At Home: Still A Lot More Upside (NYSE:HOME)

Investment Thesis

At Home Group, Inc. (HOME) is adamant in its goal to reach 600 superstores and has followed through on expanding its store base throughout its existence. This goal mixed with positive same store comps and the company’s unique BOPIS position should propel At Home into a leader in the U.S. home decor market in the coming years. With the massive expansion in superstores in coming years, we see a lot more upside potential for At Home’s stock.

Company Overview

At Home operates home decor superstores in 39 states across the U.S. As of the beginning of 2020, At Home was composed of 212 stores, with their grand goal of operating 600 superstores across the country. The company dedicates more home decor inventory per square foot than any other player in the industry.

Source: My Calculations

The company went public in 2016 and has seen impressive growth in sales the past few years, and operates in brick-and-mortar stores as well as through their website.

Industry Overview

Because of At Home’s large stores dedicated almost exclusively to home decor and their unique way of handling Buy Online and Pick Up In Store (BOPIS), the company does not believe it has any direct competitors that both operate similarly and sell similar home decor products. However, it does identify companies that sell comparable products and they do compete for market share in the home decor industry. The industry is heavily fragmented with the top three companies covering only 25% of home decor market share.

For online sales, the company primarily competes against Wayfair (W) and Amazon (AMZN). Offline, the company competes against a wide variety of stores. In home improvement, the company competes against Home Depot (HD) and Lowe’s (LOW), in arts and crafts, the competitors are Hobby Lobby and Jo-Ann, and in mass retailers, the company is up against Target (TGT) and WalMart (WMT). These names are only a small sample of companies competing in the home decor space. Noticeably, At Home is the closest to a pure play online and offline home decor retailer listed, giving it a possible edge in the space for future growth. Because At Home is the only pure play of its size, it would be more comparable to contrast the company to the overall home decor industry than it would to any single competitor throughout our analysis.

The U.S. home decor market was estimated at $126 billion in 2019, and is projected to grow at a CAGR of 8% through 2027. The industry is growing at an admirable rate and At Home’s FY 2020 sales were close to only 1% of the U.S. home decor market, but the company’s market share is growing rapidly.

Consumer Buying Preferences

At Home states in their FY 2020 10-K that their research indicates customers are drawn toward buying or browsing online and picking up in store processes, but we’ll look at whether this is true and if the trend is showing this way of shopping is increasing or decreasing.

By next year, it is estimated that up to 90% of retailers will implement some form of BOPIS. The effects of COVID may exacerbate this trend, but it stands that having an online presence as well as a physical store will remain important for many industries.

Inverse of the 90% figure is the trend showing that 10% of all transactions will be BOPIS by 2025. Sources differ in the percentages of current and future retail BOPIS transactions, but they all seem to agree: the number of these types of transactions are trending upwards. The vast majority of the 10% is likely to be within certain industries, with the home decor industry being a likely leader in this category of transactions. The primary reason home decor and BOPIS go so well together is that customers like to physically see the items they’re buying to decorate their home with before leaving the store. This gives them the ability to see the item online while they’re in their home in advance, and then physically see the item at the store to make sure it is as advertised.

Source: KIBO

Other retailers selling home decor items implementing BOPIS means that At Home may lose its edge in this area in the coming years when it comes to home decor BOPIS, but for the time being the company should enjoy its status as the king of pure play home decor BOPIS companies.

COVID Impact

As most know by now, COVID forced many retailers to shut down early in 2020, and At Home was not immune to the effects of the virus. The company closed its stores early on in the pandemic, but implemented its reopening plan in May 2020. The negative effects of the virus appear to be short-lived as the company has reported FY Q3 2021 same store comps of 44% and an increase in total year over year net sales of an astonishing 47%.

This increase in sales can likely be partly attributed to the store’s BOPIS capabilities during a time where foot traffic in most retailers would be significantly slower.

Aside from net sales growth, COVID has also impacted short-term plans related to the growth to 600 stores. The company announced early into the pandemic that new store openings would be significantly slowed down due to the uncertainty surrounding the virus. However, given the positive impacts of the virus, it’s unknown how long that partial suspension in new store openings will remain.

Loyalty Program Growth

An indicator of likely customer retention is a retailer’s loyalty program and new member sign-ups. Loyalty members buy 5-20% more frequently and spend up to 20% more per shopping trip than non-members.

At Home launched its Insider Perks loyalty program in 2017. In Q3 2021, the company added 2.4 million members, a year over year increase of 42%. These numbers put their current loyalty program users at 8.3 million members. The rate of increase in the company’s loyalty program as well as the large number of users means we can reasonably estimate a high customer retention as well as forecast high future growth in new customers.

Source: My Calculations

Many of these new customers may have been brought in thanks to online shopping due to the pandemic, however the ones that have signed up for the loyalty program are likely to stick around, but new sign-ups may slow once the effects of the pandemic have been subsided.

The largest benefit of high member sign-ups for the company will be the increase in same store comps due to members spending more. The cash flow from this will help At Home further finance new store openings, pushing its plan to 600 stores.

Pre-COVID Growth

It’s important to look at a company’s growth and trends during a normal market as well, despite At Home still operating in a market externality. The pandemic has obviously been kind to certain companies, and At Home is one of them.

At Home’s annual net sales growth rates hovered around 20% CAGR before the pandemic, while the home decor industry it operates in grew at a much slower rate. The company’s growth translates into it not only capturing new growth in the industry but also being able to take significant existing market share from competitors.

At Home not only looks to expand on same store comps (which it has done impressively pre and during COVID), but it also looks to expand on the number of stores it operates in total. As stated, the goal is to 3x the number of stores from roughly 200 to the goal of 600. During a normal year, the company’s goal is to expand the number of stores by 10%. It’s been consistent in this goal, and with the payback period of opening the stores a mere 2 ½ years for its leased stores (and less than 2 years for new builds), At Home is set to see exponential growth in the coming years from new store openings.

Risks

While At Home has seen impressive positive comps during COVID, their FY 2020 comps were nowhere near as exciting. We can see average U.S. retailers average around 3-9% positive comps per year from 2016-2020. During Q3 FY 2020, At Home posted -2% in same store comps and the other quarters in that fiscal year were similarly negative. Through these numbers, we can reason that for At Home, the majority of the net sales growth in a normal year comes from new store openings and not from increases in comps.

Source: Y Charts

However, as noted earlier, we think the combination of the increased adoption of BOPIS systems and new loyalty sign-ups could help turn around the comps numbers in the coming years for At Home.

Another risk to note is the way in which the company finances new stores. A revolving line of credit is used, and the company is generally very heavy on long-term debt and operating lease liabilities. Despite this, it maintained a relatively healthy working capital ratio of roughly .8 at the end of FY 2020, however the majority of the assets in this equation are inventories. Its cash position is generally minimal. Because of these factors, a downturn in business could mean At Home would be a bankruptcy risk. The value of the stores themselves that the company owns and does not lease may or not cover amounts owed to creditors in the event of a bankruptcy.

Valuation Analysis

We used a DCF model to value At Home and, due to the increase in comps, we forecasted the net sales growth rate at 40% for the first year, 30% the second due to residual positive COVID effects, and then reverting down to average company growth rates the third year at 20% and then slowly trending downward to forecasted industry growth rates in years 4 and 5.

It should be noted that a high forecasted free cash flow in the first year was helpful to our high growth rates in the valuation. This is due to the high net sales growth and also the projected decrease in spending on investments because the company partially suspended new store openings due to COVID.

To account for additional risk regarding business conditions going forward, we used a large discount rate of 20% and landed at an NPV of $22.27, significantly above current share price of $16.92 as of the valuation date, 11/23/2020.

Source: My Calculations

For transparency on our valuation of HOME and to test your own assumptions, see our financial model here: HOME_Financial_Model.xlsx.

Key Takeaways

At Home will utilize its new store growth numbers and continue to take market share in a competitive industry. The effects of COVID have given it a short-term boost in sales, but it will likely help to boost customer retention and customer spending metrics in a normal business environment as well. Because of At Home’s unique standing as a home decor pure play and the numbers laid out above, we believe the company is set to take a dominant place in the home decor industry in the coming years.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in HOME over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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