0001558370-18-005169.txt : 20180607 0001558370-18-005169.hdr.sgml : 20180607 20180607161607 ACCESSION NUMBER: 0001558370-18-005169 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 64 CONFORMED PERIOD OF REPORT: 20180428 FILED AS OF DATE: 20180607 DATE AS OF CHANGE: 20180607 FILER: COMPANY DATA: COMPANY CONFORMED NAME: At Home Group Inc. CENTRAL INDEX KEY: 0001646228 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOME FURNITURE, FURNISHINGS & EQUIPMENT STORES [5700] IRS NUMBER: 453229563 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-37849 FILM NUMBER: 18886662 BUSINESS ADDRESS: STREET 1: AT HOME GROUP INC. STREET 2: 1600 EAST PLANO PARKWAY CITY: PLANO STATE: TX ZIP: 75074 BUSINESS PHONE: (972) 265-6227 MAIL ADDRESS: STREET 1: 1600 EAST PLANO PARKWAY CITY: PLANO STATE: TX ZIP: 75074 10-Q 1 home-20180428x10q.htm 10-Q home_Current folio_10Q_Q1FY19

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended April 28, 2018

 

or

 

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

Commission File Number: 001-37849

 

AT HOME GROUP INC.

(Exact name of registrant as specified in its charter)

 


 

Delaware

 

45-3229563

(State of other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

1600 East Plano Parkway
Plano, Texas

 

75074

(Address of principal executive offices)

 

(Zip Code)

 

(972) 265-6227

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒ Yes  ☐ No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  ☒ Yes  ☐ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

Smaller reporting company

 

Emerging growth company

 

(Do not check if a smaller reporting company)

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ☐ Yes  ☒ No

 

There were 62,849,640 shares of the registrant’s common stock, par value $0.01 per share, outstanding as of June 4, 2018.

 

 

 


 

AT HOME GROUP INC.

 

TABLE OF CONTENTS

 

 

Page

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 

1

 

 

PART I — FINANCIAL INFORMATION 

 

 

 

 

Item 1. 

Condensed Consolidated Financial Statements.

3

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

15

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk.

29

 

 

 

Item 4. 

Controls and Procedures.

29

 

 

 

PART II — OTHER INFORMATION 

 

 

 

 

Item 1. 

Legal Proceedings.

31

 

 

 

Item 1A. 

Risk Factors.

31

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds.

31

 

 

 

Item 3. 

Defaults Upon Senior Securities.

31

 

 

 

Item 4. 

Mine Safety Disclosures.

31

 

 

 

Item 5. 

Other Information.

31

 

 

 

Item 6. 

Exhibits.

34

 

 

 

 

 

 


 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q 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”, “believe”, “continue”, “could”, “estimate”, “expect”, “intend”, “may”, “might”, “plan”, “potential”, “predict”, “seek”, “should” or “vision”, or the negative thereof or other variations thereon or comparable terminology. In particular, statements about the markets in which we operate, our expected new store openings, our real estate strategy, growth targets and potential growth opportunities and future capital expenditures, estimates of expenses we may incur in connection with equity incentive awards to management, and our expectations, beliefs, plans, strategies, objectives, prospects, assumptions or future events or performance contained in this report 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, including the important factors described in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended January 27, 2018 as filed with the Securities and Exchange Commission (“SEC”) on March 23, 2018, many of which are beyond our control. These and other important factors 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. Some of the factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements include:

 

·

general economic factors that may materially adversely affect our business, revenue and profitability;

·

volatility or disruption in the financial markets;

·

consumer spending on home décor products which could decrease or be displaced by spending on other activities;

·

our ability to successfully implement our growth strategy on a timely basis or at all;

·

our failure to manage inventory effectively and our inability to satisfy changing consumer demands and preferences;

·

losses of, or disruptions in, or our inability to efficiently operate our distribution network;

·

risks related to our imported merchandise;

·

adverse events, including weather impacts, in the geographical regions in which we operate;

·

risks associated with leasing substantial amounts of space;

·

risks associated with our sale-leaseback strategy;

·

the highly competitive retail environment in which we operate;

·

risks related to our substantial indebtedness and the significant operating and financial restrictions imposed on us and our subsidiaries by our secured credit facilities;

·

our dependence upon the services of our management team and our buyers;

·

the failure to attract and retain quality employees;

·

difficulties with our vendors;

·

the seasonality of our business;

·

fluctuations in our quarterly operating results;

·

the failure or inability to protect our intellectual property rights;

·

risks associated with third-party claims that we infringe upon their intellectual property rights;

·

increases in commodity prices and supply chain costs;

·

the need to make significant investments in advertising, marketing or promotions;

·

the success of any investment in online services or e-commerce activities that we may launch;

·

the success of our loyalty program or private label or co-branded consumer credit offerings and any investments related thereto;

·

disruptions to our information systems or our failure to adequately support, maintain and upgrade those systems;

·

unauthorized disclosure of sensitive or confidential customer information;

·

regulatory or litigation developments;

1


 

·

risks associated with product recalls and/or product liability, as well as changes in product safety and other consumer protection laws;

·

inadequacy of our insurance coverage;

·

our substantial dependence upon our reputation and positive perceptions of At Home;

·

the potential negative impact of changes to our accounting policies, rules and regulations;

·

changes to the U.S. tax laws and changes in our effective tax rate;

·

our control by an investment group led by certain affiliates of AEA Investors LP and Starr Investment Holdings, LLC (collectively, the “Sponsors”); and

·

other risks and uncertainties, including those listed under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended January 27, 2018 as filed with the SEC on March 23, 2018, and in other filings we may make from time to time with the SEC.

 

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 report 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 report. 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 report, they may not be predictive of results or developments in future periods.

 

Any forward-looking statement that we make in this Quarterly Report on Form 10-Q 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 report.

 

2


 

PART I — FINANCIAL INFORMATION

 

ITEM 1. — CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

AT HOME GROUP INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

    

April 28, 2018

    

January 27, 2018

    

April 29, 2017

 

Assets

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,532

 

$

8,525

 

$

10,576

 

Inventories, net

 

 

283,107

 

 

269,844

 

 

252,116

 

Prepaid expenses

 

 

9,239

 

 

7,911

 

 

6,939

 

Other current assets

 

 

9,234

 

 

14,653

 

 

5,216

 

Total current assets

 

 

315,112

 

 

300,933

 

 

274,847

 

Property and equipment, net

 

 

528,710

 

 

466,263

 

 

375,541

 

Goodwill

 

 

569,732

 

 

569,732

 

 

569,732

 

Trade name

 

 

1,458

 

 

1,458

 

 

1,458

 

Debt issuance costs, net

 

 

1,868

 

 

1,978

 

 

1,081

 

Restricted cash

 

 

2,515

 

 

 —

 

 

564

 

Noncurrent deferred tax asset

 

 

39,277

 

 

33,561

 

 

40,516

 

Other assets

 

 

736

 

 

316

 

 

407

 

Total assets

 

$

1,459,408

 

$

1,374,241

 

$

1,264,146

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

76,194

 

$

79,628

 

$

63,687

 

Accrued and other current liabilities

 

 

92,758

 

 

89,499

 

 

73,095

 

Revolving line of credit

 

 

183,500

 

 

162,000

 

 

126,800

 

Current portion of deferred rent

 

 

10,512

 

 

9,072

 

 

7,291

 

Current portion of long-term debt and financing obligations

 

 

3,600

 

 

3,474

 

 

3,664

 

Income taxes payable

 

 

1,583

 

 

 —

 

 

13,442

 

Total current liabilities

 

 

368,147

 

 

343,673

 

 

287,979

 

Long-term debt

 

 

289,397

 

 

289,902

 

 

299,403

 

Financing obligations

 

 

28,152

 

 

19,690

 

 

19,882

 

Deferred rent

 

 

147,605

 

 

124,054

 

 

105,959

 

Other long-term liabilities

 

 

5,508

 

 

6,043

 

 

2,715

 

Total liabilities

 

 

838,809

 

 

783,362

 

 

715,938

 

Shareholders' Equity

 

 

 

 

 

 

 

 

 

 

Common stock; $0.01 par value; 500,000,000 shares authorized; 62,354,101,  61,423,398 and 60,366,768 shares issued and outstanding, respectively

 

 

624

 

 

614

 

 

604

 

Additional paid-in capital

 

 

583,837

 

 

572,488

 

 

551,590

 

Retained earnings (accumulated deficit)

 

 

36,138

 

 

17,777

 

 

(3,986)

 

Total shareholders' equity

 

 

620,599

 

 

590,879

 

 

548,208

 

Total liabilities and shareholders' equity

 

$

1,459,408

 

$

1,374,241

 

$

1,264,146

 

 

See Notes to Condensed Consolidated Financial Statements.

3


 

AT HOME GROUP INC.

Condensed Consolidated Statements of Income

(in thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

    

April 28, 2018

    

April 29, 2017

 

 

 

 

 

 

 

 

Net sales

 

$

256,161

 

$

211,841

 

Cost of sales

 

 

170,917

 

 

139,963

 

Gross profit

 

 

85,244

 

 

71,878

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

59,465

 

 

49,141

 

Depreciation and amortization

 

 

1,579

 

 

1,418

 

Total operating expenses

 

 

61,044

 

 

50,559

 

 

 

 

 

 

 

 

 

Operating income

 

 

24,200

 

 

21,319

 

Interest expense, net

 

 

5,778

 

 

4,886

 

Income before income taxes

 

 

18,422

 

 

16,433

 

Income tax provision

 

 

61

 

 

6,384

 

Net income

 

$

18,361

 

$

10,049

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

Basic

 

$

0.30

 

$

0.17

 

Diluted

 

$

0.28

 

$

0.16

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

Basic

 

 

61,758,330

 

 

60,366,768

 

Diluted

 

 

65,889,163

 

 

62,265,248

 

 

See Notes to Condensed Consolidated Financial Statements.

 

4


 

AT HOME GROUP INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

    

April 28, 2018

    

April 29, 2017

 

Operating Activities

 

 

 

 

 

Net income

 

$

18,361

 

$

10,049

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11,456

 

 

10,836

 

Loss (gain) on disposal of fixed assets

 

 

31

 

 

(18)

 

Non-cash interest expense

 

 

501

 

 

465

 

Amortization of deferred gain on sale-leaseback

 

 

(1,978)

 

 

(1,468)

 

Deferred income taxes

 

 

(5,716)

 

 

219

 

Stock-based compensation

 

 

2,128

 

 

3,289

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

Inventories

 

 

(13,264)

 

 

(8,321)

 

Prepaid expenses and other current assets

 

 

4,091

 

 

(3,088)

 

Other assets

 

 

(420)

 

 

142

 

Accounts payable

 

 

(5,263)

 

 

3,335

 

Accrued liabilities

 

 

(9,117)

 

 

(4,711)

 

Income taxes payable

 

 

1,583

 

 

6,177

 

Deferred rent

 

 

4,315

 

 

3,944

 

Net cash provided by operating activities

 

 

6,708

 

 

20,850

 

Investing Activities

 

 

 

 

 

 

 

Purchase of property and equipment

 

 

(78,587)

 

 

(40,897)

 

Net proceeds from sale of property and equipment

 

 

49,637

 

 

18

 

Net cash used in investing activities

 

 

(28,950)

 

 

(40,879)

 

Financing Activities

 

 

 

 

 

 

 

Payments under lines of credit

 

 

(131,000)

 

 

(74,476)

 

Proceeds from lines of credit

 

 

152,500

 

 

99,701

 

Payments on financing obligations

 

 

(139)

 

 

(34)

 

Payments on long-term debt

 

 

(828)

 

 

(1,596)

 

Proceeds from exercise of stock options

 

 

9,231

 

 

 —

 

Net cash provided by financing activities

 

 

29,764

 

 

23,595

 

Increase in cash, cash equivalents and restricted cash

 

 

7,522

 

 

3,566

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

8,525

 

 

7,574

 

Cash, cash equivalents and restricted cash, end of period

 

$

16,047

 

$

11,140

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

Cash paid for interest

 

$

5,033

 

$

7,902

 

Cash (received) paid for income taxes

 

$

(160)

 

$

191

 

Supplemental Information for Non-cash Investing and Financing Activities

 

 

 

 

 

 

 

Increase in current liabilities of property and equipment

 

$

13,670

 

$

4,123

 

Property and equipment reduction due to sale leaseback

 

$

(26,982)

 

$

 —

 

Property and equipment acquired under capital lease

 

$

 —

 

$

1,000

 

Property and equipment additions due to build-to-suit lease transactions

 

$

8,660

 

$

 —

 

 

See Notes to Condensed Consolidated Financial Statements.

 

 

5


 

1.    Summary of Significant Accounting Policies

 

Basis of Presentation

 

These condensed consolidated financial statements include At Home Group Inc. and its wholly-owned subsidiaries (collectively referred to as “we”, “us”, “our” and the “Company”).

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information in accordance with Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented have been included.

 

The condensed consolidated balance sheets as of April 28, 2018 and April 29, 2017, the condensed consolidated statements of income for the thirteen weeks ended April 28, 2018 and April 29, 2017 and the condensed consolidated statements of cash flows for the thirteen weeks ended April 28, 2018 and April 29, 2017 have been prepared by the Company and are unaudited. The consolidated balance sheet as of January 27, 2018 has been derived from the audited financial statements for the fiscal year then ended included in our Annual Report on Form 10-K for the fiscal year ended January 27, 2018 as filed with the Securities and Exchange Commission (“SEC”) on March 23, 2018 (the “Annual Report”), but does not include all of the information and notes required by GAAP for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the fiscal years ended January 27, 2018 and January 28, 2017 and the related notes thereto included in the Annual Report.

 

The Company does not have any components of other comprehensive income recorded within its condensed consolidated financial statements, and, therefore, does not separately present a statement of comprehensive income in its condensed consolidated financial statements.

 

Fiscal Year

 

We report on the basis of a 52- or 53-week fiscal year, which ends on the last Saturday in January. References to a fiscal year mean the year in which that fiscal year ends. References herein to “first fiscal quarter 2019” relate to the thirteen weeks ended April 28, 2018 and references to “first fiscal quarter 2018” relate to the thirteen weeks ended April 29, 2017.

 

Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of At Home Group Inc. and its consolidated wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of these condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.

 

Reclassification

 

Certain prior period amounts have been reclassified to conform with the current period presentation within the condensed consolidated financial statements and the accompanying notes.

 

6


 

Seasonality

 

Our business is moderately seasonal in nature and, therefore, the results of operations for the thirteen weeks ended April 28, 2018 are not necessarily indicative of the operating results that may be expected for a full fiscal year. Historically, our business has realized a slightly higher portion of net sales and operating income in the second and fourth fiscal quarters attributable primarily to the impact of summer and the year-end holiday decorating seasons, respectively.

 

Restricted Cash

 

Restricted cash consists of cash and cash equivalents reserved for a specific purpose that is not readily available for immediate or general business use. Our restricted cash balance as of April 28, 2018 consists primarily of cash equivalents held for use in the purchase of property and equipment.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02 “Leases”, which supersedes ASC 840 “Leases” and creates a new topic, ASC 842 “Leases” (“ASU 2016-02”). Under ASU 2016-02, an entity will be required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with early adoption permitted. At adoption, this update will be applied using a modified retrospective approach. We are currently evaluating the impact of ASU 2016-02 and we expect that upon adoption we will recognize right-of-use assets and liabilities that will be material to our financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 simplifies the measurement of goodwill impairment by removing the second step of the goodwill impairment test, which requires the determination of the fair value of individual assets and liabilities of a reporting unit. Under ASU 2017-04, goodwill impairment is to be measured as the amount by which a reporting unit’s carrying value exceeds its fair value with the loss recognized not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The standard is to be applied on a prospective basis. We are currently evaluating the impact of ASU 2017-04 and do not anticipate a material impact to the consolidated financial statements once implemented.

 

Recently Adopted Accounting Standards

 

On January 28, 2018, we adopted ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”) and ASU No. 2016-04, “Recognition of Breakage for Certain Prepaid Stored-Value Products” (“ASU 2016-04” and together with ASU 2014-09, the “New Revenue Standard” or “ASC 606”) using the full retrospective method. For more information, see Note 2 – Revenue Recognition.

 

On January 28, 2018, we adopted ASU No. 2016-18, “Restricted Cash” (“ASU 2016-18”) using the required retrospective transition method.  This ASU requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statements of cash flows.

 

7


 

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

April 28, 2018

    

January 27, 2018

 

April 29, 2017

    

January 28, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

13,532

 

$

8,525

 

$

10,576

 

$

7,092

 

Restricted cash

 

 

2,515

 

 

 —

 

 

564

 

 

482

 

Cash, cash equivalents and restricted cash

 

$

16,047

 

$

8,525

 

$

11,140

 

$

7,574

 

 

2.    Revenue Recognition

 

On January 28, 2018, we adopted ASU 2014-09 using the retrospective transition method.  ASU 2014-09 requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. Results for all reporting periods presented include the impact of the new guidance under ASU 2014-09, including prior periods that have been recast to reflect the estimated cost of returned assets within other current assets rather than netted with our sales returns reserve within other current liabilities. The adoption of ASU 2014-09 did not impact opening retained earnings as of January 28, 2018 and did not have a material impact on revenues recognized for the thirteen weeks ended April 28, 2018. 

 

The adoption of ASU 2014-09 had the following impact on our condensed consolidated balance sheets as of January 27, 2018 and April 29, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheet as of January 27, 2018

 

 

 

 

 

 

New Revenue

 

 

 

 

 

 

As Reported

 

Standard

 

As Recast

 

 

    

 

 

    

 

 

    

 

 

Other current assets

 

$

13,701

 

$

952

 

$

14,653

 

Total current assets

 

 

299,981

 

 

952

 

 

300,933

 

Total assets

 

 

1,373,289

 

 

952

 

 

1,374,241

 

Accrued and other current liabilities

 

 

88,547

 

 

952

 

 

89,499

 

Total current liabilities

 

 

342,721

 

 

952

 

 

343,673

 

Total liabilities

 

 

782,410

 

 

952

 

 

783,362

 

Total liabilities and shareholders' equity

 

 

1,373,289

 

 

952

 

 

1,374,241

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheet as of April 29, 2017

 

 

 

 

 

 

New Revenue

 

 

 

 

 

 

As Reported

 

Standard

 

As Recast

 

 

    

 

 

    

 

 

    

 

 

Other current assets

 

$

4,217

 

$

999

 

$

5,216

 

Total current assets

 

 

273,848

 

 

999

 

 

274,847

 

Total assets

 

 

1,263,147

 

 

999

 

 

1,264,146

 

Accrued and other current liabilities

 

 

72,096

 

 

999

 

 

73,095

 

Total current liabilities

 

 

286,980

 

 

999

 

 

287,979

 

Total liabilities

 

 

714,939

 

 

999

 

 

715,938

 

Total liabilities and shareholders' equity

 

 

1,263,147

 

 

999

 

 

1,264,146

 

 

8


 

The adoption of ASU 2014-09 had the following impact on our condensed consolidated statement of cash flows for the thirteen weeks ended April 29, 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed Consolidated Statement of Cash Flows

 

 

 

Thirteen Weeks Ended April 29, 2017

 

 

 

 

 

 

New Revenue

 

 

 

 

 

 

As Reported(a)

 

Standard

 

As Recast

 

 

    

 

 

    

 

 

    

 

 

Prepaid expenses and other current assets

 

$

(3,166)

 

$

78

 

$

(3,088)

 

Accrued liabilities

 

 

(4,633)

 

 

(78)

 

 

(4,711)

 

Net cash provided by operating activities

 

 

20,850

 

 

 —

 

 

20,850

 


(a)

Accrued liabilities have been reclassified in the prior period to conform with the current period presentation as discussed in Note 1 – Summary of Significant Accounting Policies.

 

We sell a broad assortment of home décor, including home furnishings and accent décor, and recognize revenue when the customer takes possession or control of goods at the time the sale is completed at the store register. Accordingly, we implicitly enter into a contract with customers at the point of sale. In addition to retail store sales, we also generate revenue through the sale of gift cards and through incentive arrangements associated with our credit card program.

 

As noted in the segment information in the notes to the consolidated financial statements included in our Annual Report, our business consists of one reportable segment. In accordance with ASC 606, we disaggregate net sales into the following product categories:

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

 

April 28, 2018

    

April 29, 2017

    

 

    

 

 

    

 

 

 

Home furnishings

 

52

%

 

53

%

 

Accent décor

 

44

 

 

44

 

 

Other

 

 4

 

 

 3

 

 

Total

 

100

%

 

100

%

 

 

Contract liabilities are recognized primarily for gift card sales. Cash received from the sale of gift cards is recorded as a contract liability in accrued and other current liabilities, and we recognize revenue upon the customer’s redemption of the gift card. Gift card breakage is recognized as revenue in proportion to the pattern of customer redemptions by applying an estimated breakage rate that takes into account historical patterns of redemptions and deactivations of gift cards.

 

We recognized approximately $3.6 million and $2.7 million in gift card redemption revenue for the thirteen weeks ended April 28, 2018 and April 29, 2017, respectively, and recognized an immaterial amount in gift card breakage revenue for each of the thirteen weeks ended April 28, 2018 and April 29, 2017. Of the total gift card redemption revenue, $1.4 million and $1.5 million for the thirteen weeks ended April 28, 2018 and April 29, 2017, respectively, related to gift cards issued in prior periods. We had outstanding gift card liabilities of $5.8 million,  $5.8 million and $4.0 million as of April 28, 2018, January 27, 2018 and April 29, 2017, respectively, which are included in accrued and other current liabilities.  Gift card redemption and breakage revenue for the thirteen weeks ended April 28, 2018 and April 29, 2017 and gift card liability as of April 28, 2018, January 27, 2018 and April 29, 2017 reported under ASC 606 were not materially different from amounts that would have been reported under the previous revenue guidance of ASC 605. We will continue to monitor future quarters for materiality.

9


 

 

In fiscal year 2018, we launched a credit card program by which credit is extended to eligible customers through private label and co-branded credit cards with Synchrony Bank (“Synchrony”). Through the launch of the credit card program, we received reimbursement of costs associated with the launch of the credit card program as well as a one-time payment which has been deferred over the initial seven-year term of the agreement with Synchrony. We receive ongoing payments from Synchrony based on sales transacted on our credit cards and for reimbursement of joint marketing and advertising activities. During the thirteen weeks ended April 28, 2018, we recorded an immaterial amount of income from our credit card program within net sales when earned.

 

Our credit card program includes a loyalty component that allows for customers to earn points for qualifying purchases. Upon reaching specified levels, points are redeemed for certificates usable at our stores. As there are no directly observable selling prices for these points, we are required  to account for the points using a relative fair value approach. During the thirteen weeks ended April 28, 2018, we recorded an immaterial amount for the deferral of revenues related to our loyalty program as a reduction of revenues.

 

Customers may return purchased items for an exchange or refund. Historically, the sales returns reserve was presented net of cost of sales in other current liabilities and based primarily on historical trends and sales performance. ASU 2014-09 also specifies that the balance sheets should reflect both a liability with respect to the refund obligation and an asset representing the right to the returned goods on a gross basis. In adopting ASU 2014-09, we utilized the expected value methodology in which different scenarios including current sales return data and historical quarterly sales return rates are used to develop an estimated sales return rate. During the fiscal year ended January 27, 2018, we utilized the practical expedient provided under ASU 2014-09 to assess all sales on a portfolio basis, as this did not yield materially different results from the actual sales returns. As such,  we now present the sales returns reserve within other current liabilities and the estimated value of the inventory that will be returned within other current assets in the condensed consolidated balance sheets. The components of the sales returns reserve reflected in the condensed consolidated balance sheets consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 28,

 

January 27,

 

April 29,

 

 

 

2019

 

2018

 

2017

 

 

    

 

 

    

 

 

    

 

 

Accrued and other current liabilities

 

$

3,332

 

$

2,023

 

$

2,365

 

Other current assets

 

 

1,429

 

 

952

 

 

999

 

Sales returns reserve, net

 

$

1,903

 

$

1,071

 

$

1,366

 

 

 

3.    Fair Value Measurements

 

We follow the provisions of Accounting Standards Codification (“ASC”) 820 (Topic 820, “Fair Value Measurements and Disclosures”). ASC 820 establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations.

 

·

Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that we have the ability to access.

 

·

Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

·

Level 3 - Valuations based on models where significant inputs are not observable. The unobservable inputs reflect our own assumptions about the assumptions that market participants would use.

 

ASC 820 requires us to maximize the use of observable inputs and minimize the use of unobservable inputs. If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument is categorized based upon the lowest level of input that is significant to the fair value calculation.

10


 

 

The fair value of all current financial instruments approximates carrying value because of the short-term nature of these instruments. We have variable and fixed rates on our long-term debt. The fair value of long-term debt with variable rates approximates carrying value as the interest rates of these amounts approximate market rates. We determine fair value on our fixed rate debt by using quoted market prices and current interest rates. 

 

At April 28, 2018, the fair value of our fixed rate mortgage due August 22, 2022 approximated the carrying value of $6.1 million. Fair value for the fixed rate mortgage was determined using Level 2 inputs.

 

4.    Sale-Leaseback Transactions

 

In February 2018, we sold four of our properties in Blaine, Minnesota; Fort Worth, Texas; Jackson, Mississippi; and Memphis, Tennessee for a total of $50.3 million, resulting in a net gain of $22.6 million. Contemporaneously with the closing of the sale, we entered into a lease pursuant to which we leased back the properties for cumulative initial annual rent of $3.4 million, subject to annual escalations. The lease is being accounted for as an operating lease. The net gain on the sale of the properties has been deferred and is included in deferred rent liabilities in the accompanying condensed consolidated balance sheets. The gain will be amortized to rent expense on a straight-line basis through the lease term, or February 2033.

 

5.    Accrued and Other Current Liabilities

 

Accrued and other current liabilities consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 28,

 

January 27,

 

April 29,

 

 

 

2019

 

2018

 

2017

 

 

    

 

 

    

 

 

    

 

 

Inventory in-transit

 

$

10,496

 

$

14,618

 

$

13,620

 

Accrued payroll and other employee-related liabilities

 

 

5,858

 

 

16,917

 

 

4,575

 

Accrued taxes, other than income

 

 

15,500

 

 

11,680

 

 

13,370

 

Accrued interest

 

 

4,418

 

 

4,173

 

 

327

 

Insurance liabilities

 

 

3,648

 

 

3,391

 

 

3,470

 

Gift card liability

 

 

5,800

 

 

5,787

 

 

4,028

 

Construction costs

 

 

19,947

 

 

9,661

 

 

10,169

 

Accrued inbound freight

 

 

9,132

 

 

10,796

 

 

9,110

 

Other

 

 

17,959

 

 

12,476

 

 

14,426

 

Total accrued liabilities

 

$

92,758

 

$

89,499

 

$

73,095

 

 

 

6.    Revolving Line of Credit

 

Interest on borrowings under our $350.0 million senior secured asset-based revolving credit facility (“ABL Facility”) is computed based on our average daily availability, at our option, of: (x) the higher of (i) the Federal Funds Rate plus 1/2 of 1.00%, (ii) the bank's prime rate and (iii) the London Interbank Offered Rate (“LIBOR”) plus 1.00%,  plus in each case, an applicable margin of 0.25% to 0.75% or (y) the bank's LIBOR rate plus an applicable margin of 1.25% to 1.75%. The effective interest rate was approximately 3.50% and 2.30% during the thirteen weeks ended April 28, 2018 and April 29, 2017, respectively.

 

We have amended the agreement governing the ABL Facility (the “ABL Credit Agreement”) from time to time. After giving effect to such amendments, as of April 28, 2018, the aggregate revolving commitments under the ABL Facility are $350.0 million, with a sublimit for the issuance of letters of credit of $50.0 million and a sublimit for the issuance of swingline loans of $20.0 million. In July 2017, in connection with the Seventh Amendment to the ABL Credit Agreement (the “ABL Amendment”), the maturity of the ABL Facility was extended to the earlier of July 27, 2022 and the date that is 91 days prior to the maturity date of the term loan entered into on June 5, 2015 under a first lien credit agreement (the “First Lien Agreement”) (as such date may be extended).

11


 

 

As of April 28, 2018, approximately $183.5 million was outstanding under the ABL Facility, approximately $0.6 million in face amount of letters of credit had been issued and we had availability of approximately $80.9 million. As of April 28, 2018, we were in compliance with all covenants prescribed in the ABL Facility.

 

7.    Long-Term Debt

 

Long-term debt consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 28,

 

January 27,

 

April 29,

 

 

    

2019

    

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

Term Loan

 

$

291,750

 

$

292,500

 

$

294,000

 

Note payable, bank (a)

 

 

6,073

 

 

6,108

 

 

6,002

 

Obligations under capital leases

 

 

867

 

 

911

 

 

9,700

 

Total debt

 

 

298,690

 

 

299,519

 

 

309,702

 

Less: current maturities

 

 

3,319

 

 

3,316

 

 

3,521

 

Less: unamortized deferred debt issuance costs

 

 

5,974

 

 

6,301

 

 

6,778

 

Long-term debt

 

$

289,397

 

$

289,902

 

$

299,403

 


(a)

Matures August 22, 2022;  $34,483 payable monthly, including interest at 4.50% with the remaining balance due at maturity; secured by the location’s land and building.

 

On June 5, 2015, our indirect wholly owned subsidiary, At Home Holding III Inc. (the “Borrower”), entered into the First Lien Agreement, by and among the Borrower, At Home Holding II Inc. (“At Home II”), a direct wholly owned subsidiary of At Home Group Inc., as guarantor, certain indirect subsidiaries of the Borrower, various lenders and Bank of America, N.A., as administrative agent and collateral agent. The First Lien Agreement provides for a $300.0 million term loan (the “Term Loan”), which amount was borrowed on June 5, 2015. The Term Loan will mature on June 3, 2022, and is repayable in equal quarterly installments of approximately $0.8 million for an annual aggregate amount equal to 1% of the original principal amount. The Borrower has the option of paying interest on a 1-month, 2-month or quarterly basis on the Term Loan at an annual rate of LIBOR (subject to a 1% floor) plus 4.00%, subject to a 0.50% reduction if the Borrower achieves a specified secured net leverage ratio level, which was met during the fiscal year ended January 28, 2017 and for which the Borrower has continued to qualify during the thirteen weeks ended April 28, 2018. The Term Loan is prepayable, in whole or in part, without premium at our option.

 

On July 27, 2017, the Borrower entered into a First Amendment to the First Lien Agreement to permit the incurrence of additional indebtedness pursuant to the ABL Amendment and to make certain technical changes to conform to the terms of the ABL Amendment.

 

8.    Related Party Transactions

 

As of April 28, 2018,  certain affiliates of AEA Investors LP (collectively “AEA”) and Starr Investment Holdings, LLC (“Starr Investments” and, together with AEA, the “Sponsors”) own approximately 61% of our outstanding common stock.

 

Merry Mabbett Inc. (“MMI”) is owned by Merry Mabbett Dean, who is the mother of Lewis L. Bird III, our Chairman of the Board, Chief Executive Officer and President. During the thirteen weeks ended April 28, 2018 and April 29, 2017, Ms. Dean, through MMI, provided certain design services to us, including design for our home office, as well as design in our stores. In addition, through MMI, we purchased certain fixtures, furniture and equipment that is now owned and used by us in our home office, new store offices or in the product vignettes in the stores. During each of the thirteen weeks ended April 28, 2018 and April 29, 2017, we paid MMI approximately $0.2 million  for fixtures, furniture and equipment and design related services.

 

12


 

9.    Income Taxes

 

On December 22, 2017, federal tax reform legislation, known as the Tax Cuts and Jobs Act, was enacted by the U.S. government (the “Tax Act”). The Tax Act makes broad and complex changes to the Internal Revenue Code of 1986, as amended, including, but not limited to, (i) reducing the maximum U.S. federal corporate income tax rate from 35% to 21%; (ii) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits are realized; (iii) creating a new limitation on deductible interest expense; and (iv) changing rules related to uses and limitation of net operating loss carryforwards generated in tax years beginning after December 31, 2017. As such, for the fiscal year ended January 26, 2019, the statutory federal corporate income tax rate is 21.0%.

 

In December of 2017, the Securities and Exchange Commission staff issued State Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which allows us to record provisional amounts during a measurement period not to extend beyond one year from the enactment date. Since the Tax Act was enacted in the fourth fiscal quarter 2018 (and ongoing guidance and accounting interpretations are expected through December of 2018), we consider the accounting of deferred tax re-measurements and other items, such as cost recovery and state tax considerations, to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions for fiscal years 2019 and 2018. We expect to complete our analysis within the measurement period in accordance with SAB 118.

 

Our effective tax rate for the thirteen weeks ended April 28, 2018 was 0.3% compared to 38.9 % for the thirteen weeks ended April 29, 2017. The effective tax rate for the thirteen weeks ended April 28, 2018 differs from the current federal statutory rate of 21% primarily due to the recognition of $4.2 million of excess tax benefit related to stock option exercises and the impact of state and local income taxes. The effective tax rate for the thirteen weeks ended April 29, 2017 differs from the previous federal statutory rate of 35% primarily due to the impact of state and local income taxes as well as a strategic restructuring that impacted deferred tax assets.

 

10.    Commitments and Contingencies

 

Litigation

 

We are subject to claims and lawsuits that arise primarily in the ordinary course of business.  It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

 

11.    Earnings Per Share

 

In accordance with ASC 260, (Topic 260, “Earnings Per Share”), basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period including the dilutive impact of potential shares from the exercise of stock options and restricted stock units. Potentially dilutive securities are excluded from the computation of diluted net income per share if their effect is anti-dilutive.

 

13


 

The following table sets forth the calculation of basic and diluted earnings per share for the thirteen weeks ended April 28, 2018 and April 29, 2017 as follows (dollars in thousands, except share and per share data):

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

    

April 28, 2018

    

April 29, 2017

 

Numerator:

 

 

 

 

 

 

 

Net income

 

$

18,361

 

$

10,049

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Weighted average common shares outstanding-basic

 

 

61,758,330

 

 

60,366,768

 

Effect of dilutive securities:

 

 

 

 

 

 

 

Stock options and restricted stock units

 

 

4,130,833

 

 

1,898,480

 

Weighted average common shares outstanding-diluted

 

 

65,889,163

 

 

62,265,248

 

 

 

 

 

 

 

 

 

Per common share:

 

 

 

 

 

 

 

Basic net income per common share

 

$

0.30

 

$

0.17

 

Diluted net income per common share

 

$

0.28

 

$

0.16

 

 

For the thirteen weeks ended April 28, 2018 and April 29, 2017, approximately 205,882 and 2,743,140, respectively, of stock options were excluded from the calculation of diluted net income per common share since their effect was anti-dilutive.

 

12.    Stock-Based Compensation

 

On April  3, 2018, we made a grant of 663,247 options to members of our senior management team and 49,189 restricted stock units to our independent directors and members of our senior management team under the At Home Group Inc. Equity Incentive Plan (the “2016 Equity Plan”). Non-cash stock-based compensation expense associated with the grant of options will be approximately $8.5 million, which will be expensed over the requisite service period of three to four years. Non-cash stock-based compensation expense associated with the grant of restricted stock units will be approximately $1.5 million, which will be expensed over the requisite service period of one to three years. Forfeiture assumptions for the grants were estimated based on historical experience.

 

13.    Subsequent Events

 

In June 2018, our Board of Directors approved a grant of 1.5 million options to Chairman and Chief Executive Officer, Lewis L. Bird III. The options vest immediately upon the June 12, 2018 grant date. However, the shares resulting from the exercise of the options will be generally subject to transfer restrictions that lapse on the fourth anniversary of the date of grant, subject to certain service conditions. In addition, the Board of Directors approved a grant of options with an aggregate grant date fair value in an amount to compensate Mr. Bird for the difference in our share price on June 12, 2018 as compared to our share price on April 3, 2018 when annual equity awards were granted to other Company senior executives. As a result of the immediate vesting of these awards, non-cash stock-based compensation expense will be fully recognized in the second quarter of fiscal 2019.

14


 

ITEM 2. — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This discussion and analysis of the financial condition and results of our operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes of At Home Group Inc. included in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes thereto in our Annual Report on Form 10-K for the fiscal year ended January 27, 2018 as filed with the Securities and Exchange Commission (“SEC”) on March 23, 2018 (the “Annual Report”). You should review the disclosures under the heading “Item 1A. Risk Factors” in the Annual Report, as well as any cautionary language in this report, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. All expressions of the “Company”, “us”, “we”, “our”, and all similar expressions are references to At Home Group Inc. and its consolidated wholly-owned subsidiaries, unless otherwise expressly stated or the context otherwise requires.

 

We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the last Saturday in January. In a 52-week fiscal year, each quarter contains 13 weeks of operations; in a 53-week fiscal year, each of the first, second and third quarters includes 13 weeks of operations and the fourth quarter includes 14 weeks of operations. References to a fiscal year mean the year in which that fiscal year ends. References herein to “fiscal year 2019” relate to the 52 weeks ending January 26, 2019 and references herein to “fiscal year 2018” relate to the 52 weeks ended January 27, 2018. References herein to “the first fiscal quarter 2019” and “the first fiscal quarter 2018” relate to the thirteen weeks ended April 28, 2018 and April 29, 2017, respectively.

 

Overview

 

At Home is the leading home décor superstore based on the number of our locations and our large format stores that we believe dedicate more space per store to home décor than any other player in the industry. We are focused on providing the broadest assortment of products for any room, in any style, for any budget. We utilize our space advantage to out-assort our competition, offering over 50,000 SKUs throughout our stores. Our differentiated merchandising strategy allows us to identify on-trend products and then value engineer those products to provide desirable aesthetics at attractive price points for our customers. Over 70% of our products are unbranded, private label or specifically designed for us. We believe that our broad and comprehensive offering and compelling value proposition combine to create a leading destination for home décor with the opportunity to continue taking market share in a highly fragmented and growing industry.

 

As of April 28, 2018, our store base is comprised of 156 large format stores across 34 states, averaging approximately 110,000 square feet per store. Over the past five completed fiscal years we have opened 98 new stores and we believe there is significant whitespace opportunity to increase our store count in both existing and new markets.

 

Trends and Other Factors Affecting Our Business

 

Various trends and other factors affect or have affected our operating results, including:

 

Overall economic trends. The overall economic environment and related changes in consumer behavior have a significant impact on our business. In general, positive conditions in the broader economy promote customer spending in our stores, while economic weakness results in a reduction of customer spending. Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include employment rates, business conditions, changes in the housing market, the availability of credit, interest rates, tax rates and fuel and energy costs.

 

Consumer preferences and demand. Our ability to maintain our appeal to existing customers and attract new customers depends on our ability to originate, develop and offer a compelling product assortment responsive to customer preferences and design trends. If we misjudge the market for our products, we may be faced with excess inventories for some products and may be required to become more promotional in our selling activities, which would impact our net sales and gross profit.

15


 

 

New store openings. We expect new stores will be the key driver of the growth in our sales and operating profit in the future. Our results of operations have been and will continue to be materially affected by the timing and number of new store openings. The performance of new stores may vary depending on various factors such as the store opening date, the time of year of a particular opening, the amount of store opening costs, the amount of store occupancy costs and the location of the new store, including whether it is located in a new or existing market. For example, we typically incur higher than normal employee costs at the time of a new store opening associated with set-up and other opening costs. In addition, in response to the interest and excitement generated when we open a new store, the new stores generally experience higher net sales during the initial period of one to three months after which the new store’s net sales will begin to normalize as it reaches maturity within six months of opening, as further discussed below.

 

Our planned store expansion will place increased demands on our operational, managerial, administrative and other resources. Managing our growth effectively will require us to continue to enhance our inventory management and distribution systems, financial and management controls and information systems. We will also be required to hire, train and retain store management and store personnel, which, together with increased marketing costs, can affect our operating margins.

 

A new store typically reaches maturity, meaning the store’s annualized targeted sales volume has been reached, within six months of opening. New stores are included in the comparable store base during the sixteenth full fiscal month following the store’s opening, which we believe represents the most appropriate comparison. We also periodically explore opportunities to relocate a limited number of existing stores to improve location, lease terms, store layout or customer experience. Relocated stores typically achieve a level of operating profitability comparable to our company-wide average for existing stores more quickly than new stores.

 

Infrastructure investment. Our historical operating results reflect the impact of our ongoing investments to support our growth. In the past five fiscal years, we have made significant investments in our business that we believe have laid the foundation for continued profitable growth. We believe that our strong management team, brand identity, upgraded and automated distribution center and enhanced information systems, including our warehouse management and POS systems, enable us to replicate our profitable store format and differentiated shopping experience. In addition, we implemented a merchandise planning system and upgraded our inventory allocation system to better manage the flow of inventory for each store and corresponding customer base, and we have recently begun to make investments relating to a second distribution center in Pennsylvania that we currently plan to open in fiscal year 2020. We expect these infrastructure investments to support our successful operating model over a significantly expanded store base.

 

Pricing strategy. We are committed to providing our products at everyday low prices. We value engineer products in collaboration with our suppliers to recreate the “look” that we believe our customer wants while eliminating the costly construction elements that our customer does not value. We believe our customer views shopping At Home as an in-person experience through which our customer can see and feel the quality of our products and physically assemble a desired aesthetic. This design approach allows us to deliver an attractive value to our customers, as our products are typically less expensive than other branded products with a similar look. We employ a simple everyday low pricing strategy that consistently delivers savings to our customers without the need for extensive promotions, as evidenced by over 80% of our net sales occurring at full price.

 

Our ability to source and distribute products effectively. Our net sales and gross profit are affected by our ability to purchase our products in sufficient quantities at competitive prices. While we believe our vendors have adequate capacity to meet our current and anticipated demand, our level of net sales could be adversely affected in the event of constraints in our supply chain, including the inability of our vendors to produce sufficient quantities of some merchandise in a manner that is able to match market demand from our customers, leading to lost sales.

 

Fluctuation in quarterly results. Our quarterly results have historically varied depending upon a variety of factors, including our product offerings, promotional events, store openings and shifts in the timing of holidays, among other things. As a result of these factors, our working capital requirements and demands on our product distribution and delivery network may fluctuate during the year.

 

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Inflation and deflation trends. Our financial results can be expected to be directly impacted by substantial increases in product costs due to commodity cost increases or general inflation which could lead to a reduction in our sales as well as greater margin pressure as costs may not be able to be passed on to consumers. To date, changes in commodity prices and general inflation have not materially impacted our business. In response to increasing commodity prices or general inflation, we seek to minimize the impact of such events by sourcing our merchandise from different vendors, changing our product mix or increasing our pricing when necessary.

 

Recent Developments

 

In June 2018, our Board of Directors approved a grant of 1.5 million options to Chairman and Chief Executive Officer, Lewis L. Bird III. The options vest immediately upon the June 12, 2018 grant date. However, the shares resulting from the exercise of the options will be generally subject to transfer restrictions that lapse on the fourth anniversary of the date of grant, subject to certain service conditions. In addition, the Board of Directors approved a grant of options with an aggregate grant date fair value in an amount to compensate Mr. Bird for the difference in our share price on June 12, 2018 as compared to our share price on April 3, 2018 when annual equity awards were granted to other Company senior executives. As a result of the immediate vesting of these awards, non-cash stock-based compensation expense will be fully recognized in the second quarter of fiscal 2019. For further information regarding this equity incentive award, see “Item 5. Other Information”.

 

How We Assess the Performance of Our Business

 

In assessing our performance, we consider a variety of performance and financial measures. The key measures include net sales, gross profit and gross margin, and selling, general and administrative expenses. In addition, we also review other important metrics such as Adjusted EBITDA, Store-level Adjusted EBITDA and Adjusted Net Income.

 

Net Sales

 

Net sales are derived from direct retail sales to customers in our stores, net of merchandise returns and discounts. Growth in net sales is impacted by opening new stores and increases in comparable store sales.

 

New store openings

 

The number of new store openings reflects the new stores opened during a particular reporting period, including any relocations of existing stores during such period. Before we open new stores, we incur pre-opening costs, as described below. The total number of new stores per year and the timing of store openings has, and will continue to have, an impact on our results as described above in “—Trends and Other Factors Affecting Our Business”.

 

Comparable store sales

 

A store is included in the comparable store sales calculation on the first day of the sixteenth full fiscal month following the store's opening, which is when we believe comparability is achieved. When a store is being relocated or remodeled, we exclude sales from that store in the calculation of comparable store sales until the first day of the sixteenth full fiscal month after it reopens. In addition, when applicable, we adjust for the effect of the 53rd week. There may be variations in the way in which some of our competitors and other retailers calculate comparable or “same store” sales. As a result, data in this report regarding our comparable store sales may not be comparable to similar data made available by other retailers.

 

Comparable store sales allow 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. Various factors affect comparable store sales, including:

 

·

consumer preferences, buying trends and overall economic trends;

 

·

our ability to identify and respond effectively to customer preferences and trends;

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·

our ability to provide an assortment of high quality and trend-right product offerings that generate new and repeat visits to our stores;

 

·

the customer experience we provide in our stores;

 

·

our ability to source and receive products accurately and timely;

 

·

changes in product pricing, including promotional activities;

 

·

the number of items purchased per store visit;

 

·

weather; and

 

·

timing and length of holiday shopping periods.

 

Opening new stores is an important part of our growth strategy. As we continue to pursue our growth strategy, we anticipate that an increasing percentage of our net sales will come from stores not included in our comparable store sales calculation. Accordingly, comparable store sales are only one measure we use to assess the success of our growth strategy.

 

Gross Profit and Gross Margin

 

Gross profit is determined by subtracting cost of sales from our net sales. Gross margin measures gross profit as a percentage of net sales.

 

Cost of sales consists of various expenses related to the cost of selling our merchandise. Cost of sales consists of the following: (1) cost of merchandise, net of inventory shrinkage, damages and vendor allowances; (2) inbound freight and internal transportation costs such as distribution center-to-store freight costs; (3) costs of operating our distribution center, including labor, occupancy costs, supplies, and depreciation; and (4) store occupancy costs including rent, insurance, taxes, common area maintenance, utilities, repairs and maintenance and depreciation. The components of our cost of sales expenses may not be comparable to other retailers.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses (“SG&A”) consist of various expenses related to supporting and facilitating the sale of merchandise in our stores. These costs include payroll, benefits and other personnel expenses for corporate and store employees, including stock-based compensation expense, consulting, legal and other professional services expenses, marketing and advertising expenses, occupancy costs for our corporate headquarters and various other expenses.

 

SG&A includes both fixed and variable components and, therefore, is not directly correlated with net sales. In addition, the components of our SG&A expenses may not be comparable to those of other retailers. We expect that our SG&A expenses will increase in future periods due to our continuing store growth, and anticipate that marketing expense for fiscal 2019 will increase to approximately 3% of net sales. In addition, any increase in future stock option or other stock-based grants or modifications will increase our stock-based compensation expense included in SG&A. In particular, the one-time bonus grant of stock options to certain members of our senior management in connection with our initial public offering will result in incremental non-cash stock-based compensation expense of approximately $20.0 million, which is being expensed over the derived service period that began in the third quarter of fiscal 2017 and continuing into the third quarter of fiscal 2019.  

 

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Adjusted EBITDA

 

Adjusted EBITDA is a key metric used by management and our board of directors to assess our financial performance. Adjusted EBITDA is also the basis for performance evaluation under our current executive compensation programs. In addition, Adjusted EBITDA is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In addition to covenant compliance and executive performance evaluations, we use Adjusted EBITDA to supplement generally accepted accounting principles in the United States of America (“GAAP”) measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures.

 

Adjusted EBITDA is defined as net income before interest expense, net, loss from early extinguishment of debt, income tax provision and depreciation and amortization, adjusted for the impact of certain other items as defined in our debt agreements, including certain legal settlements and consulting and other professional fees, relocation and employee recruiting incentives, management fees and expenses, stock-based compensation expense, impairment of our trade name and non-cash rent. For a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure, see “—Results of Operations”.

 

Store-level Adjusted EBITDA

 

We use Store-level Adjusted EBITDA as a supplemental measure of our performance, which represents our Adjusted EBITDA excluding the impact of costs associated with new store openings and certain corporate overhead expenses that we do not consider in our evaluation of the ongoing operating performance of our stores from period to period. Our calculation of Store-level Adjusted EBITDA is a supplemental measure of operating performance of our stores and may not be comparable to similar measures reported by other companies. We believe that Store-level Adjusted EBITDA is an important measure to evaluate the performance and profitability of each of our stores, individually and in the aggregate, especially given the level of investments we have made in our home office and infrastructure over the past four years to support future growth. We also believe that Store-level Adjusted EBITDA is a useful measure in evaluating our operating performance because it removes the impact of general and administrative expenses, which are not incurred at the store level, and the costs of opening new stores, which are non-recurring at the store level, and thereby enables the comparability of the operating performance of our stores during the period. We use Store-level Adjusted EBITDA information to benchmark our performance versus competitors. Store-level Adjusted EBITDA should not be used as a substitute for consolidated measures of profitability of performance because it does not reflect corporate overhead expenses that are necessary to allow us to effectively operate our stores and generate Store-level Adjusted EBITDA. For a reconciliation of Store-level Adjusted EBITDA to net income, the most directly comparable GAAP measure, see “—Results of Operations”.

 

Adjusted Net Income

 

Adjusted Net Income represents our net income, adjusted for impairment charges, loss on extinguishment of debt, initial public offering related non-cash stock-based compensation expense and related payroll tax expenses and the federal income tax impact associated with the special one-time initial public offering bonus stock option exercises, transaction costs related to our initial public offering and the registration and sale of shares of our common stock on behalf of our Sponsors, losses incurred due to the modification of debt and tax impacts associated with the federal tax reform legislation enacted on December 22, 2017 (the “Tax Act”). We present Adjusted Net Income because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. For a reconciliation of Adjusted Net Income to net income, the most directly comparable GAAP measure, see “—Results of Operations”.

 

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Results of Operations

 

The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of our net sales:

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended

 

 

    

April 28, 2018

    

April 29, 2017

 

 

 

 

 

 

 

 

 

Statement of Operations Data:

 

 

 

 

 

 

Net sales

 

$

256,161

 

$

211,841

 

Cost of sales

 

 

170,917

 

 

139,963

 

Gross profit

 

 

85,244

 

 

71,878

 

Operating expenses

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

59,465

 

 

49,141

 

Depreciation and amortization

 

 

1,579

 

 

1,418

 

Total operating expenses

 

 

61,044

 

 

50,559

 

Operating income

 

 

24,200

 

 

21,319

 

Interest expense, net

 

 

5,778

 

 

4,886

 

Income before income taxes

 

 

18,422

 

 

16,433

 

Income tax provision

 

 

61

 

 

6,384

 

Net income

 

$

18,361

 

$

10,049

 

Percentage of Net Sales:

 

 

 

 

 

 

 

Net sales

 

 

100.0 %

 

 

100.0 %

 

Cost of sales

 

 

66.7 %

 

 

66.1 %

 

Gross profit

 

 

33.3 %