Q3 2021 At Home Group Inc Earnings Call
Order fiscal year at 2021 earnings conference call at.
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Now I'd like to try at this conference over to your host Mr. Arvind Bhatia, Vice President Investor Relations. Please go ahead Sir.
Good afternoon, everyone and thank you for joining us today for at home third quarter fiscal year 2021.
Earnings results Conference call.
On the call today are.
Chairman and Chief Executive Officer LIBOR spread.
President and Chief operating Officer, Peter of course.
<unk> Chief Financial Officer, Jeff.
[music].
The team has made their formal remarks, we will open the call at fashion.
Before we begin I need to remind you that certain comments made during this call.
May constitute forward looking statements.
Within the meaning of the federal Securities laws.
Such forward looking statements are subject to both known and on.
Known risks and uncertainties.
I could cause our actual results or performance to differ materially from such statements.
On risks and uncertainties are referred to at at home.
That's really the issue right.
And at already see filings.
Including our annual report on form 10-K, and subsequent reports.
The forward looking statements made today.
As of the date of this call or other specified date.
And at home.
Home does not undertake any obligation to update any forward looking statements, except as required by law.
Any discussion during this call our results from the current quarter to date are subject to variability.
I'd be indicative of our results sort of trends ready for reporting period.
Finally, the speakers made of Florida Sir.
Non-GAAP financial measures on this call.
A reconciliation schedule showing the comparable GAAP versus non-GAAP financial measures is available in at home press release issued today.
If you do not have a copy of today's press release, you may obtain one.
Visiting the Investor Relations page of the website at <unk>.
That's true dot at home Dot com.
I will now turn the call forward of thing.
Lease.
Thanks, Darren I hope all of you are staying safe and healthy.
On with the rest of our team I'd like to express my heartfelt gratitude could those who continue to serve on the front lines and our hope for a swift end to the current health crisis.
With respect to the third quarter I'm pleased to report the highest ever calm and the best Q3 in our history of the public company art.
Our Q3 comp growth was a record 44% and our team.
Total sales were 479.
More than 47% on.
Our new at Noncomp store performance was also strong reflecting the successful execution of our real estate strategy.
New stores are performing well above our expectations in terms of sales profit on return on investment.
Q3, GAAP EPS of 71 cents at significantly above our.
Our preliminary expectations at 58 of 62 cents due to stronger than expected flow through.
Our leverage ratio at the end of Q3 was 0.9 time on.
Lewis ratio ever at the public company, beating the record of 1.4 time at with achieved just last quarter.
This was driven by continued strength of our business at a significant transformation of our balance sheet.
Strong ticket and traffic growth both contributed to our incredible performance end market share gain from Q3.
From a departmental standpoint, our every day categories delivered comp at about 50% and she's on comps in the low twentys.
Well, our strength was broad based and all departments Comped solidly positive wall decor, textiles, active decor kitchen and entertaining at home organization were exceptional.
Our back at camp this assortment, which benefited both Q2 and Q3.
Ended their seasonally comps double the company average.
From a seasonal performance was above expectations driven by three key factors.
One of the resurgence in Patti on garden, there from a restart key item.
<unk> strong Halloween at all performance, which sold through at 90% at full price.
Three robust early demand from our reinvention of Christmas assortment.
Our redefined go to market approach within the at home 2.0 strategic framework is continuing to propel us forward.
All three of our SDLP plus campaigns in Q3.
GAAP in storage Labor day, and fall refresh for highly successful.
Year to date, we've run 10 strong campaign validating our approach.
Conventional once again comps significantly above the company average I'm, particularly pleased with our success in decorative active Christmas and checked claim.
The reinvention engine is working well price to reflect our team's renewed focus on this important ongoing comp driver.
Customer response to EPS Schwartz of Grace Mitchell, our first your multiyear collaboration has exceeded our expectations and reinforced our confidence in the strategy.
We're working on additional exciting collaboration can play a share of the GTL nearer to launch.
Under the leadership of Chief merchant Chad's Docker, we're striking the right balance between art and science of merchandising.
We're offering unique on trend products that are resonating with our customers at the same time, our data driven approach to pricing on inventory management is proving invaluable.
If you look back at our history, our best comps have been during periods when we of excelled in keeping our pricing very sharp.
At it's certainly been true this year.
On a fight sharper pricing, that's an opportunity from last year and we put at an intense focus on it. We're now benefiting from day changes, we made and believe this back to basics approach well continue to have a positive impact on us at the long term.
Net value has never been more important than the current macro environment.
On the loyalty of front, we ended the quarter with 8.3 million insider purchase numbers.
Adding another 2.4 million new numbers year over year, representing 42% growth.
This stellar growth underscores the value of our customers continue to see end joining the program.
Not surprisingly inside of perks members engage with us at a deeper level net bigger baskets that are average customer.
Customer loyalty, it's obviously a competitive advantage for any business based on our research this is especially true in our category.
Actually she our chief marketing and digital officer and her team have consistently delivered strong results in this area and developed it into a strategic asset for us.
[noise] or Bopis curbside delivery offerings are continuing to grow and provide our customers alternative ways to access their holiday and everyday products at great prices.
Our span of delivery partnership of pickup in Postmates, It's also helping us better serve customers during a busy Q4.
Speaking of Q4 reported day performance, including during the Thanksgiving weekend over the Black Friday weekend has remained strong at our customers continue to find joy and refreshing you're at home decorating for the holidays.
Our customers are shopping decorating earlier than in past years, and we are delivering on our promise to be the already headquarters for them.
Our every day trends are robust, especially as we have been successful in replenishing inventory over the past few months and our reinvented Christmas assortment is performing extremely well.
Based on quarter day trend, we expect total Q4 comps to be in the mid to high teens.
On track to deliver some of the best fourth quarter result in at home history.
With that I will turn the call over to Peter to share an update on our operational initiatives Peter.
Peter.
Thanks, Lisa good afternoon, everyone.
I want to take a moment to thank each of our store and distribution center employees as well as our field leadership.
Their passion and dedication to the brand and their unrelenting focus on our key strategic priorities have been essential to delivering record results.
Q3 was not only a record at in terms of comps, but it was also driven by accelerating traffic.
Our field teams handled the increase from markedly well, that's evidenced by strong customer satisfaction and higher net promoter scores.
Our stores successfully put on three E.L.P. plus events during the quarter at our execution continues to improve with each campaign.
We expanded the rollout of our omni channel offerings to additional stores. During Q3 at are pleased with the execution at the store level.
As we mentioned Q4 is off to a strong start.
We are appropriately staffed at well equipped to handle a busy season.
The unique advantage of our large store format has never been more evident than during traffic searches, including over the Black Friday weekend.
The health of our customers and team members remains Paramount and our heightened safety protocols continue to be in place.
With the recent research at Corrado virus cases, we're taking extra precautions that monetary the situation carefully.
As was the case earlier this year, we do not expect to be significantly impacted by potential capacity of restrictions due to our large store size, which could further differentiate us from some of our smaller format competitors.
In addition to strong traffic our D season of stores have been handling extraordinary levels of receipts to support demand.
Despite challenges such as international container shortages and production and shipping delays due to cove at our improved processes and supply chain mitigation strategies have minimize disruption.
I'm pleased with the momentum and our improving inventory position as we get ready for spring.
We're also making good progress on our direct sourcing and country diversification initiatives.
With respect to direct sourcing we're on track to achieve our long term goal of 30% compared to 15% at the end of last year.
Direct sourcing could at hundreds of basis points the item level of product margins. In addition to providing us greater control and visibility on product development.
In terms of country diversification, we continue to source more product from countries, such as Vietnam, India, Indonesia, and Malaysia, which is helping mitigate the impact on some of the high tariff categories.
We're pleased with our ongoing work on skew rationalization of.
Our focus this year has been on four departments decor, textiles accent furniture and rugs.
Within these departments, we've reallocated inventory dollars from lower performing items to those with higher returns and these efforts are paying off.
We will continue to work on these departments and expand their strategy to at least another two departments next year.
I believe operationally, we have never been stronger on.
Our stores are clean and well organized our Dcs are functioning smoothly, our amazing field team is energized and focused at our customer satisfaction scores are strong.
We're seeing broad geographical strength, despite the increase in front of virus case accounts.
The unique challenges of managing through the pandemic have sharpened the team's focus and positioned us to emerge from the pandemic even stronger than before.
With that I'll turn the call over to Jeff to provide of financial update.
Thank you Peter and good afternoon, everyone.
As Lee mentioned Q3, net sales grew 47.5% of 470 million end comparable store sales were a record of 44.1%.
I'm pleased to Echo of wall total sales on comps were in line with our Preannouncement the flow through to the bottom line was stronger than expected.
Leading to meaningful upside and earnings per share.
Q3, gross profit doubled year over year end gross margin increased 950 basis points to 36.3%.
Occupancy and depreciation leverage on the record comp drove most of the margin improvement along with more than 200 basis points of product margin expansion driven by more full price selling and higher clearance margins.
From a lesser extent the timing of transportation costs from the reduced inventory flows at the onset of the pandemic also benefited freight expenses. This quarter as a reminder, our outbound freight costs impact cost of goods sold as inventory turns.
Third quarter, adjusted EPS, DNA increased 29.8% year over year to 97.2 million, which includes incentive compensation expense that was 10 million higher due to the record setting year, we're happy.
While we significantly reduced discretionary expenses during portions of the first and second quarters. When stores were closed during Q3, we are rebuilding toward more normalized levels of store labor home office expenses and other traditionally fixed costs.
Marketing expenses at 2.4 percentage of sales were below our usual target of 3.5 per cent due to our significant top line outperformance.
As a percentage of sales Q3, adjusted EPS. She may improved 280 basis points year over year to 20.7 per cent because of operating leverage and lower new store preopening expenses, partially offset by incentive compensation.
[laughter] despite year to date total sales growth of 21.5 per cent adjusted SGN eight through the third quarter has only increased 2%.
Q3, adjusted net income was 49.6 million and pro forma adjusted EPS was 74 cents compared to flat in Q3 last year.
Due to better than expected sales flow through GAAP EPS was 71 cents versus the anticipated range of 58 to 62 cents. We provided during our pre announcement at the end of October.
Finally, adjusted EBITDA grew nearly 185% to 93.8 million up from 32.9 million in Q3 last year.
Turning to our balance sheet.
As we discussed on our Q2 earnings call one of the key elements of our at home 2.0 strategy is optimizing our financial model, we have been laser focused on improving the health of our balance sheet, extending our debt maturities and providing a longer runway for growth as evidenced by our successful day.
Refinancing in August.
Last fall, we shared our goal of better balance in new store growth with free cash flow generation and heading into this year, we are targeting modestly positive free cash flow for all of fiscal 2021.
With that context in mind I'm exceptionally pleased to share that we generated almost 70 million of free cash flow on the third quarter alone, bringing our year to date total to nearly 300 million.
We ended Q3 with nothing drawn on our $425 million ABL facility at more than 360 million of total liquidity up nearly 55 million from Q2.
Our leverage ratio, which we define as net debt to adjusted EBITDA was already at a record level of 1.4 times on a trailing 12 month basis at the end of Q2.
During the third quarter, our strong adjusted EBITDA growth further reduced our leverage to only <unk> 0.9 times, earning us credit ratings upgrades from both S&P and Moody's in November and cementing our current balance sheet as the healthiest and at homes history.
From an everyday inventories standpoint, we improved our position as expected.
Overall net inventory was down nearly 20% year over year first is down 30% at the end of Q2, marking continued substantial improvement in our inventory turns.
We ended the quarter with nearly $350 million of inventory coincidentally, the same level as Q3 fiscal 2019.
<unk> third quarter fiscal 21 sales were nearly 50% higher.
We plan to continue building, our everyday inventory position throughout the fourth quarter and into fiscal 22 to support strong customer demand.
However, this year's clearly demonstrate that we can deliver a fantastic topline without proportion of inventory growth should we expect of fiscal 22 inventory turns on efficiency will be an improvement over past years.
In terms of Q4, while we're not providing formal guidance I'd like to take a moment to reiterate some of the dynamics, we expect to play out this quarter.
As Lee mentioned the strong early momentum in our Christmas assortment and continued performance in every day are exceeding our expectations and we now expect Q4 comps to be in the mid to high teens.
From a gross margin standpoint, we expect year over year expansion from the same factors that generated margin improvement in Q3 fish.
Fixed cost leverage product margin expansion and lower freight expenses.
Finally, our SGN day ratio expectations for the back half remain relatively unchanged from our Preannouncement, we still anticipate a low twentys SGN a rate for Q4.
As we round out fiscal 21 of our business has rebounded tremendously from the disruption caused by COVID-19.
We're pleased at the remarkable top and bottom line performance. We have delivered since our stores were temporarily closed earlier this year should enable us to significantly increase incentive compensation for eligible team members in both at home office and the field.
We look forward to closing out a record year end rewarding our team members for the strength perseverance and dedication they've shown to at home and especially to our customers. During these unprecedented times with.
With that I'll turn the call back over to lease.
Thanks, Jeff.
We continue to see significant growth opportunities for at home and we believe we have the right strategy to unlock our future potential.
Specific to next year I did share a few high level thoughts during our most recent call. They thought it might be helpful to provide a quick recap weak.
We expect to benefit from our strategic comp drivers positive macro backdrop accelerated new store openings next year.
As I mentioned previously we have acquired many new customers this year and they indicate strong satisfaction you intend to repurchase from us.
We're most focused on customer retention engagement and new customer acquisition.
Cash with several competitors currently closing their doors this year.
But the continued success of our video plus strategy incredibly strong performance in our reinvention categories in recent and upcoming collaboration we like our position.
We also believe our rapidly growing loyalty membership improving inventory availability in a more robust omnichannel operating next year at will enhance our ability to retain existing customers and acquire new on.
We also believe the tailwind of strong home sales, which have historically been a lagging indicator price as well as nesting and de urbanization trends should continue to provide a strong macro backdrop next year.
With respect to new store openings recent discussions with our real estate partners had been highly productive.
We now expect to open 12 to 15, new stores next year higher than our prior plan at seven at 10 stores.
As I look beyond next year I could not be more excited about our ability to capture the opportunity that lies in front of us.
We operate in a highly fragmented industry approaching $200 billion at it expected to grow annually at a low single digit rate.
But at that many years been growing at much faster pace on the industry and picking up market share.
This has been especially true this year.
Our long term goal is to continue to expand our market share significantly.
We have potential for 600, plus stores, which is nearly three times larger than our current footprint.
Additionally, one of their revenue per store average of 7 million several of our more mature markets already average about $10 million per store or about 40% higher with the primary difference being the age of the stores and therefore at the level of brand awareness.
Finally, our omni channel strategy, which launched just this year is evolving.
When you combine or store expansion potential our ability to increase revenue per store and the power of Omni channel you can see why we believe we have a long runway.
In terms of stores, we've mapped out all of our future markets and in many cases, the exact retail areas in our real estate opportunities are only getting stronger.
After next year, we plan to resume care per cent annual unit growth as we grow in new and Underpenetrated market.
Let me share. Some examples we believe that in California, where we have only four stores. There is a potential that 80 to 90 stores.
Similarly in the New York Tri State area, where we of 11 stores could support 50 to 60 stores as.
There's also tremendous opportunity Midwest, where we have 50 stores he of potential per 120 stores.
In markets, such as southern Florida, we have only one store in are barely scratching the surface.
Our target New store economics included first your revenue and EBITDA margins at 6 million and 30%, respectively, and the payback period of approximately two years.
As I mentioned earlier, our recent stores are on track to outperform these expectation.
Our customer value proposition is simple, but powerful offer the widest selection of home decor products at the lowest price is.
This formula has stood the test of time, and we believe will continue to serve us well into the future.
In addition, our evolving omni channel approach will not only allow us to prioritize customer convenience.
But also significantly expand our customer reach.
A large warehouse like stores offer the flexibility to pivot and adapt as our channel mix changes while at the standing highly profitable model both in store and online.
[noise] profitability free cash flow and balance sheet and have never been stronger and we remain incredibly well positioned to drive continued growth in market share gain.
We have the most talented team in the industry, we want to thank each and every one of them from a remarkable resilient intense focus, particularly during the ongoing pandemic on.
Our team has made us fundamentally stronger.
With that operator, please open up the line for questions.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad a confirmation from.
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One moment, while we pull for questions.
Our first question comes from the line of John Michael Bacal with Guggenheim You May proceed with your question.
Let me start with.
DLP plus can you talk about learnings and then as you think about how many campaigns you want to run next year.
Are you on in structure them.
The learnings that you picked up this year.
Of that possibly can make them more productive next year.
Yes, John obviously this is our first year with SDLP plus were excited about it we're pleased with the performance we've run nearly a dozen campaign so far.
[laughter] Q3 events were really successful we had bed bath and storage, which included back to campus program, which by the way back at campus performed double the company average from a comp standpoint. So we're really pleased we know that simple.
Adjusted now that end kind of success, we certainly did and we had great sales in textiles and home more.
And what we found is a third of these customers I've never shopped bed and Bath before so introduce new customers into the new areas of the store and obviously new customer acquisition has been a big focus of ours, but at the Labor day event was great. The fall refresh event is great. We've had strong reg price selling as well at really nice clearance sell throughs as well so there's a lot of lease.
Earnings that have gone on with these campaign I.
What we've done is we've looked at the performance of each of those we've adjusted our plans for next year. Some of them. We've added a new campaigns that may be a little bit shorter on some are going to be a little bit longer. It allows us to to highlight the reinvention that we have planned for next year as you know that's a big part of our playbook and we're really pleased.
Yes, we feel like we learned a lot we can get even better at it we feel like we can improve our performance we liked it click through of our email messages out there to our loyalty members on balance the campaigns to share enough people are looking at are also looking at on website standpoint. So a lot of learning we feel like we can get.
Even better at at next year.
And then moving secondly, you know the business was always very profitable.
At sort of at least once you reopen gone on to higher levels I recognize that some of that's promotional when you think about how much of the.
Stepped back and promotional activity how much of on structural and then is this a business did you give a sort of an EBITDA margin high teens.
In the past is this a business that could be you know 20 or better or is there a GAAP.
At against that because you want to reinvest to drive share not not move margin up to on.
Yeah, you know I would say that from a performance standpoint versus promotion. If you think about the third quarter. There was a lot of activity out there from an emotional standpoint, a lot of our competitors had their big selling at event.
During that time and we delivered this great comp. So it tells you that we set the price right right from the beginning our EDI LPV approaches to set the price right. As you know we took a sharper of effort.
Effort around pricing this year, and we went back end roll back prices in furniture and accent furniture in mirrors as well so in certain areas. We felt like we weren't at competitive we needed to we actually reduced the prices for Christmas we've had the sharpest ever price moves that we've had for our Christmas assortment to our prices were lower than last year as a result of that.
Great full price selling it doesn't turn into a mark down that way right in the face of everyone else is promotion so.
So we like the performance, obviously, a lot more full price selling than we had expected.
But I would tell you we like that the when you talked about EBITDA margin, yeah, we're going to of an incredible year from an EBITDA standpoint.
As you know, we always have strong EBITDA margins, even on our worst year, we had very strong EBITDA margin. So this year, we'll be back to kind of an average performance in the high teens EBITDA margin standpoint, we think that's about the appropriate level for us over the next number of years as well as we get gross margin improvement through our direct sourcing efforts and other activities.
We'll take we'll reinvest that as we've mentioned to you before in terms of in marketing and product quality reducing prices.
It's hard to beat these EBITDA margin, but we want to keep the topline growing stronger and that's how we'll reinvest or money that way.
Thank you.
Thanks, John.
Our next question comes from the line of Simeon Gutman with Morgan Stanley You May proceed with your question.
Hey, good afternoon or at least a short while short term one on a long term on the short term. One if you look at Q3 and think about in relation to Q4 of Red comps were very robust now on the talking a little bit slower maybe half the rate and I realize Q3, you know this was at the beginning of the stores being fully open. So there was probably a lot of release of.
Demand in getting to the stores, but can you just talk about what could be sequentially changing whether it's inventory you know demand vis-a-vis channels, how to think about what's changing and evolving just so we have a roadmap to.
Maybe thinking about you know going into 2021.
Sure I.
I mean, so Q3 to Q4, we talked about then to be into mid to high teens for Q4 is our outlook now.
Which is obviously different than the amazing numbers that we had for Q3.
But it's very strong I'm not going to apologize from mid to high teens from a comp standpoint.
What's different is it just really seasonal inventory I mean, I would tell you from the everyday business continues to trend.
Better than we initially expected every day inventory position continues to improve through the quarter. As you know we just mentioned that we went from down 30 every day inventory at the end of Q2 to down 20 at the end of Q3. So that obviously is improving and now we're looking to that continue to improve throughout the fourth quarter were excited about the reinventions we've had.
Clean fashion bat healthy home home office, which will home office will be showing up in the middle of this month. So we're excited about that as well it's seasonal of for US is the one that is those expectations haven't changed for us for seasonal just remember that we were constrained from inventories standpoint, it made those decisions on.
We made the decision back on Christmas around March April and the mix flips really to just Christmas in the fourth quarter compared to Q3, where we were able to sell Patti on garden fall in Halloween as well as Christmas and Christmas sold through even more in Q3 than we've ever seen before.
So its really just that all that's left for us in Q4 as to Christmas and it had strong sell through and I would tell you the constraints will limit the upside for US. We've had early demand as I mentioned, we did the reinvention is working at fish words collaboration has been fantastic.
And we didn't have that Halloween and fall markdowns like we had last year to selling Q4, because they sold through over 90% of full price selling in Q3. So that's what limits on our upside, but it's not every day every day is whats continuing to be strong we're pleased with that.
And I would say as we look through the quarter, we still see that continuing to remain very healthy for us as we continue to get back on inventory.
Okay, and then thanks for that lead to the longer term of question a little bit related to what John just asked you you know it seems like if the current backdrop stays in place you will still see outsized trend into next year.
You mentioned accelerating some store openings, but I wanted to ask you. If you have a sense of one of the natural margin of this business should flow through should get to over time right anything theory, youre going to be seeing a lot more dollars and you can let the margins flow up higher than than that natural level that your inclination or you're going to continue to invest whether it's digital is there other things to it.
Yes, then or no not enough and you will at the margin flow.
Well you know I mean, obviously, we've got great margins. This is a super profitable business at the lovely business model. When you have a vertical retailer that you design develop your on product you've got really nice margins, you said im afraid that on price right upfront you got over 80% full price selling on.
You get really nice margins and you keep your cost structure Super type of low labor model, we've got low rent because of second generation real estate all of that equates to and result in a very nice EBITDA margin and we intend to continue to have that really strong EBITDA margin, we don't intend it to get to two much better than our average and Inc.
We're going to reinvest it we've got an omni channel business that we've launched at by the way continues to perform very well for US we're super pleased with that.
And we've been making money at omni channel other players don't do that.
We will continue to invest in marketing will invest in quality will continue to make sure. Our prices are very sharp and that'll continue to deliver an outsize EBITDA when you compare our EBITDA margin to the competition out there and one less profitable retailers in the whole industry not just the home furnishings industry I'm talking about all of retail and that that would take.
All you that we feel good about that number and we'll continue to reinvest and keep it at high levels.
Okay. Thank you Mike Thanks from it.
Our next question comes from the line of David selling drugs with Wolfe Research you May proceed with your question.
Okay, great. Thanks for taking the question.
On a follow up on the Q4 comps potentially mid to high teens.
Very strong number given some of the supply constraints, but.
What kind of allow for upside to that Q4 cash guidance is there anything around the ended the quarter maybe in terms of seasonal merchandise from can bring in or maybe even less clearance activity or an aggressive new marketing campaign with some of your customer bad at that could potentially reaccelerate sales growth post the holiday.
David This is Lee what I would say is we don't see much upside and Christmas were already selling through so much already so we already assumed that we're going to have at strong sell through as we've seen in our other seasonal products. This past fall. So that's not going to be much of an upside January is always a wildcard from its web.
They're dependent it could be it could be upside it could be a bad guy. So we've tried to be very thoughtful about January even though smaller volume month for us we're thoughtful about at one thing that that we've done to help our chances for the early part of next year is bringing Patti on garden earlier. This year, we're bringing at four weeks earlier than.
Last year that could give you end up with a very nice warm January that could turn out very nicely force is we'll have headroom garden in the stores. So we're excited about that at that that's potentially an upside I'm not going at bed on that please don't there's right now I've been here now through nine fourth quarters, and we've had multiple ice storms and snows too.
Farms across the country and wet and cold and so you just never know on it's going to play out we set ourselves up for success, which is what you'd want us to do.
And we won't have the carryover for we won't have the sell down of markdowns for Christmas they'll be sold at full price of the margins will be good, but we won't walk into next year with markdown liability either so we'll finish the year clean well finish well start the year with value on garden set early and set ourselves up really for a nice start at the beginning of next year.
Got it Okay and then just my follow up on the gross margin side your per.
Probably end up this year at somewhere in the low 30% range or so.
How sustainable is that level of getting the benefit from higher sales volume this year, how material sourcing and if this can help here, maybe just walk us through the puts and takes on the gross margin line moving to 2021.
Yeah, David when you think about the margins, we're incredibly pleased with 950 basis points of expansion in the third quarter now the vast majority of that was driven by leverage on our fixed costs of thinking about depreciation occupancy, but we also saw at several hundred basis points.
Of product margin expansion due to better full price selling not only on our seasonal assortment with follow on all of lean selling through 90 plus percent at full price, but also in our every day business. So moving forward as you think about gross margins at its really going to be a function of the sales expectation and the comp but we.
We do expect all of those Tailwinds that drove nice gross margin expansion in the third quarter to persist into the fourth quarter.
Thank you and best of luck this holiday.
All right. Thanks, David.
Mm.
Our next question comes from the line of.
Jeremy Hamblin with Craig Hallum Capital Group you May proceed with your question.
Thanks, and I'll add my congratulations on the of the strong momentum at the business on.
I wanted to come back for a.
Two quarter day trends for a second and just the first thing.
I know that you know seasonal you you're missing out on some opportunity.
By not having more on stock there at the performing really well I just wanted to make sure within the comp.
Guidance that you have of mid to high teens does that assume that the seasonal category of providing a positive contribution for the quarter.
Yeah Jeremy.
Mentioned coordinate trends have been really strong we're really pleased with that strong consistent performance, including Black Friday, and Black Friday week.
In fact, if you look at the performance of our business, we had really nice business very strong business at the week two Saturdays before Black Friday week as well. So we saw with customers were buying earlier and a and they maybe do avoid a little bit of the crowds from black Friday, but not at our business, we still had strong traffic and to the whole week.
Then on but we did see earlier demand every day is trending better than we initially expected inventory positions improving as I mentioned before seasonal our overall expectations are unchanged, we still say that will be up slightly so we will have a positive comp.
For Q4 and seasonal but at the upside as I mentioned with limited just because of the inventory constraints, but I would tell you really nice customer response for our Christmas assortment.
I feel like we had the best assortment I've ever had.
Since I've been here in nine years, a chat on the team put together just an amazing assortment of prices were sharp assortment was was fantastic pricing as well as the quality and unique product, which makes it a reason to come to our store because you cant find anywhere else, especially with our collaboration with Epay of Schwartz shows that we have unique.
Roddick also with Grace Michel So we're creating of a franchise model, where we've got unique products of people feel like they can only come to us for your finding great prices and we're delivering great outcome to that end.
Jeremy average just add that you have at seasonal contribution that is roughly 40% of our business in the fourth quarter with every day you know comprising the other 60%. So that's how we're thinking about those comp expectations for the fourth quarter.
Thanks, that's helpful color.
I also wanted to just get into the the online portion of your business.
And just kind of a sense for what you're seeing on the evolution of that in.
In terms of you at all.
You know BOPUS here versus what you're seeing now as we get into Q4 at the end of Q3 into Q4.
You know how you're seeing the evolution now that your capabilities of improved so much in terms of you know whether it's a you know your delivery options and kind of your new initiatives here with Postmates.
You know, but can you give some sense of how that business is evolving you know are you seeing.
What percentage of your online transactions are Bopis transaction. This versus you know delivery any color that you might be able to share with us on.
How of that is evolving now over time as we've seen you know retailers of fully opened up at this point.
Sure.
Well as you know we started with a 20 store pilot.
With our BOPUS solution rolled it out during the coated store shutdown period for us to allow our stores to operate we now at 98% of our stores now have BOPUS end curbside, 75% have local next day delivery starting at $10.
We haven't disclosed really the exact contribution because of flexes end. During this holiday season, we've seen that continue to be an important part of our business and has flexed.
Even where case accounts have been adjusted FFO of it keep accounts have been adjusted around the country in some hot spot we've seen the BOPUS Ray curbside pickup rate has gone up but it's allowed us to support our customer and their customers' needs to be able to buy their product and not have to come into a store that they may not want to on but obviously our stores are big enough there they can social distance easily.
On our store and we put in.
A lot of capability to make sure our stores feel safe to shop in as well I would say that we had strong performance in from an omni channel over the last few weeks, including Black Friday weekend, and it's an important part of our playbook and remember the margins are comparable from so when we're talking about higher 80 S is there.
There is a little bit more on labor at <unk> to cover that but the margins are comparable from a dollar end margin per cent standpoint. So we're focused on doing of profitably and we're doing that.
And at Postmates has been a great partner from because if you think about small package delivery, we use them for that and we pick up at a larger items. It's been a great partnership now with both of them.
Okay, great. Thanks best of luck on.
Thanks, Jeremy.
Our next question comes from the line of Curtis Nagle with Bank of America. You May proceed with your question.
Great. Thanks very much.
So.
Sounds like of I, just wanted to clarify something on on before to comp.
So for the mid to high teens.
After the quarter your expectation of how we want to frame. It is that actually at the numbers you guys saw flow for I'm sorry through November at today or is that just kind of what you think further on the blended number how should we think about I guess the kids.
Yes, that's a blended number that kind of outlook for the 13 week period end in Q4, and we do out of the 50 Threerd week. This week, but that's on a 13 week basis right. There on that so that's not we did not provide an update on quarter to day trends just with what we have behind us and our outlook for the remainder of the quarter. That's how we see things playing out right now.
Got it I guess, presumably it would probably fair share, but on Nov is probably half of that maybe some deceleration just again on the commentary of.
Seasonal.
Christmas and that's all fair is that at the right way to think about it.
That would be fair, okay awesome.
And then I guess just.
So where are we at discuss a little bit just kind of thinking about to set up a little bit more on it's a one Q.
Yeah, well, obviously a bit of of different seasonal set up but theoretically should be.
I would assume at a in a better position was more of the tour it come again.
<unk>.
Decor outdoor I guess part of your friend or stuff like that on a bigger item.
How much of a step up do you think you could see on your seasonal business and typically how big is you.
On that category kind of the first part of the year.
Yeah, you May recall I mean Q1 is when we closed a bunch of stores. So we have what we would consider an easy compare.
So we try to think of things in the terms of the first half of which is if combined Q1 and Q2 you end up at a 0.3 comp for the two quarters combined.
We're excited about the opportunity there we saw a lot of store.
Strength in our patio on garden business, we saw strength in our everyday business as well I mentioned earlier in one of the questions answered earlier that we are setting of Patti on guard and four weeks earlier. So at the end of this quarter will already be set to start the year out. So we'll start to the quarter strong end if weather holds and helps on it and we can see a really nice day.
Art to it every day inventory of wells, we will exit the year in a much better inventory position that we found ourselves in Q2 or Q3, and a and so we'll be at will be at a really good spot from an everyday inventory as well to have a really strong quarter as well.
So we're looking hard at at really setting ourselves up for a great first half.
Seasonal in every day and we're excited about the Reinventions that are coming we're excited about the patio and garden improvements we learned a lot is patchy or even though we had a great year. There's always the opportunity that you find on the assortment. We made those adjustments we feel like we've really taken a lot of market share. Obviously, we had a lot of new customer growth in Q3, if you look at our overall growth.
And you're growing at 47% and the industry isn't growing nearly as much on the data we see.
A lot of market share.
And if we look at the overall sector.
A lot of people were benefiting by just existing customers coming in more often in our case, we had a huge benefit from a lot of new customers coming in he was a significant portion of our growth and our existing customers did come in more often and spend more with the benefit of our loyalty program. We have all of those new customer is now that we've built a relationship with now in Q3 and hopefully Q4.
All the way through that we'll be able to leverage those relationships for all of next year and that will set us up per really great year as well.
Terrific. Thank you.
I think sort of.
Our next question comes from the line of Bob Thomas.
Keybanc capital markets. You May proceed with your question.
Hi, Thanks for the taking my question Congrats on on continued momentum here.
My question was going to be around at the store outlook for next year, you mentioned 12 to 15.
Stores planned for next year now can you talk a little bit about the timing of openings that we're going to see.
As we map out of 2021, what you're seeing in terms of the quality of locations have on costs look like they're going to shape out at any more detail you are able to share of the wonderful.
Sure of Brad.
Our real estate pipeline is just super deep I'm really pleased with the quality of it as well so not only the quantity, but the quality of the locations that were seeing as you would expect are quite good.
The economics are working at our favour because of the supply of locations that are out there. It's mostly second generation net we're going to be doing next year.
And those locations are fantastic.
What I would say is there will be evenly distributed in the first three quarters, we like not we'd like to not open stores in the fourth quarter. So think of them about at third a third of third roughly in each of the first three quarters on is how we're looking at at and then obviously, we'll resume 10% unit growth the year after that all of this is enabling us.
To deliver that kind of growth and self funded from our free cash flow. So we can open up the stores still have really great unit economics as you know they pay for themselves back in two years.
We're looking at a nice mix between existing and new markets and the rents that we're getting our fantastic because we run of the only national retailers, if not the only national retailer that looks for boxes that are 80000 square feet in above and there is a lot to look for out there.
It really on point and if I get at a follow up question on the inside our perks number you mentioned 8.3 million members can you give us any more color about how important the credit card itself is becoming as a percentage of your sales.
Maybe talk about strategies to leverage that next year.
Sure, Yes, Lucky now 8.3 million members strong 2.4 million members more.
More than last year of 42% growth year over year, which is in line with our comp growth, which shows you that that's a lot of new customers come in seeing the value in that program and the minute. They walk end they see that the flash find price is only available for them. If they join the loyalty program and they've done that on our Black Friday offers that we had there.
Prices that were available for Black Friday were only available. If you had the loyalty program. So people are seeing the reason to join it and they're joining it in there and then their email open rates at fin been fantastic very strong email open rate great web traffic from us as well these folks have bigger baskets and non FERC members.
So and I would say that mix of sales driven by perks members continues to grow inside of our overall mix and the credit card customer, we like that credit card customer we provide a solution. We opened the credit card program with synchrony, because we knew we had larger ticket items, Inc. Patio sets in furniture that made it a little bit.
More challenging for our customer at a byproduct like that without some type of financing solution, we offer financing solutions through our credit card and the credit card.
Is made available to our customers right. There through the same program you can kind of two insider perks, it's that we haven't disclosed how much it is but I would say it it's been growing end, becoming more meaningful part of our business.
But I would tell you that the loyalty program, which is far more democratic.
A lot of people feel like they already have a credit card and so we don't push that on people. We just make it available at the loyalty program. That's the one that's going to provide the biggest gains from overtime.
Very helpful. Thank you.
You bet. Thanks Brent.
Our next question comes from the line of John.
Much of the Suky with Jefferies. You May proceed with your question.
Hey, guys. Thanks for taking my questions on the nice job on the momentum.
At a follow up question on the inside of Perks program as you mentioned up up to over 8 million members. How do you think about the penetration of that program for your active customer file over time and can you give us any more color in terms of maybe how the basket or.
The average annual spend of that inside of perks member looks looks relative to a a non loyalty member would be my first question Bank.
Sure Jonathan so the IP customer they come in more often they have bigger baskets.
And the mix of their sales to our total sales continues to grow and become more meaningful to us on Ashley she to lead that team for us as well as on digital efforts has really focused on our CRM efforts that we've been adding to the team. We're now looking at our customer database index dials and saying how can we get people to.
Move up I guess style from where they are how can we get into coming more often and have to get them to spend more money.
What items were in the back of what items could day have bought at they didnt necessarily by how can we make them aware of the assortment that we have that they may have missed.
On what their life chapter of what's going on in their family based on the demographic data, we have about and how can we better meet their needs. So we are doubling down on the program. We've got a lot more information from the program now we've added a VIP program in Q3, we added a boss program for.
Insight for decorators, and Stagers all of that data and all of those services that we're offering is showing value for our customer and so we're going to continue to double down on even more because we feel like it's going to add more and more value to our business in total.
That's great Super helpful. And then just a quick question on some of the collaboration is you guys have been doing sounds like you're seeing success with that they of shorts and some of the other one and it sounds like you're going to be kind of continuing that strategy next year.
Anything to parse out in terms of are these kind of a a driver of new customer acquisition or kind of more broadly resonating with your existing shoppers and and just kind of be the strategy. There going forward in terms of sourcing some of these fees the collaboration thanks.
Jonathan we focused on the collaboration is to do a number of things for us from feel like it allows us to create newness and get a fresh of point of view on our assortment, which we always feel like that's important it expands our reach to new customers and attract new customers because these partnerships have their own following.
And those followers then come to us.
It also gives the style of credibility as of vertical retail or we designed developer on products people look at us as a private brand. If you bring in on people that they know about and net feel they feel confident in their style capabilities at become a partner to us. It just gives us more credibility overtime.
We're targeting two to three of these a year they cover a lifestyle for example, and if you take Grace Mitchell for example, whose of a rising TV star She's got four shows on two different networks all in the home decor space and even actually in the food space as well now she's a traditional life.
Now look so one of our lifestyle Assortments is with her and Grace Mitchell's across our entire store. It allows us to have per point of view across at.
Group of assortment.
Becomes a great way for us to broadcast our brand and work with her followers. It gives us credibility and a end it's for a multiyear benefit for US a lot of other companies do collaborations as top of collaborations or flash collaborations. We think there is a multi year benefit here for both parties to build the brand for each day.
Then definitely at should which of the same thing exclusive decor on and around the tree for US people are aware of that brand. We were that we created exclusive assortment with them. We'll do that again, we're excited about that performance. We're excited about new collaborations next year, we'll at we'll announce a few just coming on.
Next coming year.
One of this coming spring and that just continues to support our credibility in the space of home decor and being the place to go at a one stop shop for all things home decor.
Great. Thanks for all of the color that's why thanks.
Our next question comes from the line of Anthony Chukumba with book Capital Markets. You May proceed with your question.
Good afternoon, and thanks for taking my question. So I just wanted to clarify one thing I'm looking at my notes from your preliminary call and it sounded like you were exiting of it.
The third quarter with your comps I have at 30, and now you're saying tend to 50 or sort of mid teens comps for the fourth quarter. So first of all I just wondering to a mixture of that I understood that correctly. There's no disconnect and then B I was just sort of understand the comfortable at on event, that's really kind of the season.
Total inventory issues that you spoke to was there something else there. Thank you.
Yes, Anthony what will be at set on our pre announcement call is at the everyday business had exited in the thirtys and at our seasonal business had exited in the mid single digits. So when you think about that.
60, 40 mix that I spoke about earlier and our expectations from a low single digit comp and seasonal obviously those everyday store trends have remained very strong and that's the momentum will be carrying in to next year. In there are every day business at that inventory position continues to improve.
Got it okay. So on an apples to apples basis. Your your comp is roughly equal to kind of you know weren't weren't where what your comp was running limited recall that at a fair statement.
Yeah, what I would say as we said at exited in the Thirtys that momentum continues a seasonal is going to be the one that is constrained.
We were at what were saying is were feeling a little bit better about our everyday business and the momentum continuing we felt like it was going to moderate a little bit now, we're saying that we feel like that momentum continues to be a solid and we want the end, we expect that to continue through the entire quarter.
Got it okay. Thank you that's helpful you've of good work.
Thanks, Yeah. Thanks Anthony.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr. Li Bird for closing remarks.
Well, thanks again for joining us. This afternoon, we reported talking to you in the coming days and weeks and on behalf of at home. We wish you the best for the upcoming holiday season.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and enjoy the rest of your evening.
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