Q2 2021 At Home Group Inc Earnings Call
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 statements.
Any discussion during this call of our results for the third quarter to date will be provided to help investors understand NSS and near term impacts of the code 19 pandemic, but are subject to variability and may not be indicative of our results or transfer ready for reporting period.
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 homes 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 Dock at home Dot Com.
In addition from time to time at home expects to provide certain supplemental materials, our presentations for investor reference.
On the Investor Relations page if its website.
I'll now turn the call orderly Lee.
Thank you Arvind good afternoon, everyone. Thank you for joining us to discuss our results for the second quarter fiscal 2021.
We're pleased to deliver the best quarter in the company's history in terms of comp profitability and free cash flow.
We're also ended the quarter with the lowest leverage ratio since our IPO.
As you know we Preannounced record preliminary Q2 results at the end of July our final comps to 42%.
Total sales of 513 million or up 51% were in line with the pre announcement.
As previously mentioned, we believe our sales increased at a rate significantly faster than the industry and our market share was up meaningfully during Q2.
We're also pleased that for the second consecutive year, we rank number eight on the National Retail Federation recently released Hot 100 retailers list.
This is the fourth year in a row, we have appeared on that list.
Q2, adjusted EBITDA of 160 million and net income of 89 million. We're ahead of our preliminary expectations.
Our leverage ratio at the end of Q2 of 1.4 times was slightly lower than our Preannounce estimates due to better than expected adjusted EBITDA. In addition, as Jeff will elaborate in his prepared remarks, we have recently completed a debt refinancing that provides us financial flexibility and addresses a key investor concern about our debt much.
Surety.
As we look forward our goal continues to be to provide enhanced level of transparency and accessibility to our investors. During these unprecedented time.
In terms of Q3, our quarter to date trends have remained strong comps are relatively in line with Q2 and had been consistent throughout the month of August.
Similar to Q2, the strength is geographically broad in both everyday and seasonal categories are performing well.
However between the two everyday is outperforming as we're not inventory constrained in that category.
We're pleased with our back to Kansas business, which has so far generally comps well above the overall company average during the same period, we refined our back to campus strategy this year and it's paying off.
Our merchant team targeted not only back to campus shoppers, but also young shoppers and their late teens to late Twentys looking to refresh their bedroom dorm room first off campus apartment or first apartment after graduation.
This holistic approach has been very effective in the current environment. When a significant number students are attending college remotely.
We offered a broader and deeper back to campus assortment this year and put greater emphasis on value.
We focused not just on the decorative theme, but also in textiles and storage.
We also offered a limited edition collection with a broad range of styles appealing to both back to campus shoppers and everyone looking to update their living spaces.
Within seasonal Halloween fall are off to a great start.
We believe this is the result of the enhanced quality investments, we've been able to offer this year.
While our Q3 quarter to date performance in both everyday in seasonal categories is clearly encouraging we believe it's still early given that August is typically the smallest month of the quarter and has a lower seasonal mix and was not affected much by inventory constraints.
We expect trends to moderate during the balance of the quarter end the year as our seasonal mix increases meaningfully and inventory constraints become a significant factor.
We're also mindful of ongoing competitor liquidations and uncertainty related to cope 19, and this year's national elections.
With a stronger than expected start to Q3, we now expect seasonal inventory to be down 20% at the end of Q3 in down nearly 10% at the end of Q4.
This compares to our previous expectation of seasonal inventory to be down mid single digits in the back half.
As a result, we expect the current gap between the performance in everyday and seasonal to wide for the rest of the quarter and the year.
Our inventory position for the back half is quite different compared to the first half when we had access to adequate patch on guard seasonal inventory to support strong demand postwar reopening.
That said, we believe the key factors driving our strong performance remained unchanged.
Consumers continue to spend time and money on their homes, including on decorating and organizing their home home offices in kitchen space.
We see this trend persisting for some time.
As a home decor category killer, we remain well positioned to capitalize on this trend.
Our wide and deep product assortment offered at industry, leading prices continues to resonate well with customers in the current economic environment.
Our large store format and self service model, which makes it easier to practice safe social design team remains a key competitive advantage for us, especially at a time when customers are concerned about the krona buyers resurgence.
The increase convenience of our improving omnichannel capabilities is also helping us win market share.
Finally, as we look forward a potential long term positive for us is population de densification.
Hi trend that could accelerate post koby 19.
As consumers will begin to move out of highly concentrated areas with citi toward suburban areas.
We could have a location advantage as you may all be aware.
All of our current stores in nearly all of our future stores or plan to be in suburban areas.
We believe many of these factors could be a sustainable advantage for us.
As the team we're focused on putting ourselves in the best possible positioned to generate consistent and predictable results for the long term.
Our track record is solid and while last year was challenging over the past seven and a half years under this leadership team. We've generated average comps of 3% net sales growth of 20% adjusted EBITDA growth of 16% and adjusted EBITDA margins at 17%.
Our new store economics are compelling with first year sales of more than 6 million store level, adjusted EBITDA of 2 million and payback period of about two years.
We continue to see a path to 600 plus stores over the long term up from 219 stores today.
We believe our post cobot strategic framework is comprehensive and powerful.
Our revised long term strategy put in place last year's yielding positive results. This year and we believe we'll continue to propel us going forward.
We're building on the solid foundation laid over the last several years, we call. This new strategic framework at home 2.0.
I'll take the next few minutes to elaborate on some key elements of this framework.
It starts with redefining our go to market approach, which includes our ERP plus strategy category reinvention.
And product or brand collaborations.
ERP plus is not highlighting at homes, great prices in customer value proposition.
We began implementing the strategy late last year and have run eight campaign since then.
Seven of them had been highly successful in driving comps and clearance sell through including our most recent bed Bath and storage campaign.
For supporting these events with visual initiatives, including in the center aisles in through our feature tables.
Our success has enhanced our confidence in the strategy and we look forward to running additional campaigns during the balance of the year, including our end customer event.
Reinventions remain a key comp driver for us and during Q2 recent reinvention such as decorative accents and sheet generated comps nearly double the company average.
We're excited about or upcoming Reinventions, including check Lane in September.
Fashion Bath healthy home and Christmas in October.
A new piece of our go to market strategy includes the annual launch of two to three brand collaborations covering our key brand lifestyle.
As part of these collaborations we intend to offer exclusive product that will offer newness across various departments at highly accessible price point.
We believe such partnerships have the potential to expand our reach and attract new customers to the at home brands.
Our first two collaboration tissue start with rising Star Grace Mitchell and the iconic brand EFO short.
We're currently in the process of Rolling out our Grace Mitchell line in the early customers bonds is encouraging.
EFO Schwartz will be rolled out in the coming weeks.
And should enhance our authority in Christmas decor.
The second key element of at home 2.0 is ensuring leadership on products in price.
As you know, we strive to have compelling industry, leading prices tend to drive down or you are.
We believe our pricing a sharper than ever at the same time, we're focused on ensuring our product is distinctive and have good quality.
We believe our ability to optimize this combination of price product quality in distinctiveness is a key differentiator for us.
Lastly over the last 12 months, we have significantly improved our inventory management capabilities across our everyday and seasonal category.
Which is helping improve inventory turns and reduce product markdown.
The third key element of that home 2.0 is accelerating digital and Omnichannel.
Our omnichannel presence is increasing and we are excited about the progress we're making.
BOPUS incurred side services are now available in nearly all stores in delivery is available in more than 70% of our stores.
We are putting a relentless focus on being able to provide a frictionless omnichannel experience for our customers.
We're also developing capabilities to ship from store and expect to introduce a solution next year.
Our rapidly growing loyalty program insider perks is a key strategic asset for us and an important piece of our digital strategy.
Our membership base is now 7.8 million members up 44% year over year, continuing a strong trend.
In early August we launched the next iteration of our loyalty program insider perks.
That includes special pricing on flash fines extended return window and other features for our loyalty members.
It also includes a VIP program and a pro program.
Our insider perks members continue to represent an increasing percentage of our sale.
The fourth key element of that home 2.0 is optimizing our financial model.
Fundamentally this means continuing our accelerated efforts to be free cash flow positive.
Reduce debt and optimize our capital structure.
As our results show, we've made significant progress on this front already.
Going forward our goal is to grow our store base at a pace that can be funded with internally generated free cash flow.
The fifth component of at home 2.0, strategic framework is becoming a great place to work and grow.
We are grateful to the more than 7000 employees that are building their careers with that home.
With our plans to increase our store base to 600 or more over the long term compared to the 219 stores today, we have a long runway for growth.
To help support this growth and propel US forward, we want to continue to attract top talent and build a strong pipeline.
Many of the key strategies have discussed today with an AD home 2.0 framework will likely be familiar to you.
They are either proven strategies for us or strategies, we've been developing a communicating with you over the last several quarters.
Our hope is today's discussion is provided you with a better understanding of our approach and why we believe we're well positioned to succeed over the near and long term.
With that I'll turn the call over to Peter to share an update on our operational initiatives.
Peter.
Thanks, Lee good afternoon, everyone.
Q2 was a great example of how we remain true to our core values during an unprecedented crisis and at a time when we were faced with the toughest challenge in our company's history.
Our teams were highly creative and they work nimbly and closely despite being in remote locations.
They came up with smart and scrappy solutions to put us in the best positioned to win in the middle of the pandemic.
As a result, we're stronger and better position today than we were prior to the pandemic.
Also the investments have made in our people systems and processes over the last several years have a quick desk to handle the surge in demand we have been experiencing.
During the period when our stores were temporarily closed our field team was instrumental in quickly and effectively rolling out BOPUS and curbside.
This allowed us to stabilize our business and subsequently thrive.
Once we relaunched our LP plus campaigns post store Reopenings, our team members implemented and executed the campaigns highly effectively.
As we reopened our stores to record volumes, we offered employment to all our furloughed employees and we were able to higher back over 85% of our staff.
We believe this success reflects our employees loyalty to the brand and the strength of our culture.
We've been hiring additional team members to support our strong performance and prepare us for the holiday season.
I'm pleased with the talent, we are attracting and the pool of applicants we are getting.
The field team is playing a key role in handling the record inventory receipts that are flowing into the stores as well as managing the strong traffic and sales levels.
At the same time, we are maintaining or improving our operational standards.
We are implementing new processes to improve and sustain neat clean and organize stores, especially given the record velocity at which our inventory has been turning and as we prepare for our seasonally strong fourth quarter.
Our enhance cleaning sanitization and safe social distancing measures remain in place in our stores and distribution centers, including disinfecting high touch areas in store signage and one way traffic files.
Our two Dcs remain highly productive cross dock facilities as you know we opened our second distribution center in Carlisle, Pennsylvania in early fiscal 2020.
The goal, what's the split receipt volumes between Plano, and Carlyle and maximize container efficiency.
While the investment was a temporary headwind on profitability in fiscal 2020, we are pleased with the efficiencies we have realized this year.
Investing in our Dcs ahead of expected growth has served us well and allowed us to smoothly handled a record receipts we have been getting.
Looking at the back half of the year, we expect some of these savings to be offset by higher inbound freight costs as we chase inventory from both domestic and international sources.
We continue to work closely with our domestic and international product partners to try to secure the necessary inventory for the higher demand levels, we have been experiencing in both everyday and seasonal categories. However, as Lee mentioned, we expect to be constrained on seasonal inventory.
Our SKU rationalization efforts are well underway.
Over the last several quarters, our teams have been identifying and pruning the lease productive skews in each department and reinvesting those dollars into skews with a higher sell through potential.
Offering a wide and deep product assortment remains essential to our success.
Our SKU rationalization strategy is designed to ensure we remain highly competitive while optimizing return on investment.
Our focus this year has been on decor, textiles accent furniture and drugs and we are pleased with the progress.
We're also making good progress on our direct sourcing initiatives.
We exited fiscal 2020 with 15% of our product directly sourced and a long longer term goal of reaching 30%.
Our team remains focused on methodically increasing penetration of directly sourced merchandise each year.
In addition, we continue to increase our country diversification efforts for product sourcing and have added selected new factories in India, Vietnam, and Indonesia to help mitigate certain high tariff categories.
With that I'll turn the call over to Jeff to provide a financial update.
Thank you Peter and good afternoon, everyone.
I'm pleased to share our wreckage savvy results for the second quarter fiscal year 2021.
While total sales comps were in line with our pre announcement.
Flow through to the bottom line stronger than we had anticipated leading to a meaningful upside in net income and adjusted EBITDA.
Before I share additional details on our Q2 results I would like to provide a little bit of color on our recent debt refinancing.
As we mentioned in his prepared remarks one's a key elements of the at home 2.0 strategy is optimizing our financial model.
In the back half of last year, we adopted a new approach that balances unit growth with free cash flow generation.
In addition, we increased focus on shoring up our balance sheet, extending our debt maturities and providing a longer runway for growth.
On our most recent call we reiterated our goal of Opportunistically exploring ways to optimize our balance sheet and capital structure.
With that goal in mind, we recently closed our private offering of 275 million of senior secured notes maturing in 2025.
We use proceeds from the offering and existing cash on our balance sheet to repay our term loan reefal, which had a $334 million balance outstanding.
In addition, we've extended the maturity ever ABL facility by three years to 2025.
As of last week, our net debt was 285 million.
We believe these debt facilities provide us significant financial flexibility and addressing key investor concern regarding our debt maturity.
Recognizing our strengthened financial position, both S&P and Moody's recently upgraded our credit rating and outlook.
While our senior secured notes carry a higher interest rate compared to our term loan. We believe our overall annualized interest costs will be relatively flat compared to fiscal year 2020.
This is due to our expectation of lower average loan balances on our ABL facility over the foreseeable future.
Next I'll provide a few highlights the results through the second quarter.
Due to net sales were 515.2 million up 50.5% year over year and comparable store sales were 42.3%.
When looking at reopened stores, along our comps were 62% for the quarter and 74% for a month, so may and June.
Sales were strong in stores across the country and across all departments.
For the first half of the year, our total sales were up 8.7% a comps 4.3% despite the unfavorable impact of temporary store closures.
Our new and non comp store performance has also exceeded expectations since reopening.
Q2, gross margins were 38.1% or up 880 basis points year over year.
The primary drivers of this increase where leverage on our occupancy costs depreciation expense and distribution center costs, given the strong sales results.
The first half period gross profits were up 12.8% and gross margins were up 100 basis points year over year to 30.1%.
Second quarter, adjusted SGN expenses were down 8.2 million or 10.8% year over year, Despite a 7.4% increase in our store base.
The decrease reflects our focus on curtailing expenses, including advertising Preopening and other discretionary expenses as well as the impact of furloughs and tiered salary reductions during the period our stores were temporarily closed.
Q2, adjusted EPS DNA as a percentage of sales improved by 900 basis points.
13% from 22% due to leverage on our fixed costs as well as reduce spending in response to the coven 19 pandemic.
For the first half period. Adjusted asked you may expenses were down 17.7 million or 11.7%.
Adjusted EPS DNA as a percentage of sales improved 430 basis points.
Q2, net income was 89.4 million and adjusted net income was 90.6 million compared to 10.4 million, an 11.4 million, respectively and second quarter fiscal year 2020.
EPS was $1.39 cents and pro forma adjusted EPS was $1.41 cents compared to six June and 18 cents, respectively in the year ago period.
Adjusted EBITDA came in at a 159.7 million up 112.6 million compared to 47.1 million in Q2 of last year.
Adjusted EBITDA was ahead of our preliminary expectations due to stronger than expected flow through primarily driven by expense capability.
Adjusted EBITDA for the first half was 145 million compared to 80.9 million in the first half of fiscal year 2020.
For modeling purposes. Please keep in mind met the timing of cash rent payments related to rent deferrals and abatements will cause an unfavorable impact to adjusted EBITDA.
We expect the impact to be approximately 30 million in the back half of this year relative to the first half.
Also we expect on net unfavorable impact of 40 million ton adjusted EBITDA on next year compared to this year.
Turning next to our balance sheet.
We ended Q2 with total liquidity of approximately 306 million, which includes more than 32 million in cash and approximately 273 million in borrowings available under our 425 million ABL facility.
Our liquidity position improved more than 250 million competitive the end of Q warm.
Merrily, reflecting strong cash flow from operations.
In addition, we received cash of 35 million from our new follow tranche facility and 33 million from our sale leaseback transactions involving three stores.
As a reminder, we fill up nine properties available for sale leaseback opportunities.
Q2, net inventories were down 30% compared to the same period last year, reflecting our strong sales performance as well as reduced inventory purchases during the time our stores were temporarily closed.
Q2 inventory turns improved significantly compared to the same period last year.
Our leverage ratio, which we defined as net debt to adjusted EBITDA at quarter end was 1.4 times on a trailing 12 month basis, a record low for us.
This was slightly better than our preliminary estimates due to upside and adjusted EBITDA.
Our leverage ratio improved approximately four turns in Q2 compared to Q1.
With our strong Q2 results and the recent completion of our debt refinancing. We believe we are in our best financial shape since going public four years ago.
We expect our balance sheet to get even stronger as we continue to focus on balancing growth with free cash flow generation.
With that I'll now turn the call back over to lead for final remarks.
Thanks, Jeff.
With 15% unaided brand awareness and only 37% of our addressable market consumed at home is still a young company with a significant opportunity ahead.
Yet the maturity of which we're navigating through the current crisis and emerging stronger is a testament to our strong foundation and the result, all of our leadership team.
We believe we have a strong model a sound strategy, the right team and the necessary capital resources to take us to the next level.
With that operator, please open the line for question.
At this time, we will be conducting a question and answer session. If you'd like to ask your question. Please press star one on your telephone keypad confirmation code will indicate United in the question Q.
You May proceed aren't too if you like to remove your question from Q.
For participants using speaker equipment, it may be necessary to pick up your handset before Christmas sorry keys.
One moment, please when we pull for questions.
And our first question is from Simeon Gutman with Morgan Stanley. Please proceed with your question.
Hey, guys. This is Michael Tessler on for for Simeon Thanks for taking my questions.
Our first I wanted to ask about.
The seasonal inventory in the back half and the way second I guess play out as far as the tacos like is there if let's say this kind of demand continues into the back half into Q4.
Assuming a seasonal mix is what it might be pass I mean is there there are certain level of comps can be supported could this level accomplished supported or I guess now I guess it would have frame impact at the seasonal inventory potentially on the back half of the great.
Well when we think about the inventory constraints in the back half what we said is.
You know.
We didnt see much impact in the month of August as we move through.
Because we have the inventory on hand, but we do expect that to be constrained in moderate as we move through the balance of the quarter. We would also say that when we look at.
You know Patti and garden in the first half it wasn't a constraint because we had already bought that so it is a difference in the second half versus the back half and we've seen these really strong results since the stores or reopened and so where as we move forward, we will be constrained because when we made those decisions.
Both in Halloween and harvest, even those results are very strong right now and certainly into Christmas as we move into Q4.
But what we would anticipate over the balance of the back half if that demand stays there is that we would experience really nice sell throughs and we would see nice upside in gross margin relative to last year.
Yes, Thanks, and just a follow up on the competitive landscape.
We've been hearing about see a liquidation to some of your competitors pure one has been one that we for maybe starting to slow down on their liquidation sales I'm curious do you think that can take some of the pressure off of your.
Your business in back half and put it actually has announced that your underlying cost run rate.
It was actually somewhat muted by those sales and that there could be more x. I had they not that occurring.
Michael This is Lee I would say the landscape continues to be evolving there is weaker the marginal players are finding difficult to survive. Obviously, you mentioned pier one in some other retailers be closing and have been closing about 1000 stores over this summer in early fall and other specialty retail.
Theres, obviously have been in filing for bankruptcy I would say there is a short term implication that could be challenging because of those liquidations, though I would tell you with these kind of comps we haven't felt that but there has been obviously the concern out there about that and in the short term, but but long term, it's super positive for us.
We're going to continue to be taking share we took a lot of share in Q2 will be taking more share as those stores are officially and finally close to the through the summer in the back half of the year you know in I would tell you. We're benefiting from our differentiated model large selection customers are consolidating trips that industry, leading prices, which is now more.
More important than ever in a recession go large store format Super helpful to social distance in our Big store 100000 square feet and now with Omnichannel. It we believe our bricks and clicks make it easier and easier to shop with us and it's a more sustainable model from the long term and and I would tell you called out Pier one I would tell you we haven't seen much him.
Akzo far out we do we do here the new stores are still closing and are expected to close the next couple of months.
And as you know there is significant overlap 90% of our stores are within six miles of one of the other pier one third of our stores or within a mile of appear one stores. So.
What I would say is there may be a slight temporary impact, but I would tell you that was customers have defined in place to shop for decor, and where the place to go.
Great great job this quarter personally.
Thanks, so much Michael.
And our next question comes from John Heinbockel.
Okay and partners. Please proceed with your question.
Two questions.
SKU rationalization were where does that take the SKU count down to.
What do you think is the optimal from where you were and then secondly, when you look at the the inside of Perks members. What are you seeing in terms of shopping frequency right. So I think your average customer probably came in seasonally.
Are you now seeing that step up or is it too early to tell.
Yeah, I would say as Peter mentioned in his remarks, we have been focus on SKU rationalization, it's really on a department by Department basis. So phase one for US was decor textiles accent furniture rugs, and we've taken skews down 20% in those departments and we're really pleased with that.
Especially in those categories, and we're seeing full price selling improvement and better inventory turns.
So as you know that we'll continue to look at other departments.
You've heard US mentioned 50000 skews is what's in our store and as in terms of active skews that count will could be coming down over time, but it's really a department by department effort.
And your second question was.
Oh inside of hurt yet so it we're super pleased about our entire perks program. Just a few years ago do you need to have one and now.
Three years later, we got 7.8 million members.
2.4 million members have been and joined from last year, a 44% increase we did relaunch the on insider purchase program with added benefits to we're pleased with that that was in early August we called it at home 2.00 excuse me on.
Insider perks 2.0.
And it gave our customers of the loyalty program access to lower prices for the flash finds revenue coming this where you can kill flash NAND flash fine prices lower than it would be to a regular customer.
We've extended the return on window, we launch a VIP inappropriate Graham and by adding more and more benefits not discounts that benefits, we're seeing an uptick in a in signup rates with our customers and especially as we've seen new customers come in the store, we're seeing those new customers converting into new members of the program.
And then lastly, where do you what do you think I assume you're not going to be interest.
Inventory constrained.
Seasonal in the spring isn't that's the case, if that's right is there any potential to bring that product in earlier.
Typically in warmer weather.
Good markets and maybe that makes up a little bit for not having Christmas seasonal this year.
Well, we will be bringing in patio and garden earlier than last year, we didnt bring that in until February we're bringing in January this coming year. So you will see that a benefit to us, especially in the as you mentioned the in the warmer weather markets were pleased and we've been looking at this for some time into we're bringing those in where we're excited about that we hope.
We aren't inventory constrained in the screen, obviously business has been really strong we're making those investment decisions right now about our spring investments for patio and garden.
As a department that we can also do follow on orders as we see pre sales.
But as you know the Halloween harvest Christmas investments were made back in April when our stores were closed March and April in our stores were closed until we had to make some decisions and if I had to do it all over again, obviously I would've bought more but back to enter stores are closer to know how long you're going to be closed and we saw the economic outlook wasn't as strong we didnt know how our customers we risk.
Bon as we reopened obviously men and been fantastic since we reopened so we've taken that into account we saw our selling of patio and Garden Act. We reopened we saw this strong response to our lower prices in patio and garden into our new assortment for patio Garden. This coming spring is going in but have even stronger price points and I'm really.
I did about when it comes in in a in early January.
Thank you.
Thanks, John.
Our next question is from Curtis Nagle with Bank of America. Please proceed with your question.
Great. Thanks very much.
A quick clarification question.
Jeff just on the 30 million dollar.
So.
Headwind to EBITDA in the back half 40 million.
And.
Next year, what exactly was that I just I just missed that point was it was renter just pull back expenses that you want a long put back in the model.
Great all relates to rent. So if you think about the really productive negotiations, we have with our landlord community to either secure rent abatements or rent deferrals. Those all all of those negotiations impacted adjusted EBITDA in the first half as a differential between cash rent and PNM rent and then as we start.
To pay back some of those deferral agreements in the back half of this year and into the course of next year, that's where that $30 million differential front half in back half comes and then the vast majority of those dollars will be paid back over the course of next year, which will lead to the 40 million dollar change year over year.
Got it okay understood.
And then maybe just a quick one on back to school so.
Just going a little more detail in terms of what I guess, what drove it sounded like outperformance.
Kind of interesting point, given what's going on in.
No commercial learning all that sort of stuff.
I was just better assortment and did you actually see.
If you can categorize it a.
Year over year increase in your back to campus or back to school business sure heard as we're really pleased will or back to campus performance, but we consider that to campus more broadly with the way we define it versus prior years and maybe about other retailers do.
As I mentioned before Weve focused not only on back to campus College age, but folks that are.
First dorm first apartment, obviously a campus, but also first apartment off campus first apartment after college and also if they're going to be starting at home in a lot of them down to update there their home home office and bedroom area and so we focused really on decorative accents, but also textiles storage homework.
Card, so much broader and deeper assortment, we emphasize value, we're really focused on making sure our prices are at or below all of our competitors sales prices and we offered a limited edition collections.
Dave collections went from you know serene dreaming glow getter and in the group to just our basics, which you just blue and Gray and if you think about all of those.
Theme as they did very well, but also the textiles storage to homework and home office, where add ons to that and we've brought those collections together in our feature tables and that worked very well. So the performance of that was above our company comp average. So you can see we outperform even last year.
Okay. Thank you.
Thanks.
Our next question is from Jonathan matches, good whiskey with Jefferies. Please.
Thanks for taking my question first wanted to follow up on the inside or per.
Talk about the opportunity you see in what seems like targeting a design trade professionals, a bit more going forward and with worrisome enhancements to the program and what percentage of your business are those customers today, and where do you think it could go over time.
Yeah. Jonathan This is Lee for the Pro program is focused right on those folks so think about Stagers interior designers there in our stores now and they've been getting a discount by just showing their certification, but we have been really focused on them as a business and stagers, especially I think about if you get paid a certain amount of money to stage at home.
If you combine that funding from us versus somewhere else, then you're going to make a lot more money as the stager and so we're really focused on providing more value for them letting them know the looks that we have which are just really similar looks of other other styles that are out there.
But at a fraction of the price and so we're we're not only letting them know about what's offered but we're also providing tools for them.
A year in summary statement of all the expenses that these spaces are paid with us that they can actually use that for some of their billing of clients and tax reporting until onto to try to listen to what their needs are and will continue to add more and more benefits to them as we grow a that customer base that I would tell you. The initial response has been very strong.
Thus far and you can see it in our if you follow us on social media. The response with our Stagers in interior designers has been very strong and excited about this program and they've they've even called that out and in their social media channels.
Great and then just a follow up on advertising historically, you guys have and then that much.
Ramps up over the past few years, but it's still fairly low relative to peers. How do you think about advertising.
You know go going forward a post pandemic is there any reason why kind of back to your budget should change materially at all or how you're thinking about kind of the advertising strategy ahead. Thanks.
Yeah, I would say, it's an opportunity for us to continue to learn and deaths.
As you know we didn't has been much in marketing in Q2. So we felt the need to come back strong in Q3, we also see an opportunity to go after where customers maybe have lost their local store or with other retailers closing two to capture that customer. So we're spending against that so we're increasing our spend in the back half.
And I would say it focused on acquiring new customers and getting those customers that he may be loftier store or have been shopping other retailers that you should be thinking about us even more we're supporting our R.L.P. plus events as well so dead Bath and storage was one that we launched most recently in August the end of summer a event starts tomorrow.
So then we have a fall program, we're doing a habitat re store event of partnership with habitat for humanity, where you can actually.
Bring product to donate to habitat for humanity to their resource stores at a local at home store and then you are then invited to you Gotta coupon to then shock and our store.
Because you've been able to give the two habitat for humanity. So it's a great partnership for us.
One thing I also want to mention is.
As our brilliant brand tone of voice has been changing we we've changed the tone of our advertising in August and our new campaigns far more optimistic made it more fun and playful to really stand out I mean honestly, we don't take ourselves very seriously. This is home decor being sold in a in a warehouse format very different than the competition. So think more about like cell.
Lines tone versus American airlines tone of voice far more fun and playful, it's going to differentiate us.
We believe it's going to be very effective in it and we use that to launch our loyalty 2.0, the insider purchase program and it tends to call out some of those great benefit into let people know what differentiates us versus the competition in the last thing that we're going to be doing an advertising is calling out these new.
Partnership So our Grace Mitchell partnership she's in HGTV star She's on three different shows on that channel. So we're excited to be a part of her brand and launching that if they have schwartz as well and more to come I would tell you and lastly, I would say just direct mail is continues to be effective for us so as we spend a little bit.
One of the back half will learn with more effectively and getting new customers and then we'll take those learnings and apply that to next years budget.
Excellent thanks for all the color.
Thanks, John.
Our next question is from Brad Thomas with Keybanc Capital markets. Please proceed with your question.
Hi, good afternoon, congrats on all the momentum and the business here.
The one ask about merchandise margins and how to think about that you know. This this is an industry that really has some pretty sizable opportunities on the merchandising marketing front when trends are good I.
I would think with the strong sales you're going to be seeing less markdown and clearance on the other hand, I know you guys have made price investments in the past and media LP. How are you thinking about some of those puts and takes on merchandise margin going forward.
Yeah, we're really pleased with our gross margins in Q2, they were up just under 900 basis points year over year. The biggest drivers there with with the sales strength that we saw was really leverage on our fixed costs, you know could think about occupancy depreciation.
And our distribution centers is really what drove product margin was up slightly year over year and as you mentioned, Brad that that was really driven by by fewer markdowns, particularly you know in seasonal a year over year. So as we look at the gross margins in Q2, we're really pleased with knowing where the markdown claim it.
A de leverage we were able to drive with the topline.
And as a follow up to that Jeff again, if we think about seasonal being down as a percentage of the mix for sales for next couple of quarters to the inventory constraints is that something that's a net positive for the gross margin for you all.
We would say that if we if you think about where demand patterns are right now and if those persist through the back half of the year. We would think that we would be able to drive very very nice sell throughs at full price and have lower markdowns year over year and not unlike Q3, but also in Q4 as we move through the balance of the year.
Gotcha and just to clarify a question on on the inventory constraints with what you know today about your inventory and how to sales are showing up.
Are you still on a can you give us some idea of what may be the upper bound of sales might be able to be in the fourth quarter. I mean, I presume we're still in that area that you could have positive comps anymore color on how to quantify maybe an upper bound would be greatly appreciated.
What we've always talked around what we talked around the last calls if you think about the mix you know historically in Q3, you've seen roughly 75 everyday 25% seasonal and then over the entirety of the back half more of a 70 30 split and you know as we move into Q4, we had said that we would think.
It's going to be yeah that that seasonal inventory on a comp basis is going to be down high single digits to low double digits and that's a constraint will be working with in Q4 based you know on on the mix that we just talked about.
Got you very helpful. Thank you so much guys.
Hi, Thanks Brent.
And again as a reminder, if anyone has any questions. You may of course store in a one on your telephone keypad doing so please sensitive question in queue.
Our next question is from Anthony to come Lou Lou Capital markets. Please proceed with your question.
Congrats as well and on a really strong quarter and thanks for taking my question. So I guess my first question.
Oh, you, obviously had a very very strong comp this quarter.
Well part of the SDMA leverage.
Was reduced costs, you know of which seven furloughing employees and cutting back on advertising I know, you're not giving guidance for the third quarter, but is it fair to assume that you know on or kind of a year over year basis SG in Asia normalized somewhat in the third quarter now that you brought back all those employees and it sounds like you've maybe a ramp up your marketing a little bit.
Yes.
Yeah. Anthony This is Jeff we would certainly expect second half you know to normalize pay historical levels versus the first half yeah, that's only going to be in their home office, where you know we won't have any impact of a furloughs or the tiered salary reductions store labor will certainly normalize as well as our advertising efforts.
That lejus spoke about what will also resume and then we would also remind as we move into the back half. We would expect you know a incentive compensation costs and normalize relative to last year, just just given the performance of last year versus this year.
Okay that was good afternoon. My next question on incentive compensation. So as a follow up you know so so.
First of all these new customers that are coming in you know have you do you have any data just in terms of what that customer betting that incremental customer looks like regular right relative to your sort of historical customer base in other words like it would seem like any kind of trade down maybe they're a little bit younger or little bit older or anything you can you can comment on that.
Thank you.
Yeah. Anthony This is Lee we've had strength across all income groups, including above $100000 household income however, less than 50000 to and and 50000 to even 100000 are particularly strong. So we're seeing strength, we're seeing a real nice trade down as well those new customers too.
Actually have a slightly higher household income than our average household income was before so we are seeing new customers coming in that have higher household incomes. We believe we're gaining significant number of new customers and gaining share across all income groups and it's not showing that we're dependent upon any.
Simulates checks or anything else like that it's it's broad based.
Got it keep up the good work thanks.
Thanks Anthony.
Right.
Yeah.
And we have reached the end of the question and answer session and I'll now turn the call over to the chairman and Chief Executive Officer LIBOR for closing remarks.
Alright, thanks, operator, thanks, everyone for joining us this afternoon and for your interest in the company look forward to speaking you. Many of you over the next few weeks at upcoming Investor conferences that we plan to attend Meanwhile, I hope you and your family or state take care.
This concludes today's conference and you may disconnect. Your lines at this time thinking create park city.
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