At Home Group Inc.
Q4 2017 Earnings Call Transcript

Published: 23 Mar 2018

[Operator:]

Greetings, and welcome to At Home Fourth Quarter Fiscal 2018 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to Bethany Perkins. Thank you. You may begin.

[Bethany Perkins:]

Good afternoon everyone and thank you for joining us today for At Home’s fourth quarter and fiscal year 2018 earnings results conference call. Speaking today are Chairman, Chief Executive Officer and President, Lee Bird; Chief Operating Officer, Peter Corsa; and Chief Financial Officer, Judd Nystrom. After the team has made their formal remarks, we will open the call to questions. Before I begin, I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. In particular, statements about our outlook and assumptions for financial performance for fiscal year 2019 and our long-term growth targets, as well as statements about the markets in which we operate, expected new store openings, real estate strategy, potential growth opportunities and future capital expenditures are forward-looking statements. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those are referred to in At Home’s press release issued today and in filings that At Home makes with the SEC. The forward-looking statements made today are as of the date of this call and At Home does not undertake any obligation to update any forward-looking statement. Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call, such as adjusted EBITDA, adjusted operating income, adjusted and pro forma adjusted net income, and pro forma adjusted earnings per share. A reconciliation schedule showing the GAAP versus non-GAAP financial measures is available in At Home’s press release issued today. If you do not have a copy of today’s press release, you may obtain one by visiting the Investor Relations page of the website at investors.athome.com. In addition, from time-to-time, At Home expects to provide certain supplemental materials or presentations for Investor reference on the Investor Relations page of its website. I will now turn the call over to Lee. Lee?

[Lee Bird:]

Thank you, Bethany. Good afternoon everyone. And thank you for joining us to discuss our fourth quarter and fiscal 2018 results. The fourth quarter was the fitting end to another year of increasing momentum in our business. Our trend right, value price assortment of everyday and seasonal home decor coupled with the progress we've made on our strategic initiative, continue to drive strong results in both our new and existing markets across the country. Fourth quarter sales, net sales grew 25% including a 5.7% increase in comparable store sales marking our 15th consecutive quarter of 20 plus percent of sales growth in our 16th consecutive quarter of positive comps. Four years ago we set on a journey to become the leading destination for indoor and outdoor holiday decor. Over that time our seasonal reinventions have contributed to a cumulative 25% comp store sales increase in the fourth quarter. Along with topline performance ahead of expectations, we drove significant expansion of growth and adjusted operating margins and a pro forma adjusted net income increase of 86% for the fourth quarter. Our full year results underscore the consistent, discipline, highly profitable growth delivered by our management team over the last five years. In fiscal 2018, we increased store count by 21%, delivered 24% net income to be net sales growth and grew comp store sales by 6.5%. Adjusted operating income grew 30% and margins expanded 50 basis points. We continue to leverage our substantial topline strength to reinvest in the future of our business through incremental advertising and new stores, ultimately delivering pro forma adjusted net income growth of 64% in fiscal 2018. Before I share with you our plans to carry this momentum into fiscal 2019, I want to recap the progress we've made against the strategic priorities that guide our path to long term growth and success. Our long term model is built upon channeling the leverage we achieve on high-teens sales growth back into the business. And we've consistently invested against each of these priorities since we came together as a management team. Over the past five years, we grew our store count by 2.5 times. We completed a top to bottom rebranding. We invested heavily in our team members and their benefits. We have met a new inventory planning allocation POS systems, we automated and expanded our distribution center, we launched a visually inspiring website showcasing our full assortment, we embrace best-in-class operating procedures, we establish a direct sourcing function and we increased annual marketing spend from zero to approximately $25 million and climbing. We accomplished all of this through organic topline growth while also paying down our long term debt. As Judd is just going to go over in more detail shortly, the tax reforms that were announced in December are going to benefit us significantly from both the rate and cash tax perspective. Given the proven strength of our existing financial model and our ongoing investments in our team members, investors will see all of the upside from tax reform flowing through net income in fiscal 2019. We expect to generate at least 30% earnings growth this year all while continuing to use our business model as an engine for reinvestment in the following strategic priorities. First, our customer remains our top priority. We've made progress on better knowing our and serving our customers through the launch of the first At Home credit cards and loyalty programs. Our credit card enrollment exceeded our internal targets and our insider program exceeded 1 million members in only the first five months. We're very pleased that both credit card and Insider Perk members continue to have above average basket sizes. In fiscal 2019 we’re focused on expanding these programs both in-store and through advertising support to drive incremental sales. We also look forward to gathering data for a customer database that overtime will better position us to execute our CRM initiatives and deliver more targeted in personalized shopping experience. We're in the first inning of CRM capabilities with a lot to look forward to. In the meantime, we continue to leverage customer research to understand and serve our customer base. Second priority is having the broadest assortment of in-store decor at the lowest prices in the industry. We carry complete royalty styles under one roof that our customers can see, touch and feel and take home. Our unique ability to flex our assortment across styles resonated in fiscal 2018 as we saw double digit growth in contemporary, modern farmhouse and whimsical look that appeal to younger customers who represent our fastest growing demographic. This January we launched our partnership with the popular Shanty2Chic sister entrepreneur who helped us bring modern farm house concepts to life in our store. Our category reinventions also contributed to our 6.5% comp this year to increase freshness at dining, table top and back to campus as those elevated textiles and patio options. As patio we're excited for fiscal 2019 as we enter our third straight reinvention year. Customers in our store today will find extensive newness in both patio furniture and cushions along with the seemingly endless assortment of functional yet fun garden decor. Our goal is to always win on price and we're very pleased that we maintain strength in items under $10 and $25 as we lapped last year's investment and low priced inventory during Q3. We believe that in addition to the trends and styles customers want, today stores have the right mix of products and price points to continue inspiring shoppers in fiscal 2019. Next up new store expansion continues to be one of our most important strategic priorities. We believe that the mark of a great retailer its ability to drive growth from both new and existing stores simultaneously. Our fiscal 2018 class of new stores not only the largest to date results but is also the best performing class ever from both the sales and profitability standpoint. We opened up 26 net new stores during the year including 7 groundout build and five stores in the fourth quarter. We demonstrated the portability of our concept through strong openings in new markets like Las Vegas, Nevada, Philadelphia and Rogers Arkansas, as well as existing markets like Washington D.C. and Detroit. We began fiscal 2019 by celebrating our 150th store which positions us at approximately only one-fourth of a long term store potential. We're especially excited about opening our first stores in large markets like New York City, as well as smaller markets like Augusta Georgia and Evansville Indiana. And of course, we’ll continue growing in existing markets like Dallas and Orlando. Over the next five years new stores have exceeded our first year expectations and we've opened them at a 21% compounded annual rate which is even faster than our long term target. The confidence we have in our real estate strategy is evidenced by our plans to grow stores by another 21% this year. In fact half of this year’s new stores are either open or under construction today. Our current real estate pipeline is the deepest in our history and we look forward to continued growth in the years ahead. Another objective with a lot of headroom is creating awareness and demand for the At Home brand. As mentioned, we ramped our marketing spend significantly in recent years ultimately achieving 2.7% of sales in fiscal 2018. Last year we launched our first TV advertising campaign that supported more priority markets across our fleet. We engage new creative talent, upgraded our website and leveraged digital media and direct mail to grow our brand outreach. As evidenced by our discipline testing control approach we delivered progress in both traffic and unaided brand awareness. In fiscal 2019, we have onboarded a new agency partnership, to help our marketing dollars stretch farther. As a result, we'll be able to nearly double our direct mail outreach including a Spring look book displaying fresh new style stories and our seasonal patio and garden assortment. We also more than doubled our online search budget to direct traffic to our website and launch a new ad campaign earlier this month that includes TV, outdoor, direct mail, influencers, social media and more. Finally we'll be amplifying our message with increased TV impressions in our priority market. Despite access to an even larger budget in fiscal 2019 our marketing team is focused on spending smarter and more efficiently to maximize our new customer reach by driving higher engagement from existing customers. Speaking of our team, we remain dedicated to sharing our success with all levels of the organization after all our team members are the ones executing our strategy on a daily basis. In 2017, we were certified as a Great Place To Work and became eligible for Fortune's Best Places To Work With which we believe is just the beginning. Over the past five years we implement 401(k) match with immediate vesting and we expanded paid leave for new mothers, father, and adoptive parents. We announced that our stores will close to allow our team members to celebrate Thanksgiving, Christmas and Easter. We raised our starting hourly rate per store employees. We implemented backup dependent care tuition assistance and a wellness program for all employees and we launched a training platform to educate team members about our company best practices in the pathway to leadership roles and higher wages. In fiscal 2017 we expanded our bonus program eligibility to include every single team member. In fiscal 2018 we significantly exceeded our internal bonus target for the fifth consecutive year. We also granted restricted stock units to every At Home store director and a larger group of At Home office team and we launched a new HR information system to better serve the organization. We made all of these investments in our people while preserving our financial model and actually expanding operating margins. We have the right people in place and will continue to add talent in key areas to scale the business and support our long-term growth plans. We plan to make fiscal 2019 another year of doing the right things to empower our team and as a result our customers. With that, I’d like to turn the call over to our Chief Operating Officer, Peter Corsa who will discuss how we are making operational improvements. Peter?

[Peter Corsa:]

Thank you, Lee and good afternoon everyone. As Lee mentioned, we believe in doing the right thing for our customers. To us that means giving them an unbeatable enabled self-held shopping experience. We added more districts and a regional manager structure in fiscal 2018 and we filled the new positions by promoting internally so that our field leadership fully understands how we execute our customer proposition. Our visual merchandising efforts continue to drive outcomes year after year and in fiscal 2018, our vignettes and feature tables showed particular strength. Merchandising our product around themes also continue to resonate with customers especially in our seasonal categories. After making a substantial investment in incremental inventory in fiscal 2017, we focused on maintaining a steady flow of inventory in fiscal 2018. Products are moving to our cross stock distribution center and arriving in stores more efficiently than ever enabling customers to find exactly what they're looking for. We ended the year with an 11% increase in total inventory despite a 21% increase in store count which demonstrates that we're doing more with less and exiting the year with clean inventory. It also positions us to maximize inventory productivity in fiscal 2019. Finally, as we leverage our fixed cost we have the ability to make strategic labor investments. This year we're adding project labor in key categories, as well as adding team members to our patio department at peak times in order to better service our customers. These labor investments are made possible by the fixed cost leverage and gross margin expansion we expect for this year primarily driven by direct sourcing benefits. We launched our direct sourcing initiative in the summer of 2017 and our initial team is now fully in place. We met our cost saving targets on the first wave of directly sourced product that arrived in stores in Q4 and we look forward to methodically expanding the program in fiscal 2019. Over time, we believe direct sourcing will enable us to continue reinvesting in store labor, lower prices, increase brand awareness, and improve quality. We also make it a priority to add industry-leading processes and procedures in place to cost-effectively deliver the At Home experience and scale for growth. From a new store perspective, in fiscal 2018 we had a second set up team and shortened our new store opening timeline. Our teams have the ability take an empty 100,000 square foot box and merchandise it with up to 50,000 different items in six days or less. This remarkable efficiency gives us a lot of confidence to continue expanding our footprint as Lee described earlier. In order to further support our new store growth initiatives, we've started preparing our distribution and IT capabilities for a second distribution center expected to open in early fiscal 2020. As the retail management team with extensive multi-distribution center experience, we're focused on being fully prepared to operate another DC before our stores expansion plans require it. We selected a second generation facility and plan to implement our best in three cross stock system both of which are key characteristics of our existing highly efficient operating model. As we increase the pace of store openings in the Midwest and East Coast, we believe that opening a second DC in Pennsylvania will yield transportation savings that will help to offset the cost of its operation over time. In the meantime, we’ll be leveraging our increasing scale and our relationship with the third-party logistics partner to manage the freight inflation currently facing the industry. We stay out of the spot market and outsourced our transportation function less than two years ago, as a result we believe that we have enough opportunities for improvement to both minimize rising domestic freight rates and deliver gross margin expansion this year. With that, I'd like to turn the call over to our Chief Financial Officer Judd Nystrom, who will walk through our fiscal 2018 performance in more detail and discuss our financial outlook for fiscal 2019. Judd?

[Judd Nystrom:]

Thank you, Peter. Good afternoon everyone. I will begin my prepared remarks with the review of our fourth quarter and fiscal 2018 results and then discuss our outlook for the first quarter and fiscal year 2019. As a reminder, additional information is available in our earnings release which can be found on our Investor Relations website. We delivered another strong quarter exceeding our outlook for both sales and profitability. In Q4 we increased net sales by 25% to $294 million driven by record first year performance from our new stores and a 5.7% increase in comparable store sales which comes on top of a 7.1% comp store sales increase in the fourth quarter last year. In fact our comp sales accelerated on a two-year basis in every quarter of fiscal 2018. As Lee mentioned, this fourth quarter reflects our 15th consecutive quarter of over 20% sales growth and our 16th consecutive quarter of positive comp store sales increases. Our strength was broad-based across all-price bands, major geographies and vintages especially in stores opened five years or longer. Our performance was also fueled by both indoor and outdoor décor, as well as everyday and seasonal merchandise. Fiscal 2018 was our fourth consecutive year that we have generated notable success in our seasonal offering resulting in a cumulative 25% fourth quarter comp and underscoring our achievements in making At Home a leading holiday the core destination. Lastly the productivity of our new stores remain strong all year and exceeded 90% in the back half as we opened a higher mix of our highly productive ground up builds. Fourth quarter gross profit dollars increased 31% driven by 25% increase in sales and 150 basis point expansion in gross margin to 33.8%. We improved product margins, produced occupancy leverage, and benefitted from lapping last year's incremental inventory investment. As expected we delevered adjusted SG&A by 60 basis points in Q4 due to incremental marketing, and preopening expenses to support our growth initiative, as well as an increase in incentive compensation generated by our topline and bottom line outperformance. Overall, we are very pleased to expand fourth quarter adjusted operating margin by 100 basis points to 14.6% of net sales. Our GAAP effective tax rate was 67.9% in the fourth quarter driven substantially by a $16.7 million revaluation of our deferred tax assets using the lower corporate rate triggered by tax reform. Outside of this one-time event, our adjusted effective tax rate was 13.5% during the quarter which includes the $7 million benefit related to stock option exercises. As a result, we deliver pro forma adjusted net income of $32.3 million or $0.50 per share almost double the pro forma adjusted EPS of $0.28 in the fourth quarter last year. Looking at our results for the full year, net sales increased 24% to $951 million driven by 21% new store growth and a comp store sales increase of 6.5%. As expected, full year gross margin of 32.3% was in line with our previous four fiscal years. We generated product margin improvement and store occupancy leverage to offset higher distribution costs from last year's inventory investment and increased occupancy costs from sale-leaseback transaction. We are very pleased to have increased our adjusted operating income dollars 30% and expanded adjusted operating margin by 50 basis points to 10.8% of sales. Our 24% topline growth enabled us to leverage labor and corporate overhead expenses partially offset by incentive compensation for our hard-working team members an incremental advertising and preopening expenses to support our growth objectives. Our fiscal 2018 adjusted effective tax rate was 26.1%. We also recognized an $0.11 benefit from stock option exercises during the year and ultimately delivered a 59% increase in pro forma adjusted EPS to $0.94. Additionally, we grew adjusted EBITDA faster than sales at 27.3% improving our adjusted leverage ratio to three times in fiscal 2018 down from 3.4 times last year and almost five times the year before. We remain committed to continuing to reduce our leverage over time. Turning to our fiscal 2019 outlook, we expect net sales to be in a range of $1.154 billion to $1.161 billion which represents a growth rate of 21% to 22% over fiscal 2018. Given the potential to expand our footprint by at least four times, new stores are the primary driver of our sales growth. With our fiscal 2019 new store pipeline complete we anticipate opening our largest new store class to-date. We expect to open a total 35 stores while relocating four stores to elevate our brand position in those markets. The continued availability of existing high quality big-box location combined with our flexible real estate model should generate a mix that is about 80% second generation locations and 20% ground up builds. We plan to open are highly productive ground-up builds in the second half of the year and increased first half new store openings by 33% which should drive an increase the new store productivity. As we mentioned, our fiscal 2018 class of At Home stores was our strongest to-date which gives us tremendous confidence in our fiscal 2019 pipeline as well as our r 600 plus store potential. Our topline guidance also assumes a full year comp store sales increase of 2.5% to 3.5% or 9% to 10% increase on a two year basis. Given our new stores reach maturity quickly they do not have a natural comp waterfall. Therefore, we lean on our strategic priorities to drive positive comps across all of our organic growth metrics. In fiscal 2019, we will continue to focus on units per transaction and conversion as well as category reinventions which have driven assortment freshness and sales growth over the past four years. In addition, we will also be expanding our new loyalty and credit card programs and investing more in marketing. On a full-year basis we expect to grow adjusted operating income dollars slightly faster r than sales as gross margin expansion driven by our direct sourcing benefits more than offsets our investments and our long-term growth opportunities. As I described on last quarter's call, quarterly margins can and do fluctuate due to the timing of sale-leaseback transactions, new store openings and marketing investments. In fiscal 2019, we anticipate an occupancy headwind from sale-leasebacks which have been part of our new store financing strategy for the past five years. We generated approximately $50 million in sale-leaseback proceeds in February and expect to generate an additional $60 million later this year. In terms of gross margin tailwinds, we are excited to begin seen a return on fiscal 2018 direct sourcing investment which should produce product margin expansion in the back half of this year as a related inventory turns. Additionally, we will benefit from lapping incremental freight costs related to last year's one-time inventory investment. These tailwinds coupled with the fixed cost leverage built into our high-growth financial model will enable us to deploy more dollars towards our strategic initiatives in fiscal 2019. This year, we will continue to focus on preserving our competitive low prices, increase in our annual marketing spend from 2.7% to 3% of sales, adding store labor to better serve our customers, opening more second-generation lease stores than ever before, and working towards a second distribution center to support future growth. Including these proactive strategic investments we expect to grow adjusted operating income dollars slightly faster than sales. For the full year, we expect interest expense of approximately $25 million which incorporates rising interest rates. We have also assumed an effective tax rate of 24% or 20% when factoring in an estimated $4 million of excess tax benefits generated by share exercises. We will continue to call out the impact of share exercises when we report quarterly results. Pro forma adjusted net income is expected to be between $78 million and $81.5 million representing growth of 30% to 36%. Based on an estimated 66 million diluted weighted average shares outstanding we expect pro forma adjusted EPS of $1.18 to $1. 24. Next I would like to spend a few minutes commenting on the recent changes in tax legislation. As we have shared we will benefit significantly from tax reform in terms of both GAAP expense as well as cash taxes paid. While the bill is being finalized we proactively accelerated fiscal 2018 incentive compensation approvals and delayed a fourth quarter sale leaseback transaction in the fiscal 2019. As a result of these actions, we saved over $4.5 million in cash taxes and we will continue to proactively look for opportunities to drive savings. Tax reform will be a significant earnings tailwind for us in fiscal 2019 as we plan to flow through all of the benefits to our shareholders. The strength of our high-growth model already enabled us to reinvest in our strategic priorities every single year. As we and Peter shared we remain committed to improving our customer value proposition which means delivering a compelling merchandising assortment at an extreme value. It also means marketing efforts that strengthen our brand awareness, systems and infrastructure investments that improve our operational capacity and team members that ensure consistent execution on our objective. Our long-held discipline in investing to faster growth has been instrumental to our success over the past five years and we remain as dedicated as ever to reinvesting sales and margin upside back into the business. These investments further reinforce our customer value proposition and position the business to successfully scale for the long runway of growth ahead. As we look towards our future growth potential, this year we will be laying the groundwork for a second distribution center which is expected to open in fiscal 2020. We elected to open it earlier than necessary and ramp its capacity gradually. While this investment will require capital and some fourth quarter preopening expenses these investments have already been included in our fiscal 2019 outlook of 30% to 36% earnings growth. Our season management team possesses a multicenter distribution expense to execute this investment smoothly and we will share additional information as we progress through the year. Before I turn the call back to Lee, I would like to provide some color on the cadence of our fiscal 2019 outlook. Our first quarter guidance includes net sales growth of 20% to 22%, nine growth and seven net new store openings and a comp store sales increase of 1.5% to 2% which represents growth of 7.3% to 7.8% on a two-year basis. We expect pro forma adjusted net income growth of 37% to 45% when considering a 24% estimated effective tax rate, plus an incremental $1.5 million benefit related to share exercise resulting in expected effective tax rate of approximately 16.5%. Gross margin will be modestly lower than Q1 last year due to increased occupancy costs from sale-leaseback transactions but should expand significantly in Q2 as we lap prior-year freight headwinds I discussed earlier in the call. We expect a similar dynamic in adjusted operating margin driven primarily by SG&A timing. We will see operating margin deleverage in Q1 as we disproportionally step up our investment in marketing and incur more preopening expenses to support 33% more new store openings in the first half of fiscal 2019. We believe both of these strategic drivers will pave the way for yet another strong fiscal year ahead. In summary, the fourth quarter capped up a great fiscal 2018 for At Home during which we made progress on our strategic priority and delivered for our customers, our team members and shareholders. On behalf of the entire management team I want to thank every At Home team member for their dedication to our customers and for their hardwork and discipline execution on our objectives. We believe we have the right strategic priorities in place to build upon our progress and we look forward to an exciting fiscal 2019. I will now return the call to Lee for some closing remarks.

[Lee Bird:]

Thanks Judd. In fiscal 2018, we celebrated five years as a management team with superior performance in both new and existing stores, significant earnings growth and meaningful progress against our strategic initiative. Our industry is growing, our product expression is exciting, our core customer relationships are strengthening. Our in-store experience is more compelling and our new store pipeline continues to deepen. Finally our team is larger, more experienced and better trained than it’s been. As we look towards fiscal 2019, we believe At Home is well-positioned to continue reinvesting in her early stage opportunities while giving customers endless possibilities and unbeatable value. Operator, please open the line for questions.

[Operator:]

[Operator Instructions] Our first question is from John Heinbockel with Guggenheim. Please proceed.

[John Heinbockel:]

So Lee first thing, if you think about the category reinventions for this year rather the categories and the chronology maybe just remind us. I know, I think this is year one of Wall Art and maybe the final year of patio. But how do those sequence and do you think the comp benefit from category reinventions how does that compare this year to last year and year before?

[Lee Bird:]

I would say first and foremost our reinventions continue to be part of the engine that drives our business. We’ve been doing this now for five years basically in total across all categories the reinvention performance has been consistent each year. So it continues to be a positive driver of same-store sales for us. We’re pleased at FY 2018 reinventions, we had better patio furniture decorative accents, pillows and cushions and better beddings. We’re really pleased with those. FY 2019 the strategy is the same, patio which it’s in third-year reinvention this year we lean into the cushion side of the business. So we’ve got premium cushions in larger sizes, a lot more new styles and patterns, fast fashion prints and new color palette. We’re pleased with that especially this spring. In the back half you’ll see a Wall Art reinvention that’s going to be mostly it will be assortment and operationally driven and easier way to shop for our customers, a cleaner way a layout for the store as well as seasonal with the back half reinvention. So I would say the strategy remains the same its contribution remains consistent and we still see lots of opportunity not only this year, but in future years for reinvention.

[John Heinbockel:]

And then secondly if you think about investing in-store labor so is that more hours, is it wages and benefits, training where does the bulk of that fall out this year?

[Lee Bird:]

Yes, let me ask Peter answer that.

[Peter Corsa:]

So what we love about our model it really affords us the opportunity to put fixed cost leverage back into our business every year and that through hours or rate or combination of both really. So we also are able to generate efficiencies and reallocate hours where it benefits our business and customers the most. So an example for that as we revised our shipment processing which allowed us to give hours back on to the sales floor to help fund for reinventions and other things that we did around patio also. So we actually do not plan to leverage our store labor line each year. Over the past five years as Judd mentioned, we've actually delivered store labor by 40 basis points and we’ve reinvested in both the employee and the customer experience. We've added some examples were mentioned as we added the floor resources that are patio department and other projects to improve our customer experience.

[Operator:]

Our next question is from Dan Binder with Jefferies. Please proceed.

[Dan Binder:]

Its Dan Binder congratulations on a another great quarter and year. My question was around your comp store sales guidance for Q1 looks like you probably up against easier one and two year comparison what you just faced in Q4. And it’s below your full year guidance for this year. Just curious if that's just being prudent or is there something you’re seeing around weather or anything else?

[Judd Nystrom:]

Dan this is Judd, what I would tell you as I shared on the prepared remarks, our business was very strong all last year and Q4 certainly we saw and acceleration on a two-year stack perspective. We had weather that actually benefited us earlier in the quarter in Q4. And we were prudent to know that we were up against an easier January the year before and we expected normal winter which we got a normal winter. We know that weather evens itself out sometimes you get good periods sometimes you get a challenging periods. February was a little bit more challenging for us to be candid when you look at our footprint we have a disproportionate number of stores in Texas. And we saw heavier rains and a slower start to the patio season. And then nor Easter has been hitting your neck at the woods have been helpful from that perspective, but what I can point to is first and foremost, when you don't have that weather we can direct rebound from a business perspective. And overall, we feel really good about how we’re positioned, how we are positioned competitively, how the field is executing, our merchandising assortment and we know that it will even itself out over time. Some of that demand will move from Q1 into Q2. But we feel really good about being able to deliver another year of 2.5% to 3.5% comp for the full year. The choppiness will move through in various quarters, but make no mistake we feel really good about the strategic initiatives we have in place.

[Dan Binder:]

That’s it my other question as it sounds like you’re seeing strength in between the snowflakes and raindrops so that’s a…

[Lee Bird:]

We just want more space in between…

[Bethany Perkins:]

Yes.

[Dan Binder:]

My other question was around new store productivity that’s been looking great. Do you think that’s a function of just better quality real estate selection and availability or do you think it's just a broader base strength that you’re seeing for the whole chain in marketing and merchandising?

[Lee Bird:]

And I will cover this together. The last four years we’ve seen improving sales and returns each year for the store portfolios the new store portfolio. And as we’ve gotten bigger we’ve gotten stronger which we’re really excited to say, and I would tell you it’s a function of a number of things. One is we’re better at executing at the store level so making sure we got the right inventory to the set up the store, making sure that we set it up well, making sure we set it up for the expected demand at the location and so on. We’re better at marketing, much better grand opening and also continue to sustain the demand in a new market. Also I would say from a real state standpoint, they’re better location. So we become a stronger retailer where we have watched scale. We’ve got more things to look at and I would tell that allows us to be more picky. So we can – when you do that you can be more picky get better locations with same or better terms as well. And now what I like even more is we have a deeper pipeline than we've ever seen, and with the deeper pipeline you can be more selective, you can go to vibrant retail modes. You can get better quality, you can look further out, you can be thoughtful about cannibalization and that can help you be sensitive about that in timing and quarters and by years. And so I would say I’m super pleased with our overall. The last thing I would say as we continue to be better on the analytical side as well. We’re on the third generation of our model. Our [bucks-in] model we're informing that more than ever with the data that we have in our performance with better data stats we’re investing in set model. We’re actually using some new science around that to help be even more selective and understand demand not just in the market, but how people travel to shopping nodes. And so as we’ve done that we've seen stronger performance as the new store opens up.

[Operator:]

Our next question is from Brad Thomas with KeyBanc Capital Markets. Please proceed.

[Brad Thomas:]

Lee, I just wanted to maybe take a step back and think about just the cadence of same-store sales here. You all have so many levers that you're pulling that seem to be really driving the business with nice mid and high single digit comps for six quarters right now. I guess as we think ahead here to 2018. Can you help me think about the dynamic of difficult comparisons versus the dynamic of so many things that seem to be building momentum for you?

[Lee Bird:]

I would say we focused on all the levers of comp. So we start with traffic, we look at conversion. We look at units per transaction and average unit retail. We have initiatives against every single one of those and we've got champions in our executive team for each one of those for example and they’re cross-functional leaders. Judd in fact runs the UPT initiatives. He focuses on how many more things can we get into a basket, works with merchandising and marketing and so on. Peter obviously works on conversion for example. Ashley, our Chief Marketing Officer who focuses on traffic, average unit retails run by Alyssa and they run across functional team. We've got efforts against each one of those. There are still a lot of opportunity in each one of those. We’re going to continue to focus on that. As a result of our focus on that, the past five years we've been able to be very consistent in delivering same-store sales growth every quarter, 16 straight quarters averaging 5.6% comp. You could say any of those become difficult compares while this the life of a retailer. And we're excited because we feel like there's still opportunity to drive same-store sales in every single box we have. So what we've got is energy against each one of those. For example, this coming year I would say our reinventions will continue to help drive our performance. That could be more units in the basket. It could be more average unit retail and so on. It could even improve conversion because – people receive their new product in our marketing campaigns and want to come in at the store. Credit card and loyalty is in the early innings. We've mentioned that that should drive traffic in bigger basket. New marketing campaign that should drive traffic and our intent to buy when they come in and hopefully more adding into to build buy. The value communication, hey we we're winning on price and the new TV campaign we just launched is the first time we've actually been showing prices on items across the whole campaign and our digital campaign really stresses price and the price value equation. And honestly the style and message too about the multiple types of architects that we carry is bringing a broader customer base but really resonate with millennials. So I'm not concerned about the difficult compares. I'm really excited about this coming year. We've given guidance – for a positive same-store sales of 2.5 to 3.5 you’ve seen our performance over time and our expectations we’re going to continue to drive same-store sales every single quarter.

[Brad Thomas:]

Well Lee may be taking the flip side of that, do you think the business may be in a position where it might be able to deliver mid single-digit comps over the next couple years?

[Lee Bird:]

I’d tell you, we don't plan ourselves too low single-digits in the way we focus our efforts. And that – but it doesn't always hits. Sometimes weather shows up some other things happen. I rather plan for something higher and ensure that we deliver on what we've just shared with you. So we have a lot of initiatives, adds up to something higher. I hope it hits. Obviously you can see in years past we've actually been able to hit - numbers that are higher than that and that's helped us with – wetter weather sometimes the product acceptance was better than we had planned, not as good as we had hoped. Actually we continue to think our product is fantastic. So I would say we gun for something higher because we put a lot of energy against it, but we never commit to anything higher than that because – you wouldn't want us to and stuff happens. And so Judd talked about the weather this quarter for example. Hey, I'm not excited about all the rain and all the snow everybody is getting is that that help patio sales? No. We're projecting a positive same-store sales growth despite the wettest February in 120 years of recorded history in Texas, where they were four Nor'easters in five weeks and but you don't want to hear us whining about weather. You want us to continue to deliver a same-store sales growth every quarter. So we'll gun for something higher and commit to what we've had in prior year.

[Operator:]

Our next question is from Matt Fassler with Goldman Sachs. Please proceed.

[Matt Fassler:]

My first question Judd is just taking a look at a couple of points you made on performance by class, you spoke about the performance of new stores. You also called out stores that are five years and older. And I guess the question is, did those stores perform at least in last chain average for comp's or were they strong relative to where they had been and what is the soft say about maturation driven. I know you typically open strong you said you don't have perhaps the maturation curve that's typical of a high growth retailer, but how should we update our thinking on the evolution of store sales by vantages as they age?

[Judd Nystrom:]

Nothing is changed with our comp waterfall at all. We've seen accelerating average unit volume for four consecutive years going from 4.2 million average unit volume to now 6.9 in our most recent fiscal year, despite seeing more average unit volume the comp waterfall or the contribution of that remains the same as it has for the last several years. Nothing is changed that way. We deliberately wanted to make sure we communicated as part of our driver of comp store sales, not only for last fiscal year, but also for the fourth quarter. Our older stores are contributing a tremendous amount to comp. So we are actually seeing stores greater than five years that are contributing as well as the new stores that are coming into the comp base, but it's not a function of a change in the maturation curve. It's a function in a very healthy business that has broad-based comp store sales drivers and a team focusing on executing it.

[Matt Fassler:]

And then a quick second question. You spoke about direct sourcing and how that's rolling in? Can you talk about how you would expect the cost profile of that business to evolve as the program seasons? Also as you think about hitting trends what your lead times looks like for directly source products versus party source from third-party providers?

[Judd Nystrom:]

So in terms of our direct sourcing, I said in our prepared remarks that we brought product in late last year. We're going to see the benefits of it in the second half of the year as inventory turns. And we're pleased with the landed cost as it came in. It's already in the stores and we're starting to see some of the filters associated with it. It's smaller now it will build as we move through the year. Overall, lead time will depend on the product we're buying. So if were buying furniture it's going to be longer, if it's going to be textiles we have more flexibility overall and it’s going to be shorter timeframes. But the good news is, as we are in the very early and in sourcing. We have a team in place that can execute what we need to do not only for this year, but also for next year and we'll continue to invest into that team. We see this as a five year journey where we can drive lot of benefits that will give us the ability to reinvest in the business. And as you've seen over the past five years we are committed to doing that. But what you've also seen is, if you go back and look at the last four fiscal years, we've seen 150 basis point increase in operating margin over those four fiscal year despite 70 basis points of incremental marketing investment, 40 basis points of incremental store labor investment as well as other investments in our home office. So the good news is, this is the multiyear certainly this is going to have a tailwind to our business.

[Operator:]

Our next question is from Curtis Nagle with Bank of America/Merrill Lynch. Please proceed.

[Curtis Nagle:]

So the first one, just curious if you could provide a little more color on what kind of list you're seen at basket from the addition of the credit card?

[Judd Nystrom:]

So the nice part is, as we launched this program in August and we're really pleased with the overall program it's very early is what we tell you. The enrollment is above expectations. What we're seeing as we see strength in younger and higher income shoppers. The basket size when you look at it despite the fact last year was only in for about five months. The basket has multiple times higher than what an average customer is which just give us excitement about the possibilities over time. The other program that we have that we're also very excited about is our Insider Perks program. We're at 1.4 million members. We ended the fiscal year at 1 million in only five months that average basket is also higher. So what we're focused on as we talked about driving all the organic metrics. We're focused on taking those members launching our CRM program which will be collecting data on, driving frequency and then you start mixing with higher baskets with those programs and then you start to see overall business continuing to grow. So the good news is as we're in the early innings and we're focused on continuing to execute against both these programs.

[Curtis Nagle:]

I mean just a follow-up, I guess for Judd. How should we think about on a per store basis what SG&A should look like I think over the past few years it's been approximately flat. If you take out advertising it’s been down I think maybe a couple percent a year and you've gotten really, really nice leverage. Going forward, what do you think is a fair assumption?

[Judd Nystrom:]

It's actually going to increase this year and it's going to increase because we're actually making significant investments in the business. So going up 30 basis points and marketing, making reinvestment in price which is not part of the cost per store but making those investments labor hours so that's putting more investment back in the store for our customers. And then overall, we'll have higher preopening expenses in D.C. So depending on how you calculate your average store SG&A you'll see more investment. The good news is, we're able to fund that by expanding our gross profit rate. And we've been holding a gross profit rate steady and still reinvesting our price. We're going to still continue to reinvest in price. The good news is, for your earlier question or for the earlier questions on direct sourcing because we're in the early stages we'll get benefit from that. That will allow us to invest in other areas of the business.

[Operator:]

Our next question is from Simeon Gutman with Morgan Stanley. Please proceed.

[Unidentified Analyst:]

[Indiscernible] on for Simeon. So a follow-up to an earlier question on the wages, how are you guys thinking about your hourly wages versus the marketplace right now?

[Peter Corsa:]

So you know we've heard a lot of talk about the retailers using the benefit from the lower tax rate to make long overdue investments in employees. And then what we love about our company is rather than a one-time event, we've been investing in our employees each year. So some examples of that, we've raised our starting hourly wage for store employees several years ago. We made all employees in our business eligible for bonus. In fact full time employees that achieved bonus this year in our stores achieved over $1100 bonus. Our average hourly pay out at the store level was 5% of their earnings. We implemented a 401 (k) match with immediate vesting. We expanded paid leave for new mothers, fathers and adopted parents. We launched a training platform for our employees showing them how to get to the next level and grow. And best of all, all of these have given them the potential to grow and make a career with us. So for us the key metric really has been turnover and in the last four years our turnover has really been cut in half. So in each year we've made those investments in our employees rather than a one-time event.

[Unidentified Analyst:]

And then Lee just on the competitive landscape, some home improvement retailers are going deeper on the home decor category. There is more free shipping offers throughout the market. Are you seeing any changes in the competitive landscape right now?

[Lee Bird:]

You know I love our marketplace and it's growing. It's a healthy business. It's fragmented. I don't think the intensity really has changed. I do I have seen what you've seen as well most retailers are reporting strength in that category. What I like is our position to compete we're a value retailer. We provide a treasure hunt solution to shopping. We've got the lowest prices out there that’s the one I'm most proud of honestly. We're still proud of our prices we've put all of our assortment on online so you can see it on pricing transparency. The direct sourcing an effort that we're putting in is going to allow us to take prices even lower. And I would tell you our model is a model that makes it very difficult for others to duplicate. We can value engineer, styles that are out there and over 70% of our product is private label. I would tell you over 80% of our sales are full price and that’s full prices are below other people sales price. We've got a self-help labor model in the stores they’re low cost structure very low real estate costs go low Home Office cost and D.C. and occupancy cost. We keep cost structure tight. So that enables us to have these great prices. So yes the marketplace there is a lot of great competition out there. I'm impressed with what they're doing with comp shop every single month, every single one of our competitors. We're staying very close to it give an example. Our most recent comp shop we’re 40% below Amazon sales prices. We're really pleased with that. We continue to pay attention to the online players as well as the brick and mortar players. And I love our competitive position and will continue to focus on that.

[Operator:]

Ladies and gentlemen, we have reached the end of our question-and-answer session. I'd like to turn the call back to Lee for closing remarks.

[Lee Bird:]

Well, thanks so much for joining us today. We're excited about the growth ahead of us and we look forward to talking to you in the next coming days and weeks.

[Operator:]

Thank you. This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.