Edited Transcript of HOME earnings conference call or presentation 24-Mar-20 8:30pm GMT

Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call, such as adjusted EBITDA, adjusted operating income, 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 investor.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.

With that, I will now turn the call over to Lee. Lee?

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Lewis L. Bird, At Home Group Inc. – Chairman of the Board & CEO [3]

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Thank you, Arvind. Good afternoon, everyone. Thank you for joining us to discuss our results for the fourth quarter for fiscal 2020. Before I discuss our results, I want to address the rapidly evolving COVID-19 situation. First, I’d like to thank our entire team who has truly come together over the last few weeks to reexamine how we continue to serve our customers while ensuring customer and team member safety and well-being during this unprecedented time. We’re taking several thoughtful steps to preserve the health and safety of our communities while also taking an exceptionally disciplined approach to managing our business and liquidity during this time. We continue to adopt recommended safeguards and plans at our stores and home office as circumstances change. As such, we have temporarily closed all of our stores across the country from Sunday, March 22, through Saturday, March 28. We’re compensating our associates during this planned closure, and we will continue to actively monitor the situation and reassess the planned timing for reopening as needed.

In order to continue serving customers’ needs during this time, our teams worked together to roll out a curbside pickup solution that is now effective at the majority of our stores as allowed by state and local mandates. At our stores that don’t already have Buy Online, Pick Up in Store, or BOPIS-enable, customers can place an order by calling their local store or completing a curbside delivery order form on our website. We’ll then text each customer when their order is ready for pickup. An associate will meet the customer curbside, wearing gloves for safety measures, process their payment and load the products without the customer ever needing to leave their car.

For stores that have BOPIS, the order process is even easier. While it’s still very early and sales from curbside pickup are relatively small, customer engagement has been strong, and the feedback has been positive so far. We continue to monitor guidance from state, local and federal agencies as the situation evolves and remain committed to implementing additional changes or closures as needed.

At the same time, we’re focused on taking decisive action to enhance our financial flexibility and preserve liquidity during this unprecedented period of uncertainty by reducing our operating costs and capital requirements in the near term. These actions include suspending all new store openings and store remodels, significantly reducing Q1 advertising spend and deferring consulting and capital projects, except to support our omnichannel initiatives, which we are accelerating. We’ve also proactively drawn down $55 million of our ABL facility and are pursuing additional sources of liquidity as a supplemental option.

I’d — now I’d like to share some color around the impact of COVID-19 that we’ve seen to date. Jeff will discuss the inventory supply dynamics, but from a demand perspective, we have seen a notable downturn in customer traffic recently that has coincided with heightened concerns around the virus. To put that into perspective, in the weeks leading up to our pre-announcement, year-to-date comps were approximately flat. However, for the past 2 weeks or so, prior to our temporary store closures across the country, comps turned materially negative as customers began implementing social distance and quarantine practices. That said, we have seen a meaningful uptick in certain categories like home office furniture and cleaning supplies over the last few weeks. The circumstances and responses changing on a daily basis, it’s simply too early for us to speculate on the impact of the virus on our operations or financial results. Given the uncertainty of the magnitude and duration of the disruption, we are unable to provide first quarter and fiscal 2021 outlook at this time. Jeff will give some color shortly and outline the actions we’re taking to preserve liquidity right now. Our team is adjusting and pivoting at lightning speed, while prioritizing the health and safety of our team members and customers.

Turning to the results of the fourth quarter. Q4 comp performance improved in the back half of the quarter, enabling us to exit the year with solid momentum. We also were pleased with our clean inventory position and the significant improvement we made in free cash flow. As noted in our last call, we had a soft start to Q4, which is due in large part to a significantly more promotional environment resulting from the shortened holiday season. We took decisive action and accelerated our typical markdown cadence to move through our holiday product and maintain our competitive position as a low-price value leader. Our teams worked hard and navigated these challenges well, allowing us to deliver results above our most recent expectations which we shared in our press release just 2 weeks ago.

In terms of the full year, fiscal 2020 was a challenging one for our company as we faced a number of headwinds. Some, like the compressed holiday season, adverse weather for the first half of the year and tariffs were external. Others, including execution on select category reinvention, customer price perception as a result of our tariff response, and incremental new store cannibalization were within our control and are clear opportunity for us going forward. We took important steps and adjusted our tactics as we move through the year to address these challenges, but our full year results fell short of our expectations, and comps were down 1.7%.

Despite weak comp performance, we grew our top line 17% on the back of solid new store performance, which helped us gain market share. Despite the challenges we faced last year, our fiscal 2019 class delivered 6.7 million in average sales in their first year and our fiscal 2020 class has been performing very close to our internal expectations. We’ve temporarily suspended new store openings in response to the current environment, but we continue to believe that over the long term, new store expansion will remain the primary driver of our growth in shareholder value.

In addition to new store performance, our team delivered several key positives in fiscal 2020. We opened our new DC on time and under budget; significantly improved our inventory position and meaningfully reduced shrink; increased our loyalty members by 65% to 6.5 million members; and delivered over $100 million in free cash flow improvement versus fiscal 2019.

Turning to fiscal 2021. Our near-term priorities are centered on navigating the current market challenges and being nimble. At the same time, we haven’t lost sight of our key initiatives designed to regain momentum and drive future success once we return to a more normalized environment. Our overarching strategy continues to be providing great products at great value.

I’ll start with our efforts around EDLP Plus. EDLP Plus is an important — excuse me, is an improvement in how we use storytelling to our advantage: visually merchandise our stores and highlight At Home’s great prices and customer value proposition, creating campaigns around select categories. We were pleased that prior to COVID-19, 4 out of 5 of our EDLP Plus campaigns were successful in driving comps and clearance through sell-through — driving comps in clearance sell-through within the highlighted categories. While we’re temporarily paused these campaigns during COVID-19 disruption, over time, we believe EDLP Plus will give customers a better appreciation for the breadth of our assortment, continuous product newness, and most importantly, the exceptional value of our everyday low prices.

Second, sharpening our focus on category reinventions, which have been a critical comp driver for us historically, but had mixed results for us in fiscal 2020. While EDLP Plus is primarily about emphasizing our great prices and category breadth, reinventions are primarily about delivering, highlighting product newness. We were pleased with the performance of several of our reinventions late last year, and our teams plan to take these learnings from highly successful reinventions, sharpen our execution and apply them to our assortments going forward.

A third initiative, we’ll continue to build upon this year is our Insider Perks loyalty program, which was launched only 2.5 years ago and has already grown to nearly 7 million members. Towards with a higher penetration and growth rate of Insider Perks membership typically deliver a better relative comp performance. Also, while we’re temporarily pulling back on media spend, our CRM and advertising campaign focused on our loyalty members have been the most productive and efficient marketing spend for us.

Fourth, we expect a reduction in new store cannibalization moving forward. Our fiscal 2019 and 2020 classes featured new stores in more mature, denser markets that impacted our higher volume stores in the comp base and therefore, drove outside friction on comps. While our new store openings for fiscal 2021 are currently on hold given the COVID-19 situation, our plan to moderate our long-term growth rate to 10% should reduce the impact of cannibalization on comp performance in the future. If this strategic initiative is continuing to build on our omnichannel capabilities, in response to COVID-19, we are taking our vision in accelerating it quickly as we roll out BOPIS and launch curbside pickup services earlier than planned. We began testing BOPIS in 28 stores across 6 markets in January, and we’re pleased with the initial results as order size and transactions were trending above our expectations prior to COVID-19. We initially plan to launch BOPIS to a larger group of stores in the back half of the year, but we have accelerated that plan in light of the current environment. We now expect to have over 100 stores enabled with BOPIS capabilities in April.

In addition, as I mentioned earlier, we have added a curbside pickup solution at the majority of our stores as allowed by state and local mandates and are quickly moving forward with establishing delivery partnerships. This is a prime example of how we are effectively adjusting the execution of our long-term strategic initiatives to better serve our customers while also prioritizing health and safety during these challenging times.

I’ll turn the call over to Peter to discuss our team’s continued focus on our operational initiatives, including sourcing, diversification and inventory management. Peter?

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Peter S. G. Corsa, At Home Group Inc. – COO & President [4]

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Thank you, Lee, and good afternoon, everyone. At Home is focused on driving profitable growth. Our key fiscal 2020 operational initiatives are expected to drive savings and enable us to reinvest in our strategic priorities over time, which in turn should help drive efficiency going forward. Our biggest operational accomplishment in fiscal 2020 was clearly the launch of our second distribution center in Carlisle, Pennsylvania, which now supports over half of our stores. I am so proud of our Carlisle team’s ability to ramp up quickly. Both of our distribution centers are highly productive cross-dock facilities. And as we get back on track, post-COVID-19, we expect to see more of the transportation savings from the Carlisle DC flowing through gross margin into fiscal 2021.

We also put a substantial effort around our tariff mitigation strategy throughout fiscal 2020, particularly by making adjustments to our sourcing strategies to diversify our supply chain and expand our direct sourcing. We increased our purchases from alternate countries and reduce some of our reliance on Chinese products. We continue to look for opportunities to diversify and expect to make further progress in fiscal 2021.

On direct sourcing, we exited fiscal 2020 at 15% of purchases, enabling us to shorten the production life cycle between concept and customer. Direct sourcing also gives us increased oversight of production to ensure higher and more consistent product quality. Our goal for fiscal 2021 is to exit the year with even higher direct sourcing penetration. We have also been keenly focused on enhancing our inventory management efforts to drive better financial returns and cash flow improvement. As an example, we increased the number of seasonal product flows scheduled for fiscal 2021 which gives us more flexibility to trim orders and respond to adverse weather events or changes in customer behavior, including the ongoing impact of COVID-19. This ultimately should help us better manage inventory levels and potential markdowns.

As anticipated, our significant reduction in shrink — shrinkage during fiscal 2020 also underscores our commitment to constant analysis and process improvement to drive our business forward efficiently. And finally, we are rationalizing the number of SKUs we carry in certain categories, along with improving our in-stock rate on key items. Over time, we expect to continue to build on this initiative.

With that, I’d like to turn the call over to Jeff, who will recap our financial performance for Q4 and fiscal 2020. Jeff?

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Jeffrey R. Knudson, At Home Group Inc. – CFO & Principal Accounting Officer [5]

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Thank you, Peter, and good afternoon, everyone. As a reminder, additional information is available in our earnings release, which is posted to our Investor Relations website and includes reconciliations illustrated in our non-GAAP results as if the new lease accounting standard had been effective in fiscal 2019. Our discussion of adjusted metrics on the rest of this call will be on a lease-adjusted basis, with fiscal 2019 results recast to illustrate the standard’s impact.

During the fourth quarter, net sales increased 12.3% to $397.7 million, driven primarily by the increase in our store base. Comparable store sales decreased 3.1%, which was above our most recent guidance and compared to an increase of 2.1% in Q4 last year. Cannibalization from new store expansion was in line with our expectations for the quarter.

In mid-January, with 2 weeks still ahead of us, we updated you that Q4 comps were trending toward the upper end of our initial guidance of down 4% to down 6%. Our outlook factored in potential weather-related volatility that we have historically seen in January. Weather ultimately remain relatively mild for the balance of the quarter, and combined with the success of our targeted Christmas markdowns, helped us report comps nearly 100 basis points above guidance.

Fourth quarter gross profit was $114.1 million, down 2.7%. Gross margin was 28.7% and declined 440 basis points year-over-year, or 360 basis points adjusted for the new lease standard due to product margin contraction and occupancy deleverage, partially offset by improvement in shrink to more normalized levels. As Lee mentioned, we’re pleased with our sell-through of clearance merchandise during the quarter, and we exited fiscal 2020 with inventory growth of 9.4%, which was well below our fourth quarter and full year sales increase of 12.3% and 17.1%, respectively.

Fourth quarter adjusted SG&A was $73.8 million, up 5.5% versus Q4 last year. Adjusted SG&A was 18.6% of sales and improved 120 basis points year-over-year due to favorability in incentive compensation and preopening costs partially offset by investments in labor and advertising. Adjusted operating income decreased 10.6% to $38.2 million, and adjusted operating margins decreased by 250 basis points to 9.6%, at the high end of our outlook. Fourth quarter pro forma adjusted earnings per share of $0.37, was $0.01 above the upper end of our $0.33 to $0.36 outlook.

Our adjusted metrics exclude a noncash goodwill impairment charge of $250 million as a result of a Q4 interim impairment test. As a reminder, the goodwill on our balance sheet relates to the purchase price accounting at the time of our acquisition by our private equity sponsors in 2011 and not from any asset purchase or business acquisition by the company.

Turning to the full year. Fiscal 2020 net sales increased 17.1% to approximately $1.365 billion, primarily driven by new store growth and partially offset by a 1.7% decrease in comparable store sales. Full year comp sales were affected by a more promotional environment in Q4 due to a shorter holiday selling season and adverse weather conditions in the first half of the year. To a lesser extent, we also saw an unfavorable customer response to tariff-related price increases in certain categories, which we discussed on our Q3 call in December.

Full year adjusted operating margins were down 360 basis points year-over-year to 5.9%. The decline was primarily due to lower gross margins driven by markdowns, occupancy cost deleverage and costs associated with our second distribution center, partially offset by shrink improvement. Adjusted SG&A rate improved 10 basis points for the year, driven by favorability in incentive comp, largely offset by investments in labor and advertising. Full year pro forma adjusted EPS was $0.57, $0.01 above our most recent outlook.

One of the fiscal 2020 highlights I’m most pleased with is the significant improvement we made in free cash flow. For the full year, free cash flow decreased $18 million, which was an improvement of $105 million versus fiscal 2019 despite a $25 million reduction in sale leaseback proceeds. We believe the sharpened focus we developed in fiscal 2020 to reduce capital investment, roll out strategic procurement initiatives and implement working capital efficiencies has helped us react to the need to prioritize liquidity during the current COVID-19 disruption.

Turning to fiscal 2021. First, our thoughts go out to all those impacted by the virus across the United States and the globe. With circumstances and responses changing daily, it’s too soon to know the full financial implications of COVID-19 on our business. Therefore, for the time being, we are suspending our normal practice of providing detailed financial guidance for both the current quarter and fiscal 2021. That said, we are prepared to share a few key insights as well as initiatives underway to preserve liquidity until normal operations resume.

Importantly, during this unprecedented time, we are prioritizing the health and safety of our customers and team members. As Lee mentioned, we have taken action by temporarily closing stores and rapidly accelerating our omnichannel capabilities to better serve customers in this environment. To help our team members who are feeling the financial impacts of COVID-19, Lee has generously chosen to contribute half of his salary to the At Home Foundation, our program that supports team members in times of hardship during this difficult time. We are committed to our team members and will continue to focus on helping each other through this challenge.

As Lee mentioned, we saw a notable slowdown in store traffic over the last 2 weeks as customers began practicing social distancing and quarantine measures to control the spread of the virus. As you know, we are a domestic retailer with no sales outside the United States. However, we do have supply chain exposure to China and Asia, and we initially saw some shipping delays as factories closed. However, most of the factories in China that we work with are operational and approaching full capacity as the virus has leveled off there. Based on the information we have today, we expect the majority of our receipts for March and April to arrive in the U.S. on time, absent further logistical disruptions.

Now I’d like to touch on the swift and bold actions we are taking to preserve liquidity. We initially plan to open 21 new stores in the first 3 quarters of fiscal 2021, implying a 10% unit growth rate for the year. Quarter-to-date, we have opened 6 new stores. However, in light of the COVID-19 developments, we have suspended all new store openings and remodel projects which could lower our capital expenditures by over $100 million if we do not resume new store investment for the rest of the year. As a result, we have also suspended inventory accumulation for unopened stores and will redeploy any accumulated new store inventory to existing stores as appropriate. We have eliminated any discretionary capital spend other than as it relates to our omnichannel initiatives. We’ve trimmed purchase orders for near-term receipts to better respond to customer demand, and we’re exercising extreme prudence on new product orders.

We’ve also reduced store and distribution center labor hours to better align with current demand. Our best current thinking is to move forward with our seasonal orders for the back half of the year, but we’ll continue to monitor the situation closely and respond as appropriate. We have significantly curtailed Q1 advertising spend, consulting projects, team member hiring and nonessential operating expenses in the short term. As a precaution, we have also proactively drawn down $55 million on our ABL facility to give us increased financial flexibility, and we have the ability to draw more, if needed. Given the incredibly fluid and unprecedented situation we are currently facing, we are evaluating additional actions to improve liquidity, including pursuing supplemental financing that could be a longer-term solution until business normalizes.

Overall, our executive team is moving quickly and nimbly to make decisions and preserve liquidity in the best interest of At Home’s customers, team members and investors. With that, I’ll pass it over to Lee for final remarks before Q&A.

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Lewis L. Bird, At Home Group Inc. – Chairman of the Board & CEO [6]

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Thank you, Jeff. I’m incredibly grateful for our team’s efforts to successfully navigate various headwinds throughout last year, enabling us to exit the year with a healthy inventory position and work together today as a community to take on the current COVID-19 challenge. Obviously, we’re facing unprecedented times and near-term uncertainty, but we remain confident in our business model and its long-term potential. We have a highly differentiated concept with compelling store economics and a significant white space opportunity. Most importantly, we have a talented team that will enable us to steer through the short-term challenges we are facing and position us for a bright future. With that, operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first questions come from the line of Simeon Gutman of Morgan Stanley.

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Simeon Ari Gutman, Morgan Stanley, Research Division – Executive Director [2]

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I have 2 questions. I’ll answer them — I’ll ask them, sorry, in one — in 2 parts here. The first, I realize you can’t give specific guidance, and it’s a very uncertain time. Can you give a sense of direction? I mean, right now, your stores are closed, but doing curbside. And we don’t know when they’ll open. And then when we do open, it’s likely we’re in a tougher economic situation. And so I don’t know if you can quantify or dimensionalize type of sales pressure that you’re expecting so that we can think through or what you’re planning to do from a cost side? And then the second question is on the supply side. Can you talk about supply chain disruption? Are there orders that you’re canceling on now? And is there flexibility in terms of inventory? And those are the questions.

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Jeffrey R. Knudson, At Home Group Inc. – CFO & Principal Accounting Officer [3]

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Yes. Simeon, this is Jeff. I’ll take the first part, and then Lee will take the second question. I would say in the weeks leading up to our pre-announcement, comps were approximately flat. And then what we saw in the 2 weeks post that announcement is that we did see a notable downturn in traffic in our stores. And week — the second week post our pre-announcement was worse than the first week. So our stores are now closed. We’re planning to be closed through this Saturday, the 28th. We do have curbside enabled where that’s allowed. We’re following the government mandates but this is a very fluid situation, and we’re going through it on a daily basis, and that’s really why we can’t give you any guidance today or any more color than that. I would say that we’re extremely focused on a day-to-day basis about preserving liquidity. And over the long term, as Lee mentioned, we think we have the right team, the right model, and we’re working on the 5 things to help drive comp store sales when we come out of this on the other side.

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Lewis L. Bird, At Home Group Inc. – Chairman of the Board & CEO [4]

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Let me talk about the supply side. What I would say is, we did a really nice job at the end of the year managing inventory. I was really pleased with our inventory actions, not only from a sell-down standpoint, but also planning our inventory as well going into the year. We did have slight delays initially from China. And I would say that, that actually helped us. We — because we’ve now trimmed our flows due to the reduced demand due to COVID. With the stores suspended, we’ve paused all inventory accumulation. We redeployed that inventory to our existing stores. We’ve also looked at our new product orders and have been thoughtful about our future orders. We are planning on Halloween, Harvest and Christmas orders, we’re placing them as we speak. But we also realize the one benefit of a slow inventory turn is we have enough inventory in the store to manage any demand when we reopen, and have enough demand with — enough product to support demand for our spring and summer assortment for some time. We were able to address those back-end orders and clip where necessary on the spring and summer. And we’ve been able to look at our inventory orders for every day and look at our inventory positions and been thoughtful about that as well.

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Jeffrey R. Knudson, At Home Group Inc. – CFO & Principal Accounting Officer [5]

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Simeon, the only thing I would add to that is we have great, long-lasting relationships with our product partners. And several weeks ago, when they were in the midst of the virus outbreak, and they were asking us for our understanding as they were working through their factory shutdowns and the delays, we’re now asking them to reciprocate with us and be understanding as we work through this and trim orders appropriately and manage our inventory levels as we’re working through it in the United States now.

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Operator [6]

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Our next questions come from the line of John Heinbockel of Guggenheim.

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John Edward Heinbockel, Guggenheim Securities, LLC, Research Division – Analyst [7]

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2 questions. On the OpEx side, maybe talk about managing labor. Once you reopen, how much will — I guess, how much you need will depend on volume and traffic. But maybe talk about managing that a little bit because I know you’ve had kind of 2 groups of folks right in the store and how you deal with that? And then secondly, with respect to working capital, can you size that opportunity? If you’re not growing this year, how much could that possibly come down and add to the CapEx benefit?

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Peter S. G. Corsa, At Home Group Inc. – COO & President [8]

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So John, this is Peter. Sure. This is Peter. I’ll take the first one. So this is a place actually where our labor model really is a benefit for us. Remember, we only have 2 exempt employees and only 25 total employee in our average store, with over 80% of that staff being part-time. So we plan our labor, as you know, as a percent of sales. So when this began to happen and we saw the decrease in changes in demand, we were very proactive with that. So when we reopen, we’ll reduce our staffing to approximately 4 people per store through a reduction in scheduled hours, it’s appropriate based on demand. And where we’re allowed in stores that are closed because some stores are close to all business, but some allow us to do curbside, we’ll continue to do that in those locations and provide curbside pickup for our customers.

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Jeffrey R. Knudson, At Home Group Inc. – CFO & Principal Accounting Officer [9]

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Yes, John, on the working capital side, I would say when we look back to this past fiscal year and the $105 million improvement that we drove in free cash flow this year, about 20% of that was driven by working capital improvements, with the remainder coming out of gross CapEx because we did fewer sale leasebacks this past year. As we look forward into this year, I would just say, I would want to remind everyone that the $100 million reduction in capital that I spoke about, is just from the new store development program. Obviously, as we think about trimming, refresh and remodel projects, other discretionary CapEx, that there is additional CapEx that can be reduced out of the business outside of just our new store development program. But that new store development program is the vast majority of our capital spend. On the working capital side, we will continue to work through that. We obviously have inventory turns less than 2x per year. So that remains an opportunity for us and certainly in a normalized environment.

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Operator [10]

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Our next questions come from the line of Jonathan Matuszewski of Jefferies.

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Jonathan Richard Matuszewski, Jefferies LLC, Research Division – Equity Analyst [11]

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Yes. I guess, just the first one, you mentioned rationalizing some SKUs in certain categories and improving inventory levels and others. It seems like more of a strategic move versus a reflection of the current dynamic, if I understand that correctly. So maybe just elaborate on that decision and what informed it? And how well it’ll evolve over the next few quarters?

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Lewis L. Bird, At Home Group Inc. – Chairman of the Board & CEO [12]

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Sure. This is Lee, Jonathan. We looked at our inventory productivity last year. We’ve looked at a focus on backing up our best sellers with more inventory and looking at our slow-turn inventory. We still want to win on assortment, but we looked at 50,000 SKUs and said there’s a lot of SKUs that may seem duplicative. And so last year, we set a goal of ourselves to reduce our SKU count by almost 20% over the next year. We’ve been able to do that over time and so our assortments, as we’ve come out now, most recently, with our reinventions and our product updates, have a lower SKU count. We are buying behind our bigger ideas, our best sellers. We’re making sure our in-stock rate on our best sellers are now at a record high for us as well before this COVID-19 situation. And that allows our inventory to be more effective and more productive. And that was a strategic plan starting last year but now been implemented this year.

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Jonathan Richard Matuszewski, Jefferies LLC, Research Division – Equity Analyst [13]

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Great. That’s helpful. And then just if you could give us an update, obviously, a really fluid competitive landscape. So just your thoughts on expectations as we normalize throughout the year, there are kind of a few players in the landscape that are challenged and closing stores, others that are liquidating. So any thoughts on kind of the degree of near-term potential headwind there? As well as, I think in 4Q, we saw the mass players using the home category to drive traffic. Do you anticipate that dynamic to kind of improve or worsen as the year progresses?

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Lewis L. Bird, At Home Group Inc. – Chairman of the Board & CEO [14]

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Sure, Jonathan. As we look at the competitive environment, it continues to evolve. I would say we’re continuing to monitor carefully. We even did a study this past December and January to really understand the promotional practices of our competition over the past 3 years in our category, mass players, specialty players and the like to see how they’ve been behaving and how we should address the market as well going forward in the marketplace given how promotional was in the fourth quarter. I would tell you, we think the environment remains challenging for everyone. The category was slowing before, but we’re a value player and a value player does very well in times of economic uncertainty. And we like our position in that. We like our price position. Our prices continue to be the lowest in the industry, and that’s been our focus. I would tell you there has been some pressures that we’ve seen around closures of our competition. So Pier 1 had a number of store closures, over 400 stores closed in the past 4 months. That’s a long-term opportunity for us, but in the near term, we did see some headwinds from that, from their inventory liquidation and their store closures, but we also know that there’s a lot of cross-shopping of our customers to their store and their customers to our store. And we see that as an opportunity for us long term. So net-net, as the economy will be challenged should value players win, and I like our position over time.

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Operator [15]

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Our next question has come from the line of Brad Thomas of KeyBanc Capital Markets.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division – Director and Equity Research Analyst [16]

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I guess, Jeff, I was hoping you could just talk through the P&L a little bit and help us think about the variable cost that you have versus the fixed costs that you all have?

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Jeffrey R. Knudson, At Home Group Inc. – CFO & Principal Accounting Officer [17]

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Sure, Brad. So obviously, if we’re in a normal operating environment, we would consider our occupancy expenses, home office labor as 2 of our primary fixed expenses. And then we would typically look at store labor and marketing as a percentage of sales and variable. But I can’t emphasize enough that we’re not in a normal operating environment right now. We’ve addressed — prior to closing this past week, we had changed operating hours within the store. We had changed — Peter’s team did a great job minimizing staffing levels in the store to reflect the demand levels we were seeing and we’re still continuing to make decisions on a daily basis to manage through this situation and focus on liquidity. As Lee mentioned in his prepared remarks, we’ve drastically reduced our marketing spend for the first quarter to the point where now we are just focused on communicating with our customers through our own channels via e-mail and the website. So we’re managing expenses as tightly as we can as we navigate through this.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division – Director and Equity Research Analyst [18]

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Great. And if I could squeeze in a couple other housekeeping. As of today or end of the period, can you tell us how many stores you owned? And is there any market today for sale leasebacks? And what do you think that could be worth in a normal sale leaseback environment?

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Jeffrey R. Knudson, At Home Group Inc. – CFO & Principal Accounting Officer [19]

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Sure. So in a normalized environment, we currently owned 12 stores today. As a reminder, we did $125 million in sale leaseback transactions this past fiscal year. That was 9 properties that we sold. So on average, roughly $14 million per property, we would think that would be a good proxy of what those 12 stores that we own today would be worth in the future in a normalized operating environment. And we continue to have dialogue and canvas the market with our real estate partners, but that market right now is not operating as normal. So we would look to maybe be able to do something, hopefully later in the year.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division – Director and Equity Research Analyst [20]

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Great. And if I could squeeze in one quick one. Could you remind us how much of the business you think of is seasonal and perhaps at risk from periods like this where the stores are closed versus how much of the assortment is maybe a core or everyday kind of product that may not have as much markdown risk?

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Lewis L. Bird, At Home Group Inc. – Chairman of the Board & CEO [21]

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It approximates the square footage we allocate to the business. So 25% of our square footage we allocate to seasonal. So think about patio and garden for the spring and then Halloween, Harvest and Christmas in the fall. Some of that patio and garden does carry through all year long. So about 25% of it is what we have for seasonal. And we’re now looking at — we’ve obviously cut orders for spring and summer, the follow-on orders, and we’re being more thoughtful about our Halloween, Harvest and Christmas orders for the back half of the year.

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Jeffrey R. Knudson, At Home Group Inc. – CFO & Principal Accounting Officer [22]

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Brad, just to go back on the sale leasebacks. Obviously, given the amount that we had planned to do this year, I would just say that by suspending the new store development and if we don’t put any more capital dollars towards new store development for the rest of the year, that $100 million reduction would well outpace what we expected to do in the sale leaseback market this year.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division – Director and Equity Research Analyst [23]

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Of course, yes. Okay. Thank you, Jeff.

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Lewis L. Bird, At Home Group Inc. – Chairman of the Board & CEO [24]

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Thanks, Brad.

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Operator [25]

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Our next question comes from the line of Curtis Nagle of Bank of America.

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Curtis Smyser Nagle, BofA Merrill Lynch, Research Division – VP [26]

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This may be a question you may not be able to answer. It’s perhaps a bit sensitive and then things are obviously very dynamic. But we did start to see a handful of, I guess, examples of other retailers trying to work with landlords in terms of, I guess, deferments on rent, and things like that, during periods of store closures. Anything you could comment on kind of how are you guys thinking about that? Yes, could you comment on that at all?

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Jeffrey R. Knudson, At Home Group Inc. – CFO & Principal Accounting Officer [27]

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I would say right now, we’re having those conversations, Kurt, but there’s been no decisions made as to how we would work with them on a go-forward manner. And all the other actions we’ve taken, those are decisions we’ve made on reducing capital, reducing the marketing spend, trimming new store orders and everything else that we mentioned in our prepared remarks, but there’s been no decisions made as it relates to our landlord relationships and how rent will be handled going forward.

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Curtis Smyser Nagle, BofA Merrill Lynch, Research Division – VP [28]

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Okay. Totally understandable. And I guess, when do you guys — again, this may be one question is just kind of too dynamic to answer at this point. But when do you think you expect to make a decision on when you could open stores? And would this be something that would, I guess, basically meditated by, well, the state mandates, and obviously, the cost and wellness of your employees and customers?

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Lewis L. Bird, At Home Group Inc. – Chairman of the Board & CEO [29]

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Yes, Curtis, we’re really listening and taking the lead of our local officials and government both federal, state and local officials on this. Our expectation and what we knew at the time when we decided to close our stores for this past week was the information we had at the time, this continues to evolve. We have found that each municipality has its own set of rules, and we’re following each of those. I would tell you that our teams are prepared to open when we need to. That’s why we kept the core team in place. As Peter mentioned, there’s 4 core team members that we have at every store that’s prepared even while the store is closed, prepare to run it, either at a support curbside pickup or reopen the store. So we’re going to take it on a case-by-case basis. But our hope is that we can open as soon as possible, but our focus really is the health and safety of everyone involved.

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Jeffrey R. Knudson, At Home Group Inc. – CFO & Principal Accounting Officer [30]

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Yes, Curt. And I would just add that, obviously, with our focus on liquidity and managing through this, the plan right now, as Lee said, would be that we would be closed this week. But then moving forward, there’s obviously a number of different scenarios that could play out where we could have stores that are closed for longer than that due to local ordinances and we’re preparing for all those scenarios and ready to make decisions as appropriate if we have stores closed longer than a week.

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Operator [31]

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Our next questions come from the line of Anthony Chukumba of Loop Capital Markets.

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Anthony Chinonye Chukumba, Loop Capital Markets LLC, Research Division – SVP [32]

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Thanks for all the helpful information. So I have a 2-part question. So you mentioned that you drew down $55 million from your ABL. I think you can draw down more if needed. I guess I was just wondering, first off, what is the remaining availability under the ABL? And then second off, you mentioned that you were exploring other liquidity measures, other financing measures, and I just wonder if you could provide a little bit more color on what exactly that constituted.

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Jeffrey R. Knudson, At Home Group Inc. – CFO & Principal Accounting Officer [33]

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Sure, Anthony. So I would just say, obviously, with our borrowing base and an inventory-backed ABL that, that fluctuates within the quarter. So we did draw $55 million on the ABL. We do have additional room there to draw more. And I would just say that with the actions that we’ve taken and the draw that we did make, that preserve all of our covenants and we’re fine from an operating standpoint with the draw that we did make and we could draw more and not violate any covenant.

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Anthony Chinonye Chukumba, Loop Capital Markets LLC, Research Division – SVP [34]

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Got it. And then just in terms of if you could just provide any color in terms of the other liquidity measures that you’re pursuing?

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Jeffrey R. Knudson, At Home Group Inc. – CFO & Principal Accounting Officer [35]

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It would be primarily — there’s a number of different options there, but the primary source of additional liquidity could be in the form in a FILO tranche on our ABL.

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Operator [36]

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We have reached the end of the question-and-answer session. I will now turn the call back over to management for any closing remarks.

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Lewis L. Bird, At Home Group Inc. – Chairman of the Board & CEO [37]

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All right. Thank you so much, and thanks to everyone for joining us this afternoon. Please take care of yourself and your loved ones and stay safe.

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Operator [38]

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This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation, and have a great evening.