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At Home Group:
Boasts Solid Growth

Home décor retailer At Home Group (HOME) boasts a differentiated concept that consumers have found attractive, as reflected by solid growth since it went public in 2016, says Doug Gerlach, Editor, Investor Advisory Service, www.InvestorAdvisoryService.com.

“The company, which was founded in 1979 and does not sell products online, has positioned itself as a value retailer in the space. At Home also boasts the broadest in-store product assortment in the industry. This value-breadth combination lends itself to a “treasure hunt” experience its customers have found compelling, leading to 18 consecutive quarters of positive comparable store sales growth and 5-year average annual sales growth of over 20%. Concerns surrounding tariffs and housing have resulted in a recent selloff, making the stock worthy of a closer look.

At Home’s stores are large – think the size of a Walmart or Costco – typically over 100,000 square feet. Stores offer over 50,000 products, such as accent furniture, rugs, holiday items, bar stools, candles, kitchenware, patio products, and pillows. It is worth highlighting that more than 70% of products are unbranded, private label, or specifically designed for At Home. The average price point for products is less than $15 and the average customer spend is $65 per visit. These lower price points for products customers like to see and feel, combined with unique products available only at its stores, help protect the company from online competition. At Home keeps product assortment fresh by updating nearly 40% of its SKUs every year.

The company does not rely heavily on discounting, instead focusing on a strategy that emphasizes everyday low prices. More than 80% of products offered are sold at full price with discounts primarily used to clear slower-moving inventory or products that are no longer in season.

The home furnishings and décor market has grown at approximately 4% over the past five years, though growth is expected to slow to 3% over the next few years. The industry is fragmented, with the top three retailers, Walmart, Target, and Bed Bath and Beyond, making up less than 25% of the total market. At Home’s exclusive focus on home décor, and differentiated concept emphasizing value and selection has it well positioned to continue gaining share in this category. Also, because the company changed its name from Garden Ridge in 2015, brand awareness is not where it could be. To address this, the company has increased its marketing spend. Marketing spend as a percentage of sales has gone from essentially zero in 2013 and progressed steadily to 3% of sales in the current year. Management has highlighted positive traction from these efforts, and increased brand awareness should help the company continue to grow share in this fragmented market.

The recipe for continued growth is fairly straightforward. Over the long-term, management has targeted store growth in the high-teens and comparable store sales growth in the low-single digits. This results in overall sales growth in the high teens. The potential for new store expansion looks attractive. Management believes there is an opportunity for 600 stores in the U.S. versus a projected 180 stores at the end of this fiscal year. The company has been growing stores at approximately a 20% annual clip over the past several years, which is expected to continue. Naturally, the pace of expansion will slow at some point, but 20% growth appears reasonable for the next few years.

New store economics are also attractive. As it has gained experience with new store openings, the company has done a better job of driving sales out of the gate. Year one sales for new stores now average over $7 million, up 20% from three years ago. New stores require a net investment of $3-$4 million and have a payback period of less than two years.

At Home has reported 18 consecutive quarters of positive comparable sales growth. Comparable store sales have averaged 5.2% over the nine quarters since the company’s IPO, above the long-term target for low-single digit growth. Comparable store sales growth has slowed in the past two quarters though the company has indicated this was due in part to challenging weather in Q1 and a particularly difficult comparison in Q2. It has guided to second half comparable store performance better than it delivered in the first half of the year, including a 4.5%-5.0% guide for Q3. The company also has other avenues for future growth including leveraging its loyalty program, which was launched a year ago and already has nearly three million members.

Concerns regarding tariffs and homebuilding have caused shares to retreat more than 25% from highs achieved in early July. It is unclear that the slowdown in new home starts will meaningfully impact the company given the types of products it sells. As it relates to tariffs, management believes it will be able to manage increased costs for products subject to tariffs and does not expect a material impact in either this fiscal year or next. Furthermore, At Home has indicated it is working closely with suppliers to address any potential impact tariffs may have.

One other potential concern worth noting is the company’s CFO, who is in his mid-40s and has served in that role for the past five years, is planning to leave the company at the end of the year. At Home’s CEO has framed this departure as the result of a young, talented individual looking to advance his career, which necessitated leaving the company since neither the CEO nor the COO is planning on leaving the company for the foreseeable future. The CFO is leaving for what appears to be an interesting private equity opportunity, but given the growth trajectory At Home has outlined, it is a bit unusual to choose to leave at this time.

We anticipate At Home will be able to grow revenue at an average rate of 17% over the next several years, with EPS growth averaging 20%. This is consistent with the company’s own long-term sales growth target in the high teens. Modest operating leverage should allow EPS to grow slightly faster than sales. Projecting 20% EPS growth over the next five years and applying a capped high P/E of 25.0, we get a potential high price of 76. Applying a low P/E of 16.1 to last year’s EPS of 0.94 yields a low price of 15. Therefore, we model an upside/downside ratio of 3.2 to 1 and a projected high total return of over 20% annually.”

Editor’s Note: For the ninth straight year Mark Hulbert has included the Investor Advisory Service (IAS) on his Investment Newsletter Honor Roll. In the 2018-2019 Honor Roll, Hulbert names just six newsletters that have outperformed the market during the most recent four bull and most recent four bear markets (between March 31, 2000 and September 30, 2018). On balance, as Hulbert writes, newsletters that produce above average performance in both kinds of markets proceeded to perform better, on balance, than those that did not.

In each monthly issue of IAS, 3 stock recommendations are featured along with in-depth profiles of recommended companies and economic and market trends. Download a FREE sample issue of IAS, one of the nation’s top-performing stock investment newsletters at www.InvestorAdvisoryService.com.

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