At Home Group (HOME) is trading sharply lower today (-9%) after reporting Q2 (Jul) earnings last night. In case you're not familiar, At Home is what is known as a home décor superstore where consumers can shop for a wide assortment of products for any room, in any style, for any budget.
Its stores are similar to HomeGoods but much larger. Its stores are huge, typically in the 80,000 to 200,000 sq ft range. That's about 5x larger than a typical HomeGoods store. HomeGoods is owned by TJX Cos (TJX). At Home currently operates 137 stores in 33 states. The chain is fairly spread out with just a few locations in each state with a focus on the South, Southeast and Midwest. As such, it's still quite small as HomeGoods has 600+ locations. With that said, HOME sees potential for 600+ stores in the US. HOME is growing its store base by about 20% per year.
Over 70% of HOME's products are unbranded, private label or specifically designed for At Home. This helps keeps costs down and makes At Home attractive for value shoppers. At Home believes that decorating a home is a continuous, ever evolving process that can be as simple as replacing patio cushions with a new seasonal pattern or as involved as updating the look of a whole room or the entire house.
It keeps rent costs down by opening new stores in locations that have been vacated by department stores and discount chains. Each store is currently profitable with average annual revenue above $6 mln and with store-level adjusted EBITDA margins of 28%. Due in part to past investments, HOME's distribution center infrastructure should be able to support up to approximately 220 stores with limited incremental investment.
Turning to the JulQ results reported on Wednesday, non-GAAP EPS rose 38% YoY to $0.18, which was slightly better than market expectations. Revenue rose 23.2% year/year to $232.1 mln, which was better than expected. Same store comps came in at a robust +7.8%, a nice improvement from the +5.8% comps in AprQ and similar to the strong +7.1% comps in JanQ. HOME has now posted 14 consecutive quarters of positive comps. Adjusted operating margin was relatively flat at 9.9% vs 10.0% last year as a result of distribution costs associated with investments in incremental inventory and increased brand advertising, partially offset by leverage of corporate overhead expenses. This was down from 11.3% in AprQ.
In terms of full year FY18 guidance, HOME reaffirmed non-GAAP EPS guidance at $0.73-0.75 but raised revenue guidance to $916-923 mln from prior guidance of $906-913 mln. Same store comp guidance was increased slightly from approximately +3.0% to approx +3.5%.
On the call, HOME said it added incremental low-priced inventory to its stores in OctQ of last year that continues to drive meaningful increases in comp store sales. While items under $25 drove the largest comp increase this quarter, HOME was pleased to deliver comp growth at almost every price range and in every department. Also, HOME expanded its selection of better and best bedding and outdoor decor to ensure that it has a full assortment for every budget. Finally, HOME continues to be pleased with the results of its one-week-only deep value deals called Flash Finds.
So if the quarter was good, why is the stock down? That's a good question. It may be the explanation that the impressive comps have a lot to do with Under $25 items. We are not certain, but cheaper items often have lower margins, although HOME did not specify. Another issue may be the fairly large sequential decline in adjusted operating margin to 9.9% from 11.3% in AprQ. HOME spent money to boost inventory and spent more on advertising. Perhaps that is spooking investors a bit, but it's not clear. Also, perhaps investors would have liked to see HOME raise full year EPS gudiance rather than just reaffirm prior guidance.
With that said, there are positives as well. As other retailers report disappointing results in 2017, At Home seems to be doing quite well. Also, that HOME believes it can grow to 600+ stores makes it an interesting early stage retail growth story.