Bethany Perkins - IR Lee Bird - Chairman, CEO and President Peter Corsa - COO Judd Nystrom - CFO

Dan Binder - Jefferies John Heinbockel - Guggenheim Securities Matt McClintock - Barclays Matt Fassler - Goldman Sachs Daniel Hofkin - William Blair and Company Zach Fadem - Wells Fargo Simeon Gutman - Morgan Stanley Curtis Nagle - Bank of America Merrill Lynch

Greetings, and welcome to the At Home First Quarter Fiscal 2019 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, Bethany Perkins, Director of IR.

Thank you, Jeremy. Good afternoon everyone and thank you for joining us today for At Home's first quarter fiscal 2019 earnings results conference call. Speaking today are Chairman, Chief Executive Officer and President, Lee Bird; Chief Operating Officer, Peter Corsa; and Chief Financial Officer, Judd Nystrom. After the team has 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 year 2019 and our long-term growth targets, as well as statements about the markets in which we operate, expected new store openings, real estate strategy, 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 obligations to update any forward-looking statements. 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 afternoon everyone. And thank you for joining us to discuss our results for the first quarter of fiscal 2019. I'm pleased to announce that we achieved net sales growth of 21%, representing our 16th consecutive quarter of over 20% net sales growth. Despite weather-related headwinds we drove yet another positive comp store sales increase, which we have done now for 17 straight quarters. For the first quarter we delivered 0.9% comp, which represents a 6.7% increase on a two year basis. As with many retailers the weather curtailed our Q1 comp performance in colder climate areas in outdoor, patio and garden categories, resulting in comps falling short of our quarterly expectations. In spite of the unexpected weather impact our confidence has not wavered. Across our footprint, our indoor home furnishing and decor categories showed strength. In warm weather markets our stores delivered a 4% comp-store sales increase during the quarter. You have heard me say before the weather evens itself out over the year and momentum returned to both our cold market and our outdoor product as the weather normalized. Beyond the top line we continued to invest in our strategic priorities while delivering a 63% increase in pro forma adjusted EPS to $0.31. We are excited about the many opportunities in our business to better serve our customers in both new and existing markets with our fresh price value priced home decor assortments. Speaking of our customer we continue to focus on making them our top priority, which is the basis of our growing loyalty and credit card programs. Enrollment in both Insider Perks and the credit card program has far exceeded our expectations since launching just nine months ago. On our last earnings call I shared with you at the end of the fiscal 2018 we already had 1 million Insider Perks members. Today I'm pleased to share with you we now have enrolled 2 million members. Both our Insider Perks members and our credit card customers are spending more perks than nonmembers. We are already leveraging Insider with each of these programs to improve our customer communication. Our efforts are in their entity but we are very pleased with the results we are seeing thus far. One of the best ways to drive positive customer interactions is by having a compelling in-stock assortment at attractive price points. In the first quarter we continue to focus on using our space to our advantage to carry the right aesthetic for every customer, while also leaning into the most popular trends. In our outdoor category we covered all the core styles more thoroughly than ever before. On a broader basis contemporary and modern farmhouse looks once again showed above planned strength, especially in [indiscernible] and the exclusive Shanty 2 Chic line that we launched just in the fourth quarter last year. In addition to having a trend inspired assortment we know that continuously introducing new products is one of the differentiating strengths of our business that customers love. We add more than 20,000 new items to our offering every year and are focused on driving substantial newness every quarter. As results of our initiatives in this area new items drove even more of our Q1 sales than last year. Overall the breadth, variety and freshness of our assortment gives us confidence in our fiscal 2019 top line growth. Our new store productivity was another highlight for Q1. First year performance continues to increase, illustrating the proven portability of our real estate strategy. We kicked off the first quarter with a significant milestone opening our 150th store and expanded to a variety of new markets. In the Northeast we opened stores in Rochester, New York and Allentown Pennsylvania. In the Midwest we entered Lafayette, Indiana and Dayton, Ohio and we increased our Southern presence with a new store in Augusta, Georgia. We also densified existing markets in Detroit, Chicago, and Orlando. Finally, our fiscal 2018 class of new stores continued to exceed our expectations in their first quarter. In terms of our fiscal 2019 class three quarters of this year's new stores are now open or under construction. We have approved half of our fiscal 2020 new store class. As I mentioned last quarter, our pipeline has never been deeper. And we continue to identify promising first and second generation new store sites. To support this exciting growth we're preparing to open our second distribution center in fiscal 2020, which Peter will touch on next on today's call. In addition to expanding our footprint, broadening customer awareness of the At Home brand is one of our biggest strategic priorities. By raising our targeted marketing spend to 3% of sales this year we are supporting a more comprehensive approach in our priority markets. Our ongoing analysis of these markets which contribute more than 70% of our sales volume gives us confidence that our investments are paying off. In fact our unaided brand awareness is already ahead of our fiscal 2019 full year internal part. In Q1 our spring marketing mix combined both traditional and digital media. Our customer outreach included direct mail catalog, digital radio, outdoor billboards and Google search advertising. Our planned fiscal 2019 social media spend is nearly 7 times last year's budget and has already generated more than 50 million brand impressions in the first quarter alone. In addition to this support many of our key markets are benefiting from the spring TV campaign, which focuses on At Home's ability to serve the home decor business with endless possibility for any budget. We're significantly amplifying our TV coverage from last year while also enhancing our ability to differentiate customer messaging across media channels. Our website traffic has increased more than 50% and our email outreach has engaged 70% more customers year-over-year. Overall we're very pleased with the outcomes we're seeing and we will continue to expand our marketing capabilities in order to better fuel our business. Next I'd like to talk about our team members who remain an instrumental part of driving our business forward. On the fourth quarter call I laid out our initiatives over the past five years from incentive compensation plan to our family focused store closings on Thanksgiving, Christmas and Easter, that established At Home as a great place to work and grow. We're proud of the employee focused culture that can grow with us on our journey towards 600 plus store potential. The initiatives like our Store Director Plus program will enable to recognize high-performing leaders in our stores, enable them to develop by training at our new stores on the standard processes. Our Store Director and Field Training programs grow more robust every year. As a testament to the success of these programs, first year sales and profitability in our new stores have strengthened each year as well. As we grow, we generate more opportunities for field leadership to take on newly created district and regional manager roles as well. By training and cultivating new team members now we're developing our internal talent we need to continue to grow and scale our business. With that I'd like turn it over to Peter Corsa, our Chief Operating Officer to talk about our operational progress. Peter?

Thank you, Lee. Good afternoon everyone. Scaling our business while enabling a great self-help shopping experience for our customers is a top priority of ours. Operationally, we focused on conversions by using new merchandising processes and signage to help customers navigate the store. Our end-caps and [dim-lights] continue to highlight decorating trends and unbeatable value to drive results year-over-year. We also applied insights from our successful Christmas Tree signage to improve our spring patio and garden presentation for customers. Signage improvements in several other categories have made it easier for our customers to shop large items while at the same time keeping our low labor model intact. Behind the scenes, we continue to proactively invest in systems, processes and procedures to ensure solid execution of our growth plans. One of those investments as we mentioned is our second distribution center, opening next year. We have chosen an ideal second generation property in Pennsylvania and we plan to implement the same proven cross-dock capabilities and automation currently used in our Texas-based distribution center. We are working with our third-party transportation and product partners to coordinate purchase orders between Texas and Pennsylvania in a way that maximizes container utilization and minimizes transportation and associated costs. We are relentless at identifying cost savings and efficiencies to invest in our growth, while maintaining our focus on profitability. At the end of Q1, we implemented floor loading at our distribution center. We have since loaded out to approximately 90 stores and we will take a measured approach as we expand it to the remaining fleet. When we eliminate the use of pallets for moving product from our DC to our stores we significantly increased the availability of capacity of each trailer. As a result, we can reduce the number of trailer trips plan store labor more efficiently and get product to the sales floor faster. Additionally, floor loading is a stepping stone to enhancing our inventory visibility which over time will enable customers on our website to easily see what's in the store. We've also worked over the past year to streamline receipt volume at our current distribution center during peak times, which generates labor planning benefits as well. Finally, direct sourcing is a key initiative that we expect to yield cost savings over time as we expand the program and diversify our product partner base. We are already realizing product cost benefits from both new and current product partners, and we expect to deliver gross margin expansion this year. Ultimately, continuous process improvements like direct sourcing, [receipt moving] and floor loading are margin driving tools that help us mitigate costs for the second distribution center and improve our value proposition through lower prices and better quality. With that, I'd like to turn the call over to Judd, who will walk through our financial performance and discuss our outlook for the remainder of fiscal 2019. Judd?

Thank you Peter. Good afternoon everyone. Before I begin my prepared remarks I want to remind you that additional information, including our outlook for the second quarter and fiscal year 2019 is available in our earnings release on the Investor Relations page of our website. We are pleased to deliver our 17th consecutive quarter of positive comparable store sales despite April's challenging weather that has been well communicated by other retailers. Our indoor and everyday product categories delivered a double-digit increase on a two-year basis. Extremely strong new store productivity during our first quarter demonstrated that our highly portable concept continues to resonate in both new and existing markets. Overall, we delivered our 16th consecutive quarter of net sales growth above 20%. From a profitability standpoint we are also very pleased to deliver 68% growth in pro forma adjusted net income and $0.31 of pro forma adjusted EPS versus $0.19 in the same quarter last year. As Lee highlighted the abnormally cold and wet spring weather proved to be a headwind for us. The comp spread between our warm and cold markets in Q1 was approximately 900 basis points, which was more than double of what we observed in Q1 last year. The spread between those markets was magnified for our outdoor and our seasonal categories during the first quarter. That said, we believe weather tends to even itself out over 12 months and we feel very confident in the strength of our underlying business. Our first quarter gross margin was 33.3%. We expected the increased occupancy costs from our sale-leaseback transactions over the past 12 months would be a modest margin headwind in Q1 but we would achieve gross margin expansion for the full year. Snow removal expenses were 5 times larger year-over-year, resulting in above planned occupancy costs, and approximately 20 basis points of the 60 basis points gross margin decrease in Q1. However, due to product margin tailwinds, we are already driving from our direct sourcing initiative we continue to expect gross margin expansion for the full year of fiscal 2019. Consistent with our long-term philosophy we plan to reinvest the majority of our gross margin improvement this year in lower prices, store labor, new stores and a second distribution center to support our growth. Aside from the new DC, our biggest investment this year will be ramping up our marketing spend from 2.7% to 3% of net sales to support our substantial brand awareness opportunity. This incremental spend is more heavily weighted to the first half of fiscal 2019 to build our brand awareness. In the first quarter alone, the increased investment in marketing expense year-over-year drove substantially all of our 110 basis point of delevered and adjusted operating margin. Weather driven new store delays generated preopening expense favorability, which partially offset our Q1 marketing investment. Q1 interest expense of $5.8 million increased versus last year due to a combination of higher borrowings to support our growth as well as an increase in interest rates over the past 12 months. I want to emphasize that despite a rising interest rate environment our credit profile is actually improving. In fact Standard & Poor's upgraded our corporate family rating to a B-plus, our term loan rating to investment grade and our recovery rating to a 2 during the quarter as a result of our continued strong performance, as well as the continued decrease in our sponsor ownership. Our first quarter tax rate decreased significantly in fiscal 2019 due in part to the approval of the Tax Act of December 2017, which reduced Federal Statutory Income Tax rates. Our underlying effective tax rate was 23% but the tax benefit from stock option exercise further reduced our rate to 0.3% compared to 38.9% in Q1 last year. Our reported rate was significantly better than the 15.5% rate we provided in our first quarter outlook at the end of March, which reflected approximately $1.5 million in stock option exercise benefits or $0.03 of incremental pro forma adjusted EPS. We ended the first quarter with $4.3 million of pro forma option benefit or $0.07 of pro forma adjusted EPS, which was $0.04 better than we expected. As a reminder, our pro forma results and outlook excludes certain items that we do not consider to be representative of our ongoing performance, including both the expenses and the tax benefits associated with options granted at our IPO and the CEO equity grant approved in the second quarter of fiscal 2019, which is disclosed in our 10-Q filed earlier today. As a new public company, our stock option history and therefore our history of estimating the related proceeds is relatively short. We will continue to refine our methodology as we move through the year but we currently estimate that the tax -- full year tax benefit from stock option award exercises will be $8 million contributing to a fiscal 2019 effective tax rate of 14.5%. Due to our expectation for even lower tax rate this year we are increasing our outlook for full year pro forma adjusted EPS to a $1.25 to $1.30 per share assuming 66 million weighted average diluted shares outstanding. At the midpoint of our outlook fiscal 2019 would represent our third consecutive year of greater than 40% pro forma earnings growth. Fiscal 2019 net sales and comparable store sales guidance remains unchanged. We expect that the strength of our new and existing stores in the balance of the year, coupled with gross margin expansion from direct sourcing benefits will offset the impact to comp store and occupancy costs from the adverse Q1 weather I described earlier. Turning to the second quarter. We plan to open 11 new stores, including one relocation in addition to the nine new stores and two relocations for Q1. As we mentioned, our new stores continue to get stronger every year, and are the primary driver of our 17th consecutive quarters of more than 20% top line growth. For Q2 we expect net sales of $284 million to $287 million which implies growth of 22% to 24% over Q2 fiscal 2018. Our comp store sales outlook, up 2.5% to 3% is on top of a 7.8% increase in comp store sales in the second quarter last year, resulting in a projected two year comp of 10.3% to 10.8%. We expect to generate meaningful adjusted operating margin improvement in the second quarter, driven by significant gross margin expansion. As Peter mentioned, our direct sourcing program is driving product margin benefits. We are also lapping 140 basis point gross margin decline in Q2 of last year, which was driven by the distribution costs from our fiscal 2017 strategic inventory investment. We are committed to reinvesting a portion of this quarter's gross margin expansion into store labor and our continued effort to drive brand awareness. We also expect the timing of preopening expenses in the second quarter, to partially offset improvements in gross margin. We estimate interest expense of $6 million and a 12.5% effective tax rate which incorporates a 23% underlying tax rate plus $2.7 million of anticipated tax benefits as a result of stock option exercise. All-in we expect pro forma adjusted net income growth of 88% to 97% and pro forma adjusted EPS of $0.32 to $0.33. Consistent with our full year guidance our second quarter pro forma outlook excludes the one-time CEO equity compensation expense as well as any tax benefits related to options granted at the IPO. In closing I would like to thank our team members for their continued focus on our customers and our strategic initiatives. Our investments in new stores, marketing and operational processes are driving great financial outcomes which is thanks to all of our talented and hardworking teams in the field and at the home office. We continue to have many great opportunities to propel our business forward for the long-term benefit as well as a benefit to our customers and our shareholders. I will now turn the call back to Lee for his final remarks.

Thanks, Judd. We are excited about the opportunities in our business as we look to the second quarter and beyond. While we faced some weather-related headwinds in the first quarter we feel great about how our business responded in May. Our industry is vibrant and growing. We know that our concept is resonating with home decor lovers in both new and existing markets. Our customers continue to embrace our broad assortments and everyday low prices, enabling us to take share in the expanding marketplace. Operator, please open it -- up the line for questions.

At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Dan Binder from Jefferies. Please proceed with your question.

I was wondering if you could just comment a little bit about traffic versus ticket and then in terms of the category reinvention, it sounds like that's continued to work well for you. I think that's comped around 10% in the past, just curious how that looked this quarter and what lies ahead?

Dan this is Judd I'll take the first one and then turn it over to Lee on the reinventions. So, as you know we don't break out by quarter what the comp components are. This quarter had some volatilities that we described. I'd like to point out that we look at the warm markets we actually did a plus 4, we're pleased with that. We're focused on driving all of the organic metrics and what we've faced, the abnormal unexpected rather caused us to deliver comps below our expectations when we look at kind of the composition of it. As I highlighted the warm markets comped four, and we like the composition of the organic metrics in those markets. New stores outperformed and when you look at despite the weather, indoor and everyday categories were very, very strong overall for us ahead of what we expected. So outside of that I'll turn it over to Lee on the reinventions.

Dan on reinventions you know that that's a strategy we've been implementing for over five years now, it continues to allow us to have newness in the stores. This year's reinventions are about the same percent of the assortment as we've had over time. We always assumed its about 15% of the assortment. The first part of the year included patio cushions which we are really pleased with the assortment of the whole lot of newness that we have put in the lot of fashion assortment. We improved the quality of our cushions as well. So we are pleased with our expanded premium and larger sizes, more fashion prints. We also launched an expanded assortment of dining sets and we are pleased with the outcome of that. In the back half of the year you will see some more on rugs and bath as well as wall art in the back half. So we are looking forward to continuing to see the implementation of our reinventions. But I'd also say one other thing that I mentioned in my prepared remarks was outside of reinventions we wanted the improve the amount of newness we had in the store. So not just reinventions but the assortment itself in areas that weren't being reinvented. So we increased the newness levels to the highest that we have seen and we saw great outcomes from that. And that allows us to continue to differentiate our assortment versus the competition.

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

Two thing guys, let me start with the what's the timeframe for store level inventory availability to customers? When will that be out there either partially or completely rolled out?

John this is Lee. Our intention is to test that in the back half of this year. For that we need the floor loadings to be able to have, the inventory be standing at the store levels so then we know exactly when it's in the store versus when it's in transit. At that point because we have the demand ware platform, we have the ability to plug in the inventory. We are doing all the testing now and that we will test it in the back half of the year. We hope at that point that provides customers even more incentive and confidence to go to the store, because there is enough inventory at the store or they may go to a different store locally that will have more of the items they need to that one particular shop.

And I know there is a prerequisite for both of those but you have also been sort of not convinced right the demand is yet there to do that. So is both still kind of out there sort of an undefined time for piloting that?

We have always said we are going to be looking at e-commerce our way that's been our strategy. And what I'd say is our primary focus is making sure that we are meeting the needs of the customer. We continue to do research with the customer as we have mentioned before. They want the largest assortment of home decor. They want the lowest prices. They want availability now and they want to see touch and feel. We have that in our store today. In fact the newness factor has increased so that we continue to have the freshest assortment out there. That seems to be the biggest opportunity. It's still not even a top five requested items in our customer research and our customer care call line. Not even, when the top five requested is basically e-commerce capability. So we are just trying to address the top four areas. But the things that they have mentioned is I wish I knew how much inventory was at my local store and can they afford it or I want to make sure I go to the right store for what I'm looking for if I need multiples. So we keep addressing what their issues are, and just make inventory visibility. And it does provide the ability for us to go further if we want to but right now our customers aren't asking for it. They still love assortments that we have today in the store and as we increase the newness I think it's going to improve our competitiveness even better than now.

And then just maybe lastly for Peter when you talk about investing in labor maybe parse that out between hours and wage rates? Is it more wage rates than hours? Or maybe 50-50 or what?

Well, so John -- hi, John first. What we love about our model is that it affords us the opportunity to put fixed cost leverage back into the business area, and that really is through a combination of hours or rate or both. So, we have generated those efficiencies that enabled us to reallocate those hours where it benefits our business and our customers the most.

And I would just like to fill on that, and just to beat your point, sometimes it is rate, our average hourly rate is over $12 now. We don't broadcast that but I just did it's over $12, and we have a model that we can afford to go further in different markets, just to be competitive with the market. In other cases it may not necessarily be rate, but it is cash comp or we had the bonus for our employees and the majority of our hourly employees received a bonus last year and that was on the hourly full time basis. They received over $1,100. And that was just new versus few years ago where they received no bonus. So we'll continue to invest against that. That allows us to have a churn over rate continue to drop year-over-year and now it's approximately a third of what it was when we started.

Our next question comes from the line of Matt McClintock from Barclays. Please proceed with your question.

I guess I have two questions, the first one just on whether 400 -- 4% increase in warm weather locations, the 900 basis point negative impact. I guess that means you're kind of classifying roughly two-thirds of your stores as warm weather and one-third as cold weather. I just wanted to understand, was there any negative impact from weather even in your warmer weather regions, meaning could that 4% been a little bit higher if there was better weather overall? That's my first question.

The short answer on it is yes when you look at our performance in warm weather markets and then you look at it by category the everyday actually did even better in those warm weather markets. If you look at outdoor meaning patio and garden those were below the 4%. So the short answer on it is yes, they would've done better adjusting for the mix of the business. I am sorry, you were right around the [allocations] roughly in terms of warm weather markets to the total fleet.

And then my follow-up question is, kind of related you had two initiatives I think that would have normally been pretty helpful. This spring to your patio business, one you're adding labor for patio and two, you had the look book out. Could you kind of -- I know it's going to be tough, because you had poor weather at the same time, but could you judge the effectiveness of both of those initiatives this spring, and is there anything that may be you pull back on or maybe that you will do differently next time? Thanks.

I would tell you the first thing on the look book was the items that were highlighted in the look book did very well. So we know that people saw it, they liked it. It showed a breadth of assortment that we haven't been able to display in other mediums other than online. And so it allowed us to show a breadth of color, showed -- allowed us to show price, and those items also we [bought] behind it and those did well. So we're really pleased with that. And we're pleased with our digital investments as well on marketing and I mentioned that the outcomes in terms of impressions as well as email opens as well as overall digital impressions. You asked about the investment in labor in patio. What I would say was we got a lot of positive feedback overall from the customers that they're receiving the help that they needed which we feel whole lot better about when we asked them what are they looking for. They would like some help with some heavier item. The signage was a big plus for us because we made it easier for them to find the item on the shelf from what the display item was in the center of the patio area in the patio and garden. And then you could easily find the boxes and then if they wanted help to get the boxes off the shelf and to their car we were more than happy to do that. And also help them understand the benefit of different product attributes, because these were trained employees in the patio area. We found that it was helpful overall not just the sales because obviously the weather was -- it did put a damper on some of that in some markets. But overall the customer experience was improved which is what we are also focused on.

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

My first question relates to the sales trajectory. So you held your sales for the year despite the first quarter coming in slightly below your original expectations for the reasons that you outlined. Is it your sense that there was some recapture of some of the seasonal business that you didn't do in Q1? In other words if some of that business deferred till later in the year and is that one of the factors embedded in the guidance?

Yes, Matt this is Judd. So we first start with weather evens itself out, just like Q4 was a tailwind, Q1 is the headwind. When you look at it over 12 months you will see puts and takes. When you look at our full-year guidance, our full-year guidance for the top line remains unchanged both from a comp and the total revenue. We do think some of that deferred demand will come back some in Q2, some in Q3. In Q2 in particular if you look at it kind of two years back we are lapping the strongest core. Last year we delivered a 7.8% positive comp store sale. It was the highest comp in 11 quarters. Yet when we are now nearly 50% of the way through the quarter overall, what we saw with some of that demand that wasn't there in April it showed up in May. And when you look at our outlook for this quarter we are actually going to be sequentially accelerating our comps materially on a two-year basis now to be 10.3% on the low-end to 10.8% on the high end which is above our 9% to 10% for the full year. So you can see some of that recapture is going to happen in Q2, not all of it, some of it's going to happen in Q3. But we have been running this business for five and half years, our Q2 outlook for two years back is strong, and for the full year remains intact. So we know that again, weather will even itself up.

I will at least add one more thing on that too, because Judd was talking about comps which is obviously one part of the equation but we have also held our full year sales. We lost store weeks because of that weather. Stores that opened up later that we had -- obviously had that benefit of lower store opening costs in the first quarter unfortunately because they had to be pushed out. We lost store weeks, those store weeks for the year and we are still in wholesale. That would tell you the strength of our new store openings and our non-comp stores continue to drive great outcomes and higher than our expectations.

My second question relates to the new DC that you are currently planning. If you think past the stage of startup and implementation, and you think operationally about regional and store specific merchandising speed to market. Are there kind of operating benefits that you might see from having a second facility? And at what point do you think those start to kick in for you?

Sure I'll take the operating benefits first. So obviously that by opening a new DC it gives a significant both inbound and outbound to be closer to the stores themselves, as well as utilization and capacity too. So gives us the ability -- we're working right now on floor loading too which we mentioned. We have 90 stores that are rolled out, we'll continue to do that throughout the organization, for utilization of our containers. This will help us to open a second DC as well as to kind of close down and eliminate some of the stem miles that we're doing right now from having Plano go all the way to the East Coast.

And one other thing from a customer standpoint. Some of those stores are pretty far away from Dallas, so the stores that are farther away are almost a week and half to two weeks later in the newness than the stores nearby. We want the customer to have the newest and freshest assortment available. This allows them to have that. So if you are in the stores in the Northeast, you are still only day and half or two days away from newness versus 10 days away.

And then Judd just with the tax rates, we're moving around, as we think about modeling Q3 and Q4 for the tax rate, is there a number that you would have us use at this early stage?

So, you've Q1 actual, we gave you Q1 projected and then what you should assume for Q3 and Q4 is 23% overall for the quarter. That's really underlying company rate. There's going to be -- when you look at it overall -- we will update you if there is anything around stock comp assumptions. Q3 I think there are some modest benefits associated with it. So you might be a little bit below 23% in Q3, but overall I -- hopefully that helps you a little bit.

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

Just a couple of questions. First on real estate and you may have addressed this a little bit earlier but anything that you're seeing at the margin in terms of amounts of supply, the quality of it, location in terms of market size and then mix between sort of build, acquire, and lease right off the bat, that's my first question?

Well I would say first and foremost as I mentioned earlier our pipeline has never been deeper, that's how you have got more to look at, which we are thrilled with. Our [executives] stand to have better quality. I would also say there continues to be not a whole lot of competition for those boxes, so that help us in the overall pricing. We're also -- what we have seen a mix in more leases than buy, so before we had planned on the third-and-third-a-third -- third and second-generation leases, the third-second generation purchases and a third round of bill, what we're seeing is there's a whole lot more leases available and people aren't willing to sell it to us. And so we're leasing them and we're still building them. But as we've found more opportunities to do second gen leases, we've pushed them off of our billed outs that's why the leases have gone down as a percentage, and now it's about 75% second gen, 25% ground up build. I would say overall -- I was on a trip business week, looking at some new locations in the Mid-Atlantic area, I would say the location quality continues to be a positive for us. Our team just got back from ICST in Las Vegas, five years ago we had explained who we are, now five years since then we've become the belle of the ball. They all want to talk to us, every developer wants to work with us, in some developments where one would say so I rather would love to have an At Home. And so we're thrilled with who wants us to be in their centers. We are now a preferred tenant. We are a known quantity that brings people to their centers and is great cotenant to others. And I'd tell you that gives us a lot of opportunity to look at great locations.

And then just my follow up question on the direct sourcing initiative and just how you see that flowing though over time, what you have learnt so far in the very early going? That would be helpful.

Dan its Judd. As we highlighted we did this work last year -- this time last year and really scoped out what's the size of the price. And as you know we accelerated investments last fiscal year to start the work, built the team, put people in place. We know that long-term this is going to be a huge driver for our company and allow us to reinvest a lot in our business to strengthen our value proposition. We exited last year with virtually nothing as a percentage of our total purchases in direct sourcing it was very small. This year it will be single-digit, low single-digit but when you look at the run rate exiting this year will be higher single digits. So the nice part is the momentum that we are going to start to pickup and what we are seeing in terms of cost reductions is going to start to accelerate. And as a result of it what you will see is purchases that we made late last year will start to hit in the second half this year. It's about a six month lag because it's over the turn of the inventory. But as you go to next year the work that we are doing now and we are doing in the second half year of the year are going to be tailwinds for us. They are going to help offset the cost of bringing on a new DC. And there is other initiatives that we are working that Peter highlighted floor loading. Floor loading will be a benefit that we will start to see at the beginning of next year because of the efforts of what we are working on now that will go with the turn of the inventory. So we feel great about both of those initiatives. We are seeing the benefits actually ahead of schedule, and it gives us a lot of confidence in our ability to continue to reinvest in our value proposition.

One other thing I'd say just about the quality of the type of product that you get through direct sourcing because you're taking people out of the process the middleman you can actually improve the newness and speed to market by being direct source as well. So that's another an inherent benefit. It helps you later on by your [depressions] of the assortment available should be then less markdowns should be better full price selling as well. So that's another competitive advantage that we wanted to go after.

Our next question comes from the line of Zach Fadem with Wells Fargo. Please proceed with your question.

Just to follow-up on both Matt's question on whether the two-thirds one-thirds math would suggest the comp impact of the adverse weather was about 150 basis points in the cold weather regions or 170 or so. But for the non-comp impact your results would suggest that new stores actually outperformed the guidance. So I'm curious if you could talk a little bit about what the new store contribution would have looked like ex the impact of weather?

New stores would have been even stronger candidly. When we look at our productivity for the quarter, it was very strong. It is -- actually our fourth consecutive quarter of 90% plus in store productivity. We saw in markets where we did -- take the colder weather market where we added stores that were impacted. They also impacted stores that were set to open in Q1 that are now opening in Q2. We feel good about the new store productivity and as you know, we measure it every year and we report out the results on it. Five plus years ago when we started at the management team we were delivering average unit volumes of 4.2 million. Fast forward to last year's [vintage] we are annualizing right now and there're 6.7 million. We've seen an increase, very significant 50% plus. The profitability of those stores back five years ago, 1.1 million, right now they're run rating and annualizing at 2.2 million, double the profitability. When we look at our new stores for FY'19 that have opened already, they're actually exceeding the pro forma, and we had higher pro formas as we expected more from these stores. So, the good news is, things like brand awareness, our operational execution, our ability to find great real estate sites, our training that we do, our hiring, taking team members and promoting them from existing stores into new markets, that is working. And we're excited about the opportunity where we're only 160 stores today on our way to 600 and the fact that not many retailers can say that for six consecutive years their average unit volume is actually increasing each year. We're proud of that.

And just on the labor front. It looks like you've done a nice job being ahead of the curve in terms of wages, versus your peers but as you start enter new and in some cases, denser markets, what are the thoughts on increasing headcount on a per store basis and do you anticipate any further uptick there, as we move throughout the year?

Well we think one of the things we love about our model is that we set it so that we've kind of looked at this impact along the way and made the changes along the way. And so we have the flexibility just cost wise within our model to be able to adjust as we move into some of the newer markets, say the Tri-State or into other parts of the country. So our processes around our lean labor model anticipate would stay the same from the headcount standpoint. We'll make strategic investments where we need to on behalf of the business and we have the flexibility to do that but we'll keep our model intact as we continue to rollout across the country.

And one thing I would add just to quantify our efforts in that space, if you look at the last four years, our operating margins were up 150 basis points. We've actually delevered wages intentionally by 40 basis points. However, when you look at the comp over that four year period, we're up over 20% when you look at it from where we started to where we are. Yes, we delevered labor intentionally and it's exactly what Peter's point was which was we're making investments and we use that intentionally not to leverage. So you'll continue to see us make investments in hours and in rates.

Our next question comes from the line of Simeon Gutman. Please proceed with your question.

In our model, we have the number of store openings relatively static over the next several years. But what happens if the square footage growth slows naturally given some of the lower [large] numbers. Just curious your thoughts on the number of stores versus the particular square footage growth and if any your thinking has changed around it?

What we say in our long-term growth algorithm is we will grow our unit count at a high teens, number. The last five years we've actually been a little higher than that, it's been 20%, and we feel good about where we've been, but we commit to high teens. What we will see overall square footage we'll continue to see that in terms of the locations we're taking, we're going to some smaller locations overall. And if you go back to where we were five years ago our average fleet was about 120,000 square feet and recently 110 has been creeping down each quarter and that's because we've been able to find locations and still drive great average unit volumes at square footage like 80,000 to 90,000 square feet. But we continue to invest in those stores and open new stores we would expect square footage to grow at a slower pace that way. But again as a reminder we focus everything on a per box basis. At the end of the day there is a certain amount of demand in the market. If you have 120,000 square foot store and 80,000 square foot store you are going to end up with the same sales and we've seen it time and time again. We've taken stores that are on the same actual street address reduced the footprint instead, key sales actually increased. So our focus is finding high-quality locations, ensuring our economic model is intact, opening the stores perfectly and delivering a great customer experience.

And then as fully stored I know this is way down the road, how many DCs are planned I don't know if you have a long-term roadmap? And I want to ask that in context, have you quantified -- I feel like there are some numbers floating around on the direct sourcing benefit and I think you mentioned that those benefits could help offset the cost of opening these DCs. So just thinking about that in relation to some of the savings from direct sourcing flowing through or just offsetting some of the expansion over time?

Simeon this is Lee and Peter will cover some of that too on the DC footprint. Overall we're going to continue to look at optimizing our business and really looking -- we've always balanced everything between transportation costs, speed to market and overall labor costs. So right now we know a second distribution center is the right thing for us to do. We will look at our footprint three years from now. Remember we have -- we are primarily a second generation real-estate store footprint too, so it's a little trickier for us to look where our footprint will be three years out, and project what that will be, based on where our storage is going to be. We look closer in and then by the way we did take a second generation box or a DC, which makes it a lot of more affordable, as well. There are available boxes and it maybe there are more available boxes in the DC network. So we always look at these three years outlook, six years out -- five to six years out in terms of need but we only look three years out in terms of the actual footprint because it's a bit dynamic for us.

On your question around direct sourcing and DC costs here is what I tell you to give you some color. We're obviously working on a lot of things that are going to be tailwinds in terms of gross profit. So Peter talked about floor loading, we talked about direct sourcing. Those will be natural tailwinds for the business and it's a result of efforts that we are focused on today. We know that we're going to have a non-linear increase in DC related costs, right, so think of another building with more rent and more people. That said when you look at it overall the number of miles we're going to drive to Pennsylvania in the Northeast through the stores it's going to lead to earlier point we're going to have newness in the store factor, we're going to have less stem miles, we're going to reduce the transportation costs, we're going to be able to bring in product in bound that's going to save time and money. And when you factor all those together we feel we have enough initiatives in place to mitigate the cost of bringing on that second DC. But we are always identifying operational improvements that we can focus on that are going to help deliver sustainable growth and allow us to reinvest back in the business.

And one thing we are really haven't shared much around that second DC, we've learned a lot around running a DC with this first one. So we've automated it. We actually use another location in the Dallas area [that tallies] and accumulate our new store inventory and then send it all to the store at once. In the new distribution center in Pennsylvania we will actually do both of those in the same building. So, we'll be a lot more efficient in our Pennsylvania facility than we are even in the Dallas facility. So when we grow, we think about how can we reduce the overall cost of operations, every time we move forward. In this case of the DC, the second gen box, is a accumulation center, and it's a cross-dock DC all in one building.

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

So just a quick one on the loyalty program, so you doubled the 2 million spend of a quarter, it sounds like it's going terrifically. Just out of curiosity do you guys know just what penetration your total customer base that might comprise and where you think that could go over time?

Like we said we're in the early innings, the nice thing is we're starting to capture on every transaction, or most transactions, the loyalty number. I would say the field is learning to do that too. So we've never had a loyalty program before. So as we've captured the loyalty number we can start to see the penetration of loyalty customers per transaction. I would say we're really only -- we only have five months in on those 1 million members and the 2 million members it's been over nine months and we obviously picked those extra 1 million up in the past three months. So, there's not an updated point to start sharing that yet, but I would say we're starting to see people return, we're starting to see what's in their basket, we're starting to then understand if we had more business by a customer we can then tailor their message going forward to what they've had in their basket by style type and preference. And we think at this point going forward we'll be more and more relevant going forward. But we do like what we're seeing. Obviously the basket for the loyalty members is modestly higher, the credit card program is much higher and it's an evolving program, that will get better over time.

And then just a follow-up for Judd. Just could you clarify I guess why the benefit from the options is staying in the operating tax rate but you're shifting out of the operating results? I guess is that something to do with what's considered one time and what's not and just any clarification on that would be very helpful?

So there's a few things moving around. Number one, was our CEO equity grant and adjusted out, it's not representative of our core operations, the way it was structured. It's focused on retention and focused on making sure that we align it with shareholder interests. In terms of the value we are going to get is solely going to be based on improvement, it's based on stock price for where the grant is and nothing -- it typically you don't have you get a certain percentage that's back getting here. In this case it's a 100% [indiscernible], so that's the logic. If you go back to our IPO grant there'll be a component as redemptions occur in the future, we're going to add back the benefit associated with that, but that's how we treated it naturally before. So, we're doing that, we're matching that one-to-one. We do and structuring it the way we did, we actually saved from a tax perspective and avoid the 162(m) that would happen in the future, so part of that's the structuring it that way to just to position us to have the least amount of tax exposure, because in future years you actually can't deduct some of that. So that was part of our consideration overall as well.

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

Great. Well, thanks again for joining us today. We are excited about the growth ahead and we look forward to talking to you in the next coming days and weeks.

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