but for the whole fourth quarter they will be down at least 10% to 15% | |
on average. So that's a lot of lost sales that we will have that inventory back in position | |
by the end of January so we believe that that's all upside for next year, assuming demand | |
remains the same which is it's new customer growth and not just pandemic related. So | |
we'll have that inventory in the seasonal business, which in the back half of the business | |
is about 30% for the back half and obviously 40% in Q4. We were down mid-teens from | |
Halloween and fall and then down mid-single digits for Christmas. So you bring the two | |
together it's down 10%. So there's another bit of loss sales as well. So all of that looks to | |
upside for next year. | |
Simeon Gutman: | Great, so I'm going to transition to store growth. Can we talk about it and what's the right |
run rate? You slowed store growth due to execution and balance sheet issues. Those | |
seemed both resolved, why is 10% the right run rate and not higher again? | |
Lee Bird: | Yeah, we had a great year throwing off a whole lot of cash, paying down our debt, we've |
got nothing on our ABL. We've got $100 million or more in cash and so we're really in a | |
great financial position. Our leverage ratio is 0.9 times which is the best it's ever been as | |
a public company. Because of that we know next year is also going to be a strong cash | |
year as well. We can pay down our debt next year a little bit so we'll pay down the first | |
tranche of our bond and we'll pay off the FILO, is our plan right now. | |
We'll still have extra cash because of that then we've said we're going to add more stores, | |
seven to ten was our original plan and now it's 12 to 15 for next year. The following year | |
it's 10% growth. When we model out 10% growth in a year, we can cover that with our | |
free cash flow. So we'll continue to de-lever and still pay off, pay down our debt, and | |
have 10% unit growth. And 10% unit growth seems to be the right number. If you look | |
at other high growth retailers that we consider our peer group, and you know who those | |
are, the people that are well talked about that have great multiples and high regard in the | |
marketplace, those are growing at about 10%. And anything beyond that you don't really | |
get a lot of credit for but you use a lot of cash to get there. And it extends your growth | |
time horizon. | |
So a 10% growth rate for the next number of years means that for the next ten years we | |
can grow 10% and continue to be a high growth company and pay for it with our own | |
cash. | |
Simeon Gutman: | Thanks, I want to maybe jump back to inventory and you -- we talked about how you |
think about the first part of next year as well as you've given us some framework around | |
the everyday sales growth. I wanted to ask you how you're planning inventory broadly | |
for next year. And obviously it's a loaded question to think about how you're planning | |
your sales environment but one -- so that's the first part, how you met planning inventory | |
and the second part, is -- you know, we've had situations pre-pandemic in which there | |
were outsized markdowns. So how do you sort of balance the buy with the -- to mitigate | |
the chance of having to go through that markdown cycle? | |
Lee Bird: | Sure, Simeon, as you know, you've followed us for -- since before we even went public. |
We've been inconsistent in our performance around inventory and so we doubled the size | |
of our inventory management team and allocation team over the past 12 months to focus |
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on strength and inventory management which is part of our At Home 2.0 strategy. So we | |
put in new people, we've put in new tools and a whole data analytics team run by a Ph.D. | |
in astrophysics to help inform all of our decisions around inventory. So that's the first | |
part. On the everyday business, so I'll tease those two pieces out because they have two | |
different inventory approaches. Everyday business, we run a bimonthly, open to buy | |
process where we look at our orders and we look at the demand out one month, two, | |
three, all the way six months out and we can -- and we adjust our orders accordingly. We | |
used to only run it monthly, now -- and during the past six months we've been running it | |
every week and now we're going to every other week because we've now gotten really | |
good at seeing the demand. | |
So as we see demand changes, we can clip orders or add to them and not create inventory | |
problems in the future. So that -- we don't believe we'll end up with an extra inventory | |
that will end up with a markdown because we can clip orders in the future periods that | |
will reduce any risk. On the seasonal, we buy in terms of halves, so think about spring | |
and summer, so patio and garden is one half of the year and then Halloween and harvest, | |
Christmas is the second half of the year. | |
So, for the first half of the year, remember we had a 0.3 comp for the first half of the | |
year, so patio and garden is now bought. We believe there's an opportunity to drive a | |
great outcome in Q1 and Q2. We saw missed sales because of this strong demand. We | |
saw what sold, we brought in lower price inventory in Q3 in patio furniture. That sold | |
very well, so we're continuing to make sure our prices are sharper and lower. So we've | |
got a nice setup for Q1 and Q2 from patio and garden. | |
And in the back half of the year we were under inventory and -- but, so we're going | |
through that decision now. We haven't decided to buy yet for the back half for | |
Halloween, harvest and Christmas but we didn't see a lot of missed sales and so we think | |
that we can buy into that demand but also manage the flows if we see changes in demand | |
we can clip those backorders. We used to have two flows for seasonal and now we have | |
up to four flows and we can adjust those if demand starts to moderate in the early season. | |
Simeon Gutman: | As store growth continues, a little bit related to two questions ago. How do you think |
about sustaining or the ability to sustain EBITDA and gross margins over time? | |
Lee Bird: | We've always had strong EBITDA margins even in our worst year we had low teens |
EBITDA margin and now we've been running the high teens and so for us we focus on | |
growing and growing profitably. Our focus always is on fueling the top-line. So if we | |
have strong profitability and great full-price selling, we deploy some of that profitability | |
towards spending and marketing, spending and labor and some of the investments in | |
Omni channel. That will continue to fuel this engine of having what we've said is our | |
motto or algorithm, as you know, it's low single digit comps as well as 10% unit growth. | |
And we believe with all this new customers coming in and our loyalty program and the | |
low brand awareness, we can continue to fuel by spending money in marketing to get the | |
top-line growing, still delivering really nice EBITDA margins and still adding 10% unit | |
growth to get into our full potential of over 600 stores. | |
Simeon Gutman: | Great. This one is from the audience. So, thinking about -- you sort of mentioned |
correcting some of the issues from a few years ago and then balancing the leverage. | |
What's the right level of debt to EBITDA for the business? Why not supplement a great |
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sustainable unit growth story with some share repurchase now and then, I guess this is a | |
part of the question, buying existing stores at returns that are better than actually building | |
stores? | |
Jeff Knudson: | Yeah, I don't think we -- I mean, we ended the second quarter levered out at 1.4 times. |
We had said last fall, the next couple of years -- achieve, you know, that adjusted | |
EBITDA of two times so we're already in full turn below that and that improved to 0.9 | |
times at the end of the third quarter. So, you know, when we look at our capital | |
allocation priorities right now, obviously we want to be able to sell fund and sustain 10% | |
unit growth moving forward. We want to continue to de-lever. We do have some option | |
in our capital -- the ability to prepay based upon take out [low] and I would say after we | |
achieve those two top priorities, that optionality exists as to what we do with that excess | |
free cash flow moving forward. | |
Simeon Gutman: | Thanks, Jeff. One more question from the audience, it's not related, this is a product |
category question. Are there specialty adjacencies like mattresses At Home can increase | |
to -- to add to increase customer touch points? And I do believe you sell mattresses | |
already but, anyway, that's the question. | |
Lee Bird: | We do believe. With our efforts on SKU rationalization, we've been able to look at our |
stores and say how can we right-size certain departments to create more space for new | |
categories and existing categories that are maybe under penetrated, to your point, | |
mattresses. We look for to -- we have a reinvention on mattresses coming up, actually | |
just coming in in about a month or so, that will be an all new assortment. We think | |
there's an opportunity there. We've missed demand with not enough inventory and we've | |
switched suppliers out to be able to create a larger supply base and more opportunity for | |
us and somebody who's one the top five mattress manufacturers in the world and so we'll | |
have great supply and great quality. We're also going to be adding new categories, | |
adjacent categories like we did this year so we added kids bedding as one department that | |
just crushed it this year, the back half of this year. We're adding home office which is a | |
new department for us this month of December. Next year we'll be adding a number of | |
new departments as well and all of those are essentially accretive to us because we feel | |
like as we've -- we can right-size a certain department, we don't feel like we're going to | |
lose sales but we can optimize the space to continue to make this box work for us. | |
Simeon Gutman: | Thanks, Lee. So, one of the themes that I'm sensing from Q3, even Q2 earnings calls, |
you've had a lot of investment and reinvestment by companies, a lot of triage, to manage | |
to the environment, but in the companies that are beneficiaries of this environment, they | |
seem to be plowing a lot back into the business. You're obvious -- you're doing great and | |
it appears that some of these trends will continue and I wanted to ask about -- it is about | |
balancing margin with investment but more importantly are there capabilities for you to | |
invest in and is there any framework that you could provide us around how high the | |
EBITDA margins of this business can and should get to? | |
Lee Bird: | Sure, yeah. What we do is we do balance investments with performance and we fund our |
growth, self fund our growth now, and what I would say is we look at investments around | |
marketing and Omni channel that will continue to fuel our top-line growth and we feel | |
like those -- both of those weren't dilutive. Omni channel's not dilutive to us in terms of | |
margins because we make money at it. We have invested in marketing, we'll be back up | |
to 3.5%. We feel like if you look at margins overall, we hit the high teens, EBITDA |
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margins are strong margins in the industry. We've got some of the best EBITDA margins | |
in the industry regardless of what sector of retail you look at. And so we'll continue to -- | |
as we hit more top-line performance and better product margin improvement through our | |
direct sourcing efforts and so on, we will then make investments in marketing to keep | |
that top-line going to deliver on that algorithm and deliver on the EBITDA margins but | |
we also feel like high teens EBITDA margins are exceptional. We don't expect them to | |
get, you know, beyond that level because what we would do is we would just ploy that | |
back into lower prices as well, better quality to keep the top-line going because the real | |
value in this company as an investment is top-line growth and profitable growth and we | |
don't want to get -- we don't want that to be imbalanced. And so for us it's about growth | |
and profitability together. | |
Simeon Gutman: | I want to ask about wages. We've seen some retailers make temporary wage increases |
permanent, $15.00 an hour is slowly becoming a level that seems to be more accepted. | |
What's the implication of this, how do you think about this for your business, and if you | |
could just paint the picture on wages broadly for your business? | |
Lee Bird: | Sure, the one benefit of this model is we've got -- it's a low labor model in terms of |
number of employees. So it's 25 to 30 people per store on average, in the holidays it gets | |
to 30 to 35, maybe 40. So compared to somebody at the same size store can have 200 | |
employees, we're only talking about 30 to 40 employees. | |
So there's less impact on wages with our business in terms of rate than other companies | |
and I would say we use incentive comp as a way to provide a total compensation package | |
to our employees. So we have a base rate and we pay by market and some markets we | |
are paying $15.00 and some markets we don't pay $15.00, but all of them are eligible to a | |
bonus, every single sales associate. So if you're a part-time associate you can get a $500 | |
bonus, if you're a full-time associate you have a $1000 bonus if we deliver this year. | |
Now, obviously this year is going to be exceptional. We've already told you that our | |
incentive comp was going to be double what our normal incentive comp has been for a | |
year so you can see that that's all going to team members. So they will be receiving that | |
and that's the way you'd want it to be if we outperform then everyone gets more money. | |
If we underperform, they don't. But we pay by market, we're super competitive and I'd | |
also tell you right now that what we're seeing is with the large unemployment rate in a lot | |
of retailers closing stores and not reopening a lot of restaurants reopening, Yelp said that | |
25% of all the restaurants that were in their system just six months didn't reopen. That's a | |
lot of impacted employees. We're not having a problem hiring, we're not having a | |
problem hiring at the rate that we pay and people are joining us and we've got a great | |
backlog of potential candidates just because we offer great benefits and we offer an | |
incentive comp program that is really rich and rewarding for them. | |
Simeon Gutman: | A framework that some companies have suggested we could look at is in trying to think |
about 2021 is in relation to 2019 and I don't want to go there in that obviously 2019 is | |
unrepresentative for you but how is, or what type of sort of I guess margin benchmarks | |
can we anchor to, to think about how the business evolves going forward? | |
Jeff Knudson: | Yes, historically we spoke about this, we have enjoyed industry leading margins and if |
you were to go back even to the 2018 time period, I think we were right around 17% | |
adjusted EBITDA margins and pro forma for the rent deferrals that we negotiated with | |
the landlord community. You know, that's right where our trailing 12-month adjusted |
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EBITDA margins are right now and looking out to the future we do see -- margin | |
expansion for periods of time as the revenue per store and our -- capabilities. That type | |
of run rate is a theme we'll continue to reinvest in the business and be extremely | |
profitable. | |
Simeon Gutman: | Great. Historically, when you've opened stores, new space productivity, it's pretty much |
among the best in retail, right, stores open almost at, I would call it, some type of chain | |
average right away. What are you -- how do your expectations change? I realize next | |
year might be a tricky year to provide some framework but how does it change and | |
especially now that ecommerce, or Omni channel, will be part of the mix? | |
Lee Bird: | We see potential for new store productivity to continue reading strong for us. Stores do |
open strong, they pay for themselves back in two years. We've got a great cash on cash | |
returns. What we're seeing from real estate opportunities, they're just getting stronger. | |
So the pipeline is deeper than we've seen in some time. And especially since a lot of our | |
competitors are closing doors and closing them permanently, there's a lot of opportunities | |
to look at. So what we're doing is we're being more selective since the amount of stores | |
we have already decided will be 10% unit growth and if the supply is greater, we're just | |
going to get -- we're just getting better locations at the existing pricing that we've been | |
normally paying. So let's say we pay $600,000, $700,000 in rent for a location, now | |
we're not a mile off the retail note, now we can be right in the power center where we | |
want to be at the $600,000, $700,000 in rent instead of doing maybe $6 million at a store, | |
now we can be $7 million with the same amount of rent. | |
So, we like the situation we find ourselves in. The new store economics are just great | |
and we think that they're going to continue to remain really strong. | |
Simeon Gutman: | When we were learning about this business several years ago, you used to talk about |
some of the dwell times of some customers, especially I think on weekend time I think it | |
was even more than weekday time. I don't know if there are any proper benchmarks to | |
look at now given the environments different but what can you talk -- tell us about | |
customer frequency; either dwell time, number of items in basket, how is that evolving? | |
Lee Bird: | Yeah, dwell time it's -- it was -- about an hour for our customer to stay in the store which |
is extraordinary for them, that hasn't changed from our observations, I would tell you, it | |
continues to be important to have a treasure hunt experience. A large store format makes | |
that safe for people so that when people feel comfortable with us, with the EDLP events, | |
we're making it more interesting and more reasons to come in more frequently. We think | |
that helps drive more traffic. And I would say what we're seeing is traffic from new | |
customers as well as existing customers coming in more often. We're seeing basket sizes | |
are larger. Some of that is the work that we've been doing around our insider purch | |
program by creating more value as I mentioned before. Some of that has to do with the | |
new product that we're bringing in through collaborations and reinventions that are seeing | |
real great strong interest from our customers. Some of that is actually making sure their | |
inventory positions and lower priced items are stronger than ever so we've been buying | |
into lower priced items like we did in Q3. We bought back into low priced wicker and | |
low priced sling-backed chairs and when we did that it drove outsized performance for | |
us. So those actions that we're taking is hitting the mark and allowing us to have traffic | |
and basket size growth. |
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Simeon Gutman: | May I ask about sourcing? This was very relevant pre-pandemic around tariff. Can you |
talk about the exposure that you have to, I guess, tariff-affected markets and where are | |
you and are you still trying to diversify a way? | |
Lee Bird: | We've made great progress in that. Everyday inventory continues to improve overall. If |
we look at our direct sourcing effort we had a goal of 30%. We were 15% last year, we | |
think we'll be close to 20% this year, our product will be direct sourced which is great | |
given how much product we have and we chase after it because business has been so | |
strong. And remember, when you direct source an item you get hundreds of basis points | |
improvement in margin by SKU when you direct source it versus going through an agent. | |
We're also moving more away from China which had -- obviously last year was a big | |
year for us to have to have all those tariff increases and it did hurt our top-line and our | |
cost structure. So we've been moving slowly away from China. | |
It is our biggest country of origin but our geographic diversification has now gone to | |
Vietnam, Indonesia, Cambodia, Thailand, the Philippines and other Southeast Asia | |
countries that don't have tariffs. We're monitoring those situations too, we think the new | |
administration may have a different view of that tariffs with China which could be a | |
benefit to us. We already have the right price to our customer but we have a higher cost | |
structure with some of those tariffs. So if they do [administration] or move away from | |
some of those tariffs that would also be a good guy in our earnings but it would be over | |
the turn of the inventory which is about six months. So it takes little while to get those | |
benefits but we think there's upside there too. | |
Simeon Gutman: | Great. I don't know if I heard this right on the call yesterday, you talked about freight |
and around Q4. Maybe this was freight within your network, not parcel or last mile stuff. | |
But I thought I heard it that it was like a good guy for your business whereas the rest of | |
retail it seems to be a headwind. Did it -- did we hear it right and just to clarify that | |
point? | |
Jeff Knudson: | Yeah, Simeon, we were extremely pleased with driving 950 basis points of gross margin |
in the third quarter. We had said the vast majority of that was leverage on our fixed costs | |
given the comp performance in the third quarter. There was also 200 basis points of | |
product profit expansion with more full price selling both in our everyday and seasonal | |
business and then there was about a hundred basis points of freight favorability in the | |
third quarter and we expect all three of those drivers to continue to drive gross margin | |
expansion in the fourth quarter. And the freight dynamic is really a residual of earlier in | |
the year at the onset of the pandemic we had essentially paused or cancelled all of the | |
orders that we had from an inventory standpoint so when you think back to a second | |
quarter, there was very little freight flowing into our DC's and then as a result of that | |
from our DC's to our stores. And those outbound freight costs flow through our cost of | |
goods sold as inventory turns so we do expect a benefit from freight in the third and | |
fourth quarter. | |
And then as it relates to the rest of the industry, we are experiencing elevated freight rates | |
right now as we're chasing back into inventory on the everyday side and trying to | |
improve that inventory position for the beginning of next year and throughout the fourth | |
quarter and we would -- those higher freight costs would then turn into costs of goods | |
sold next -- in the first half of the year. |
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Simeon Gutman: | Got it. There's one follow-up from an investor, I think related to direct sourcing. Why |
couldn't you get to 100% direct sourcing for everyday product lines, why or why not, and | |
what percentage of your seasonal could and will be direct sourced? | |
Lee Bird: | Direct sourcing is a great benefit for us from a margin standpoint but it's also a great tool |
against our agents and suppliers to say we could go direct source. And so when we've | |
had that threat of direct sourcing they've come back with more competitive pricing, one, | |
and two is, when you direct source it, you have to design and develop it, you have to | |
create -- you have to create a team that does the design development work, you have to | |
create a tech pack that gives all of the specifications of the product that you want which | |
then you have to send to the supplier. So that requires more SG&A for us. So we look at | |
the total cost. If we can get the supplier who would then do all that design work for us, | |
and at a total cost that's less than the product cost savings for us plus all the SG&A, then | |
we will then decide to stay with an agent which is going to be more efficient. So in each | |
case we use it as a lever to get lower prices. Sometimes we go then to direct source. We | |
also have about 15% of our product is not -- you know, 15% to 20% is not private label, | |
private branded but it's actually national branded so we're not going to get that 20%, so | |
now you're talking about an available pool of 70% to 80% is available and if we can get | |
half of that direct source, that's great. The other part, it's just more efficient to work | |
through a third-party when there are lower costs but them carrying the load on the | |
SG&A. | |
Simeon Gutman: | Perfect. So, look, with that, we're about one minute under our time. Lee, I don't know if |
-- I can pass the floor back if there's anything you'd like to say in closing and if not I can | |
wrap up and I'll pause for one second. | |
Lee Bird: | Yeah, I would just say thanks for the time. We love talking about our business, we've |
been gaining meaningful share over and above what the industry is. We feel like our | |
business has turned around from last year's underperformance and we've corrected the | |
things that we needed to. We continue to outperform the industry. We think that there's | |
an opportunity here for investors that they look at our business to see us compared to | |
other potential peer groups that were undervalued, but that's our job to prove that and | |
what we're trying to do is proving that by delivering outsized outcomes which is what | |
we've done in the past, now, two quarters in a row going to now three quarters with Q4 | |
looking so good. | |
Simeon Gutman: | Thank you, appreciate it, Lee. Thank you to Lee, to Jeff, to Arvind and the entire At |
Home team. Congratulations on what you have accomplished. Thank you for your | |
participation and all the best on the holiday and into 2021. | |
Lee Bird: | Great, thanks Simeon. Take care. |
Jeff Knudson: | Thanks, Simeon. |
Simeon Gutman: | Take care. |
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At Home Group Inc. published this content on 04 December 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 04 December 2020 09:00:02 UTC