Bethany Perkins - Director, IR Lee Bird - Chairman, President and CEO Peter Corsa - COO Jeff Knudson - CFO

Simeon Gutman - Morgan Stanley John Heinbockel - Guggenheim Securities Matt McClintock - Barclays Jon Matuszewski - Jefferies Brad Thomas - KeyBanc Capital Markets Zack Fadem - Wells Fargo Curtis Nagle - Bank of America Merrill Lynch

Greetings, and welcome to the At Home Third 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, Ms. Bethany Perkins, Director of Investor Relations for At Home. Thank you. You may begin.

Thank you, Melissa. Good afternoon, everyone, and thank you for joining us today for At Home’s third 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, Jeff Knudson. 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 years 2019 and 2020 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 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 morning, everyone. Thank you for joining us to discuss our results for the third quarter of fiscal 2019. We had a strong third quarter, exceeding our top-line and bottom-line expectations, while also making longer term investments and progress against each of our strategic priorities. Our comparable store sales increased 5.2% along with exceptional new store productivity, fueled net sales growth of more than 25%, making this our 18th straight quarter of over 20% sales growth. With 178 stores today and a longer term potential of at least 600 locations, new stores are the growth engine for this business. Our robust and improving new store productivity reflects our growing awareness and appeal as well as the great execution by our entire team. For our existing stores, Q3 represented our 19th consecutive quarter of positive comp, once again demonstrating the strength of our highly-differentiated value-driven model. Our compelling assortment of everyday home décor was the biggest contributor to our third quarter results and customers responded well to our strong fall, Halloween and Christmas offerings. Overall, we're very pleased to report a 12.3% two-year comp. This top-line performance was accompanied by a 280 basis-point improvement in gross margin and planned investments in advertising and store labor hours, resulting in more than 60% adjusted operating income growth. Coupled with some interest expense and tax favorability, pro forma adjusted EPS more than doubled to $0.18 from $0.07 in Q3 last year. We are very pleased with our Q3 results. But given our substantial white space, ultimately, we focus our efforts on the long term. As Jeff will cover shortly, our outlook reflects a patch of softer weeks in November before the business rebounded. However, the strong performance of our new and non-comp stores enable us to reiterate our fiscal 2019 net sales and adjusted profitability expectations. Our focus remains on our proven operating model and the longer term strategic priorities I will talk about today, which is our customer, our assortment, the At Home Brand, store growth, and our team. Afterwards, Peter will take you through our progress on the in-store experience and operational efficiency. Our top priority is understanding and meeting the needs of our customer. The launch of our loyalty and credit card programs last year is generating valuable information as we build our database and engage with our customers in new and exciting ways. Insider Perks enrollment continues to exceed our expectations and now sit at 3.5 million members. In October, we rolled out digital receipt for our credit card and loyalty members that feature customer satisfaction scoring. This initiative gathers real time feedback on the customer experience, which is provided to our district managers at both the store and individual level. Over time, this visibility will enable us to recognize the best practices of our top performers and leverage those learnings across the entire fleet. During the third quarter, we also began displaying store level inventory on our website in a handful of test markets including our home market, DFW. Our goal is for inventory visibility to better enable self-help shopping for our customers. From an assortment standpoint, delivering freshness and value across the broadest range of aesthetics is critical to our model. In the third quarter, our team delivered broad strength across both everyday and holiday categories as well as all major geographies. Once again, our ability to reflect the assortment between styles and trends and advantage as we saw customer shift from more traditional look to contemporary and modern farmhouse décor. Consistent with Q2, our customers embraced newness throughout the entire store. We also offer a compelling fall line-up in a variety of Halloween items assorted by theme that drove a great customer response. We highlighted our existing and exciting seasonal assortment through our fall advertising campaign. Given the opportunity to significantly expand on our low brand awareness, investments in marketing and advertising are one of our key priorities. We continue to leverage both digital and traditional channels like TV, direct mail, social media, digital search, outdoor, radio and e-mail as part of our comprehensive marketing plan. And our strategy is driving a positive return over time. Customer e-mail engagement has increased 78% year-over-year; unique website visitors, up more than 30%. We leaned into Q3 with television spots and higher volume markets that account for two-thirds of our total sales. We also circulated fall LookBook with a larger format and double the page count versus last year. At the end of the quarter, we issued an incremental holiday mailer to showcase our one-stop holiday offering. Our overall media mix is important for building long-term brand awareness, and we’re pleased that it has driven a meaningful increase in both aided and unaided brand awareness year-over-year. We continue to evaluate both the size and the allocation of our media spend as we think about next year and beyond. Finally, most importantly, we’re focused on new store expansion. We opened nine stores in the third quarter across both new and existing markets. Our new markets were Hartford, Connecticut; Crofton, Maryland; Savannah, Georgia; College Station, Texas; and Middletown, New York. We also opened stores in our existing Dallas and Chicago market, and successfully relocated our Knoxville, Tennessee store. Our class of fiscal 2019 is on track to be our strongest class ever, which gives us confidence in our long-term store potential and reflects great execution by our various functional teams. Real estate is selecting strong and ever-improving sites; store operation is bringing exceptional store leaders and team members. Quickly merchandising the store and facilitating the self-help shopping experience, our merchant teams are delivering continuously elevated assortment, and our marketing teams are promoting new stores, architecting more effective campaign and building brand awareness. Nearly all of our fiscal 2020 class has been approved with 10 stores already under construction. We expect next year’s mix to be similar to fiscal 2019 with approximately 80% second generation sites and 20% new store builds. The second generation real estate environment has plenty of attractive opportunities. And we’re excited about next year’s pipeline, including our entry into the West Coast with new stores in California and Washington states. Next, I want to provide a brief update on our tariff mitigation progress. As you know, the 10% tariff on $200 billion with the Chinese imports went into effect September 24th. We mitigated the impact through a combination of value engineering, negotiated cost reduction, and strategic retail price increases on items that already held a meaningful competitive price advantage for us. Such increases began to take in effect in stores over the last few weeks. But given our inventory turns, we would not expect to observe any potential impact, until well into next year. As we shared since the tariffs were first announced, we do not expect the 10% tariffs to have a direct material impact on our fiscal 2019 or fiscal 2020 results. While our current plans for fiscal 2020 assume a 10% tariff, we've made preparations to intensify our approach in the case of a 25% tariff. Our merchant teams continue to collaborate with our product partners on comprehensive cost mitigation plans. They assess our everyday low price position relative to our competitors and review proactive sourcing alternatives that could become more attractive at 25% tariff. If the 25% tariff becomes reality, we would continue to pursue a combination of sourcing and pricing actions with the goal of protecting operating profit dollars. Before I wrap up, I'd like to thank our team members for their continued hard work and dedication. We pride ourselves on At Home being a great place to work and grow. We continue to make progress and investments in a comprehensive employee experience. These investments go beyond wages to include an incentive compensation structure that aligns teams with our overall objective, an array of benefits such as tuition reimbursement and a 401(k) match with immediate vesting. Most importantly, we're proud to offer team members limitless career growth opportunities on our multiyear journey towards realizing our 600-plus-store potential. 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, and good morning, everyone. We continue to be focused on elevating our customers’ in-store experience with both our assortment and our compelling use of visual merchandising to inspire and bring our product to life. Our teams executed a customer-friendly bath reinvention during the quarter that leveraged new signage and included more intuitive merchandising, which customers embraced. End caps and feature tables delivered above average growth by once again highlighting the trends and value that At Home is known for. Our ability to deliver on our customer promise of outstanding value is grounded in our disciplined operating model. While lean labor is part of the foundation of our model, we continue to make investments in additional store labor hours as we did in Q2. As a reminder, as our top-line grows, we have deliberately reinvested in a combination of store wages, benefits and hours every year. We assess our compensation on a market by market basis; and on average across our fleet, we continue to pay well-above minimum wage. We also offer a wide range of compelling benefits. All team members enjoy a bonus opportunity based on their stores’ performance, and we provide abundant career opportunities as a high growth retailer. We measure our success of being a great place to work and grow by our store level turnover, which has decreased significantly in recent years. We've talked before about our direct sourcing efforts, which are ramping nicely. As direct sourcing and product partner negotiations drive product margin expansion, we are reinvesting some of the savings back into the business to further elevate our customer experience. For instance, in the third quarter, we generated significant margin savings and reinvested 60 basis points in various store labor projects. We are on track to achieve a full-year goal of high-single-digit direct sourcing penetration, and we will exit this year directly sourcing more than 10% of our purchases. We look forward to the measured expansion of the program over the next several years. Turning to freight. Like others across the industry, we’re facing inflationary pressures on transportation costs. In the near-term, those pressures are being amplified by tariff-related surges and port congestions as retailers pull forward shipments. We are prioritizing our international shipments to ensure that we have the products needed to support our inventory position, heading into fiscal 2020. However, this has caused delays in receipt of product and additional costs that are impacting us in Q4. Even as we face these additional freight pressures, we continue to leverage our growing volume and our transportation partners to help mitigate the impact. At the same time, we remain proactive at identifying and implementing productivity measures. For instance, the introduction of floor loading rather than palletizing product at our DC is currently driving freight efficiencies for us. And at the end of Q3 floor loading was implemented in 120 of our 178 stores. Finally, as we think about next year, and the addition of our second distribution center, we’re taking a very-measured and thoughtful approach to ensure smooth execution. As a reminder, we are opening a capital-light second generation facility in Pennsylvania and implementing the same proven cross-dock capabilities in automation currently used in our Texas-based distribution center. Within the DC, we’ll have a total capacity to serve approximately 350 stores, nearly twice our current 178-store footprint. We are in a deliberate and fortunate position of having excess capacity at our Dallas facility, enabling us to open the new DC in early fiscal 2020 and then ramp it gradually. While this may be financially inefficient in the short term, we believe, it is the best way to avoid potential business disruptions typically associated with the DC launch. We’re excited about the growth and efficiency potential it unlocks for our supply chain over the long term. With that, I’d like to turn the call over to our new CFO, Jeff Knudson, who will update you on the cost profile of the second DC, as well as walk you through our financial performance and outlook for Q4. Jeff?

Thank you, Peter, and good morning, everyone. Before I begin my prepared remarks, I’d like to start by saying how excited I am to be part of the At Home team. I spent the last two months immersing myself in the business and working in our stores. And I’m very impressed by the caliber of this team and the significant growth opportunity ahead of us. We’re still in the early days of this growth story, and I’m looking forward to working with Lee, Peter and the entire management team as we continue to execute our strategic objectives and position At Home for long-term financial success. For those of you on the call that I don’t know yet, I look forward to meeting you and working together. Moving on to our third quarter results. Q3 was a great quarter, ahead of our expectations with net sales growth of 25.5%, comparable sales growth of 5.2%, and continued strong productivity from our new stores. The third quarter marks our 19th consecutive quarter of positive comparable store sales growth with broad-based strength throughout the quarter across all regions and price bands, and in both our everyday categories and holiday assortment. As expected, we also benefited from cycling 820 basis-point headwind in fiscal 2018 from Hurricanes Harvey and Irma. Our everyday categories have been strong through the first three quarters of the year and our seasonal business gained momentum with the arrival of the fall and holiday decorating seasons. From a profitability standpoint, we more than doubled third quarter pro forma adjusted EPS at $0.18 and generated significant margin expansion. Gross margin increased 280 basis points to 32.2%, driven by a mix of favorable product partner negotiations, fewer markdowns than last year and year-over-year timing impact of other non-recurring items. Our direct sourcing efforts continue to ramp and drive product margin expansion, which was offset by higher occupancy costs due to sale leaseback transactions. Third quarter adjusted SG&A dollars delevered 120 basis points to 23.9% of net sales and included more than 50 basis points of planned marketing investments and 60 basis points of incremental store labor hours, which Peter just discussed. For the full-year, we expect approximately 40 basis points of marketing deleverage and slight deleverage in store labor funded by continued strong sales growth and gross margin expansion. In Q3, our SG&A investments and gross margin favorability resulted in 61% adjusted operating income growth or a 170 basis-point expansion in margins to 7.7%. Year-to-date, our adjusted operating margin has increased 50 basis points to 9.6% and we continue to expect slight operating margin expansion for the full-year, in line with our growth algorithm. Interest expense of $7 million increased due to a rising interest rate environment and increased borrowings on our asset based lending facility to support our growth. As we noted last quarter, we are focused on having an efficient capital structure as we continue to scale the business. We recently explored an opportunistic refinancing of our term loan facility as part of a broader strategy to lower our overall cost of borrowing. Given current market conditions, we instead entered into a $50 million add-on to our existing term loan facility. We used the net proceeds to partially pay down our ABL. And we'll continue to evaluate opportunities to ensure that we have the best capital structure to meet our needs. From a tax perspective, we recognized income tax expense of $1 million for the third quarter. Our underlying tax rate before discrete items was approximately 23%. However, the tax benefit from stock option exercises favorably impacted our effective rates. On an adjusted basis, our Q3 and year-to-date effective rates were 11.3% and 6.7%, which reflect $1.3 million and $9.2 million of non-IPO-related stock option benefit, respectively. As a reminder, our adjusted metrics exclude both the costs and tax benefit of stock options related to our IPO. In total, we recognized $1.4 million of stock option tax benefit in Q3 compared to our guidance of $1 million. Year-to-date, the total option benefit is $9.8 million. Turning to our outlook. We expect net sales of $347 million to $352 million and plan to open seven new stores in Q4. On average, we expect that these new stores will be opened for approximately half the quarter. As Lee mentioned, we had a patch of softness earlier in the fourth quarter during a few of our highest volume weeks. The business has since rebounded, and we believe that strong multi-year comparisons and everyday product delays caused by tariff-related port congestion were both factors. Our fourth quarter comp outlook of 1% to 2% or 6.2% to 7.2% on a two-year basis reflects the previously mentioned factors in early quarter performance. We expect approximately 60 basis points of operating margin deleverage in Q4, driven entirely by approximately 115 basis points or $4 million of pre-opening expenses related to our second distribution center. Given an earlier Chinese New Year in 2019 and the tariff-related port congestion, we are pulling forward inventory flows year-over-year and expect the resulting incremental store and DC processing costs to be offset by leverage in other areas. Because of this pull forward, we are planning for year-end inventory to be higher year-over-year before normalizing in fiscal 2020. We estimate interest expense of approximately $7.7 million and a 20% effective tax rate. In fiscal 2018, Q4 pro forma adjusted net income included a benefit of $7 million related to option exercises. For fiscal 2019, we do not expect the fourth quarter tax benefit from option exercises versus previous guidance of $1 million. We expect pro forma adjusted net income of $30.2 million to $32.2 million. And assuming 66.6 million shares outstanding, our fourth quarter pro forma adjusted EPS outlook is $0.45 to $0.48. From a full-year standpoint, the continued outperformance of our new and non-comp stores enables us to reiterate our full-year net sales outlook of $1.159 billion to $1.164 billion. Considering our fourth quarter guidance, we are reducing our full-year comp outlook to 2.2% to 2.5% and find two-year stack of 8.7% to 9%. However, we remain laser-focused on our discipline model. And we now expect to expand gross margin for the year by approximately 75 basis points compared to our prior 50 to 75 basis-point estimate. With planned reinvestments and labor hours, marketing and preparations for our second distribution center, we continue to expect slight operating margin expansion for the year and are narrowing our adjusted EPS range to $1.28 to $1.31. Finally, from a CapEx standpoint, we are increasing our expectations for the year, primarily driven by an opportunistic purchase of several fiscal 2020 stores from a major retailer. For all other details on our full-year outlook, please refer to our earnings press release. We’re still finalizing our budgeting process for fiscal 2020. And as usual, we’ll be giving guidance for next year on our fourth quarter earnings call in March. However, we would like to give you color on how we are thinking about the impact of next year’s biggest strategic investment, our second distribution center. As Peter discussed, we’ll be bringing on our new DC in a very thoughtful, measured way. Because we are ramping it methodically in the first half of the year, we believe our second DC will be a net margin headwind of approximately 100 to 110 basis points for the full year. This estimate includes the related freight benefits that will begin flowing through with inventory turns in late fiscal 2020. Once fully ramped, we expect the second DC to generate meaningful transportation efficiencies, beginning in fiscal point 2021. Ultimately, this is a strategic decision for us and an important investment for the business as the additional distribution capacity will support store expansion and the long term growth rates we focus on delivering. We will be in a position to give you more precise guidance on fiscal 2020 and discuss any other puts and takes during our Q4 call in March. I will now turn the call back to Lee, for his final remarks.

Thank you, Jeff. We're pleased to deliver strong Q3. And despite a slightly softer start to Q4, we’re well-positioned for another year of significant growth. We're making progress against all of our strategic priorities as we continue to invest in the customer experience and strengthen our superior value proposition. We remain committed to our longer term growth targets, as we make the infrastructure investment in fiscal 2020 to further solidify our foundation and position us to capitalize on the long runway of growth that lies ahead. Melissa, please open the lines for questions.

Thank you. [Operator instructions] Our first question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your questions.

Good morning, guys. I was wondering if you could -- we could talk about the fourth quarter for a minute, if there's any other way you can sort of quantify how it started, whether the business is running somewhat negative and it’s running much stronger now, mid single digit, any kind of directional guidance so we can get comfortable with where the business is running today?

Yes. Simeon, it’s Lee. I would tell you, the third quarter was very strong throughout the quarter. You should know that. As we ended the fourth quarter, it continued to do well, and then we hit a patch of softness for a few weeks. Those are big weeks for us. And when you have those big weeks, we just wanted to be very honest and transparent with you that that happened. The business rebounded very nicely. We're very pleased with how our business is performing since then and into December. But, we want to be practical about the guidance. And so, we feel like, overall, we wanted to reiterate our full-year. We feel like this is going to be, remember, our 20th straight quarter of positive comps. So, the fourth quarter, despite an easy comparable will be another strong, nice quarter for us. And the momentum has returned in the business. And we feel good about it. Just those two weeks are big weeks. And so, that just kind of holds back. And I would also tell you that those new stores that we have are performing very strong, and that's why we continue to commit to our revenue. Our new stores are really outperforming even our own expectations.

Okay. And then, related to that, I think it was mentioned that there was somewhat of a lack of product that may have hurt the business in those couple of weeks. It sounds like that didn't affect the third quarter to any extent, if you said it was consistent, but curious if there was any impact for the third quarter. And, is there an expectation, can it be a practical expectation of how long this issue will last related to getting inventory?

Yes. I would tell you, it didn't appreciably impact Q3. It hit us more appreciably in Q4. And I would tell you, these delayed receipts were several times larger than normal. And you may have heard about port congestion in China that had affected us. It didn't affect us from a holiday standpoint because as you know we bring our product in early, and that’s the nice thing about it. So, we said obviously Christmas in August. Sometimes people are a little surprised with that early, but we have empty space, because we use space to our advantage. So, Halloween, harvest and Christmas are well-positioned. This is everyday product that got delayed. This is everyday product that actually has fueled our performance all the way through Q3. We’ve talked about Q1, Q2, Q3. And so, those items, which are essentially replenishment items, think about the everyday business being, some of it being basics and fundamentals that people need all the time, when you’re missing some of those, it affects you. Some of that is clear. We expect that to continue to clear. I would give a hats off and a shout out to Peter and his team on the operations side where they expedited freight. We obviously had to pay for some container shipments to expedite those. It was great freight team and third-party partners. But that did help -- that didn’t hurt us during that time. But I would tell you, the freight is coming in now. We’re really pleased about the DC capacity here and plan to be able to handle that surge that’s coming through that was not planned. We’ve done a much better job throughout the year to bring inventory evenly. But now we have a surge coming through right now. They’re handling it well. That’s why we feel good about the back half of Q4. And what I also feel good about is the work that we’ve done, that Peter and his team have done to set us up to have the inventory ahead of Chinese New Year, is the best preparation we’ve ever had for that. So, as opposed to other years where we had light inventory every day in Q1, because of Chinese New Year timing, we won’t have that this year. So, we’ve set ourselves up as we always do for long term performance and not just short term.

If I can just sneak in one more for Jeff. He mentioned that there was an expected net headwind related to DC for next year, which I don’t think is a big surprise, but I just want to clarify net headwind. Is that just from the DC alone or are you speaking to overall gross margin net headwind and/or overall EBIT margin for next year?

Yes. So, Simeon, we’ll give more precise guidance for the overall P&L on the March call. But, the 100 to 110 basis points, it’s just from the DC alone.

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

So, maybe just to start off, so, it sounds like there has been a return to normal in the base business here in the last several weeks. Is that correct?

Yes.

Okay. And so, when you think about -- how has seasonal performed here in the fourth quarter? Product certainly looks as good as it’s ever been, Christmas holiday. So, is that basically in line with your expectations or perhaps even better?

Yes. We’re really pleased with seasonal. I would tell you, our Halloween, harvest and holiday assortment were the best I’ve seen, honestly, out of our team, I’m glad you feel the same way. I’m glad our customers, even more importantly feel the same way. Because if we like it, that’s fine. But that doesn’t really matter. Our customers like it, it’s meeting our expectations, we’re really pleased with it. I would tell you the reinvention trees, which is a really focus of us has gone very well. We love the diversity that we have in the assortment, the best, I think we’ve ever had in trees. Customers are resonating with it. We’re very pleased with our -- with overall our theme. Our themes are updated very strongly. And what’s also interesting is we -- our assortment, as you know, can glide as the customers’ preference glide. And so, when you think about modern farmhouse and contemporary, we bought into those trends, and those have performed very well for us.

Okay. And then, maybe as a follow-up, if you think about -- you've done a pretty good job, right, of balancing investments with harvesting of the business. So, if you think about fiscal ‘20 and the investment in the DC, maybe talk about the offsets to some of that pressure ramping up direct sourcing, what do you do with advertising next year, you’ve kind of flatten that out; what do you do to mitigate the impact of the DC investment on the bottom line?

Sure. What I would say is, John, as you know, in our long-term model, we've always said that we're going to continue to focus on driving top-line gross margin benefits through direct sourcing and other efficiencies to help fund investment against marketing, reduction in price and better quality and labor investment. This year, we’re going to have record earnings. Okay? So, when you think about that long-term financial model we've given you, high teens unit growth, high teens revenue growth, mid-20s operating income growth, that is a long term model. And this year, we've far exceeded it. We will far exceed that model. And so, what we're doing is we continue to use that -- those performance on top -- and we've talked about direct sourcing; we're really pleased with the progress against that. We'll exit this year at a 10% direct sourcing rate of our total cost of goods sold, and that next year will continue to grow. That momentum in there is continuing; we’ve enhanced the team there. So, we feel really good about the progress. And so, next year, we have to make an investment against our distribution center. That's an investment that we're pleased with. I'm really excited the fact that with -- that's a scrappy approach, we've actually got a second generation DC. This is not a big investment for us, because we’ve already -- the building has already been built. We're taking it over in western -- in eastern Pennsylvania. And so, it shows up obviously in operating expenses. You have rent in an inefficient startup. All of our team, we've got a very experienced management team, we've all opened up DCs before, we all know that they don't always go as planned. So, what we've done is we've planned that that maybe the case. So, we were super inefficient to our first year. We've got our DC today in Plano, could handle all of next year without having to have a new DC. But we've decided to open up this one a year early to make sure our business is never interrupted. We get this thing up and going. It runs -- it's an automated cross-dock facility. Peter has designed it such that it’s got a manual cross-dock backup plan too, if anything were to happen with the automation system. So, we have built in all the contingencies in this. It's going to be slightly inefficient. But what you're going to like is, now it's going to support 400 stores between these two DCs, which will set us up for growth long-term. On the details of the margin pieces, I'll turn that over to Jeff.

So, as we think about the DC next year, obviously, the headwinds will be more front half loaded. And then, in the back half of next year as we -- later in the year, as the inventory starts to turn and we get some of those freight benefits on the mileage side, that will turn too. And then, we're also going to cycle the preopening costs. So, the net headwind of 100 to 110 basis points will be more of a front half story than a back half story. And then, from just another headwind and tailwind standpoint, obviously, we'll have the benefits of floor loading and our continued ramp on direct sourcing rolling through next year. But then, as Peter mentioned, we'll also have the freight inflation that we're incurring right now due to port congestion. To expedite product, we'll roll through next year, as well as higher occupancy costs from our sale leaseback transactions, and then we'll get into more details on the March call next year.

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

I was wondering if we could discuss the underlying volatility of comp store sales this year. You started the year -- there was some bad weather in the first quarter, and that impacted your business. The second quarter, it seemed like there was a bit of operational issues. The third quarter was outstanding, and now we're back to the fourth quarter where you had some soft weeks. When I try to assess the third quarter and how outstanding the comp is, from your perspective, is that more just a normalized comp, business as normal, or is there something special to the comp in the third quarter or the business in the third quarter that really drove the five-plus comp?

Thanks, Matt. It's Lee. The third quarter is a normal performance for us. I would tell you it's broad-based, it's across all categories, it's across all geographies. That's how we plan the business. That's how we've operated. If you look at our five-year performance overall, and even in the past four years, we've averaged a 5% comp -- this is how we've been performing, and this is part of our model. Now, remember, we always guide from a low single-digit standpoint, but we plan for something that's in the mid-single digits, and in the third quarter, everything worked the way it was supposed to. Obviously, in the first quarter, demand was affected by weather. In the second quarter, we told you that our performance was slightly impacted by our own execution issues, and we would have had a mid-single-digit performance if it wasn't for that, which gave us confidence that Q3 was going to be the same thing, which was a mid-single-digit performance. In the fourth quarter, we hit an air pocket. We hit an air pocket for two weeks in November. Those are big weeks. We're telling you we're still going to hit our revenue; we're still going to hit our earnings. That would tell you also the beauty of this model. We're not going to change our business model for that. We're not going to go extra promotional. We don't have to. The holiday season is strong. And so, we feel good about that. But we hit an air pocket in that demand for those two weeks in mid-November. But I would say it's rebounded. It's rebounded nicely. We feel really good about it. If you think about the overall -- the overall performance of the fourth quarter, we had like the 25 comp over a 4.5, 5-year period. That's a big number. And I would tell you that we continue to comp, and this will be -- our fourth quarter will be our 20th consecutive quarter of same-store sales growth, and that's how we run the business. We focus on delivering same-store sales growth with a commitment of low single digits, and we focus on delivering new store openings, and those stores continue to execute well.

I was actually looking forward to next year and how easy those compares look, but I will say this -- if I could switch the topic to the tariffs, you gave us several buckets of how you're dealing with that. Could you give us some sense of how much of each bucket, like is it a third, a third, a third? A third price increases, a third vendor negotiations, or is it more price increases, just so we can have a sense of how you're approaching it?

That 10% tariff -- we knew it was coming. We had the chance to prepare for it. We had a supplier summit in August, we brought our top 100 suppliers in to the U.S., here in Dallas. Then, we had a supplier summit in China where we brought the next 100 suppliers in there, reviewing our plans and requiring them to come with mitigation and migration plans to help us offset those increases. As you know, the exchange rate has worked to our favor, so the majority of our tariff mitigation plans revolved around negotiations with our partners and some value engineering. Then, the rest was left to a small amount of price increases, and we didn't take that across the board. We only took it where the price is available. We're super slow on taking price increases. We comp shop every single month. We know what our competitors are charging for similar looks. At that time, then, we decided to take some strategic price increases that still kept our prices below everybody else's sale prices. Third parties have continued to do pricing checks for us, we continue to be 30% below Wayfair, we're significantly below Amazon as well, and all of our competitors -- we're below their sales prices, so we're slow to take price, but we did take a little bit of price, but the majority of it was with those product partner negotiations and some value engineering.

Thank you. Our next question comes from the line of Jon Matuszewski with Jefferies. Please proceed with your question.

Great. Thanks for taking my questions. Just to start off, I think Wendy has been with the company for around six months or so now. Could you just talk to what progress she's made thus far, where her strategic priorities lie in the assortment, and are there any certain categories that she's super focused on? As I understand it, I think she has some involvement in the direct sourcing effort, but I'm thinking more so on the consumer-facing side of the business. Thanks.

Sure, Jon. So, Wendy was brought in -- thrilled to have her, just like Jeff, being new to the team. They come from great retailers. So, Wendy came from DICK’S Sporting Goods, and she ran the hardlines business there, and before that, she was at Best Buy. Both of those are great retailers, mature retailers, have great systems and merchandising processes. I wanted to have those merchandising processes benefit our business, and we've already seen benefits on that. She has gone through an end-to-end effort with Alyssa, who's now our Chief Design Officer, who was the Chief Merchandising Officer, who's still working hand in hand with Wendy, and they've outlined the entire merchandising process end to end, working also with Peter on the operating side -- because he handles merchandise planning and allocation -- to say who owns what. Given the fact that we have an increased direct sourcing capability, we have a new product development team, we have a new trend team, how do we make sure this works elegantly to deliver fresher products faster and still deliver our financial expectations? So, that's all been mapped, that's been outlined with the team; she's already implemented that across the organization and outlined how we're going to behave going forward. We also brought in Chad Stauffer, who was with Bon-Ton as President of Merchandising and Marketing, and he is now Head of Everyday. Wendy and Chad joined around the same time -- actually, I think Chad beat Wendy in the door by a few weeks. Chad's been focusing on the everyday business to make sure that out-of-stocks go away, to make sure we actually address out-of-stocks, and that we buy behind bigger ideas. Those are going to start showing up next year, as our everyday items have already been flowing through pre-Chinese New Year. So, I'm really pleased with what Chad and Wendy are doing in that, and obviously, the seasonal business has been performing well from a holiday standpoint. She has focused on making sure that our inventory positions are stronger in the patio and garden because they were softer on our part this year. We did not bring in the inventory we needed to meet the demand. So, she's leaned in pretty hard there to make sure that we execute against inventory expectations so that the assortment will deliver on those customer expectations. So, I'm really pleased with her early progress, and we'll see the benefits of Wendy and her entire team over the next number of years.

And then, just one more, I know the offpricers have been more vocal lately about their commitment to the home category. From a consumer standpoint, I think your depth of assortment is probably one of the many things that set you guys apart from them, and that channel happens to be more hit or miss with product availability in the category, but could you just talk about from your view, what's your strategy to continue to defend your share with their renewed focus on the category?

Sure. Hey, I love our position. The fact that we carry every style of home décor at prices below everybody else's sales prices -- that includes those folks that you just mentioned, so our prices are competitive to those folks, but our assortment is unmatched. Fifty thousand SKUs, 20,000 new a year, all new archetypes are covered. Think about how things have shifted in demand from a style preference. We already have it in our store. As customers' preferences change, we can do that too. I love our price position. If you think about our customer, she loves newness, she loves the treasure hunt, we have that in our store. If you think about the overall industry, it's super fragmented. Everybody's out there selling home décor, but nobody has any appreciable share in the market, but the market itself is growing, and we're taking share. We're continuing to take share. When you grow 25% in the quarter and the industry is only growing 2-3%, guess who's taking share? We are because our price and our assortment is unmatched. So, I really love our position. The fact that we've delivered 18 straight quarters of 20% sales growth at a time where everybody's leaning in to home and 19 straight quarters of same-store sales growth when everybody's leaning in to home -- it tells you I love our mix of assortments and I love where we're headed.

Thank you. Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed with your question.

I wanted to follow up on the loyalty program, the credit card program. You mentioned 3.5 million members. Lee, what are you seeing in terms of frequency of shopping out of these customers? How big is this becoming as a percentage of your sales and how powerful of a lever do you think it could be for you as we look out to next year?

I am super thrilled with 3.5 million customers. Think about it -- it's only been five quarters that we've had this loyalty program since we've launched. Now, we've got these 3.5 million members. We can see their transactions, which we never saw before. We have a whole lot more information about them demographically. This is starting to inform the way we communicate. So, just this quarter is the first time we've actually been able to start to message a little bit toward what their transactions have been in the past. If I like modern, I'm going to get more messages around modern assortment than I am going to get around traditional. So, I love the fact that now that we have their information, we can do e-receipts. I've been buying in our store for a long time. Now, when I buy at the store, they ask for my loyalty number, I give it to them -- which is my cellphone number -- by the time I hit home, it seems like I get my e-receipt right away. It asks me right away, "How was your customer experience?" We're taking that data into our field organization to immediately impact the customer experience going forward. They also answer a few more questions, which we didn't have before. We had to do customer research. Now, we get customer detail and response. Once we have the detail, we can do suggested selling. Now, we know what they bought. For example, I bought a bunch of dining chairs -- I did a remodel this quarter. I bought a bunch of dining chairs, redid the entire dining room, kept the table I had, but we did exactly what we expect from our customers and I freshened all the chairs. I bought 12 new chairs. And then, in my email later, I also saw, “the people that bought this also bought this." We weren't able to do that last time. So, with that design archetype and everything else, we can say, "Hey, these are the items you might want to think about on your dining table.” So, all of this is going to inform us going forward. The basket, by the way, is slightly higher, so we like that in our loyalty customers. Obviously, in the credit card customers, it's much higher. Now that we've got this credit card program rolling, our patio assortment coming up, that's where -- and furniture, that's where people spend larger tickets, and they use their credit card. We like that. And so, long term, we expect that we will drive frequency and basket over time.

And if I could follow up about the fourth-quarter trends to date here -- just to be clear, it sounds, Lee, like this is not an issue with the seasonal offering and the holiday business itself. It may have been a little bit of a headwind from what inventory you did happen to have in stock at the time, which now has been rectified. Is that right?

Yes, not a holiday issue at all. We were pleased with holiday; we were pleased with it before. This was a two-week -- some people call it an "air pocket." We didn't have some of the product we also needed because of the port congestion. That is clearing, but the business -- regardless of that -- has rebounded very nicely.

Are you able to quantify how much was from port congestion issues?

We are still assessing it. We're in the middle of a quarter. What we're trying to do is give you real-time information. We've always been transparent with everyone, and that's what you want. We've decided, "Hey, this is where it is." We want you to have new guidance to let you know that. We want you to know that what we do know is it was an air pocket, it was two weeks of affected business, and that obviously affects our comps. We say we're still going to hit the full year. We're still going to have gross margin performance, which we like. We're not going to go promotional. Other people have done that. We don't have to. And so, it's just this moment in time that happened, and it happens in retail. Over 13 weeks or 52 weeks, you're going to have a couple weeks. Unfortunately, it's at a time where these weeks are double other times in the year, so it clipped our guidance for comps.

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

So, just with all the moving parts next year around DC costs, higher occupancy, and offsets from direct sourcing, et cetera, do you think it's fair for us to expect EBIT margins in your fiscal ‘20 to be below the long-term model for 20% growth?

We'll get into all those specifics on the March call. We wanted to give everyone clarity on the DC and that impact, and what we can tell you right now is we see that investment being 100 to 110 basis-point headwind to our operating margins next year.

And just to unpack that $4 million of pre-opening in Q4, can you quantify a little bit what's rent, what's labor, what's recurring, what's nonrecurring? And then, for next year, just to button it all up, what level of comp do you think you'll need to leverage SG&A given all these moving parts?

The $4 million -- it's all the buckets that you just outlined on the $4 million of the pre-opening costs, and as a reminder, those costs -- because they're pre-opening-related -- are going to roll through SG&A, and that will be a 115-basis-point headwind on our Q4 operating margins. Obviously, we would be leveraging very nicely in the fourth quarter excluding that impact, and the full year, we still expect it to be in line with our long-term growth targets, and we'll leverage those margins modestly.

Zack, for more color on that, too, we take the building -- we're not pumping inventory through the system, but we take the building, we hire the team, we install the automation equipment. All those costs -- it's not running yet -- flow into this quarter. That's what happens when you have start-up costs. But then, we'll start running product through that DC in the first quarter. It'll be inefficient because we want to make sure it operates properly while we're running our Plano DC full steam ahead, so we'll have two DCs running when we really only need one, but by the end of the year, we'll have an efficient format and an efficient distribution system.

Got it. And, just to clarify, those are all in SG&A in Q4, and then, once the DC opens, it'll shift into cost of goods next year?

That's correct. Again, that impact will be more front-half-loaded than back-half-loaded as we start to get the benefits and cycle the $4 million in the fourth quarter.

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

Good morning. Thanks for taking the questions. So, the first one -- just a quick one on CapEx. So, there'll be some pull-forward as you guys are being opportunistic on stores this year. How does that affect CapEx -- our expectations for next year?

So, you're right. With that opportunistic purchase -- and, that's the beauty of our flexible real estate model, we did pull some spend into this year. It's going to allow us to open those stores early next year. As Lee said, we already have 10 stores under construction, and we feel great about our pipeline. As it relates to the rest of the details on our spend, we'll talk more about that in March, Curtis, for fiscal year '20.

Okay. And then, not to belabor a point here -- I'm sorry, Lee. Go ahead.

One thing I would say is this opportunistic purchase reflects the relationships we have with these large retailers. So, when those become available, they call us first, which we love. We've built a great relationship. We know people are going to optimize their fleets. They call us, we have the opportunity to go after them, we can do a bundled deal, we can go back and forth with those retailers about that situation. They know we're the only national player out there getting big boxes. That allows us to make efficient purchases, it allows us to have those quick responses, and also, since we've already scored every big box in the U.S. of what it would be as if it was an At Home, we know what the sales call would be, we can move fast, so when these retailers call us, they tell us, we say, "Does it meet our market plan?" Yes. "Is it a location we'd want?" Yes. "Would that store be a productive At Home store?" Yes. We can respond so quickly that they can get their job done and get their real estate committee to approve it right away.

And then, not to belabor a point here, but how conservative is the 1-2% comp guidance for 4Q? I understand that the business has returned to strength, but you still have a ways to go in the quarter, and there's still plenty of uncertainty around what's going to happen with tariffs. Given that the current share price is not pricing much, if any, comp growth at this point, why not be more conservative?

Well, we're only a few weeks into the quarter, and we just want to be realistic with you of what it's going to be. We obviously don't give you a number we don't feel comfortable with. We gave you a number we feel very comfortable with. We know these are higher-volume weeks, so it's going to clip our comp, but if you noticed, in the last number of quarters, we said, "Here's what we think it's going to be," and we go to focus on trying to meet or beat that number. That's our focus. We've still got a lot of quarter to deliver, and we'll let you know -- when it's done -- how we did.

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

Okay. Well, thank you so much for joining us. I know we had to move the call because of some outside events, and so, we appreciate you being willing to meet with us this morning, and also, we know it jumps on a lot of other calls, so, thank you for your ability to adapt to that. Thank you again for joining us. We're excited about the growth ahead. We've got such potential in this business, and we continue to deliver, obviously, sales growth over 20% and comp store growth for now 19 straight quarters, and we look forward to sharing our progress over time, and also talking to you over the next couple days and weeks. Take care, and have a great and happy holiday season.

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