Lee Bird - Chairman, CEO and President Judd Nystrom - CFO Peter Corsa - COO David Frazer - Senior Director of Finance

John Heinbockel - Guggenheim Securities Dan Binder - Jefferies Simeon Gutman - Morgan Stanley Matt Fassler - Goldman Sachs Brad Thomas - KeyBanc Capital Markets Curtis Nagle - Bank of America/Merrill Lynch David Magee - SunTrust Robinson Humphrey

Greetings, and welcome to the At Home Second Quarter Fiscal 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, David Frazer, Senior Director of Finance.

Thank you, Hector. Good afternoon everyone and thank you for joining us today for At Home’s second quarter fiscal year 2018 earnings results conference call. Speaking today are Lee Bird, Chairman, Chief Executive Officer and President; Judd Nystrom, Chief Financial Officer; and Peter Corsa, Chief Operating 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 Web site 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 Web site. I will now turn the call over to Lee. Lee?

Thank you, David. Good afternoon everyone and thank you for joining us to discuss our second quarter fiscal 2018 results. Before we begin with our prepared remarks, I’d like to address the devastation that Hurricane Harvey brought to Southeast Texas and Louisiana last week. As a Texas-based retailer that was headquartered in the Houston area for decades, our thoughts and prayers are with those in our communities that were impacted by the flooding, including our customers and our team members. We’re committed to helping all of our neighbors as they rebuild and we have several disaster relief initiatives in place to help those affected to go safely and to feel at home again soon. As you saw in our earnings release issued earlier today, our second quarter demonstrated broad strength across the business in everyday and seasonal product categories, in new and existing stores across the country and in good, better and best merchandise. Our fiscal 2017 investment in incremental low-priced inventory is continuing to delight our customers. With the second quarter, we delivered our 13th consecutive quarter of 20% plus sales growth and our 14th consecutive quarter of positive comp store sales increases. Our new store growth of 18% coupled with our investment in incremental low-priced inventory and our merchandising and marketing initiatives drove net sales growth of 23% and a 7.8% increase in comp store sales. This quarter despite absorbing the bulk of the distribution cost from last year’s one-time setup in inventory as well as the strategic increase in advertising to support brand awareness, we continued to demonstrate our industry-leading profitability by delivering a 35% increase in pro forma adjusted net income and pro forma adjusted EPS of $0.18. Most importantly, our top line outperformance funds continuous reinvestment in our business to drive sustainable, long-term growth. The strategic priorities I’ll discuss on today’s call are the framework for these reinvestments. To be an enduring and a successful retailer, our first priority is and must always be our customer. In order to address our customer needs, we continue to make purposeful investments in getting to know them better. We’re very pleased with the growth in our email database which exceeded 3 million members for the first time in the second quarter. We also increased our email open rates by more than 50% year-over-year giving us more confidence in the effectiveness of our messaging. And just last week, we officially launched both co-branded and private label credit cards which will reward our loyal customers and provide financing options for them while also enabling us to better understand their preferences and their shopping behavior. We simultaneously launched an At Home loyalty program called Insider Perks for our frequent shoppers, including our email database members. We’re very pleased with the progress made and the opportunities these initiatives will ultimately generate as we continue to enhance our relationship with our customers and interact with them in new and exciting ways. Our second strategic priority is our assortment. We are committed to giving our customers an incredible selection of trend relevant home décor in unbeatable value. Because this includes having a sufficient amount of products to satisfy customer demand, we added incremental low-priced inventory to our stores in Q3 of last year that continues to drive meaningful increase in our comp store sales. While items under $25 drove the largest comp increase this quarter, we were very pleased to deliver comp growth at almost every price range and in every department. Finally, in support of our annual category reinvention strategy, we expanded our selection of better and best bedding and outdoor décor to ensure that we have a full assortment for every budget. Continuously introducing freshness and newness in our offering has the added benefit of giving us more opportunities to communicate with our customers and draw them into our stores. Our third priority and our biggest growth opportunity is new store growth. At 137 stores today, we believe we are less than 25% of our growth penetration in the U.S. Given our substantial white space, we are focused on expanding our footprint in both new and existing markets. In the second quarter, we opened seven net new stores including one rebuild and reopened in our home market of Houston, Texas that delivered the highest first week volume we have ever seen in our four plus years as a management team. We continue to see new store performance ahead of expectations for the class of fiscal 2018. In Q2, we entered new states like Nevada and Massachusetts, introduced new markets like Clarksville, Tennessee and Merrillville, Indiana and expanded our presence in existing markets like Washington DC, Birmingham and Pittsburgh. Our second quarter new store performance demonstrates the broad appeal of our value priced home offering and highlights the portability of our concept. With our fiscal 2019 real estate pipeline fully identified, we continue to have confidence in our growth strategy moving forward. Our fourth focus is our in-store experience. We want to provide customers with an easy and enjoyable self-help shopping experience every time they come in our stores. In fiscal 2018, we’ve been translating the multiyear success of our holiday reinvention to other categories by merchandising them along curated themes making it easier for customers to shop their favorite style and trend. This quarter we focused on decorative garden and back to campus digitally highlighting them through the improved digital marketing and leveraged exceptional strength in our end caps and feature tables. To support our category reinvention, we also enhanced signage and displays for the launch of our better and best bedding. Finally, we continue to be pleased with the results of our one-week-only the value deals called Flash Finds which we lapped at the end of the quarter. In this digital age we remain committed to giving customers an exciting and inspirational in-store experience as we help them make any house a home. On to our fifth priority, operating efficiency. We know that in order to grow our business and serve our customers well, we must continuously improve systems, processes and infrastructure to ensure we’re operating efficiently and effectively. In the second quarter we added to our distribution center lot in Plano, Texas; implemented a yard management system and optimized receipt planning and process to drive future cost reductions and short lead-times to our stores. To enhance productivity of our lean self-help labor model, in Q1 we expanded our district manager program and introduced regional manager positions which were all filled internally. I’m pleased that under the new alignment, our stores executed the second quarter without missing a beat. The standout performance they delivered enabled us to accelerate our direct sourcing efforts, which should result in price development efficiencies that we can redeploy into brand awareness, better quality and lower prices to further strengthen our customer value proposition. With substantial growth ahead of us, we continue to ramp up internal talent development ensuring a field leadership pipeline that can keep pace with our new store expansion. Sixth, our brand. We’re focused on aggressively but thoughtfully expanding the At Home brand. As a reminder, we have increased our targeted marketing spend to 3% of sales in fiscal 2018 and our expanded budget has gone in part towards increasing the number of markets and stores supported by our recently launched TV and digital advertising campaign. We continue to measure and monitor the results of the campaign and we’ve been pleased with the positive traction to-date. We’re seeing a meaningful increase in digital consumer engagement, particularly as unique Web site visitors has increased by almost two-thirds and second quarter page views have almost doubled from a year ago. As a result, in August, we launched an updated Web site with an emphasis on visual inspiration improving search functionality and ease of use. We also optimized our mobile platform as customers increasingly used handheld devices to browse. We continue to devote our marketing efforts to an ever-improving mix of digital and traditional media showing customers the breadth and the depth of our assortment in everyday low prices to drive greater brand awareness over time. And our final priority and the foundation for all others is our team. We firmly believe that being a great place to work and grow is one of the pillars of a successful business. To reward our team members for their contributions and to promote an owner-operator mentality, in August we granted restricted stock units to an expanded group of home office management and to every At Home store director, as planned. Our stores are the heart of our business and we believe that if we take excellent care of our store personnel, they will in turn take excellent care of our customers. The Dallas Business Journal recently recognized our commitment to culture by naming At Home to their Best Places to Work list for the second year in a row and designating Chief People Officer, Valerie Davisson as an honorary for their 2017 Women in Business awards. While these awards reflect the transformational journey Valerie and her team have led us on for the past four years, I’m even more excited about the future of what we can achieve together. With that, I’ll turn the call over to Judd to walk you through the financial performance in more detail and discuss our outlook for the remainder of fiscal 2018. Judd?

Thank you, Lee. Good afternoon, everyone. I will begin my prepared remarks with the review of our second quarter fiscal 2018 results and then discuss updates to our fiscal 2018 outlook. As always, additional information is available in our earnings release which can be found on our Investor Relations Web site. As Lee discussed, the second quarter demonstrated the broad-based success of our merchandising and marketing initiative as well as our strategic investments which culminated in our 13th consecutive quarter of 20% plus net sales growth and our 14th consecutive quarter of positive comp store sales increases. Our comp store performed well by almost all metrics with all quartiles of stores by volume delivering a mid-single digit comp or better. In addition, our comp sales were consistently strong throughout the quarter and across our footprint. Our Q3 fiscal 2017 investment in additional lower-priced inventory continued to be a comp driver for us contributing meaningfully to our 7.8% comp sales increase. Finally, our 23.2% net sales growth also reflects strong performance of our net stores. We opened eight new stores during the quarter or seven on a net basis when considering one relocation in our Birmingham market. Based on our strong new store performance, we continue to believe that our fiscal 2018 class of new stores will be one of our strongest yet. Consistent with our industry leading profitability, our substantial top line growth was accompanied by a 35% increase in pro forma adjusted net income and a 38% increase in pro forma adjusted EPS to $0.18. We are especially pleased that we delivered strong earnings growth while also absorbing the capitalized distribution costs associated with turning last year’s incremental low-priced inventory. The expected 140 basis point decrease in Q2 gross margin which was already contemplated in our full year outlook was almost entirely driven by these additional freight costs. It is important to note that our merchandise margins have increased 30 basis points on a year-to-date basis. Despite the expected gross margin headwind as well as the planned deleverage from our fiscal 2018 investment in marketing, we grew adjusted operating income dollars by 21.4% and maintained adjusted operating margins at a relatively flat 9.9% of sales due to substantial leverage achieved in corporate overhead, as well as the favorability in the timing of preopening expenses. Interest expense continued to benefit from the IPO-related payoff of our second lien term loan in the third quarter last year which drove a significant decrease in interest expense year-over-year. From a tax perspective, our second quarter effective tax rate was 35.7% compared to 39.0% in the second quarter of last year. The planned legal entity restructuring that we launched at the beginning of Q2 drove the rate decrease. Stock option exercises had an immaterial impact to both second quarter tax expense and our effective tax rate. We continue to expect a full year effective tax rate of 37.5% which is in line with previous assumptions. Net inventories increased 28.3% over the same quarter last year driven by an 18.3% increase in the number of stores opened since the second quarter of fiscal 2017 and to a lesser extent the investments in incremental low-priced inventory we made during the third quarter last year as well as the number, timing and expected sales volume of the remaining new store openings planned for fiscal 2018. We remain on track to see our inventory growth rates moderate by the end of our fiscal year. To further support long-term new store expansion, in late July we leveraged our strong financial performance and favorable market conditions to amend and extend our ABL. The amendment not only increased our borrowing limit to $350 million from $250 million but also provided for improved terms and conditions and a favorable interest rate structure. We extended the agreement into 2022 which provides us increased flexibility to deliver our long-term growth objective. Next, I would like to update you on our fiscal 2018 outlook. Based on the strong performance we delivered in the second quarter, we are raising the expected range for full year net sales by $10 million to 916 million to 923 million which would represent growth of 20% to 21% over prior year. In addition, we have also increased our annual comp store sales outlook to approximately positive 3.5% which builds upon the positive 3.7% comp increase we delivered in fiscal 2017. Consistent with prior guidance, our full year outlook implies roughly a 1.5% to 2% positive comp in the second half of fiscal 2018 which would result in a mid to high-single digit two-year stack in each quarter this fiscal year. We expect the continued top line momentum to be offset by an incremental penny per share as a result of higher incentive compensation. The continued top line growth affords us many opportunities to reinvest for the benefit of our customers, our team members and our shareholders. As an example, in the first half of fiscal 2018, we increased our marketing spend by 60 basis points year-over-year and we are pleased with the progress to-date. We also delivered value to our customers by reinvesting in lower prices through Flash Finds and by launching both private label and co-brand credit cards in August. The credit cards and the Insider Perks loyalty program we just launched are great opportunities to reward our customers for their continued loyalty while also providing them with financing opportunities as we continue to elevate our assortment. And finally, we accelerated the investment in our direct sourcing initiative in Q2 and recently began to build the in-house team that will lead the program in the future. As we highlighted last quarter, our investment in direct sourcing is a modest, short-term EPS headwind of approximately $0.02 per share. The long-term benefits of direct sourcing provide us with the flexibility to deploy the product cost savings into lower prices, higher product quality and brand awareness to continue to drive our market share gains. We are exceptionally pleased that the continued strength in our business gives us the opportunity to make these disciplined investments to further strengthen our value proposition and affirm our commitment to At Home’s long-term growth. The significant momentum we had in the first half of the year carried into the third quarter with the exception of seven stores that were directly impacted by Hurricane Harvey. We are pleased to report that our team members are safe and accounted for. None of our stores were significantly damaged and all stores are currently open and operating. However, at this point it is still too early to precisely estimate the impact of our existing stores and the two ground-up builds in the Houston area that were expected to open next month. We do expect that there will be some storm-related headwinds to net sales, comp performance and net income during the third quarter. That said, given the continued strength in our core business throughout our footprint, we are well positioned to deliver our 15th consecutive quarter of positive comp store sales growth. For our fiscal third quarter, we expect pro forma adjusted net income growth of 35% to 45%. Based on the momentum we have outside of our Harvey impacted markets, we reiterate our outlook although the timing of the opening of the two Houston ground-up builds which were previously expected to open next month will impact where we fall within our full year outcome of pro forma adjusted EPS between $0.73 and $0.75, or an increase of 26% to 30% versus prior year. Our outlook also incorporates an increase in the expected interest expense of approximately 1 million to 21 million as a result of higher interest rates and an elevated balance on our asset base lending facility, as we accumulate inventory and construction costs on our second half new store openings. As a reminder, we also anticipate sale-leaseback proceeds of $100 million across the latter half of fiscal 2018 which will offset a portion of our annual capital expenditures. We expect to generate the first 62 million in proceeds on one transaction of six stores this month. Including the impact from sale-leaseback transactions, we continue to expect gross margin to be relatively flat year-over-year which is consistent with each of our previous three fiscal years. In summary, we are very pleased to deliver another strong quarter of performance and continued progress on our strategic initiative. Overall, our broad assortment of fashion-relevant home décor at everyday low prices continues to resonate with customers driving exceptional top line growth at a 21% compounded annual growth rate over the past four years. We remain focused and committed to taking great care of our customers, team members and shareholders by delivering strong top line results and industry-leading profitability while generating abundant opportunities to continue to fuel our growth. Before I turn the call back to Lee, on behalf of the team I want to congratulate him on winning the prestigious Ernst & Young Entrepreneur of the Year award in retail and hospitality for the Southwest region earlier this summer. His leadership and innovation have been key to our differentiated strategy and disruptive retail concept, and we are excited to see him recognized for all of his contributions. And finally, Lee and I would like to congratulate our entire team on a successful first year as a public company which we celebrated last month. We appreciate the tremendous contributions of every one of our team members and their strong execution of our strategies as we continue to deliver on the substantial growth opportunity that exists for At Home. I will now turn it back to Lee for his final remarks.

Thanks, Judd. Our second quarter once again demonstrated the strength of our value proposition through exceptional performance in both new and existing stores resulting in meaningful income growth. We believe we’re investing in the right people, processes and opportunities to continue to profitably address our significant white space. Looking beyond the second quarter, we believe At Home is ideally positioned for a future of substantial growth and industry-leading profitability. U.S. census data shows that furniture and home furnishings industry continuing to be a bright spot in retail, growing another 5.6% in July. Value players like us are especially well suited to take share as customers focus on getting the lowest price every time they shop. We look forward to continuing to serve them with our unbeatable selection, everyday low prices and compelling in-store experience in the years to come. Operator, please open the line for questions.

At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question is from John Heinbockel with Guggenheim Securities. Please proceed with your question.

So two things. One, I wanted to look at the impact of the low-priced inventory on customer acquisition. Are you able to tell the degree to which that’s driving new customer acquisition as opposed to existing customers buying that product? And if you can tell if it’s driving new customer acquisition, any sense around the demographics of those new customers and their frequency of shop versus what you had before?

John, I can tell you right now that the information that we have right now compared to what we will have is different. Right now we can’t tell our new customers versus new customers. That’s why we launched a credit card and a loyalty program. So we’re really excited about that. Our team actually launched it in record time. There was some questions that we wouldn’t be able to even launch those together, they did. They did an excellent job. With that, we’ll get CRM data that we will be able to use to know who’s new to us versus who is a follow-on customer and continues to come to us and how often they come to us. So we’ll be able to better answer that question in future periods. I will tell you obviously that the additional lower priced inventory did drive sales. We mentioned that it did drive our performance in the quarter. We’re pleased with that. It’s done that now for four quarters in a row. And we’re now lapping that. So the third quarter that’s coming this quarter that we’re now operating in and it’s not that we’re reporting on, it’s starting to lap that in the back half of the quarter, but it did help drive the quarter.

All right. And in the spirit of reinvestment, where does BOPUS and ship-from-store lie in your priorities on reinvestment? And I guess you would do BOPUS first, and is that a 2018 project or further out?

Yes, our focus on the reinvestment; first of all, we’re grateful we can reinvest. Our over-performance allows us to do that. So we set expectations for the year for ourselves. We’ve been able to beat those expectations. So with that, we’ve always told you that we’re going to reinvest in our business to deliver industry-leading profitability already. So as we over-deliver, which we’ve been able to do now this year both quarters, we’re going to invest in price and value which is the most important thing to our customer. So our prices continue to be lower than anyone else’s sales prices. In fact there’s some analysts reports out there that says we’re now lower than Amazon prices and Wayfair prices, significantly below Wayfair prices. So that’s where the customer sees it first, brand awareness, then more customers know about us and also direct sourcing. We’ve now pulled in our direct sourcing efforts, we’ve pulled it ahead because we outperformed in the first half of the year and now will drive product margin expansion which will allow us to drive price even lower and brand awareness even further.

Okay. Thank you.

Thanks, John.

Our next question is from Dan Binder with Jefferies. Please proceed with your question.

Thanks and congrats on a good quarter.

Thanks, Dan.

I was wondering if you could maybe just go down a layer on the guidance and tell us how your outlook for the back half may have or may not have changed and what you’re building in specifically for Hurricane Harvey?

Sure. Dan, this is Judd. So what we’re pleased with is we exited the second quarter with a lot of momentum. And when you look at areas that were not impacted, that momentum continued. Obviously, we were impacted in the seven stores. We know that stores were closed for in some cases more than a week. They’re all back up and operating as expected. We see the headwind related to that in those impacted markets to be modest overall. We do get some benefits from our low-priced inventory that will be a tailwind. So overall we’re pleased. To reiterate guidance for the full year, especially when you consider we made the deliberate decision to increase our investment in direct sourcing which is about $0.02, we have higher incentive compensation which is a result of the team actually driving higher comp store sales. We do anticipate that Harvey will have an impact mostly driven to the two new stores that were slated to open next month and we don’t know exactly when those are going to open, as we highlighted in our prepared remarks. And we also have about $0.01 related to higher interest expense. That said, we had a tremendous amount of momentum in the first half of the year and we feel really good about being positioned for the second half of the year overall.

And with regard to Harvey, there’s a lot of damage and flooding that we’re all aware of. I would think that some of your stores would benefit from recovery efforts and just curious if you could comment on what your experience has been in prior storm recovery periods and what you might expect on that front?

Dan, on Hurricane Harvey part, I would tell you I want to really applaud our team for the preparation that they put in for the stores to prepare them. We had all of our stores prepared to be watertight. We actually had facilities and store leaders actually closeout the stores, put everything in place in front of the doors and anywhere else where water could come in. They put in multiple layers of corrugated boxes and so on just to absorb any water that would come in. We actually placed people, facilities reps from outside the area in Houston during this time to check on the store so that the Houston employees could focus on themselves and their family and they were able to do that. Our stores – because of our maintenance efforts beforehand, were watertight. We had minimal damage at all and any of the stores to not only the buildings but also to our product in the store. So we have opened within a week of that terrible disaster. So I’m just grateful for our team’s efforts. I think that shows you the excellence that our team can perform in times of distress. And honestly we’re working on the new construction sites and see what we can do, but we told our contractors to first make sure they focus first on their families and take care of their needs and then come to the construction site when they can. But I would tell you for us to get bounced back that quickly were the seven stores I was thrilled with and that’s kind of a hats off to our team. In terms of how it affects us --

Yes, I think we highlighted for the third quarter it’s going to have a headwind from a comp perspective but we’re still going to deliver our 15th consecutive quarter of positive comps. And while doing that, we expect to deliver pro forma adjusted net income of 35% to 45% overall. So we feel very good about our momentum we had exiting the quarter and we’ll be able to navigate some of those challenges despite what we’re seeing from the impact of the storm.

Yes, and from a future standpoint, there is information out there that says from our store performance in areas where they’ve had some terrible situations like this that indeed families have to rebuild and homes have to rebuild, and they come to our store because they can afford our product more than anywhere other place. So we’ll hopefully be able to address their needs when they need that. Right now, they’re focused on more important things. But when they get to that point, we’ll be there for them and we’ll have the best prices they’ll find anywhere.

Great. Thanks.

Thanks, Dan.

Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question.

Thanks. Good afternoon. Nice quarter, guys. Lee, in your remarks you mentioned – you said the bulk of the transportation costs and I think Judd used 140 basis points that was expected and gross was down a little bit more than that this quarter. Just want to clarify if those costs – the capitalized costs are behind this completely or there’s some lingering impact going forward?

Sure, Simeon, this is Judd. They’re mostly behind us. We expected this. It was part of our annual outlook. What we thought was our over-performance from a top line perspective driven by our comps as well as our new stores pulled a little bit more of that in, in the second quarter. But as we said, full year we expect our gross profit rate to be roughly flat for the full year.

And then related to it, product margin up 30 bips year-to-date. Can you share with us – I looked back, I didn’t see it in the transcript what the margin was running Q1, just relative magnitude Q1 to Q2?

It was a little bit higher than that in Q1.

And anything other than --

One thing I will highlight to give you a little more color. We actually had high 80s in terms of net sales at full retail price. So we feel really good about the quality of our inventory as well as what the customers are seeing in terms of value.

Got it, okay. And my follow up is looking at next year’s – I was looking at next year’s consensus, it looks like it’s building in about 30 bips of EBIT margin improvement, I think 10.8 versus – or 10.5 this year. You guys are clearly the gatekeepers on the reinvestment. The business seems to be running fine. As you think about you’re going to cycle some of these transportation costs, Lee mentioned there’s going to be upward pressure on growth that you’re going to reinvest. But is there any reason why you shouldn’t get back either all this transportation costs back in the gross and then not reinvest all of that savings that you get next year? Just trying to think about how conservative the number looks for next year?

Sure. So what we’ll tell you is our growth algorithm is to drive high-teens revenue growth, lower operating income at roughly 20% and grow our net income 25%. So what you’d naturally see is some modest operating margin expansion. We haven’t provided our outlook for next fiscal year. We will later this fiscal year. But the correct framework is you should expect some modest improvement this year which we’re on track to deliver as well as given the growth algorithm some modest improvement next year.

Okay. Thanks.

Thanks, Simeon.

Our next question is from Matt Fassler with Goldman Sachs. Please proceed with your question.

Thank you so much and obviously a terrific quarter. My first question, Judd, relates to the color that you gave and the momentum continuing into Q3 and juxtaposing that with the guidance that you gave for the two year, run rates remain very high-single digits and the one-year comp to decelerate to some degree. Obviously the guidance is the guidance but you did add in some color about the performance of the business ex-Houston. Does the guidance per se and the relatively modest bump in the full year comp number relative to your second quarter performance and your exit rate from the second quarter reflect some sales setback from the storm, or is it conservative in the context of the commentary that you just offered about the exit rate from Q2 and the start of Q3?

Sure. Matt, this is Judd. So what we’ll tell you if we didn’t have the storm, it would have been a little bit better than what we provided. We tried to estimate – obviously we can estimate when the stores are closed and the lost sales during that period. We also assume that customers would actually come back to our stores but it would take a little bit of time, because they’re focused on making sure their family is safe, getting the necessities back, repairing their home and eventually they’ll come back and redecorate. And as we highlighted, we think we’re very well positioned given we have extremely high brand awareness relatively speaking in Houston. Stores are over 10 years old and we’re well positioned. Our comp outlook for the back half incorporates the days we were closed as well as the assumption that the stores won’t ramp up in Houston as quickly, because that’s typically what happened. And what we would say to be balanced is weather tends to even itself out over time and we expect that. It just may not be this fiscal year. We’re okay with that because we know that we have a great value proposition and customers can go into our stores and get products at everyday low prices and we have a great relationship with customers, especially in that market. So we feel like we’re well positioned next year to capture some of that benefit back.

Anyway to quantify the discrete impact to closings and the initial recovery period would have on the Q3 comp for the full year comp [indiscernible]?

We will provide that once we see what that ramp is. We know that it’s more than 100 basis points roughly, we know that. We just don’t know the magnitude completely at this point. A lot of it depends on that ramp but we’ll provide more color on that when we report our third quarter results.

And that’s 100 basis points for the quarter, Judd?

Right.

And then my follow-up question relates to inventories. So you talked about why the inventory was up. It was actually the smallest inventory increase really since I guess a bit more than a year ago. The inventory grew last time I had modeled and it seems like – and that was really before the compare for inventory really spiked which was in Q4. So can you talk about how your inventory compared to plan? Obviously, you had strong sell-through which would help you in terms of the percent increase or help moderate that percent increase. How did inventory compare at your plan and to your expectations and what kind of growth rate would you expect to see over the remainder of the year?

Sure. So overall we highlighted that inventory increased 28% primarily driven by an 18% increase in new stores. Inventory was actually less from a dollar amount than plan than what we expected. And that was really driven by an outperformance in our comp store as well as outperformance in our new stores, which we’re very pleased with. The other component I would tell you is the capitalized freight that was on our balance sheet, some of that pulled forward into the second quarter because we actually turned that inventory a little bit faster than what we expected. Now when we get to the third quarter, we expect a gross profit rate headwind related to sale leaseback transaction that we expect and then some modest turn of the inventory on the freight related to that inventory we brought in the third quarter of last year. But the vast majority of it is behind us.

Great. Thank you so much, guys.

Thanks, Matt.

Our next question is from Brad Thomas with KeyBanc Capital Markets. Please proceed with your question.

Good afternoon. Let me add my congratulations as well. Judd, I just wanted to follow up about – and Lee if you want to chime in about your thoughts for comps for the fourth quarter. If we back into it and I know it’s a little bit simplistic but if we back into it, I think it implies a flat to maybe even a down comp. Obviously you have a tremendous potential to keep bringing new customers and growing your business. How are you thinking about same-store sales for the fourth quarter?

Sure. So overall we provided you with the back half of comp forecast which was 1.5% to 2%. We’d expect that Q3 would be a little bit higher than Q4 given that the comparison for Q3 are against the 4.2 and Q4 is against 7.1. That said, we are very focused on making sure from a Q4 perspective we continue to invest in our merchandising assortment and we have a differentiated assortment to continue to build on those comps. We have some early reads on the holiday already and we feel very, very pleased with our early reads. Customers – it’s resonating with our assortment and she’s buying some product earlier which has historically been indicative of what we can expect for the fourth quarter. But to be clear, we don’t expect the fourth quarter to be negative comps. We expect it to be more challenging given the 7.1 comp and we have to be balanced. Last year we had a tailwind for weather. We can’t assume that we’re going to have a tailwind for weather overall, but we feel very good about our assortment. Our stores are ready and we think we’re well positioned given a lot of the value proposition type things; credit card and royalty program that are actually being launched right now.

Very helpful and that’s encouraging to hear about the early read on holiday. And then just last from me on direct sourcing. As you all continue to make investments, could you just give us your latest thoughts on how quickly we might be able to see an impact from them and see these products in your stores? And what kind of savings you might be able to recognize from this program?

Sure, Brad. I’ll just give you an overview of the direct sourcing effort. You know that we mentioned that we’re using outside third party to help us scope the opportunity and size the price essentially and put together what those opportunities were in waves and those waves were focused first around first wave was commodity-based, easy, no real design complexity to them and go directly to factories. We’ve been able to work on wave one and now wave two and three can start thereafter. We’ve also hired a Head of Direct Sourcing. So David Heartquist has joined our company. He ran a direct sourcing initiative for Michaels before that. He was VP of Global Sourcing at Walmart. So we’re thrilled to have David now lead the effort as the leader inside of our company and he’s reporting to Alissa Ahlman, the Chief Merchant and Peter Corsa who’s here today with us, the Chief Operating Officer, to ensure that those outcomes happen. And he’s in charge of hiring and building his team. So we’re gearing up. In the meantime we’ve had a third party help us with that who’s been living with us to do the work. So we’ve had an onsite team and now it’s going to convert to our own team and they’re transitioning nicely already. But I’m really pleased with the framework and the progress so far and Judd can give you the details on some of that.

Sure. So direct sourcing we expect that we’ll get this year it’s about a $0.02 drag from an EPS perspective and that’s just part of our reinvestment. But it’s going to position us to realize some benefits and recognize some benefits beginning next fiscal year, get a tail at the end of this fiscal year but most of it is going to come next fiscal year. And as a result of that what we’re doing at this point is making sure that we have the benefits coming in that we can focus on making sure our prices are the best, improving the quality and improving our brand awareness. Over time we think that we’ll have multiple waves of direct sourcing that will yield benefits over several years. This year was about getting wave one launched. Next year will be focused on wave two. And we’re really, really excited about the opportunities we have in front of us.

Very helpful. Thanks again.

Thanks, Brad.

Thanks, Brad.

Our next question is from Curtis Nagle with Bank of America/Merrill Lynch. Please proceed with your question.

Good afternoon and thanks for taking my question. Just a very quick one on free cash flow. Wondering if you guys could provide me an outlook on what you’re expecting, whether you might be a little breakeven or maybe even be slightly positive, or do you think it will perhaps be more in I guess slightly negative range this year.

Sure. What we would tell you is we gave you a few components. Number one, we gave you kind of what we expect from net CapEx. Nothing’s really changed related to that and we’re on track to do 100 million in sale leaseback proceeds. This fiscal year with 62 million actually going to occur over the next couple of weeks and we expect to generate a significant amount of free cash flow from operations or cash flow from operations. That said, we will have – when you look at from a free cash flow perspective, it will be a drag overall so we expect that our net CapEx will be in the $110 million to $130 million range after that 100 million in sale leasebacks.

Okay, understood. Thank you very much.

Thanks, Curtis.

Our next question is from David Magee with SunTrust. Please proceed with your question.

Hi, everybody; nice quarter.

Thanks, David.

Thanks, David.

A couple of questions. One is just given the strength, Lee, in the overall environment that you referenced for July in terms of home décor, are you seeing any lessening of the promotional environment around you as you go into the second half?

Yes, I would tell you that for us we’re not changing our approach which has continued to drive prices down which may not be helping the environment because we are seeing heavy promotions that continues to be what we’re seeing out there. We’ve put our prices out on the Internet which allows everyone to see the prices that we offer which makes people then have to react as such. So there’s a lot of messages out there. There’s a lot of sales that are always – we all get those emails as well as see those sales campaigns. We like where we are. We’re well suited to compete. We’ve got strength across our entire business. I mentioned that our second quarter we had comp store increases across all of our departments and categories. So we’re seeing that our lowest prices continues to drive great outcomes for us and value clearly is winning in the industry, us and other value players are clearly having nice comps out there. So I like where we are in the marketplace.

Thank you for that. And secondly with regard to the marketing and the investment that you’re making year-to-year, what’s working the best right now in terms of the various initiatives on the marketing side?

Yes, I would tell you there’s a couple of things and this is going to be a multiyear effort. We’re learning a lot in marketing. I’m thrilled with Ashley Sheetz, our new CMO and her performance and her approach. She’s a strategic business person looking at how to drive and create new brand awareness to a very small and emerging brand. What we’ve done is for this year we added TV into our mix. We haven’t done a national TV campaign and we bought it on a spot basis, so we bought it for the markets where we have stores. We’re able to significantly increase the number of stores in markets that we’re covering. TV will run a third of the year. We’ve posted. We’ve made sure that we’ve got the right messaging across that. We’ve got national broadcasters. I would say we’ve also significantly increased digital spending which is – our biggest piece of our spend is in digital, so think about social and digital spending. Also we do have radio, billboards. We did a real big back to campus effort which is a grassroots effort to work with students and marketing partners in those markets where our customers live near store and then go to a school near a store. And the last part of our mix was the grand opening. We continue to focus on grand opening which has actually a direct mail campaign. And then we also have a new mover program where we get the information of people that are moving. We send them an offer to come to our stores. With all of that said, we then do a lot of analyses around the performance of that marketing, a whole lot of rigor. We look at pre and post. So where we spend money, we have other markets where we don’t spend any money, so we can compare the performance before and after and versus controlled. So pre, post, net of control. We look at all measures; traffic, conversion, sales lift, unique site visits as well. We look at our media performance and so on. We’re even doing a test with Google where we can see who actually sees and served up a Google ad and then we can see that they come into our store and we can see the conversion rate of that Google test. So we like being a part of that beta test as well. So we’re going to continue to learn from this, get better and better at it. But as I mentioned in my prepared remarks, we like the outcomes, we like the progress we’re seeing, we love the positive response to it and we will invest again. And because of the direct sourcing initiative and our other efforts to compete in an efficient and effective business, we’ll continue to double down our marketing and spending in that and we feel like it’s going to prove very fruitful for us.

Great. Thanks, Lee, and best of luck here.

Thanks, David.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to management for closing remarks.

Great. Thanks, Hector. Thank you again all of you for joining us today. We’re excited about the growth ahead of us and look forward to talking to you in the upcoming days and weeks.

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