Greetings, welcome to the At Home First Quarter Fiscal 2020 Earnings Call. At this time, all participants will be in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I'll now hand the conference over to Bethany Perkins, Director of Investor Relations. Ms. Perkins, you may now begin.

Thank you, Rob. Good morning, everyone, and thank you for joining us today for At Home's first quarter fiscal 2020 earnings results conference call. Speaking today are Chairman and Chief Executive Officer, Lee Bird; President and Chief Operating Officer, Peter Corsa and Chief Financial Officer, Jeff Knudson. After the team has made their formal remarks, we will open the call to questions. Before we begin, I need to remind you that certain comments made during this call may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. In particular, statements about our outlook and assumptions for financial performance for fiscal years 2020 and 2021 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 obligation 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 net income and adjusted earnings per share. A reconciliation schedule showing the GAAP versus non-GAAP financial measures is available at 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, and good morning, everyone. And thank you for joining us to discuss our results for the first quarter of fiscal 2020. Q1 was a challenging quarter for us. We faced unusually adverse weather across most of our footprint, which led to a competitive, highly promotional spring across the industry. Favorability in new store weeks and the solid productivity in our non-comp stores enabled us to deliver nearly 20% net sales growth despite a comp store sales decrease of 0.8%. We delivered $0.03 of adjusted EPS, at the low end of our outlook. Jeff will walk through the puts and takes of our 3.4% adjusted operating margin, as well as our updated guidance in a few minutes. While we continue to deliver over 80% of our net sales at full price, we proactively took seasonal markdowns earlier this year due to the lighter weather related demand, which impacted our Q1 profitability. We're taking a swift action on additional markdowns in Q2 and Q3 to ensure we have the freshest and most competitive assortment in the industry. Although, the adverse weather continued into the second quarter, we've been pleased with the rebound in our business as weather has improved. However, in light to the soft start of the year and recent industry trends, the related markdowns, and the impact of recent tariffs, which I'll discuss shortly, we've decided to take a more cautious view of the remainder of fiscal 2020. As such, we're taking down our outlook today. This is not an action we take lightly, and we are disappointed. But we're laser focused on driving this business to its full potential. I continue to have confidence in our everyday low price model and the progress we're making against our strategic priorities and we have several initiatives in place to drive growth this year. From a merchandising standpoint, I'm excited about our upcoming category reinventions and the second half seasonal assortments. As a reminder, we have fresh portion -- we refreshed portions of our assortment every year to add incremental newness and elevate our visual merchandising. These category reinventions create more opportunities for us to highlight that there is always something fresh and exciting about the At Home assortment, giving our customers a reason to buy, again and again. Our fiscal 2019 and 2020 product reinventions continue to outperform the chain and our Q2 lamp reinvention is off to a very strong start. The strength we've seen in reinvented accent rugs, window treatments, and bath tells us updated textiles are resonating with customers. As a result of that, we plan to pull forward additional bedding reinvention into this year. I'm also excited about our seasonal assortment for Halloween, Harvest, and Christmas that will be arriving in our stores this summer. Over the past five years, we've driven a cumulative comp of more than 25% in Q4 and have solidified our position as the holiday headquarters for our customers. We look forward to meeting all their seasonal decorating needs, again this year. From a marketing standpoint, in Q1, we increased brand awareness once again and our loyalty program continues to grow and it's at 4.8 million members currently. We're driving more traffic to our website and our email outreach is engaging more customers than ever. We're very encouraged by the early results of our comprehensive Perfect One campaign, which gives our customers confidence that with At Home selection and value, she'll find the perfect products at the perfect price. We're reaching out to customers across both digital and traditional channels and we love the positive return we've seen from our digital and direct mail efforts. With our growing loyalty program, we're learning more and more each day about what works. In the back half of the year, we're refining our media mix to shift even more of our advertising investments into the highest return channels. I also continue to be very pleased with our new stores, which continue to deliver very strong productivity. We opened 11 new stores in Q1 and we are especially pleased with the performance our first California store. Our real estate and new store opening teams executed flawlessly and actually opened new stores in the first quarter earlier than planned, driving top line favorability. We're on track to open two-thirds of our fiscal 2020 class by the end of Q2, which should be a back-half tailwind for us versus last year. And finally, we're making important progress towards our fourth quarter buy-online-pickup-in-store test. We rolled out store level inventory visibility to the entire chain in Q1,ahead of schedule, gathered all of our requirements and identified our key external partners to support the test. If anything, the weather-related softness in Q1 and early Q2 has strengthened our resolve to test and evaluate this omnichannel opportunity. Before I turn the call over to Peter, I want to touch on the recent developments in trade negotiations between the U.S. and China. We mitigated the initial 10% tariff on Chinese imports through a combination of value engineering, negotiated price reductions, and strategic retail price increases, without a material impact on our business. While we are prepared to intensify our approach if tariffs were to increase to 25%, our initial fiscal 2020 guidance assumed no further increases from last year. With tariffs now raised to 25%, we have an even sharper focus on collaborating with our product partners to mitigate the increased cost. We'll be leveraging both our substantial growth and the movement in the exchange rate to offset as much of the tariff as possible. Because we will not pass along the additional price increases to our customers, there will be some increased costs that we cannot mitigate. We are incorporating that unmitigated portion into our margin outlook today. As always, we remain committed to giving our customers an incredible value and the broadest, freshest, assortment in the industry. Now, I'll turn the call over to Peter Corsa, our President and Chief Operating Officer to drill into some of our operational initiatives. Peter?

Thanks, Lee. Good morning, everyone. I'd like to start-off by discussing our inventory growth in the first quarter. Heading into fiscal 2020, our plan called for a step up in inventory to support new store growth and opening those stores earlier this year. As we shared, we have been really pleased with the cadence and performance to-date of our fiscal 2020 stores. We also have strategically begun the year in a strong position to take advantage of seasonal opportunities that were under-inventoried in the first half of last year. With both the weather and the resulting promotional environment working against us, we exited the quarter with more product than we expected. We are taking swift markdown actions that will result in additional margin pressure in Q2 and Q3 before inventory normalizes in the fourth quarter. Despite the weather related challenges, I'm proud of our stores and distribution center teams for getting products quickly through the DCs to the store and out to the sales floor for our customers. Speaking of the DC, by the end of Q1, we ramped our second distribution center in Carlisle, Pennsylvania to support more than 100 stores. I couldn't be more pleased with our team for an incredibly smooth launch, delivering the second DC, not only on schedule, but under budget as well. As we continue to open new stores across the country, we will allocate those stores between our Plano and Carlisle distribution centers to optimize freight costs. From a product standpoint, we also continue to be pleased with our efforts around product development and direct sourcing. We remain on track to exit fiscal 2020, directly sourcing about 15% of our purchases, signifying excellent progress on our journey to approximately 30% penetration in the next few years. Finally, I want to give a quick update on the shrink reduction – or the shrink discussion we began last quarter. In response to the unexpected increase in shrink, we recorded in the fourth quarter last year we increased the operational focus of our entire field organization. This effort included more attention to store preparation, account processes and staffing. Based on the early reads from recent inventory counts, our overall efforts appear to be driving shrink improvements. We're continuing to pursue these efforts and we'll update you again next quarter as we count our next cohort of stores. With that, I'd like to turn the call over to our CFO, Jeff Knudson, who will update you on our Q1 performance and our outlook for both Q2 and the full year. Jeff?

Thank you, Peter, and good morning, everyone. As a reminder, additional information is available in our earnings release, which is posted to our Investor Relations website. I would also encourage you to review the supplemental slides, we posted to the site last quarter, as well as the non-GAAP reconciliations included in today's release that illustrate our non-GAAP results as if the new lease accounting standard had been effective in fiscal 2019. If the standard had been effective last year, it would have impacted adjusted operating income by approximately $14 million. We estimate that, it will impact adjusted operating income in fiscal 2020 by $15 million to $16 million. While the standard reduces reported earnings both the underlying cash flows of the business and our analysis of real estate opportunities on a discounted cash flow basis, remain unchanged. Our discussion of adjusted metrics on the rest of this call will be on a lease-adjusted basis with fiscal 2019 results recast to illustrate the standards impact. Now, onto our first quarter results, our top line grew 19.6% to $306.3 million, which was slightly above our outlook due to favorability in fiscal 2020 store weeks versus expectations. For the quarter, comparable store sales decreased 0.8%. As Lee mentioned, weather was a hurdle for us in Q1. Approximately 75% of our stores are located in areas significantly impacted by weather in the first half of the quarter. Although, comps improved in the back half, weather didn't rebound as much as we expected and promotional activity in the space intensified. As a result, we took some unplanned markdowns that drove nearly 100 basis points of gross margin pressure in Q1. Gross profit increased 3.3% to $88.1 million, while gross margin rate decreased 450 basis points to 28.8%. Adjusting for the new lease standard, gross margin decreased 360 basis points on an apples-to-apples basis. In addition to the 100 basis points of incremental markdowns, costs associated with opening our second distribution center, or a headwind of 115 basis points, or 35 basis points favorable to our outlook. In line with the expectations we shared with you in March, the balance of the Q1 gross margin decline was due to non-product costs and nearly 50 basis points of deleverage from our fiscal 2019 and 2020 sale-leaseback transactions. Adjusted SG&A increased 210 basis points to 24.8% of net sales, primarily driven by the timing of increased store labor expenses within the year, pre-opening expenses due to opening our new stores earlier in fiscal 2020, and increased advertising to support our growing brand awareness. Adjusted operating income declined to $10.3 million and adjusted operating margin contracted 570 basis points to 3.4% due to the factors I just mentioned. Overall, our adjusted operating margin came in slightly below our outlook of 3.5% to 3.7%. Product margin contractions more than offset favorability in second DC cost and advertising expenses; a lot of which is due to timing within the year. Interest expense increased to $7.8 million due to higher interest rates and increased borrowings to support our growth. We recognized $4.2 million of income tax expense in the first quarter with a 23.4% effective tax rate and a 25% adjusted effective tax rate. In Q1 last year, our adjusted effective tax rate of 0.6% included $4.2 million of tax benefit related to stock-based awards. In Q1 fiscal 2020, we actually had a nominal tax expense related to non-IPO exercises. As a reminder, our adjusted metrics exclude both the cost and the tax benefit of stock options related to our IPO. In total, we delivered $0.03 of adjusted EPS in the first quarter of fiscal 2020. Turning to our outlook, we are revising our expectations to reflect a lower sales outlook, incorporating a soft start to the year and recent industry trends, higher than expected markdowns due to Q1 softness, the recently announced 25% tariffs and their expected margin impact, and higher freight costs year-over-year. In terms of the top line, we now expect net sales to grow 18% to 19% to a range of $1.37 billion to $1.39 billion, including full-year comp store sales of plus or minus 1%. We expect an acceleration in the two-year comp between the first half and back half of the year due to the merchandising and marketing drivers we described. As a reminder, our previous adjusted operating margin guidance of 8.5% to 8.7% incorporated 90 basis points to 100 basis points of headwind from the second DC, but was otherwise flat to prior year margins. Given the Q1 cost favorability, we now expect the second DC will be a full year operating margin headwind of approximately 80 to 90 basis points or $0.13 to $0.15 of EPS. From a cadence standpoint, the dollar impact of the second DC is similar across the first three quarters before decreasing in Q4, due to the benefit of lapping its preopening cost in fiscal 2019 SG&A and the realization of freight savings. As we've said before, once fully ramped, we expect the second DC to generate meaningful transportation efficiencies over time. Versus our previous guide, our revised adjusted operating margin outlook of 6.6% to 6.9% reflects approximately 190 basis points of incremental pressure. About 100 basis points relates to lower than expected product profit in Q1, the impact of markdowns primarily in Q2 and less so in Q3, and the new tariff exposure that we described. Fixed cost deleverage on lower sales expectations and higher than expected freight rates make up the balance of the headwinds. We are now assuming $33 million of interest expense and an effective tax rate of approximately 23% before considering the tax impact of certain stock-based compensation events, resulting in $44 million to $48.5 million of adjusted net income. Based on approximately 66 million diluted shares, we expect adjusted EPS of $0.67 to $0.74. As I mentioned last quarter, we expect that Q4 will be our strongest quarter due to the timing dynamics of the second DC, new store pre-opening costs, non-product cost in gross margin, and the lapping of significant tax benefits from stock award exercises in the first three quarters of fiscal 2019. As a result, we expect approximately two-thirds of our fiscal 2020 adjusted earnings per share will be generated in Q4. Drilling down to the second quarter, our comp store sales outlook of plus or minus 1% incorporates tough weather at the beginning of May and the subsequent recovery in two-year comp trends. We plan to open 13 stores versus nine last year and generate $340 million to $345 million in net sales, representing 18% to 20% growth year-over-year. From a profitability standpoint, we are assuming a gross margin decline of 320 to 360 basis points. First, we estimate approximately $3.5 million or 100 basis points of incremental cost from the second DC. Second, we expect 100 basis points of product margin pressure driven by increased markdowns, primarily related to seasonal inventory. Store level occupancy costs will increase about 50 basis points from sale leaseback transactions that occurred in the prior 12 months. The remainder of the gross margin decline is triggered by fixed cost deleverage on lower sales growth year-over-year, particularly in occupancy and depreciation. We expect Q2 SG&A rates to be roughly flat as pre-opening expense leverage offsets our advertising investment. All in, we expect 6.2% to 6.6% adjusted operating margins and $9.5 million to $11 million of adjusted net income. Assuming approximately 66 million shares outstanding, our Q2 adjusted EPS outlook is $0.14 to $0.17. Finally, we remain on track to open our largest new store class to-date at 36 gross and 32 net new stores, representing 18% growth for the year. We plan to open two-thirds of these stores in the first half of this year and we now expect roughly 90% of our fiscal 2020 mix will be second generation locations and purchases. As a result, our assumptions for net capital spend have decreased slightly to $200 million to $220 million. We continue to pursue efforts to reduce our capital spend and improve our free cash flow profile by exploring build-to-suit and buy-to-suit financing alternatives, managing our new store capital outlay and focusing on procurement and payment terms. The depth of our pipeline, strong productivity of our new stores, and strategic opportunities we have in both merchandising and marketing give us a lot of confidence in our business and the longer-term potential for 600 plus stores. With that, I'll now turn it back over to Lee for his final remarks.

Thank you, Jeff. Overall, we weren't pleased about revising our full year guidance, and I'm disappointed that we broke our streak of 20 consecutive quarters of positive comp store sales. However, we're moving quickly to get into a cleaner inventory position in the second half of the year and deliver more freshness in the assortment. Giving customers a compelling values at the core of what we are, and we're committed to our everyday low price model as we continue to expand our market share. We're also making necessary infrastructure investments in fiscal 2020 to support our foundation and position us for the long runway of growth ahead of us. Finally, I'd like to thank our team members for their continued hard work and dedication to these initiatives. Their support drives our business forward every day. With that, operator, please open the line for questions.

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question today comes from the line of John Heinbockel with Guggenheim. Please proceed with your question.

So, Lee, a couple of things. Let me start with -- though this is not a comp story, right? There's been last I don't know year and a half lot more variability than we may have seen before. Do you think something has changed in the macro environment or the competitive environment? Or I don't detect anything that has changed in your stores. So maybe touch on that because I don't know if it's just solely we hit these macro air pockets in weather or something changed in the environment you're looking at?

Well, John, weather was a big headwind for us in three out of the last four years for Q1. And so, we're more susceptible to it based on our product mix with the brick-and-mortar retailer, you're going to be -- with seasonal products, you're going to be more susceptible as well. That was a big issue. I would also say retailers and more online penetration have less impact in this. We saw that in Q1 with weather. We saw that in the air pocket in Q4. So that is an issue with our footprint, but we also value our footprint. We think that's a competitive advantage. We can have the largest assortment in-store. We are though positioning ourselves for the omni-channel test in the back half of the year, and that helps -- these situations help us think through those requirements to our business and what's possible and what's necessary to meet the needs of our customers to be able to find the largest assortment at the best prices. We're still super pleased with our pricing. We've got the best prices in the industry, against everyone, brick-and-motor and online, but we've got to be mindful of these situations, especially when whether hits you this way. I would also say that recent industry trends have been softer. We hadn't really felt it until Q1. I mean, honestly, we have a plus five comp in Q3 last year. So don't forget that. And so, what I'd say is, we hadn't felt it until this quarter. What I'd say is that we added -- that was a 12% to your stack in Q3 and an 8% stack in Q4, so -- and I would say that we are pleased with the recent trends that we're seeing in our business now in Q2 now that the weather has improved, but we do want to be mindful and realistic about what we're seeing in the business. And what I'd say is, I'm pleased of our position as the value player, but that puts us in the best position in situations and times like this. We did grow 20% in the first quarter. That means we're taking share and I like that. And we still see lots of opportunity in our business from marketing and analytics to help us get sharper. The loyalty and credit card, we're just starting to get benefits from it, from understanding our customer better and there's still a lot of opportunity in our merchandising to get stronger and better. So I still see opportunities in our business. I don't want to say that it was all weather and everything, but I would tell you, it was a very difficult weather period for us. So we have work to do on our end as well.

And it sound like, at least when you thought about the 25% tariff last year that you thought there was some pricing flexibility you had. Is what's changed the fact that the comp cadence has been choppier and you'd rather not take pricing in that environment? Or is there something else that because I think that's a little bit of a change in your thinking now?

Well, it wasn't a change in our thinking, for the first 10%, we did take some prices because as we did do a whole market. And as you know, we do comp shopping every month. We do it by department. And each of our teams look at the competitors not only monthly, but quarterly and we look at where our price positioning was and we felt like there was price opportunity there, slight price opportunity, so we took it. But we took as far as we could, and maintained our low-price leader position. Now that the tariffs have gone up, we don't believe we can take more price to continue to be the low-price leader. So we're going to have to and we are working directly with our supply base even as we speak to go get cost savings to help mitigate some of that. But some of that we're going to have to get pinched within our margins to maintain that position. And it's just a decision on our part -- in part too because of the comps. We certainly need to drive sales and to be -- to do that over the long term, we know the model for us is having the lowest prices and the largest assortment in the industry and we felt like we've gone as far as we could with price, with the last movement.

Okay, thank you.

Thank you, John.

The next question is from the line of Jonathan Matuszewski with Jefferies. Please proceed with your question.

Great, thanks for taking my questions. I guess, just, could you help us better understand the thinking behind the current 2Q comp guide. I may have missed it, but is that based on trends quarter-to-date or does it assume an improvement from quarter-to-date trends? And I guess similarly for the revised annual guide, part of that is of course driven by the late 1Q results. But just any thinking in how that down one to up one forecast was formed? Is that baking in an even more intensified competitive landscape ahead or does that assume current category trends persist throughout the year? Any more color on kind of 2Q and the full-year comp guide would be helpful? Thanks.

Sure. Jonathan, I'll cover Q2 and I'll let Jeff cover the full year guide. For Q2, we had weather in the first few weeks of the month, we -- May, we won’t get that back. So we've assumed that that's just gone. But we have seen really nice progress since then, since the weather rebounded. It's just been a really tough weather season for us. Honestly, for the first half of Q1 and then the first few weeks of May, and we have a disproportionate expectation of seasonal during that time. But we have seen nice rebound in our business. Since that first two weeks of May, we're encouraged by that. What we've assumed in our guidance is, we don't get it back, but the recent trends will continue till the end of the quarter. When I think about where things were overall, I do like where the rebound has been lately, but we just wanted to be realistic about the quarter. And then, for the year, Jeff?

Yeah. And then, on a full year basis, as we said, we do expect an acceleration in our two-year stack performance in the back half. We are very confident in our strong fall and holiday assortment and then we also have the reinventions in play in the back part of the year in lamps, entertainment, textiles that Lee also mentioned in his prepared remarks. So there would be some slight acceleration in the two-year trend into Q3 and Q4 implying that guide Jonathan?

Okay, that's helpful and then just a quick follow-up for the BOPIS pilot coming up in 4Q, is there anything baked into your assumption for that kind of test. And I guess as we think to maybe when it potentially gets more rolled out next year, how do you kind of foresee that impacting overall comp trends and consistency and things like that? Thanks.

Sure. All the costs associated with the test are built into our guidance and we are not assuming any upside, it's a small test. We're talking about roughly a 30 stores and it's in the back part of Q4. So it's not an impact on the topline, but the cost associated with being prepared for that are already built into our guidance. What we really want from buy online pickup in store is a more seamless access for our customers for our product. We think it might even help us insulate just a little bit from weather and that's a prudent thing to do. But we're going to -- as we've said before, we're going -- the only reason and way that we would do this and the test will help us tease this out is, is this going to be a good thing for our business and our business model? It's not just a revenue play, it's actually make sure that it actually helps protect earnings and doesn't harm earnings and also creates better access for our customers because we still want to deliver low prices. We still want to create a treasure hunt environment even -- whether that'd be online or in stores and protect our financial returns. So, in the past number of years we laid the tracks for this. This is not something we're just suddenly coming up with. Over three years ago, we put the demand platform online. Put all of our products online. We put product recommendations out there, inventory visibility rolled out earlier this year, actually quite early. So all the test pre-work has been done, has been invested in and that's in the guidance and we'll see. We'll know from the test what we're going to do, so we're going to watch it for the first part of next year. We'll let you know how that test goes and then if we like the results and we think our customer is appreciative of it, then we'll roll it out.

Helpful, thank you.

You bet. Thanks, Jonathan.

Our next question is from the line of Brad Thomas with KeyBanc. Please proceed with your question.

Hey, good morning. Thanks for taking my question. I wanted to ask about same-store sales. I guess, just thinking about the last five years, you guys have just done a great job of driving comps. It does feel like the industry has really gotten a lot softer. This doesn't seem to be just an At Home issue. But I guess my question is, Lee, how do you think about positioning the business and how you change maybe the investments you make? How you spend? How you make decisions? If the new normal for At Home is perhaps slightly negative to slightly positive comp story over the near term rather than that, more consistent comp story than we've seen in the past. How might that change the investments and decisions you're making every day?

Sure. Well, first what I would only say is, we're continuing to focus on delivering low-single digit same store sales growth quarter in and quarter out. We wanted to revise our guidance to give you what we're seeing in the business and to be prudent with our outlook. And we've always tried to be as transparent as we can, based on the situations we're facing. Well, I can't over emphasize the impact that weather had for us. In the first part of the year, it's more weather sensitive than the rest of the year for us. Overall, if you look at our comps over the last four or five years, you'll see Q1 and Q2 have been more choppy than the back half of the year. There is work that we can do to help that though, I would tell you that. So we are focused on that. We have seen an intensifying effort around promotions in the industry and we think that the industry is getting softer. But we actually grew 20% at a time where maybe the industry was softer. So we are taking share in a world where the industry may be less -- there may be less growth in the industry. And it's a share gain. We're focused on gaining share. And so there is things that we can do to do that, but remember that we're still only -- we've always committed to be a low-single digit comp model for the -- all the reasons we've explained in the past. We're focused on reinvention, our assortment, refining our media mix, and leveraging the loyalty program that we put in place. I would say, if you think about the industry and the economy were to be less certain, I'll put it that way, we're going to be very prudent about that, and we would be thoughtful about that. We don't see that. We're just letting you know that there's -- the industry is little bit softer and more promotional than we've ever seen. And as a result of that, we're going to be more mindful of that in our guidance. But it's not going to stop us from being on the offense, because we want to take share during this time.

Great. And then just housekeeping on tariffs. Could you just remind us for this year, what percent of your purchases you think are exposed to the List III tariffs under way right now and what that might go up to if List IV is enacted?

You know when I -- what we said along the way is, we've shared externally that no more than 50% of our products are imported. We've shared what the impacts of each of those tariffs have been thus far in the first round of tariffs. We said we've covered it ourselves or through slight price increases. This round to 25% obviously is -- was a big move in tariffs and we didn't want to pass that on to our customers since we build that into our margins. What I would say is, I'm also pleased with our progress on direct sourcing to help us offset some of these increases and go other places too for sourcing. One thing that I mentioned in my prepared remarks is the fact that we pull in some of our -- a few textile reinventions into the back half of the year. That's because of the progress we've made on direct sourcing. Those reinventions in top of that are actually direct sourced items that will come into our assortment faster, at a lower cost to help us be price competitive. So we're mindful of what the tariffs are going to do. We're mindful of our footprint. We're working on that and we try to be as thoughtful in our guidance with you as possible, let you know that this -- that 25% from 10% to 25% had to clip our margin performance for the year.

Got you. Thank you, Lee, and good luck.

Thanks so much, Brad.

The next question is from the line of Zach Fadem with Wells Fargo. Please proceed with your question.

Hey, good morning. First question for Peter, appreciate the update on shrink, but curious if there's any clarity you can provide on the specific drivers of the issue. Whether the impact was more at the store level versus the supply chain level and then what you're doing to mitigate the impact going forward. And then also with respect to the numbers, could you just talk about what you're baking in for the impact to shrink in the gross margin guide for Q2 and the rest of the year?

Yes, sure Zach. I'll start with the shrink analysis that we did. We did an extensive analysis. We brought in a cross-functional team across both the field organization and the corporate organization and really there is no obvious drivers that we saw. We suspected to see elevated inventory that contributed to that so we went back and we doubled down and put our field operational focus and we added processes, added more preferred accounts and getting ready than we've done in the past. We're still processing our recent counts, but what we're seeing is encouraging and our overall effort seems to be working.

Yeah, Zach, this is Jeff. And then on the outlook, our outlook on shrink hasn't changed from our last call. So once we took the elevated shrinkage in Q4 of last year that -- as a percentage of sales that remains consistent with our outlook for fiscal year 2020. And as Peter said, the counts -- we counted over 40 stores in Q2 and those counts were consistent with our expectations and we still feel good about that percentage of sales for the full year.

Okay. And then, once again, you touched on the BOPIS pilot, curious if you could talk about logistics there? Whether you think this is something that you could actually execute without a margin drag. And then, just bigger picture on the category, curious if there's any indication that your customers are pivoting even more online, any thoughts on the evolution there?

Sure. So Zach, on the BOPIS test, the way that we're going to operate and execute that as an in-store model. And our intention is that we'll not hurt gross margins and operating margin dollars. That's our intention, that's how we're measuring it. We're expecting this to be a revenue driver to help our customers have more access to our assortment, without having to shop the entire store and commit the time in-store, but because they can commit some time online to pre-shop and order that way and then swing by and pick it up. Our store labor then will have to do the picking and then we'll reserve the product for them to come and pick that up. We believe and our intention would be that that would create extra visits and that will create more revenue. And even with the incremental labor in the store that the margins -- the dollars won't be hurt. We hope it will be accretive, but what we're saying essentially is, we want to protect the downside as it won't be dilutive that way either. When I think about advent of customers pivoting online, I'll remind you, we grew 20% in the first quarter. If the industry is choppy right now, we're taking share. So, maybe our comps were, and they were, slightly negative 0.8%, we still grew 20%, and the overall industry didn't grow. From our indication, the industry traffic certainly and the overall industry probably could have been slightly down. We know the traffic was down from what we have from other indicators in the industry. But when we -- our indications are the industry itself was maybe down to -- flat to slightly down, but we grew 20%. So, we grew share. We do know that people -- and we do customer research, they all pre-shop online. That's why our assortment is online. That's why I like our competitive position versus other players. Some of the other discounters in our space don't even have an online assortment. They just have an in-store assortment. So, you can't even -- you don't even know what's there. Now, we have the inventory visibility, so they know how much is there to make it worth their trip. So, I'm really pleased with our competitive positioning. I think the test will help us see if we add more value to our customers without any harm to our shareholders.

Got it. Appreciate the thoughts.

Yes, thanks, Zach.

The next question is from the line of Chuck Grom from Gordon Haskett. Please proceed with your question.

Hey, thanks, good morning. Just on the change to the topline guide of up low singles to now flattish. Just to play devil's advocate, you know that still implies a pretty big step-up on the two year to get there. So, I'm just wondering if -- Lee, if you can just dive into some of the drivers supporting that improvement, because there are certainly a lot more negative macro factors out there than positive. And then, just as a follow-up to that for Jeff. Just -- can you help us with the sensitivity on margins? So, if the comp guy were to come in a point below what you're modeling now, what can that do to margins for the year? And then my second question is, just with regards to the total gross margin guide. You changed it by about 170 basis points. Can you dissect that between the markdowns you took in the first quarter and what your expectations are for 2Q and 3Q, and then also what the impact is going to be from the List 3 change? Thanks.

Okay, Chuck, that's a lot. Let me -- we'll parse it out among our team here to answer the question.

Thank you.

The first one and if we get -- if we miss them, then just let us know we'll make sure we answer them on the call right now. So, the first one was the confidence in that comp guide for the year based on Q1 and the first part of Q2, what gives us confidence there will be an acceleration, if I get that, right acceleration in comp trends. I did get that, right?

Yes, that's perfect.

Okay. What I would say is, we look at the outlook and now that the weather is behind us, what we've assumed in the outlook for the rest of the year is the trends won't be much different than what we're experiencing right now. So, we're not looking for this back half big hockey stick, so the trends inside of our business overall. We also have got things loaded for us for the back half of the year around reinventions in there. So, we have more in the back half than we had in the first half. We also know that we are known as the holiday headquarters for Halloween Harvest and Christmas. That's less weather sensitive products as well, less weather sensitive time of year. We also know that we've got really nice traction in some areas of our marketing efforts and we believe those adjustments that we'll make in the back half of the year will prove to be effective to help us outperform versus some of the performance in the first part of the year thus far. That's where we think how we're going to improve from what we've said in the first part of the year. Jeff, next question?

Yes. So, Chuck, on the leverage point, what I would say is, if you think about the 190 basis point change in our adjusted operating margins, about a 100 basis points of that is coming from gross profit and I'll come back because I think that was your third question on the piece parts there. The remaining 90 basis points was about 50 basis points in fixed cost deleverage and the remainder coming in increased domestic freight rate. So, if you think about, we had about a two point comp change at the midpoint, that then drove that 50 basis points of deleverage so that should give you a good sensitivity on where we can leverage at that low single-digit comp. On the 100 basis points on the margin side, I would say that roughly about half of that it is impacted by seasonal that's the impact of the Q1, 100 basis points as well as the Q2 piece that we see the 100 basis points in Q2 is about 50 on the full year and then the remaining 50 basis points is split pretty equally between the tariffs and then the markdowns we'll be taking into Q3.

That's very helpful. And then just Lee, I mean -- I'm not sure if you want to talk and get a little bit more granular on May and into June here. But with the stock doing what it's doing pre-market, it could -- might help you guys to frame out maybe what you exactly saw on the first couple of weeks of May and then what you're seeing now, just to lend some confidence in that back half for you?

Yes, I can just tell you that first part of May was tough weather. I mean you can read the weather reports. You can talk to people around the whole Midwest. Remember, we have a very large Midwest and Southeast footprint. We opened only our first store in California and our first store in Washington State in this past three months. So, the middle of the country got a whole lot of weather, check about all the flooding, check about tornadoes and all that, and May was -- the first few weeks of May had the same experiences as the first half of Q1. We couldn't ablate our footprint; it's just what it is. And what I would tell you is since that time, we like where the trends are, we like where we are performing on a one-year and two-year stack. And when we think about the rest of the year, we expect ourselves to perform at those levels.

Okay. Okay, guys. Thanks very much.

Thank you. Thanks, Chuck.

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

Good morning. Thanks for taking my question.

Good morning, Curtis.

Good morning, Lee. Just out of curiosity, would you face better -- I guess, if this volatility in results does continue? Sorry about that, can you hear me guys?

Yes. We can.

Okay. Great. So -- yeah, so -- yeah, my question is just given if volatility in results does continue, I guess given the growing leverage, given what's going on with overall industry growth, would you consider cutting back store growth?

Yeah, Curtis, what I would say is we're disappointed to break our 20 consecutive quarters of same-store sales growth. That's one quarter and it's a 0.8% negative. Obviously, this is -- and if you think about school, Peter and I talked about it this morning, it's like a mid-year grade. This isn't the full year. We've got a lot of the year left. We expected -- we only measure ourselves on -- we give interim updates on quarters and we measure ourselves on years and we've got a lot of year to go. And we -- and if I felt -- if I saw that new store performance was waning at the same time that comps were choppy, that would be different. The new store performance is doing fantastic. It's meeting our expectations. Our teams are opening up the stores even earlier. That's how we're able to outperform on our sales line in that area to help offset the missing comps. So, our new stores are performing very well. We like the ROI on those. We like their cash flow paybacks on those stores. We had a negative 0.8%, not worse than that, and it's only in one quarter and we like you to -- we hope you thinking about measuring us not on quarters, but on years and multi-years. This is that we told be -- being the year -- this is going to be year of a non-linear investment. We were going to have to put some investments in for our DC. We're also going put some non-linear investments in and around marketing to help drive brand awareness, because that was our biggest opportunity. We said that was one of the biggest three areas of opportunity to grow this business and take this business from 180 stores to 600 stores and we're doing that and you'd want us to do that. You'd want us to think about the long-term and the short-term at the same time. Obviously, we're disappointed with our short term comp performance. Me more than anybody, I mean I've been here for 6.5 years, this is the first quarter that it's just been that bad. I take that personally. Our team does. Peter and I have been here the longest, and we take this very personally. So we're working on it. We feel really good about where the trends are today. We look forward to updating you over the course of this next year along the way, spending time with you, helping you to see more deeply into our business. But I would tell you it was one quarter. It is a tough quarter. We've given a more realistic guide to the year to be more thoughtful, but we really still like our new store performance. And so we'll look at it over the course of the year and then we'll continue to review it. We'll be thoughtful about those decisions. And if we see something that we don't like over the course of multi-quarters to the point of the year, then obviously we'll be more realistic and more thoughtful about that.

Got it. And where should we expect leverage to be by the end of the year? And I guess, what's your ABL capacity at this point?

The ABL capacity is consistent with where it's been and the availability. It -- well, that will be in the Q later today. But it's not any demonstrably different than where we're at, at the end of the year. And then from a leverage standpoint, obviously with take down in EBITDA, it will tick-up a little bit toward end of the year, but still we would expect it to be just slightly above three times.

Okay. Thank you very much.

Thanks, Curtis.

The next question is from the line of Anthony Chukumba with Loop Capital. Please proceed with your questions.

Good morning. Thanks for taking my question. So you talked about the fact that 75% of your stores were affected by bad weather and you're not only people talking about weather. I guess, my question was what was the comp performance in the 25% of stores that were not impacted by weather? Were those -- did those, I'm assuming those comp positive, but if you can give us any color in terms of the magnitude, even just directionally of the comp of those unaffected stores I think that would be helpful. Thank you.

Hey, Anthony, this is Lee. There were hundreds of basis points improvement versus the stores that were affected by weather which -- and we have -- the nice thing is in retail you see a lot of data and we can look at stores performance by region, by weather area and we can see where stores were not affected by weather versus the stores that were and we saw hundreds of basis points improvement where the weather was better and more appropriate for that time of year.

Got it. That's helpful. Thanks so much.

Thank you, Anthony.

Our next question is from the line of Sumit Sharma with Berenberg. Please proceed with your questions.

Hi, thank you for taking my question. Just clarifying the last comment. Did you say hundreds of basis points, but my main question is with regards to BOPIS, I guess you mentioned that your products are on Demand Ware and your customer pre-shops a lot. We also know that you guys get a higher share of site visits than some of your peers. So, the operations and the logistics aside, what could be your biggest concern on the BOPIS program or test? I'm just trying to figure out, what could stop you from ruling it out?

Sure. Okay, Sumit. On the first one, it's hundreds, plural hundred, of basis point improvement. So I'm sorry if I wasn't clear on that. On BOPIS, we're going to do the test and for us, we love our demandware platform. We bought that a long time ago, because we knew it could essentially transact for us later. We have seen great interest in our website and people are spending a lot of time on our website. So the visitation is great, and the amount of page views is great. So there are going not just to our site for store location looking at for items, they're comparing item, they're spending time on the site and then we can actually -- if you review that on a mobile device, we can actually see if that mobile device came in the store and that mobile device has a phone number and that phone number then is your loyalty number and then we can see if you bought, so that data has been super helpful for us to see viewing turns to visitation, turns to a transaction. That gives us confidence that people will actually then buy online and come up and pick it up in store, because we have all that data. What we put us -- the way we're looking at it is, at the lifetime value of the customer on for buy-online-pickup-in-store. I'm going to make something up for a second and say, let's say the customer -- average customer with this customer let's say, Bethany spends $300 at our stores this year and she comes in four times a year. Now with BOPIS, we'll watch her transactions and we'll see that Bethany, our Head of IR, spent not $300, but $400 and she came in the store three times a year, but bought online three other times during the year and swung by and picked up. So now we picked up a $100 in revenue and then we'll look at the profitability of that transaction and compare it to the labor that was required and see was that an accretive transaction for us. If that's an accretive transaction for us, you know we got more share of wallet from Bethany and, hey this is a good thing. But if we find out that Bethany, who used to spend $300 now without buy-online-pickup-in-store and with buy-online-pickup-in-store spends $250 and visited the store only once and bought three other times online and those are smaller transactions than normal, then obviously that wasn't a good thing to do and you wouldn't want us to do that. We're a capitalist at heart and so we're going to want to make the best financial outcome. And obviously, we must not have met our expectations because now she is buying less than she was before. So that was a disappointment for the customer, it would have been a disappointment for our shareholders. So that's how we're looking at it. We'll be thoughtful about it. The nice thing about a test in retail, you have all these stores you can test it out. We can test it out multiple markets. We'll let you know where those store tests are so you can -- if you want to be a part of that and if you live in that area, you should try it out and check it out. It's certainly going to be something we'll check out ourselves personally and then we'll let you know how that test goes, and if it's a good test, we'll roll it and we'll feel good about it.

Thank you for that. If I could squeeze another one in, with regards to the increased freight costs, I know you mentioned that 90 bps of the margin squeeze was because of cost deleverage as well as increased freight costs. With the second -- with the opening of the second DC, how much of that freight cost gets mitigated or offset or another way of asking this is, how much of the freight cost has increased in just logistics inflation versus something that could be mitigated once the DC is fully operational?

Yeah, this is Peter. So what I'd say is, in fiscal 2019, we were really pleased because we stayed out the spot market and we leverage both our third-party volume as well as our increasing volume with initiatives like floor loading. We're able to mitigate most if not all of the rising freight costs that affected the industry last year. So however, we do continue to see inflation primarily on the domestic side in outbound transportation specifically between our Plano DC and some of our longer run stores. Based on our footprint and location of new stores, rates per shipment are coming in higher than we thought. So we're continuing to see the benefits of floor loading and our second DC, but unfortunately increased freight rates continue to outpace those savings. So over the longer term, we do expect that by adding the second distribution center will benefit from having our new stores closer to DC to minimize our stem miles. As we add new stores to the next couple of years, we'll allocate them between Plano and Carlisle and make sure that we are optimizing those stem miles. And all of that's been incorporated into our guidance going forward.

Thank you so much.

All right, thanks Sumit.

Thank you. We have reached the end of the question-and-answer session. I'll now turn the call over to management for closing remarks.

All right, well, thanks again for joining us this morning. We're excited about the opportunities in front of us and the long-term potential of this business and the long-term growth potential, as we look forward. Look forward to talking to you in the coming days and weeks as well. Take care.

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