Bethany Perkins - Director, Investor Relations Lee Bird - Chairman, Chief Executive Officer and President Judd Nystrom - Chief Financial Officer

Dan Binder - Jefferies John Heinbockel - Guggenheim Securities Simeon Gutman - Morgan Stanley Matt Fassler - Goldman Sachs Oliver Wintermantel - Evercore ISI Curtis Nagle - Bank of America/Merrill Lynch Daniel Hofkin - William Blair & Company

Greetings and welcome to the At Home First Quarter Fiscal 2018 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Bethany Perkins, Director of Investor Relations for At Home. Thank you. You may begin.

Thank you, Melissa. Good morning, everyone and thank you for joining us today for At Home’s first quarter fiscal year 2018 earnings results conference call. Speaking today are Lee Bird, Chairman, Chief Executive Officer and President and Judd Nystrom, Chief Financial Officer. After Lee and Judd have made their formal remarks, we will open the call to questions. Before we begin, I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. In particular, statements about our outlook and assumptions for financial performance for fiscal years 2018 and 2019 and our long-term growth targets as well as statements about the markets in which we operate, expected new store openings, potential growth opportunities and future capital expenditures are forward-looking statements. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those are referred to in At Home’s press release issued today and in filings that At Home makes with the SEC. 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 statement. Finally, the speakers may refer to certain adjusted or non-GAAP financial measures on this call, such as adjusted EBITDA, adjusted operating income, adjusted and pro forma adjusted net income, and pro forma adjusted earnings per share. A reconciliation schedule showing the GAAP versus non-GAAP financial measures is available in At Home’s press release issued today. If you do not have a copy of today’s press release, you may obtain one by visiting the Investor Relations page of the website at investors.athome.com. In addition, from time-to-time, At Home expects to provide certain supplemental materials or presentations for Investor reference on the Investor Relations page of its website. I will now turn the call over to Lee. Lee?

Thank you, Bethany. Good morning, everyone and thanks for joining us to discuss our first quarter fiscal 2018 results. As you saw in our earnings release issued earlier today, we delivered strong first quarter performance that exceeded our expectations driven by our everyday and seasonal offerings as well as the investments in incremental low-priced inventory that we made in the second half of fiscal 2017. Our performance once again demonstrates how our assortment and our great value price points are increasingly resonating with customers. In our first quarter, we delivered a 23% increase in sales, which is our 12th consecutive quarter, a 20% plus sales growth driven by a 22% increase in stores and a 5.8% increase in comparable store sales, representing our 13th consecutive quarter of positive comp store sales increases. Compared to the first quarter of fiscal 2017, we generated stable gross margin rate while absorbing the increased rate expense associated with our increased incremental inventory. We also delivered a 20% increase in adjusted operating income and a 32% increase in pro forma adjusted net income while ramping up our marketing expense to support our brand awareness initiative and a newly launched campaign. From both the top and bottom line perspective, the first quarter was an exciting start to the year and we continue to focus on executing against our core strategic priority I have shared with you over the past several quarters. Our first priority is our customer. We want to know the home décor shopper and specifically the At Home customer very well. On year-over-year basis, we have more than doubled the size of our e-mail database for six straight quarters. We also continue to partner with Synchrony Financial as we have prepared to launch both a co-branded and a private label credit card later this year to provide financing options and purchase rewards to our loyal customers. Included in but not exclusive to our credit card program home décor enthusiasts will have the option of enrolling in upcoming loyalty program which will be customer’s exclusive rewards and décor inspiration in exchange for basic individual data. Each of these initiatives represents an exciting opportunity to enhance our customer relationship management capabilities and ultimately design a more targeted marketing program and communication – and communicate more effectively with our customers moving forward. Second is our assortment, we want to provide an unbeatable in-store home décor assortment, the largest freshest and most relevant at the best value in the industry. This includes ensuring we have the right styles, trends and the amount of inventory to every store to meet the needs of our customers. As I mentioned, we continue to drive broad based top line growth in fiscal 2108 as our customers responded to the incremental inventory lower price points that we brought into the stores late last year. In addition, we incorporated substantial newness into our outdoor and table categories in the first quarter which included refreshing, expanding or even elevating our in-store selection and presentation. These efforts import our annual category reinvention strategy and provide additional opportunities to communicate freshness and draw customers into our stores. Our next priority and biggest growth opportunity is new store growth. We have substantial white space and we believe we can significantly grow our national wide footprint to at least 600 stores from 129 at quarter end. As we have discussed before our grand openings typically generate substantial enthusiasm for our concept which enables us to open stores with relatively high first year sales volume and quickly generate payback on our initial store investment. In the first quarter we opened seven stores expanding our store base by almost 22% year-over-year. Customers’ supportive At Home has been and continues to be consistently strong across the variety of geographies and markets whether new, existing, large or small. Each quarter we have seen strong new performance and for the first quarter of fiscal 2018 with no exception with openings in markets spanning from Saginaw, Michigan to Mobile and Montgomery, Alabama, Columbus, Georgia and Elizabethtown, Kentucky to Warwick, Rhode Island as well as another store added to our existing Virginia Beach market. This strong performance is especially notable in a quarter like Q1 where six of our seven openings were in brand new markets. Again underscoring affordability of our concept and validating the substantial store growth opportunity that lies ahead. Our fourth strategic focus is our in-store experience. We wanted to ensure that when our customers to At Home they would find our self-help shopping experience easy and enjoyable. On the fourth quarter call I discussed the multi-year journey we had been on to become the leading holiday décor destination which included merchandising along specific theme. Due in part to the success of the fourth quarter in each of the last 3 years, we extended this merchandising strategy to our table top and outdoor décor categories in the first quarter of this year to make it easier for customers to shop their preferred style and trend. We also refined the strategy and execution behind our vignettes and our feature tables, visually inspiring customers by highlighting broad trends and emphasizing value through signage. Finally, we continue to be pleased with the results of our Flash Finds which are one week only deals at an incredible value even compared to our already everyday low prices. As always, we remain focused on developing, testing and evaluating new ways to create an exciting and gratifying experience for our customers in fiscal 2018. On to our fifth priority, operating efficiency, this means making the necessary investments in systems, process and infrastructure to ensure we are operating efficiently and effectively while simultaneously supporting our ability to grow. We continue to perform with an At Home’s best in class, super-lean, self-help labor model. And we are pleased with the flexibility and financial benefit it provides us quarter-after-quarter. We also continue to focus on reducing shrink and damages within our supply chain and at the stores which was a source of margin favorability for us in the fourth quarter of fiscal 2017. Sixth, our brand, we are focused on thoughtfully and aggressively expanding the At Home brand. In fiscal 2018, we increased our annual marketing target to 3% of sales, up from 2.6% of sales in fiscal 2017 and just over 2% in fiscal 2016. For the first time this April we launched an internally curated television and digital campaign that draws on our unique brand personality to highlight our seasonal and everyday assortment, enjoyable self-help experience and everyday low prices as it encourages customers to unleash their inner decorator. Given our diverse footprint to maximize productivity, we aired our commercials on cable and broadcast networks by concentrating specifically on our priority markets. Due in part to this efficiency and through a customized mix of digital, print, outdoor and social media in addition to television, our comprehensive fiscal 2018 campaign will support than twice the number of markets as last year. Although the television campaign is still [indiscernible] we are encouraged by the positive results we have seen thus far. Early reads indicate that positive results from our digital media efforts which will represent a greater share of our total marketing spend in fiscal 2018. Finally, our direct-mail redemption rates continued to cease industry averages and unique visitors to our website have increased almost 40% year-over-year. I could not be happier with the success of this customized holistic marketing campaign that our new Chief Marketing Officer, Ashley Sheetz. This is not implemented during the first quarter and the momentum it has generated for our future brand awareness initiatives which brings me to our final priority and the foundation of all the others, our team. They are the heart of what we do and we are relentlessly committed to making sure that At Home is a great place for our team members to work, grow and build their careers. Our high growth environment provides substantial opportunities for upward movement as our store count has grown so as our needs for additional leadership and guidance in the field. We announced the new structure in the first quarter of fiscal 2018 and promoted five existing store directors to the district manager level. We also established two new regional director roles that were filled by internal promotion as well. At the At Home, home office we celebrated the fantastic leadership of our finance and accounting teams as D CEO Magazine selected Judd Nystrom as accounting – as Outstanding Chief Financial Officer, Becky Haislip as Outstanding Chief Accounting Officer and David Frazer as top finalist in the financial planning and analysis. On the company wide level, the American Business Awards named At Home the Gold Stevie award for Retail Company of the Year. These awards reflect the industry leading results delivered by our exceptionally hard working and talented team members across all levels of the organization. And I continue to believe that we have only squashed the service of what we can achieve together. With that I will now turn the call over to Judd to walk you through our financial performance in more detail and discuss our outlook for the remainder of fiscal 2018. Judd?

Thank you, Lee. Good morning everyone. I will begin my prepared remarks with a review of our first quarter fiscal 2018 results and then discuss update to our fiscal 2018 outlook. As always additional information is available in our earnings release which can be found on our IR website. As we mentioned the first quarter illustrates the very positive response our customers have to our fresh value priced merchandise assortments including the additional lower price inventory we brought in during the back half of fiscal 2017. We increased first quarter net sales by 23.1% to $211.8 million representing our 12th consecutive quarter of 20 plus percent net sales growth. Our Q1 comp of 5.8% delivered our 13th consecutive quarter of positive comp store sales. Strength was broad based across product categories, geographies and vintages with stores greater than 5 years old comping in line with the teen average. From a new store perspective, we opened seven new stores during the quarter, up from six new stores in the first quarter of fiscal 2017 and we closed one of our legacy stores that is being completely rebuilt to provide its loyal customers an even better self-help shopping experience. Because of this closure at the beginning of the quarter as well as a shift in the timing of the first quarter opening, total store operating weeks increased 18% versus our total store count increase of approximately 22%. As Lee discussed we saw continued strength in our new store performance and we remain confident that this year’s new store class will be one of the strongest vignettes we have. First quarter gross profit dollars increased 23.3% primarily driven by sales growth. Gross margin was consistent with the first quarter of fiscal 2017 at 33.9% of sales. Our merchandise margins improved year-over-year driven by vendor contributions of quarter brand awareness efforts, offset by higher occupancy costs from prior sale lease back transactions and the turning of capitalized transportation costs associated with last year’s investment in incremental inventory. From an operating expense standpoint, our adjusted SG&A rate was relatively flat at 21.9% of sales compared with 21.8% of sales in the first quarter last year. leverage achieved on some of our recurring corporate overhead expenses was offset by the planned 110 basis point investment for increased marketing and pre-opening versus first quarter of fiscal 2017 which reflects our commitment to expanding our business through our two biggest opportunities brand awareness and new store growth. Those first cap investments coupled with slight de-leverage in corporate DNA due to the amortization of our new merchandise planning system and other IT investments resulted in adjusted operating margin contraction of 30 basis points. Overall, we delivered a 20.3% increase in adjusted operating income at $24.0 million. Interest expense decreased 40% to $4.9 million as a result of rate step down we achieved on our first lien term loan in the prior quarter as well as the pay-off of our second lien term loan with IPO proceeds last year. From a tax perspective our first quarter effective tax rate was 38.9% compared to 37.8% in the first quarter of last year. The rate increase we experienced was driven by a planned restructuring that we launched in fiscal 2018 which impacted deferred tax assets during the quarter. As we look for the full year we expect the restructuring to lower our overall effective tax rate and we are reiterating our assumptions for an annual effective tax rate of 37.5%. Accordingly our pro forma result for the first quarter reflects this normalized full year expectation. It is also important to note that there was no impact to either GAAP or pro forma tax expense during the quarter for the new stock based compensation accounting rules that went into effect at the beginning of the year. We will separately disclose any impact we experience in the future quarters. Ultimately we are very pleased we have delivered a 32% increase in pro forma adjusted net income in the first quarter to $12.0 million or $0.19 per share compared to pro forma adjusted EPS of $0.15 in the first quarter of last year, driven primarily by substantial top line growth and maintaining our industry leading profitability. In terms of the balance sheet net inventory increased 43.7% over the same quarter last year driven largely by the same factors I called out on our fourth quarter earnings call. New store growth including the number and timing of our new store openings planned for fiscal 2018 drove two-thirds of the increase. The remaining third of the increase was driven by our investments in incremental low price inventories during the second half of last year including the associated transportation costs that will turn through profit sales in the upcoming second quarter of fiscal 2018. Turning to our fiscal 2018 outlook, we are incorporating the strong performance we delivered in the first quarter and raising the full year net sales expectation to $906 million to $913 million, which represents growth of 18% to 19% and assumes a comp store sales increase of approximately 3%, up from 2.5% to 3% previously. Our assumptions around tables within the year remain unchanged from last quarter’s call. We expect that comp store sales through the second quarter will be higher than our full year outlook with lower comp performance in the second half of the year as we lapped strong third and fourth quarter results. Our positive top line trends in Q1 have continued into the second quarter. However, we are mindful that the month of May represents our easiest prior year comparison. We are very excited about the current momentum we have and we have several strategic initiatives covering all areas of our business, especially those in support of increased brand awareness and new store growth. Our recent top line out-performance has also given us the flexibility to redeploy sales upside into another meaningful long-term opportunity which is direct sourcing. During the second quarter, we began to accelerate investments in this area that were originally planned for next fiscal year. While building direct sourcing capabilities will be a multi-year journey, we are excited to begin laying the foundation for medium and long-term benefits. In light of our first quarter performance balanced with our reinvestments and direct sourcing we are raising the midpoint of our full year earnings expectations. We now expect to deliver pro forma adjusted net income growth of 26% to 30% based on a range of $46.1 million to $47.5 million which translates to pro forma adjusted EPS between $0.73 and $0.75 on 63.5 million diluted shares outstanding. We anticipate that the pull forward of direct sourcing investment will impact EPS across the second and third quarters by approximately $0.02 which is included in our updated guidance. Regarding the cadence of earnings within the year, we now expect first half pro forma adjusted net income to comprise approximately 47% of full year earnings up from 45% previously. As I described on last quarter’s call, some of the factors considered in our short-term results are capitalized transportation costs related to our fiscal 2017 incremental inventories that will disproportionately impact second quarter gross profit and marketing and pre-opening de-leverage that will be more heavily concentrated in the first half of the year as we elevate our annual marketing spend of 3% of sales, while investing in our new store growth. Overall, we are very pleased with another strong quarter of performance, meaningful progress on our strategic initiative and a great start to fiscal 2018. Our value proposition and the breadth and depth of our assortment are continuing to resonate with our customers. Internally, we see strength and consistency across our business both operationally and financially. Our full year outlook reflects our commitment to reinvestment while simultaneously generating the high growth results and industry reading profitability we have delivered for the past several years. We are excited about the path ahead and we look forward to our long-term growth targets and 600 plus store potentials. Before we conclude our prepared remarks, I want to congratulate Lee on two outstanding accomplishments during the first quarter. First, our Board of Directors recently elected Lee as Chairman of the Board in recognition of his vision and unwavering commitment to transforming the At Home brand over the past 4 years. Additionally, the American Business Awards honored him with a Silver Stevie award for the 2017 Retail Executive of the Year. On behalf of the management team, I’d like to congratulate Lee on those achievements and look forward to his continued leadership in his expanded role. I will now turn the call back to Lee for some closing remarks.

Thank you, Judd. Looking beyond our first quarter results, we believe At Home is ideally situated in the healthy and growing furniture and home furnishing sector, which has averaged 4.4% growth over the past 4 years and has delivered positive year-over-year sales growth for the last 38 consecutive months. Additionally, our status as a valued player not only positions us to continue taking market share in our highly fragmented industry, but it puts us among some of the top performing names in all of retail. Our first quarter results reflect the strength of our business model which has manifested itself in both compelling new store performance and positive same-store sales increases for more than three straight years. We believe that the investments we have put in place in fiscal 2018 will drive another year of impressive growth and profitability as we capitalize on the tremendous wide space we have in front of us. Operator, please open the line for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Dan Binder with Jefferies. Please proceed with your question.

Great, thank you. Congratulations on a good quarter. I have couple of questions. One around the just the cadence of the quarter and how things sort of panned out post-tax refunds and whether you saw pickup? And also on in terms of categories you talked about broad strength I was curious as you look at the next area for category reinvention, what should we see on that front? And then lastly, you mentioned a 40% increase in the e-comm traffic to the website. I am just curious how consumers are reacting when they see that there isn’t really a transactional website there to purchase product from and if you are getting feedback that they want one?

Great. Thanks, Dan. I will address the first question and then Lee will hit the next one. So, when we look at our first quarter comp, we are very pleased with the performance. And as I mentioned, it was across all the geographies. It was very broad-based and consistent. We saw our everyday and seasonal performed very well, stores greater than 5 years performed in line with the change – with the chain overall. It was our 13th consecutive quarter of positive comps. When you look at the last 13 quarters, we have averaged 5.3%. We did not see the choppiness that other retailers have highlighted. As a reminder, we are a value player and we saw consistent results throughout the quarter. We exited on a strong note and we said that the momentum has continued into the second quarter and we are very pleased with our business through the first 4 months of the year.

Dan, you asked questions about reinventions and about the website. So I’ll cover that. It’s Lee. So, on the reinventions that continues to be a few operas in our engine. It’s a way for us to signal newness to our customers. It’s a way to refresh an entire department or category and we are pleased with the results that we have had in the first part of the year with our reinventions, specifically if you think about our outdoor décor, which is in the second year of reinvention. We are very pleased without our better patio assortment has performed very well and our indoor tabletop décor was another reinvention that we called down. And remember our reinvention we expect if we look at our assortment, there is three categories we put our assortments into either you need to sustain your business, improve your business or reinvent your business. And improvement means we expect high single-digit comp stores improvement on that – for that category. For reinvention, it’s got to be 10% or better comp increase. And for the back half of the year, we are excited about our fall and Halloween, which are going to be updated and reinvented based on the learnings we had in Christmas, the past 3 years of Christmas which has performed very well for us. Our top of bedding, you will see that actually it just started to roll into the store now and our occasional furniture and dinning furniture. So, those are the upcoming reinventions we have. Now, I would tell you from the website we continue to see additional visitors to our website. It reflects the investment we have made. We wanted to make it easier for our customers to see the values that we have in the store before they come and pre-shop. We put a Demandware platform online so that people could see our entire assortment. We have over 50,000 SKUs now in our assortment and all of those are online. So, they can see it. They can see the price. And remember that – and when we look at the home décor customer, industry research has shown that when they ask what are customers looking for in this category from a player whether online or in store is they want price selection, see, touch and feel and take it home immediately. So, we continue to focus our website on the dressing dose and pointing them to the store and as you can see from our same-store sales growth, we continue to see progress we can assess.

Great, thank you.

Thanks, Dan.

Thanks Dan.

Thank you. Our next question comes from the line of John Heinbockel with Guggenheim Securities. Please proceed with your question.

So, two topics. One, performance of new stores in existing and new markets, new stores in those markets, how similarly are they tracking the volume ramp up and are you seeing as we get some multiple stores into existing markets and the ensuing brand awareness pickup, are those stores then maturing at a faster pace? And also would you in a perfect world – would you like to cluster more where you think the clustering is about where you would like it to be?

Great. Thanks, John. I will address the first question and then Lee will hit the second one around clustering. So as I said in my prepared remarks, we had 18% increase in operating weeks which was slightly below where we were last year on a 22% store accounting treatment. We are very pleased with how the stores opened in the first quarter and as I highlighted in our prepared remarks this year we have the opportunity to have one of the strongest vintages yet. We have a lot of stores that are reopening in the second half of the year that have higher sales volumes, some of which are ground up build. And we are excited about those new store openings of attracting actually ahead of what we had expected. The new and existing we had more new markets in the first quarter for the year its more balanced, its 50-50 overall, so we will see some of those stores that are going to open in the second half of the year that are ground up build are actually going to be in our existing markets and we expect those stores to perform higher. But overall we are very pleased with the stores we are opening up. We are going to stay true to our economic model and make sure that we are open on delivering the return that we expect.

And John on the clustering part ideally we would love to have more stores in existing markets, it’s the super efficient way to run your business. You can leverage the existing marketing spend. You can leverage your leadership in that market as well. You know the customer already. You know their buying patterns. You can know their preferences of assortment. So we are going to continue to look for in stores in existing markets and as Judd mentioned the back half of the year will be more concentrated towards the existing markets which is to happen at probably [indiscernible] we planned it that way. Remember we are an opportunistic player in real estate, so when we take second gen box system [indiscernible] to an existing market sometimes those are a new market. They are consistent with our market plan. But obviously we love to have clustering to make sure they are far enough away from each other so they don’t cannibalize themselves too much. We are thoughtful about cannibalization impact. We analyze what that expectation is well before hand and we plan accordingly. So I am excited about the fact we get to add new stores in existing markets more in the back half of the year. It will build our brand in those markets even deeper and some of those were some of strongest markets already.

And then with respect to direct sourcing, so how will that interplay with the reverse engineering process and is there an opportunity to significantly further reduce the cost of the products that you are selling?

Yes. I think for us as the direct sourcing process is going to be a journey. We identified this early part of the year as we have started to work on and we have planned to put some whole lot of energy in the back half of the year against direct sourcing. But as we did our early study on it we found that the opportunities would be even greater as we pull that ahead and that’s why that we have some additional investment in this year than we had originally planned by taking some of the good news in Q1 and investing against as we have always said we will invest against opportunities. So we are investing into direct sourcing. It’s a three phased approach that early stages will be on low design content products. Think of this as product has been in our store for a number of years, it doesn’t take a lot of design at the commodity. For example, let’s take wooden bar stool for example. So that wooden bar stool we have been selling for a number of years, we can direct source that without having a lot of design, without having any additional or new design work on the product. As you move across these ways of direct sourcing efforts, we are going to have to add product development capabilities in side our company. We have to add direct sourcing capability inside our company, so there is a new hires. That’s what’s happening this year. By the back half of the year we will start adding even more to the product development team because by the time you get [indiscernible] we have to do some of the design work ourselves which our product department has been doing for us. That allows us though to take that design direction and make it clear to the factories a lot faster and working through the third-party. We think this will help not only our speed, it will improve our profitability overall. And then we are just going to reinvest it, we are going to reinvest those – that savings which we will see in gross margin against lower price points and improve quality and also against marketing brand awareness to drive more top line growth so we can continue to fuel our top line even greater than that.

Okay. Thank you.

Thanks John.

Thanks John.

Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

Thanks. Good morning. Nice quarter guys. I would follow-up with on direct sourcing, can you remind us what percentage of your cost of goods is currently sourced by agents or third-party, I don’t know if you have given us the percentage. And then, can you hear any parameters around what the cost of that sourcing is meaning, what the overall opportunity for gross margin could be on the savings perspective?

So overall the answer to your first quarter – this is Judd. Right now we go 100% direct sourcing today, 100% through third-party partners. So we think there is a meaningful opportunity. We haven’t quantified it yet. We have done work preliminary a step what the opportunity is and we are very pleased with it. Many retailers have experienced hundreds of basis points versus this has been tens of basis points. But I want to emphasize again what we highlighted in the previous question. We have industry leading profitability today. So we are focused on taking that and doubling down on our value proposition and using this as an meaningful opportunity to drive brand awareness and to take market share over time. So that way we are going to plan. Overall, we know there is a lot of value there. We have seen others do it and we have been to other companies and actually have done it at other retailers. We are excited about this. We are excited to be of the pull forward. And we have a lot of confidence and a lot of momentum in our efforts. But just remember this is a long-term type way. We will see a little bit of benefits late this year. We will see more next year. And again I want to reemphasize we have industry leading profitability. We want to make sure that we continue to drive our share gains and hopefully accelerate them over time.

Okay. And my follow-up is just thinking about reinvestments and so you have talked about marketing and now you have introduced direct sourcing, I am assuming that the store growth ramp, I mean is acceptable and suitable for the rate you are going, I don’t think anyone is complaining about it, but can you talk about pushing direct sourcing versus may be ramping up the store growth even faster versus I don’t know if there is other decisions whether there is some online investments that you have considered naming?

Yes. Simeon, I would tell you we are already one of the leaders in retail in terms of store growth, a 20% unit growth for now 4 years running, it’s hard to match. And we are really pleased with that. We can deliver that I will say comfortably in essence we have put in the process and system to that to perform at that high octane levels. We don’t see the need to go any faster on that. There continues to be a strong supply of real estate to address that not only from a second generation boxes, but also our ability of opening stores and build them ourselves. I would say we do see an opportunity to build our brand, the biggest opportunity is brand awareness. We have got the lowest brand awareness in our category in existing markets that we already compete in and we are less than half of the competitors out there in those existing markets. So why wouldn’t we spend against marketing to build brand awareness in the existing markets, so we want to do that. I would say with the investments against our online, we continue to invest against online I mean Demandware platform was just added less than 2 years ago. If you look at our advertising spend and marketing spend that most amount of money we spend in any categories in digital, we believe that’s where people have decided to make their purchases they have decided to pre-shop. We don’t want to take away what the customer is looking for which is an in-store experience [indiscernible] take it on today great prices and that’s what we offer. We are – our prices will below anybody else’s sales prices and they can see, touch and feel it. They can take it home today. But there are investments you will see in the future to make that connectivity from digital to the store to make it even easier for her to shop our customer and so we are going to make those investments which will be considered digital investments to improve her shopping experience.

Okay. Thanks.

Thanks Simeon.

Thanks Simeon.

Thank you. Our next question comes from the line of Matt Fassler with Goldman Sachs. Please proceed with your question.

Thanks so much and good morning to you. My primary question focuses on the flow of inventory through the system and its impact on margin, was the impact of inventory handling on cost of goods in Q1 consistent with your plan, is there any change in the allocation of that inventory costs from Q1, Q2, Q3 versus where you were at the outset, what you are thinking that as in the absolute fiscal year?

Matt, this is Judd. So what we had in terms of receipt in the first quarter was actually right on plan. We went back and we wanted to understand will we have transportation through the P&L with the inventory made from the number of receipts. And it was right on plan for what we expected in the first quarter and we are tracking along that in the second quarter. As I mentioned in our prepared remarks our increase in our inventory really was driven by two things. Two-thirds of it was driven by new stores and that’s the opening and future timing of stores. And then the second was increment one-third of the increase which when we looked at our business on our comp unit basis we have to go back to about 2.5 years ago when we had similar comp units. What we wanted to do is make sure we brought in the inventory to match what the customer would expect. And if you go back 2 years or 3 years ago we had an 8.3% comp overall. So we have been having less units in the store that what we would expect and Q1 reflects more in line with where we were 2.5 years ago. As a reminder, the quality of our inventory is measured as part of our borrowing facilities with our ABL. We actually have a third-party that has to evaluate in the first half for five consecutive years the quality of our inventory has increased as evidenced by our NOLB level where liquidation of our inventory is actually above $1 and that reflects the quality only a handful of retailers would ever had that overall. And we remain very pleased with our inventory. I do want to highlight part of our higher inventory that you would see at the end of Q1 as we have some capitalized transportation costs from Q3 and Q4 last year that will turn over in the second quarter. So we have highlighted that in our outlook. There is nothing changing with our outlook related to that, but we wanted to call that out also in [indiscernible].

And Matt, this is Lee Bird. I just want to give a shot out to our operations team. So Peter Corsa is our Chief Operating Officer and needs a lot of effort to ensure that we can now smooth the intake of our inventory into our system. We are best in class in terms of our labor model and operating efficiencies, but we have identified better ways to run the business. Obviously, Peter and his team has identified the need for the inventory in the stores, but when you convince it had a surge to it in the third quarter and fourth quarter and we wanted smooth that out to make our business run more effectively on a day-in and day-out basis and not have those surges any more. Peter and his team have jumped on that. And I am really pleased with the way that we are now running more consistently every week into our DC. And it allows the product to flow into our store more consistently instead of surges, which allows us to actually put better – more hours on the floor on a daily basis to deliver better customer service and also have newness in the store on a more regular basis. So we are running the business even more effectively than last year.

Thank you. But way of follow-up on the same team, I think at the fiscal year end call you talked about the rate of inventory growth beginning to normalize in the second half of the year [indiscernible] about the facts that two-thirds of the inventory growth, so certainly in excess of 20% related to new stores and not that much above the growth rate of new stores and rest of it relates to comp stores, should we see that comp store growth come down close to your same store sales growth or would you expect it to exceed it still in the second half of the year?

The second quarter we had expected for widen, because we are actually at a low point in the second quarter which is part of what drove our lower comp last year of 0.9. No, I would expect in the back half of the year we would start to more normalize and by the time we exit fiscal ’18, we would be at normalized level more in line with our comp overall. Q3 will come down a little bit. But it still won’t be completely normal. But by the fourth quarter we would expect that to be more in line.

Thank you so much.

Thanks Matt.

Thanks Matt.

Thank you. Our next question comes from the line of Oliver Wintermantel with Evercore ISI. Please proceed with your question.

Yes. Good morning. Going back to the capital as transportation costs, I was just wondering is 100 basis points headwinds, that’s still a good number to use for the second quarter and then maybe if you could give us some details on the third quarter and fourth quarter how you think about these transportation costs that probably should level off and the Q3 and Q4 gross margins then – could those be up again?

Yes. Oliver, this is Judd. So you are correct. You should think about it as 100 basis points headwind. And that is transportation costs, it’s not merch margin, its transportation cost related and it relates to be inventory we have brought in. In Q3 and Q4 and it just matches with the turn of the inventory that we expect to sell through in Q2. As you look at the balance of the year what we highlighted about smoothing our inventory out and our intake out, the efforts we have had over the past four months to do that will make it more predictable around our transportation costs but we should have a less of a variation in that cost overall as we look forward.

Okay, great. And then you mentioned a co-branded private label credit card, if you could maybe share some more details on that, so maybe the timing of the launch and then what the terms are and if you benefit from profit share or you benefit from sign ups, just some more details would be helpful? Thank you.

Sure. I will give you a little bit more detail on it and then we will have a press release when we actually launch it which will be late summer. So timing wise it’s going to be late summer. As a reminder the co-brand and private label credit card, customers will get rewards overall and we will highlight what that is in terms of the value proposition when we do our announcement. We will get a lot of rich customer information and that will help us in our marketing efforts. As we have highlighted before we are building CRM database and that will allow us to do tailored marketing to our customers. We will have an element around loyalty and that will provide the customer with rewards. We hope that the credit card drives two things. Number one, we expect that it’s going to drive basket, so we are going to deferred financing with that. Second, we expect to drive frequency. So the customer will get rewards and they come in more frequently and we will know more about that and that would add [indiscernible] I guess. Overall it comes the information we will have gathered around the customer we will be able to tailor our offerings to them and our communications to them which should drive more frequency around visits as well. And again we will provide more information on the actual program later in the summer when it launches.

Great. Thanks very much and good luck.

Thanks Oliver.

Thank you. Our next question comes from the line of Curtis Nagle with Bank of America/Merrill Lynch. Please proceed with your question.

Great. Thanks very much for taking my questions. First would be I guess given the success you guys have had with the ramped up advertising and potential sourcing savings coming down the line, where do you think advertising could go over the next few years as a percentage of the sales perhaps above 3%?

Curtis this is Lee. We said we are going to invest against it. I don’t know where it’s going to go. It’s always going to be based on how it performs. We are super thoughtful about what we do. We analyze everything in our business. We are going to look at the marketing effectiveness of each and every medium and each and every campaign. And if we see benefits which we obviously feel the need to do that because brand awareness is low we want to invest against it [indiscernible] against it. And I would – we assume it’s going to go up, I don’t know how far up and as it goes up we expect it would be driving top line performance to deliver those outcomes. I would say we still have awareness at very low levels. I have mentioned before that our competitors in existing market have more than double almost three times our brand awareness, so we got to spend against that. I am really pleased as I mentioned in my prepared remarks about Ashley Sheetz and her performance. I mean she is a super analytical, she is a business person first. She looks at how to build the brand overall and how to do that effectively and financially effectively and not just spend money which some people do out there in the industry. So she partners closely with our operations and financing to measure the performance. We do testing the controls against all of this investment as well. And our early reads are we are really pleased with the investment and we are very pleased with the outcome so far. And I would expect that we will spend against those type of outcomes.

Got it.

To build on what we have said, we are also focused on maintaining our industry leading profitability, so as we do have gains from direct source and other things we want to make sure that we continue to have industry leading profitability, but at this point growing our market share is a biggest opportunity.

So the increase in marketing expense when it comes from the good news that we get from direct sourcing and other activities above the line and it won’t dilute our bottom line performance that we are going to continue to deliver those outstanding EBITDA and profit margins that we have right now.

Understood. And then just as a follow-up, just curious if you guys can give any update on the availability or I guess increased availability of secondary sites given continued store closures in the rest of the retail?

Yes. There is a whole lot of news out there about closures and so that creates great opportunities for us. I would tell you our pipeline has never been deeper. I like the quality of the pipeline and deeper the pipeline the more picky you can be against it. It allows us to not only look at better sites, but it allows us to consider existing markets and impact of cannibalization to be more thoughtful about that. I will tell you we are super disciplined around it. We continue to look at the same way we have thus far. We continue to open up the stores stronger than in the prior year and we want that to continue, that’s enabled by better quality locations and as retailers continue to announce closures, I will tell you our team had the relationship – the best relationships in the industry. So they call us first. They give us the opportunity to look at those locations. We can give them a quick response. We can do those – we make those decisions quickly. Our real estate committee consists of just four people Judd and myself, our Head of Real Estate and our Head of Development, Norm McLeod and then – and we look at those sites analytically on paper. We have the site scoring system where we use Buxton as an analytical tool to help us score the location. We already have the market plan for all those 600 plus locations would be. So as the location comes up, we will see if it’s in a place we already wanted to be. Now like we are just going to say it’s a good idea or not. We already know that’s the market we want to be in or not. We have already scored the box. We have operated – we have scored all operating big boxes over 20,000 of them. We already know what those boxes would be as an At Home store. So we can already have a first look and a first point of view on that right away. So we are prepared better than I think anybody in the industry for this situation which gives us a whole lot of opportunities out there. And I would tell you the deeper the pipeline gives you more flexibility against landlord as well say that we can only afford so much and then we will pass on a deal, because we know we have other options so we don’t have to be desperate in chasing deals. We are supper thoughtful about it and I think that the bigger the supply which we are seeing is only more helpful for us not only today but long-term.

Thanks very much.

Thanks Chris.

Thanks Chris.

Thank you. Our next question comes from the line of Daniel Hofkin with William Blair & Company. Please proceed with your question.

Good morning. Just a couple of questions first on the gross margin, I am not sure if you said, but what were the factors that drove the higher product margins that you alluded to and how sustainable do you feel like those factors are, that would be my first question?

Dan this is Judd. Though merchandising margins were up as I highlighted in my prepared remarks, the driver of that was the vendor support that we had related to marketing that we actually started collecting last year and we have recognized it over the term the inventory, so that was the primary driver overall of our merchandise margin. We will have that in Q3 of this year.

Okay. And then just to clarify the direct sourcing, the incremental couple of cents over those second quarter and third quarter that is purely incremental, in other words kind of absent that you would be taking up your underlying guidance by $0.02 to $0.03 additional, is that fair to say?

Yes. Overall, it would be a couple of pennies. We highlighted in the call we have raised the bottom up $0.01. We do have $0.02 related to direct sourcing overall and those are incremental costs for the year. And we feel very good about our business. We feel very good about the momentum overall. We did increase the midpoint of our range and that reflects the $0.02 of direct sourcing. And overall, when you look at our Q1 performance we exceeded kind of the outlook we provided to you during our fourth quarter call regarding the first quarter.

Okay. And then lastly you touched on that little bit before, but on the CRM initiative kind of can you help us understand kind of the timeline you are thinking about there? And what if any sort of expenses will be associated with that over time or is that largely kind of a gross margin impact in exchange for better sales?

Yes, Daniel. This is Lee. The CRM program, it’s been basically a loyal – we are going to have a loyalty program. It’s not going to be necessarily a giveaway program. It’s a loyalty program that’s going to be an enhanced build off of our existing e-mail program, but we are going to be collecting other customer information to give us more data on our customers to be more targeted on our marketing going forward. That will be in the back half of the year. It will follow the credit card launch. It’s going to be in partnership with a credit card program. And what we are going to do is we are going to be able to be more targeted in our messaging. We will be able to watch and read how our customers come into the store, how often they come into the store, what they are seeing outside the store and then coming in. So, we are excited about the visibility we are going to have against our customer shopping patterns, which we haven’t had up till now. And I would tell you that, there won’t be much of an impact on the margin basis at all. What we are going to be doing really is providing more targeted communication to them to our customers, take for example, right now, we have got to back – we will have back of campus campaigns and programs in June, July and August, okay. Now, I happen to have going back to college and I should get that kind of communication, but 4 years from now I am in and they are not in college anymore, I don’t want that message anymore, it’s not relevant top me. So, we have got customers who do have kids going to college and some that don’t. So, right now, everybody gets that message. So think about how much better we can be when we are communicating and talking to them about that opportunity. So, it’s more around being more targeted and more thoughtful in our connection to our customer versus just blasting out e-mails and blasting our communications going forward.

And Dan just highlighted from a gross margin and SG&A perspective, the investment we have regarding CRM is already included in our outlook from a marketing perspective part of the dollars we are spending them increased marketing includes that investment CRM. As we highlighted from a gross margin perspective, we don’t expect to see much related to our new program, because it’s really enhancing our programs we communicate into the customer and learning our customers some additional benefits associated with that, but overall, we are excited about the program and the whole CRM is included in our outlook.

And it’s not a discount program, it’s not a coupon program, it’s not anyone of those wherein everyday low price, their prices are lower than everybody else’s sales prices already. It’s about being more effective with our communications, with our existing customers and inviting new customers and talking to them in a more targeted way.

Understood. Very helpful. Thank you.

Thank you. Mr. Bird, there are no further questions at this time. I will turn the floor back to you for any final remarks.

Alright. Well, thank you again for joining us today. We are excited about the growth ahead of us and we look forward to talking to you in the upcoming days and weeks.

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.