A month has gone by since the last earnings report for At Home Group (HOME). Shares have lost about 5.1% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is At Home Group due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
At Home Reports Break-Even Q3 Earnings, Guides Low
At Home Group Inc. reported break-even adjusted earnings per share in the third-quarter of fiscal 2020 compared with the Zacks Consensus Estimate of a loss of 2 cents. The reported figure declined from adjusted earnings of 14 cents in the year-ago quarter. The downside was mainly caused by product margin contraction due to incremental markdowns, increased occupancy deleverage resulting from the adoption of ASC 842 “Leases” as well as fiscal 2020 and 2019 sale-leaseback transactions, and costs associated with the company’s second distribution center.
At Home reported net sales of $318.7 million, which beat the consensus mark of $314.4 million by 1.4%. That said, the reported figure increased 19.3% from $267.2 million in the prior-year quarter owing to increased new store openings. However, a 2% decline in comparable-store sales or comps partly offset the positives. The decline was driven by unfavorable customer response with respect to tariff-related strategic price increases.
Gross margin of 26.8% was down 540 basis points (bps) from the year-ago quarter’s figure. The downside was caused by product margin contraction associated with incremental markdowns and increased occupancy expenses resulting from the adoption of ASC 842 “Leases” as well as sale-leaseback transactions in fiscal 2020 and 2019.
Adjusted selling, general and administrative (SG&A) expenses, as a percentage of net sales, improved 80 bps year over year to 23.5% on reduction in incentive compensation.
Adjusted operating margin contracted 350 bps to 2.7% from the prior-year quarter’s level owing to the above-mentioned headwinds. Adjusted EBITDA of $32.9 million fell 11.8% year over year during the quarter under review.
As of Oct 26, 2019, At Home had 213 stores in 39 states. Out of these, 9 net new stores were opened during the fiscal third quarter, up 23.1% from Oct 27, 2018 level.
At Home reported cash and cash equivalents of $14.1 million as of Oct 26, 2019 compared with $11 million on Jan 26, 2019. Long-term debt came in at $335.7 million at the end of the fiscal third quarter, compared with $336.4 million at fiscal 2019-end. Total liquidity (cash plus $125.9 million of availability under revolving credit facility) was $140 million as of Oct 26, 2019.
Lowered Fiscal 2020 Guidance
The company has lowered its fiscal 2020 guidance, thanks to weaker performance in its Christmas offering, largely driven by a more promotional holiday environment and the impact of a late Thanksgiving.
It now expects total net sales in the $1,352-$1,360 million range (versus prior expectation of $1,372.5-$1,387.5 million), reflecting 16-17% growth on a year-over-year basis. Comps are expected between negative 2.6% to 2% (versus down 1.5% to up 0.5% expected earlier), with 32 net (36 gross) new store openings.
In view of approximately 90 bps impact of the second Distribution Center (“DC”), gross margin is anticipated in the range of 28.2-28.5%. Adjusted operating margin is expected within 5.6-5.9%, inclusive of approximately 75 bps impact of the second DC.
At Home lowered its adjusted earnings guidance to the band of 51-56 cents per share, which is lower than the current Zacks Consensus Estimate of 68 cents (considering the midpoint of the guidance). Previously, the company had expected adjusted earnings between 67-74 cents per share.
Capital expenditures are likely to be between $115 million and $125 million, net of approximately $125 million of sale-leaseback proceeds. This is lower than the prior expectation of $135-$155 million.
For the fiscal fourth quarter, At Home expects net sales in the range of $385-$393 million, reflecting 9-11% growth on a year-over-year basis. Comps are expected to decline between 6% and 4% during the quarter. Adjusted operating margins are projected in the band of 8.8-9.6%, including nearly 40 bps impact of the second DC. The company expects adjusted earnings in the band of 31-36 cents. Additionally, the company anticipates opening one net new store.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -36.7% due to these changes.
At this time, At Home Group has a poor Growth Score of F, however its Momentum Score is doing a lot better with a C. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise At Home Group has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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