Bethany Perkins - Investor Relations Lewis Bird - Chairman and Chief Executive Officer Peter Corsa - Chief Operating Officer Judd Nystrom - Chief Financial Officer

John Heinbockel - Guggenheim Securities Matt McClintock - Barclays Capital Matt Fassler - Goldman Sachs Jonathan Matuszewski - Jefferies Daniel Hofkin - William Blair & Company Josh Kamboj - Morgan Stanley Curtis Nagle - Bank of America Merrill Lynch

Greetings, and welcome to the At Home Second 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 second 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 for 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 opportunity 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 investor.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 second quarter of fiscal 2019. Our second quarter results once again demonstrate the momentum of our differentiated value-driven concept. We delivered net sales growth of 24%, representing our 17th consecutive quarter of 20-plus-percent net sales increases. Top line was driven by exceptional new store productivity and a 2.8% comp store sales increase, which represents a 10.6% increase on a two-year basis and a notable acceleration from our first quarter performance. However, we were under invested in seasonal inventory in Q2 and could not meet the strong customer demand for outdoor, patio and garden decor that arrived later in the quarter. We estimate that a decrease in comp store seasonal inventory constrains Q2 comps by approximately 200 basis points. But we expect to realize significant gross margin expansion as a result of our clean inventory position heading into Q3. In the second quarter, we expanded gross margins by 230 basis points, grew adjusted operating income 37% and more than doubled pro forma adjusted net income. Pro forma adjusted EPS grew 89% to $0.34. In fact, Q2 was the fourth straight quarter of pro forma adjusted net income growth above 60%. The strength of our performance is a result of the success of our unique model and the disciplined execution of our team members. Our approach is to continually refresh assortment for the home at an everyday low price. It’s offering every style for every room and every budget in a self-help enabled one-stop shop. It’s having a flexible and opportunistic real estate strategy that can lease, purchase or build new and second generation locations in large, small, new and existing markets and then make each new store class more productive than the class before. It’s all supported by uniquely efficient and lean operating structure at the stores, distribution center and at the home office. Our model has enabled industry-leading profitability even as we invest in infrastructure and capabilities that will continue to drive our customer experience. As we look to the next phase of our development, we also continue to strengthen our leadership team to ensure we have the best talent in place to scale. In Q2, we reinforced our merchandising function with the addition of Wendy Fritz, as Chief Merchandising Officer, enabling veteran merchant Alissa Ahlman to drive the advancement of our sourcing and product development functions as Chief Design Officer. Additionally, we have amplified the leadership under Wendy to ensure our business is well-positioned to excel as a newly minted billion-dollar retailer. At the Board level, we added two new Independent Directors, Paula Bennett and Steve Barbarick, both of whom had extensive retail background in merchandising, marketing and customer experience. After five-plus years with the company, our friend and colleague, Judd Nystrom, has decided to explore other early-stage growth opportunity. Judd has been integral – has been an integral part of our transition from a privately-held organization with less than 60 stores and $365 million in revenue to a thriving public company that has nearly tripled in size. We’re grateful to Judd for his many contributions and for his commitment to ensuring a smooth and successful transition of responsibility. We’re excited to announce that we have found a strong replacement in Jeff Knudson, who’ll be joining At Home – the At Home team as CFO. Jeff’s tenure as Senior Vice President, Finance and Retail Controller at CVS Health, as well as his impressive track record of major retail consumer companies will add considerable depth to the strong financial team we already have in place. We believe Jeff’s exceptional leadership will be instrumental to the continued achievement of our strategic objective. I’m very proud of the entire team we have assembled and fostered. And I’m confident, we have the talent and experience in place to continue driving our business forward for the long-term. This month marks the second anniversary of our IPO. At that time, we outlined a set of long-term financial targets, a high teens rate of annual top line growth fueled by new stores and low single-digit comp, which generates fixed cost leverage and 20-plus-percent operating income growth. Our performance over the last few years as a public company has demonstrated, simply put, that the model works. Our fiscal 2017 and 2018 results exceeded targets, and we feel confident in our ability to surpass them again in fiscal 2019. We remain committed to the initiatives and opportunities that we believe strengthen our model in value proposition and paves the way for future growth. Additionally, we continue to be guided by the same core strategy and strategic priorities that have delivered our outperformance to date. Our top priority is understanding and meeting the needs of our customer. To that end, we launched the loyalty and credit card program exactly one-year ago. Enrollment in these programs have exceeded our expectations. In fact, we added 1 million Insider Perk members in the first five months of the program and have reached 2.5 million members in the first-half of fiscal 2019. As we mark the one-year anniversary of the program, we have now enrolled more than 2.7 million total members. During this period of rapid growth, we’re gathering insights, testing and learnings, determining how best to add value through benefits like sneak peak, insider events and personalized outreach. We believe we are still in the early innings of these programs, but we are excited about the customer response and their ultimate potential. We continue to supplement our knowledge through customer research, which has recently reaffirmed how much our customers value our comprehensive in-store assortment. Offering fresh, inspiring product at great prices is a clear priority for us. Strategic efforts around product newness and younger demographics are driving above-chain average comp through both our category reinvention and our back-to-campus collection. Sales of new product improved hundreds of basis points over last year, as customers embrace freshness across our assortment. In the first-half of the year, we continue to refine our patio offering, bringing customers’ distinctive and contemporary furniture along with a fast, fashion-driven assortment of cushions and pillows at acceptable prices. We also borrowed from our prior year success in Christmas and Halloween decor by extending themed assortments, checks out, throw pillows and outdoor and garden decor. As we look to the back-half of fiscal 2019, we’re pleased with the early results in our reinvention and our seasonal assortment, both of which will be showcased to our customers in our fall advertising campaign. This brings me to the At Home brand and our objective to broaden customer awareness. We have increased our marketing spend annually for the past five years, and we plan to increase it again this year, up 30 basis points at 3% of sale. We rely heavily on test and analytics to inform our media approach, so that we can nimbly and efficiently allocate our spend on outcome. In Q2, we focused a mix of TV, direct mail, search, social media, and other digital outreach generating hundreds of millions of impression. We began testing engagement on Pinterest and have been encouraged by the early results there. Though still in its infancy, we’re recently – we also recently deployed dynamic content to create more personalized message for our growing e-mail database. Our digital advertising and e-mail effectiveness drove more than a 50% increase in unique website visitors and 77% increase in e-mail engagement year-over-year. Our research also shows that brand awareness is improving, which we believe is one of the drivers of our increasing new store productivity. New store expansion is the key driver of our long-term growth, and we are very pleased that our new stores continue to get stronger even as we have grown our footprint at a 21% compounded annual growth rate for more than five years. Increasing new store productivity in our second quarter illustrates that our recipe of disciplined site selection, growing brand awareness, and team member execution is a winning combination. We opened nine stores in Q2, including one of our strongest grand openings to date. We entered the State of Maryland for the first time as well as new markets in Evansville, Indiana; Nashville, Ohio; and Wayne, New Jersey; which is our most convenient store to Manhattan. We also identified existing markets in Dallas, Fort Worth, Orlando, Omaha, York, Pennsylvania and Utica, New York. The strong performance of our new stores and the visibility of our pipeline extends well beyond fiscal 2019. Not only have we approved a substantial portion of our fiscal 2020 pipeline, but we’ve also identified several fiscal 2021 sites already. Additionally, we’re excited that for the first time ever, we have plans to open stores next year in California and Washington State. Recent infrastructure and technology investments have given us the capabilities to pursue the West Coast, which we believe is a significant opportunity on the long-term journey to our 600-store potential. Given we have less than 170 stores today, our runway for growth is one of the most compelling aspects of our business. With that, I’d like to turn the call over to Peter Corsa, our Chief Operating Officer to talk about our operational progress. Peter?

Thank you, Lee. Good afternoon, everyone. In the second quarter, we continue to focus on giving customers a compelling in-store experience. Above the average performance in our vignettes, featured tables, end caps and Flash Finds demonstrated that newness and value continue to inspire our customers. We also implemented new signage in both rugs and patio furniture in order to enhance the self-help experience and make it easier for customers to locate items in our store. From an operational standpoint, we remain committed to leveraging our growing scale to find efficiencies and improve profitability. In late Q1, we launched floor loading, which eliminates the use of inefficient pallets to load outbound trailers. Instead, employees stacked and arranged boxes to utilize as much filler capacity is possible. As a result, we can accommodate significantly more product in each trailer and reduce the number of trips from the distribution center through the stores. We are pleased with the results so far and have implemented floor loading for 110 of our 167 stores. Floor loading is just one example of the opportunities we are constantly pursuing to manage potential cost challenges. On the transportation front, our multi-year partnership with the best-in-class transportation company combined with our increasing scale has significantly mitigated our exposure to recent industry-wide freight inflation. We stay out of the spot market and renegotiate our rates on an annual basis. Improved trailer utilization, route predictability, intermodal flexibility and increasing volume have contained any rate increases to well below industry average. We are also focused on several initiatives that drive positive relationships with our carriers, who have been beneficial partners for us domestically. On an international front, our space advantage enables us to bring in seasonal inventory well ahead of peak times, which avoids expensive bottlenecks. In fact, our Halloween fall and Christmas assortments arrived in our stores several weeks ago. We did not expect great inflation to impact our fiscal 2019 results, and we have many levers in place to help mitigate any future industry fluctuations. Finally, direct sourcing is another compelling opportunity to direct cost saving in our business. In fiscal 2018, our full assortment was sourced through third parties. We planned to exit fiscal 2019 with a high single-digit penetration of directly sourced goods, and we already are ahead of pace of that target. Over the next few years, we plan to expand the direct sourcing program to one-third of our entire assortment. We feel confident that we can leverage the growth of direct sourcing to help mitigate potential tariff assessments, which Judd will cover later in the call. We are very encouraged by the product margin expansion that direct sourcing is generating in fiscal 2019 as a tailwind that enables us to continue reinvesting for growth. With that, I’d like to turn the call over to Judd, who’ll 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 third quarter and fiscal year 2019 is available in our earnings release on the Investor Relations page of our website. We are pleased with the results of our second fiscal quarter, which was highlighted by broad-based strength across categories. Net sales increased 24% and surpassed a record $1 billion over the trailing four quarters. Q2 also marked our 18th consecutive quarter of positive comparable store sales growth. We delivered a 2.8% comparable store sales increase in the second quarter, or a 10.6% positive comp on a two-year basis, that accelerated almost 400 basis points from Q1. As we discussed last quarter, Q1 weather was a challenge for our seasonal assortment. Due to the late start to spring, we ordered less patio in outdoor decor to mitigate potential second and third quarter markdowns. Our Q2 seasonal performance rebounded when the spring weather arrived, but overall comp was constrained by an estimated 200 basis points due to insufficient seasonal inventory to meet strong customer demand. However, we were very pleased that the momentum in our indoor and everyday assortment continued into the second quarter. We feel confident both our inventory position and our business performance heading into the third quarter, which is reflected in our strong Q3 outlook. As we mentioned, our non-comp stores and new stores were extremely productive in Q2. At the same time, our oldest, largest volume stores contributed the strongest to our comp performance. The strength of both new and existing stores continues to demonstrate both the portability and sustainability of our model, and we remain very excited about the substantial runway of store growth that still lies ahead for At Home. From a profitability standpoint, we grew second quarter pro forma adjusted EPS 89% to $0.34 and generated significant margin improvement. Gross margin increased 230 basis points year-over-year to 33.8%, as we lap prior year distribution costs related to our fiscal 2017 inventory investment. Our substantial product margin expansion was driven by direct sourcing and prior year cost negotiations with product partners, which turned through inventory this quarter. Finally, a product compliance matter drove a modest 35 basis points, of our 230 basis point expansion, which was largely offset by incremental occupancy costs related to sale leaseback transactions. These same factors drove a 90 basis point improvement in year-to-date gross margin. Second quarter adjusted SG&A dollars, which excludes a $41.5 million expense triggered by the previously discussed one-time CEO grant delevered 140 basis points to 22.3% of net sales. We delevered adjusted SG&A largely on the timing of expenses for both store and home office employees. As a reminder, our financial model naturally generate fixed cost leverage that we reinvest back into the business to support our strategic priority. Store labor is one of our strategic areas of focus in fiscal 2019. On our fourth quarter call, we highlighted the significant investments we have made over the past five years to establish At Home as a great place to work and more importantly, to grow. We continue to pay well above minimum wage. We offer a wide range of benefits and we provide significant career opportunities, because we are a high-growth retailer. Given our store labor model is mostly fixed as an annual sales continue to increase, we deliberately reinvest in-store wages, benefits and/or hours every year. In fiscal 2019, we are focused on expanding labor hours to continue improving the customer experience. We channeled the majority of our investment this year in the second quarter store level projects to help ensure an enjoyable self-help environment for our customers, but we expect annual store labor as a percentage of sales to be roughly flat to fiscal 2019. As we discussed, we’re also very excited about several talent addition to our home office team and our Board of Directors. Incremental costs related to these additions had a modest impact on Q2 and year-to-date SG&A rate, which translated to approximately $0.01 of EPS. Finally, incremental ongoing grants were ahead in stock-based compensation, coupled with expense acceleration due to a reduction in sponsor ownership to approximately 47% of outstanding shares. Ultimately, we delivered 37% growth in the second quarter adjusted operating income and expanded adjusted operating margins by 100 basis points to 10.9%. Year-to-date, our adjusted operating margin remain consistent at 10.6%. Interest expense of $6.7 million increased due to rising interest rates and increased borrowings on our ABL to support our growth. We are focused on proactively leveraging our improving credit profile, including recent S&P upgrades to ensure we have the most efficient capital structure, as we continue to scale the business. From a tax perspective, our underlying tax rate before discrete items was consistent with Q1 at approximately 23%. We generated an income tax benefit of $8.4 million for both second quarter and year-to-date. Our effective tax rate for those periods were primarily impacted by the GAAP pre-tax loss, driven by the one-time CEO grant. Tax benefit from stock option exercises also impacted our effective tax rates. On an adjusted basis, our Q2 and year-to-date effective rates were 9.1% and 5.3%, which respectively reflect $3.8 million and $7.9 million of non-IPO-related option benefit. As a reminder, our adjusted metrics exclude both the cost and the tax benefit options related to our IPO. In total, we recognized $4.1 million of stock option tax benefit in Q2, compared to our guidance of $2.7 million. Year-to-date, total option benefit was $8.3 million. Compared to our previous full-year guidance of $8 million, we now estimate that we will generate approximately $10.3 million of tax benefit for the full-year. On the top line, our business has momentum, and we expect that our new stores will continue to outperform. Given this, we are raising and narrowing our full-year net sales outlook to $1.159 billion to $1.164 billion. We also narrowed our fiscal 2019 comparable store sales guidance to 3% to 3.5%, or or a 9.5% to 10% increase on a two-year stack basis. We expect to drive 50 to 75 basis points of gross margin expansion this year through direct sourcing benefits and cycling the incremental distribution charges from the first-half of fiscal 2018, partially offset by sale leaseback headwinds in occupancy. We planned to reinvest that upside to support our growth through increased advertising, home office talent and the second distribution center. We have deliberately deleveraged advertising more than 50 basis points year-to-date. We planned to delever once again in Q3 by 35 to 45 basis points to support new store openings, as well as the launch of our fall advertising campaign. As planned, we expect our incremental full-year advertising investment to be approximately 30 basis points implying leverage for the fourth quarter. Our full-year outlook of slight adjusted operating margin expansion includes $4 million of planned Q4 preopening expenses related to our second distribution center. We are very pleased that the strength of our model and financial performance have enabled us to deliver on our growth targets, while simultaneously reinvesting to support our long-term growth potential. Given the current interest environment, our full-year interest expense assumptions have increased to $27.5 million. However, the incremental anticipated tax benefit from non-IPO stock option exercises should drive a 12.5% full-year effective tax rate that offsets the higher interest costs. Based on our first-half performance and our current momentum, we are raising and narrowing our fiscal 2019 pro forma adjusted EPS outlook to $1.27 to $1.31, which would result in our third consecutive year of more than 35% growth. Our guidance also reflects an increase in expected share count to 66.5 million shares from 66 million shares previously. For the third quarter, we plan to open between eight and 10 net new stores, including one relocation. As we have always said, we believe weather tends to even itself out over the course of 12 months. While we faced Q1 headwinds from a late spring, our Q3 comp guidance incorporates the tailwind from lapping significant prior year hurricanes in the south. We estimate that our highly productive stores, the strong momentum we already have seen in the third quarter and a comparable store sales increase of 4.5% to 5%, or 11.6% to 12.1% on a two-year basis to drive net sales of $264 million to $266 million. Assuming this outlook, Q3 would represent our 18th consecutive quarter of 20-plus-percent revenue growth in our 19th consecutive quarter of positive comp store sales increase. We expect to significantly expand gross margin again in Q3. Direct sourcing continues to drive product margin improvement. Additionally, last year’s third quarter gross margin was impacted by markdown timing related to category reinventions. This year, we’re entering the third quarter with a much cleaner inventory balance, particularly in patio and outdoor product. As I mentioned earlier, we underinvested in seasonal inventory when we encountered unfavorable weather in Q1. Our Q2 seasonal inventory was 5% lower on a comp store basis as a result. But we’re well-positioned to navigate Q3 with fewer markdowns in a much better gross margin year-over-year. Driven by this gross margin expansion, we also plan to significantly expand Q3 adjusted operating margin despite strategically increasing advertising and preopening costs to support our brand awareness and store expansion objectives. We estimate interest expense of $7.4 million and a 14.5% effective tax rate, which incorporates a 23% underlying tax rate, plus approximately $1 million of tax benefit related to non-IPO stock option exercises. All in, we expect to more than double pro forma adjusted net income to a range of $9.3 million to $10.3 million, assuming 66.7 million shares outstanding, our third quarter pro forma adjusted EPS outlook is $0.14 to $0.15, compared to $0.08 last year when adjusting for hurricanes Harvey and Irma. Next, I’d like to take a few minutes to address the recent tariff speculation and how a tariff on Chinese imports could impact our business. If tariffs were adopted as proposed, we do not believe they would have a material impact on our results for fiscal 2019 or fiscal 2020. As of this call, three tariff proposals have been issued. Of the first two list, less than 100 of our 50,000 items are affected. The third and more robust list includes a 10% tariff that could impact as much as broader base if implemented. We’re closely monitoring this important matter and proactively preparing our business. We have several levers in place to effectively mitigate potential cost increases and we’re proactively approaching tariffs through a combination of supplier negotiations, direct sourcing, and strategic price increases. Our supply chain includes relationships with product partners both domestically and abroad in Hong Kong, Belgium, Taiwan, India, Vietnam, Turkey, Indonesia, Mexico, as well as other countries. Diversifying our product partner base has already been an initiative for the past several years. Just last week, we invited over 100 of our largest product partners in Dallas for our Annual Summit during which we collaboratively discussed ways to mitigate proposed tariff and migrate our supply chain. Our product partners have enjoyed significant growth with us. In fact, many have more than tripled their business with us in the past five years. We’ve also historically paid for all of our purchases in U.S. dollars, because our product partners have benefited from our shared growth, as well as our currency inflation, we have asked them to help offset the proposed tariff on Chinese purchases. The recent introduction of direct sourcing gives us an additional tool in supplier negotiations, as we streamline our supply chain to save hundreds of basis points of product cost. Direct sourcing gives us the opportunity, not only to reduce product cost, but also improve international sourcing flexibility, increase supply chain diversity, and broaden our access to unique and high-quality products. In addition to changing the country of origin and lowering the cost of imported items, if we were to increase prices, our average basket of approximately $65 and average retail price of less than $15, gives us a significant advantage. While we expect cost savings from suppliers to be the focus on our approach, our ultimate tariff strategy will be – will depend on the final assessment. In closing, it was a strong quarter and we are well-positioned to deliver on our full-year goals. Our runway for growth is very long and we continue to execute against our opportunity for the benefits of our customers, team members, and shareholders. Before I turn the call back to Lee, I would also personally like to thank Lee, our private equity sponsors, and all of our talented team members for their partnership over the past 5.5 years. It has been an extraordinary experience positioning At Home to scale, preparing the company for a successful IPO and seen it flourish in the past two years since. I’m proud of the finance organization we’ve built and it’s been a pleasure to work with such talented, focused, and driven leadership. I’m committed to working with the team through the end of the year to ensure a smooth and successful transition, and I wish Lee, Jeff and the entire At Home team all the best as they pursue the next phase of growth. I will now turn the call back to Lee for his final remarks.

Thank you. As Judd mentioned, we’ve achieved a lot over the last five years, but we’re just getting started. We have made low-priced fashion home decor accessible to countless new customers, demonstrated the portability and sustainability of our model and delivered exciting growth for our team and for our shareholders. We continue to be excited about the long-term potential for our differentiated concept and the achievement we’re making along the way, and we look forward to many years of growth ahead. Operator, please open the line for questions.

[Operator Instructions] Our first question comes from the line of John Heinbockel from Guggenheim Securities. Please proceed with your question.

So, Lee, let me start with, how much, I don’t recall how much earlier have you brought particularly Christmas product in this year versus past years? And is there an opportunity really across seasonal, given the size of the box as an advantage to do more of that, get the product in even earlier in the season? And is that the way the customer is now going to shop? Do you think, if the value is there and you kind of get to them before, the heart of that particular season’s shopping gets underway?

John, good question. I would tell you, we’ve always used space to our advantage. We love the size of our box. It helped us bring product in pre-demand. Also, our model has – since the CrossTalk DC allows us to flow it into our supply chain quicker. So we actually place orders for our product ahead of our other competitors orders to get lower prices as we’ve basically taken open capacity for Christmas, for example. So Christmas flows into our stores in July and set by August, early August, as you know. You’ve been in our stores a lot. And that allows us to get a pre-read on sales. And that’s why we’ve already taken the guidance up for Q3. We’ve seen great progress so far in Halloween, harvest and Christmas. It allows our customers to get a pre-look, honestly, and they’re buying at full price. And we – that’s allowed us to really get a jump on the season and get a really good read for the quarter and the whole back-half.

Okay. And then two last things. The – where do we sit with the – I know the pilots of the wall art reinvention, where do we sit with that? And then secondly, separate, when you think about brand awareness, right, so as you put, as you densify markets, put more stores into markets you’ve been in for a while. Do the existing stores that have been there for a while, do they see a comp uplift because of brand awareness? And maybe how significant is that uplift?

Okay. Sure, let’s talk about Wall Art first. Wall Art, we actually ran a – we ran a two-step test on that. One was, in such a large department with so many SKUs, we – the first part of the test was, if we just reorganized it and cleaned it up to make it easier to shop, what would be the performance of that? The second part is, if we reoriented it, the assortment, in a different way for the customer to shop, how would performance be? And what we found and either results if it was successful would obviously then become the basis for our reinvention. All the while, we’re working on a product assortment change at the same time. As you know, reinventions always include, at least, two of the three following activities. It’s going to be a product address – we’re always going to readdress the product in a significant change in the assortment. We’re going to change the in-store experience for the customer and then we’re going to communicate that externally to our customers through advertising, communication. So what we did the first part was just must change the customer experience first, while we’re consistently and parallel [parse through] [ph] the product. What we found was, we actually saw progress and performance improvements in our Wall Art by just changing the customer experience by cleaning up the assortment and the way was merchandising the store without even changing its positioning in the store. So what we did is, we proactively rolled that out over the summer, and we decided to give our team more time to go work on the product side of the reinvention and move that into next year, because we can see the benefits already without having to test a product assortment allow that to roll in next year. So that’s where we are in Wall Art. And on brand awareness, we’ve seen the benefit of brand awareness. Obviously, when you have new store productivity, the strength that we have and we’re opening up stores at a strong rate and your performance gets better every year in markets we’ve never been before. In Maryland, in store opening, for example, was a fantastic store opening in a market we’ve never been in before. But we’ve been advertising now nationally for over a-year-and-a-half and that message about At Home is growing and we are in adjacent market. So first time in Maryland, but we’ve been in D.C. and that word-of-mouth is growing as well. So the brand awareness continues to tick up. That’s our long-term metric for advertising spend and probably continue to increase it. And the short-term metric is traffic, so we continue to measure that as well.

Okay. Thank you.

You bet. Thanks, John.

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

Hi. Yes. Good afternoon, everybody, and Judd best wishes to you. We’re going to miss you.

Thanks, Matt.

Thanks.

I was – Lee, I was wondering if we could talk a little bit about seasonal and patio specifically, just the shortfall that you experienced in Q2 relative to what the business probably would have been if you had a little bit more inventory. Was that simply – was that – that lack of inventory, was that simply a forecasting – conservative forecasting for your business for specifically what pent-up demand could be in patio for the second quarter? I’m just trying to parse through, I get that in the first quarter we had issues with patio because of the rain and weather, and I get that you would hold back on inventory to some extent. But is it a pent-up demand thing? Could you just dig a little bit more into what went wrong there? Thank you.

Sure. Well, the two-way, remember is, a 10, six, on a two-year basis, which is stronger momentum than we had in Q1. But – and we’re pleased with that, but we know we could have done better. When we look at our stock-out rate in our markets and in first quarter, we talked about warm weather markets and full weather markets. In this case in Q2, weather was consistent across the fleet. It was more a matter of stock-out rates. We actually sold through and had higher sell-through, and we were conservative in our investment for our seasonal inventory for this quarter. And we didn’t place follow-on orders that we could have – that could have ended up as a markdown that actually could have ended up with more sales. In hindsight, we should have had more inventory, and that’s on me. But I would tell you, our team has learned about that and said, okay, let’s go forward with a little more courage going forward. And when we move with courage, for example, for Q3 and Q4 for Halloween, harvest and Christmas, it has driven great outcomes, and that’s why we’ve already raised the outlook for Q3. We feel great about the inventory position we have for the back-half. We feel great about it in Q3. We’ve seen early signs. Obviously, we’re one month into the quarter and we’re already taking the outlook for Q3, because that demand for seasonal was there for Q2. We didn’t have the inventory. We have it for Q3. The everyday inventory is really in a nice position, and that everyday business continues to deliver for us.

And to build on what Lee said, our – when you look at our gross profit, you can see, it reflects in gross profit. From a margin perspective, we didn’t have as many markdowns related to that and we’re going to experience that again in the third quarter. But had we had the product, we would have clearly had more sales and more gross profit dollars.

Right. That’s completely fair and understandable. And then, I guess, my second question was, Lee, I think, you said something really interesting was that the new product comped [separable] [ph] a couple hundred basis points higher than new product, I guess, new product last year. As I – can you explain that one to me a little bit, because I’m trying to think of what exactly that several hundred basis point is. I want the context around what that represents?

Yes. So one of the metrics we look at for our business is on the scorecard for our merchants is the percent newness in their assortment. How much is under six months in the store? How much of that six to 12 months, 12 to 18 months, 18 to 24 and over 24 months? We put an effort last year, as we saw that we were – what I would say is buying into bestsellers and more than we were buying in newness, the previous year. We wanted to reinforce newness, because that’s our model. And we were – we weren’t driving newness as much as we should have in certain categories, not necessarily across the whole company. So we put a greater emphasis on newness and that newness sold better, obviously, and drove our performance for us overall.

Perfect. [Multiple Speakers] Sorry, go ahead.

All right. Thanks, Matt.

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

Thanks a lot, and good afternoon. Judd, all the best to you moving forward.

Thank you.

A couple of questions. First of all, can you just talk about the margin rate that you typically see on seasonal and seasonal that is? In other words, did the mix profile of the business this quarter aid your gross margin in addition to the lack of markdowns?

No. The mix did not impact us overall. Our categories are pretty consistent from a margin perspective. I will say, we would have had less markdowns. If we had more inventory, we would have sold that at a lower gross profit rate.

Yes.

But as we analyzed the business, looked at sell-throughs, looked at where we had product within our footprint, what we saw was those stores that had it had 200 basis points more and when you have a minus 5% comp inventory, we didn’t have the product. So as a result of that, we benefited from a margin rate, because we weren’t selling some of those as markdowns. But as I said earlier, we really left some comp stores sales dollars on the table, as well as more gross profit dollars albeit at a lower rate.

Understood. And then my second question, great to hear that you’re planning a flag out on the West Coast, particularly in California given the market opportunity. Other than the fact that real estates are a bit different and logistically you obviously need to expand your reach anything different you think about the way you’ll come to market, as you move into that part of the country?

No. Our playbook has worked everywhere that we planted a flag. So – and we used proof points to make sure that we feel comfortable with that. When we moved into Salt Lake City, for example, that has actually a very high real estate cost and has a Pacific Northwest aesthetic, for example, and the model works great there. And we can handle the extra real estate costs and still deliver great outcomes and great returns on a per store basis. Phoenix, for example, has got a Southern California aesthetic. So then we know we can work in California and Northern California from an aesthetic standpoint. So those are proof points. And now the assortment there, where those markets are unchanged, we’ve, as you know, we have a national assortment. We bring into the market and then it’s replenished by archetype into those stores differently based on rate of sale. So the archetype changes may necessitate and may drive a mix shift over time in those stores, but don’t – their starting lineup of assortment will be the same. They’ll still end up with all of the same SKUs, but the depth of those SKUs will be different based on rate of sale.

One thing I would add to it is, we are proactively working with vendors to make sure any product compliance issues, as well as proactively looking at an HR-related type items to prepare ourselves for a successful launch on the West Coast.

Gotcha. Understood. Thank you so much, guys. I appreciate it.

All right. Thanks, Matt.

Our next question comes from the line of Jonathan Matuszewski from Jefferies. Please proceed with your question.

Great. Hey, guys. First question, could you just share some of the learnings you’ve had as you’ve been ramping up direct sourcing? It sounds like you’re ahead of plan for the year. So just curious what you’ve been learning with that process and how you can apply what you’ve been learning towards your longer-term goal of a third of inventory over time?

Sure. So as a reminder, we launched this work last year. And after sizing the price, we accelerated it. We brought product in late last year. We said it was going to start hitting our P&L in the second-half of the year. It actually started hitting a little bit earlier, because we’re ahead of pace. And the nice part about it is, you can see in our margin outlook for the year, 50 basis point improvement in gross profit, a 75 basis point is significantly above where we’ve historically tracked. The last three years, our gross profit has moved 10 basis points. And now you look at some of the things we’re working on proactively to position us this year to deliver that 50 to 75 basis points, it’s direct sourcing, which is ahead of pace. We expect to exit this year high single-digit on a run rate basis, double digits next year. The team is marching down that path and we’re pleased with the progress, again, ahead of what we had written down. And the good news is, this has been very early innings. A lot other retailers have done it. We’ve done it at other retailers before, it’s hundreds of basis points that we’ll harvest over time. It’ll allow us to mitigate certain things, tariff would be example. It will allow us to reinvest in the business. And we’re focused on continuing to invest in it and make sure that, that the team is positioned for success for many years of benefit.

Another thing I’d add on that Jonathan from Judd’s comment was you asked what learnings were. One of the hypothesis we had and one that Judd felt really strongly about was, once you announce direct sourcing to your supply base, your existing suppliers will get sharper on their prices. We found that to be the case as well. So in some cases, we didn’t have to migrate to and to direct sourcing. We can still work with our product partner and not have to create product development capabilities in-house, because our existing partner brought their prices down to our target for direct source product as well and which is what we assumed would happen and make sure that’s allowed us to do that as well.

Great, guys. Thanks for taking my question.

All right. Thanks, Jonathan.

Thanks, Jonathan.

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

Good afternoon. Just a couple of questions. First, maybe just to clarify. Typically, not always, but you see new store performance and comp store performance kind of directionally tracking of one is better than expected, the other is often as well. Just curious what kind of – would explain in a big picture sense, the dynamic or comps were sort of in line-ish, and new stores are really continuing to outperform so much in 2Q? That’s my first question?

Sure, Dan, this is Judd. Well, one thing I would remind you is, we don’t have a comp waterfall. So we don’t perform like a lot of other retailers with that. What we are very, very excited about is, when you look at our new store productivity, this is our sixth consecutive quarter of significantly strong new store productivity. This is our first quarter overall, where we are over 100% at a 101% based on how you calculate it. And the last four years, we’ve had a history of improving our sales, as well as our EBITDA. And when you look at the fact that our first year adjusted EBITDA almost doubled, the new store performance was strong. Our opportunity was, we should have been better. We should have had more seasonal product. It would have come at a lower gross profit right, but we would have had more sales associated with it, and you would have seen that correlation to be tighter overall.

Yes, and I’ll add on that. Part of this has been an effort on our part to make sure every store opens perfectly. So we made sure every single new store had the inventory they needed to drive the seasonal business, which then meant our comp store seasonal inventory was lower than last year. So that’s why you find it inconsistent. Overall, there wasn’t as much inventory as we needed to sell. It went to the new stores. It drove great productivity, obviously, drove great profitability. But it constrained the headroom that we had and the availability of comp store sales in our comp store business and that’s a lot in trust. We need to have the courage to actually buy more. When we are buying in, I’ll tell you that it comes off of a third and fourth quarter that outpace the expectations and we should have had more courage. And that’s something that we will take back as a lesson, because it shows you the demand is there, that’s why we’ve took Q3 guidance up. The demand is there, we just weren’t able to meet at all.

Okay, that’s helpful. That kind of, I guess, leads me a little bit into the question as it relates to comps. It’s a small change, but you did raise the bottom end of your full-year comp plan despite 2Q kind of being just within the range. I understand the dynamic about the seasonal product. But what kind of at the margin, just taking the full-year as a whole, are you seeing other aspects of the business come in a little better than expected? Are you seeing, just in Q3 so far, the outdoor business perform better than you originally would have expected it to? What’s leading to that upward revision in the bottom-end of the guidance for comps?

Sure. So what I would tell you, if you step back and look at our business over 19 quarters or 18 quarters, you look at consecutive comp store sales, we’ve averaged 5.3%. So we have a history of delivering. And when you look at what we’ve been focused on for the last six years, our holiday assortment is an opportunity, where we have such a dominant assortment that while it’s customers’ a one-stop shop that we tend to pick up customers in the second-half of the year. If you look at our stacks for the fourth quarter, four years back, it’s about 25% in terms of comp store sales. So what gives us a lot of confidence is, we bring product in earlier than everyone else. We get early reads, and those early reads are very accurate. And we typically sell a lot of Halloween and a lot of harvest earlier in Q3, because it’s closer in and Christmas starts to go in as we put it in. And the nice part about it is, we’re partially through the third quarter and we’ve had a very strong start. We emphasized that in our prepared remarks. We’re very pleased, and we’re going to start mixing more into that product in the second-half. So it’s part of our strategy. We’re going to mix more into it, it’s doing very well, which positions us. So when you look at the full-year, the 2.5% on the low-end, we believe will do better than that when you squeeze out the fourth quarter. So as a result, we trimmed the low-end of the outlook. So now 3% to 3.5% and to put it in context, that’s a 9.5% two-year stack to a 10% two-year stack. We feel good about that, that’s off of a 6.5% last year as a reminder. If you look at the last four years, we haven’t done less than 3.5%. So we have optimism related to that. But we want to make sure we continue to be prudent and we deliver on our outcomes overall.

Okay. Thanks. Best of luck and best for everything, Judd.

Thank you, Dan.

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

Hi, this is Josh Kamboj on for Simeon Gutman. You came in near the top-end of your comp guidance range for the quarter despite the inventory headwinds or sort of implies your guidance as conservative. Are you thinking about the guidance similarly in Q3, or you’re sort of flowing through a shift of some Q2 sales into next quarter?

Yes. I mean, the way we approach the businesses, we put targets that we feel confident we can deliver on. First and foremost, we have a track record of being a public company now for nine quarters. We’ve delivered the bottom line nine consecutive quarters. We want to be prudent on what we put down this as when you look at it overall a 5% – a 4.5% to a 5% comp on top of last year’s 7.1% comp implies significant acceleration. The good news is, we’re already part of the way through the quarter. We want to make sure that we put down what’s prudent. And we didn’t know what the delay and demand for Q2 was going to be. You could – we could have bought a lot more of that seasonal product and the demand wasn’t there and then we would have been talking about lower gross profit. So it’s a fine line. We are always honest about our performance internally, and we focus on internally as well externally sharing with you where our opportunities are. And our opportunities, we should have had more product, we would have had a lower gross margin, but we would have had more sales and more gross profit dollars. So that’s what gives us confidence. We’re in the seasonal side and we’re mixing more into that, it’s doing very well.

All right. Thank you. And were there any regional differences in comps that stood out for any reason?

Yes. What we tell you is first, our categories were very consistent. We like what we saw there. Seasonal overall could have been better for all the reasons I just highlighted. When you look at the parts of the country, we would tell you that our older stores actually drove more comp, which is a good sign overall, because if we’re investing in our business and we’re investing in labor and we’re investing in marketing and we’re clearly gaining traction. So typically, retailers have their younger stores driving their comp. In our case, we actually have older stores driving, which we like.

All right. Thank you. And if I could squeeze one more in. Could you update us on the four-wall revenue and EBITDA and how that’s tracking this quarter?

Four-wall EBITDA?

Yes?

Yes. So four-wall EBITDA, well, we’ll put in our Q overall, we provide store-level EBITDA, it’s growing. And the nice part about it is, when you grow your operating income dollars 37%, you’re going to have nice four-wall EBITDA dollar growth, but we’ll break that all out in the Q, which will likely be filed tomorrow.

Great. Thank you.

Thank you, Josh.

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

Great. Thanks so much for taking the call or question. So just, I guess, quick modeling question on 4Q. Looks like the very interesting comp and total sales is narrowing from, I think, about 20 points in the past three quarters, including 3Q to about 2015. Is that primarily due to maybe timing of openings, or could it be something else?

Yes. Timing of openings is going to be a bigger piece. What we’re going to have stores that are going to open in the fourth quarter, we typically like to have those stores open in the third quarter, not the fourth. But there are going to be ample of stores that are going to go into the fourth quarter, and they’re going to open a little bit later than we would even like. That’s a function of store weeks overall. What I would remind you though is, if you look at FY 2019 overall and you do the productivity math, we actually will have the most productive vintage in five years. And it’s approximately 88% at the low-end of the range overall calculating it at 91% in the high-end. So we view that as a fantastic year overall in terms of outcomes. How it plays out in the fourth quarter, new stores are outperforming what we wrote down under those deals in terms of our performance. So we hope that that trend continues, but we’ve embedded some of that in our outlook.

Okay. That makes perfect sense. And then just as a follow-up for Judd. I don’t think I caught this, but in terms of, I guess, the potential – I guess, how much the business could be impacted from the second tariff? Would you be able to quantify what that is?

Sure, Curtis. So here’s the way we think about it. First of all, I said in our prepared remarks, we’re focused on mitigating and migrating overall, and that’s what the team is focused on. We don’t know what they’re going to end up being. Are they going to be 10% or maybe higher? What categories? We’ll find out later. But what we typically do is, we try to first focus on the things we can control, which is how in the event we have a tariff, what do we need to do? Second, if we can’t be as successful on those mitigate/migrate, we have a contingency plan. Contingency plan is, what would you need to do in order for our price increase? As you know, we have a $65 basket. We have about four to five items in there. It’s about a $15 average unit retail. If you go to our cost, our cost is below 7.50, [ph] which contains freight. So now, by the time you have a certain portion of that, that’s going to be tariff, you’re going to end up from a math perspective, if you had to increase prices, it would be low single digits in terms of an increase in price. It wouldn’t be that significant, and you’re talking about a low single-digit on a $15 AUR or a $5 cost or something like that. So our competitive position is actually going to improve, because we already start with lower prices than our competitors. And if they have to raise it 10% or something like that without the levers that we have, we’re actually going to have a more magnified price value composition. So that’s why we think about it overall, it will be a low single-digit increase in price. But we’re focused on doing mitigating and migrating and making sure we can deliver on what we can control.

Got it. Makes perfect sense. Thanks very much.

Thanks Curtis.

Thanks Curtis.

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

All right. Well, thanks again for joining us today. We’re excited about the growth ahead, and look forward to talking to you in the next couple of days and weeks. Take care, everybody.

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