Greetings and welcome to the At Home Third Quarter Fiscal 2020 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] Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Arvind Bhatia, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Devin. Good afternoon, everyone, and thank you for joining us today for At Home's third quarter fiscal year 2020 earnings results conference call. On the call 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 provisions 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, future capital expenditures, future cash flows and the impact of tariffs 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 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, Arvind. Good afternoon, everyone, and thank you for joining us to discuss our results for the third quarter of fiscal 2020. We delivered a healthy third quarter performance with nearly all of our guided metrics exceeding our expectations. Strong new store productivity drove more than 19% sales growth representing our 23rd straight quarter of at least high teens revenue growth. We continued our West Coast expansion with stores in Kennewick Washington and Riverside California. We also opened new stores in Wisconsin, Nebraska and Chicago suburbs and we expanded along the East Coast from Ellington Florida to Turnersville New Jersey. Overall, our total sales outperformance helped drive Q3 adjusted operating margin and adjusted EPS above our expectations. Third quarter comp sales were down 2% within our guided range and comp store traffic was above the industry average. On a two-year basis, our comp store sales increased 3.2% which includes an estimated 120-basis-point tailwind in fiscal 2019 from hurricanes in the previous year. From a merchandising standpoint, our category reinvention strategy continues to deliver incremental newness and positive comps and our visual merchandising efforts focused around end caps, vignettes and feature tables drove some of their highest growth in years during Q3. Our Halloween and fall categories were particularly strong, driving nearly double-digit comps. On the marketing front, in September we shared our plan to reallocate our media mix in the back half of the year towards our most effective traffic drivers, digital outreach and direct mail. In Q3 we distributed more direct mail pieces and delivered 350% more digital impressions year-over-year. Our total and unaided brand awareness grew once again and our loyalty program continues to expand at 6.2 million members currently. The growth of this program which represents a meaningful portion of our total customer purchases will enable us to be even more targeted and efficient in our digital communications in fiscal 2021, especially as we launch EDLP Plus and our buy online pickup in store tests. In total our media mix continues to drive a positive return as we continue to reach both new and existing customers. While we are pleased with the progress we're making in our business, we are facing challenges as we've moved through the back half of fiscal 2020 primarily in our seasonal product. As I mentioned, fall and Halloween offering were very strong in Q3. However, our Christmas assortment, which represents a significant portion of our Q4 sales volume, has performed well below our expectations. We believe a more promotional environment and the later Thanksgiving this year are causing a change in holiday shopping behavior that is significantly impacting our seasonal performance. Additionally, we believe our Christmas assortment versus the competition was not as compelling as it had been in prior years, which is an opportunity for us in fiscal 2021. However keep in mind that with the calendar shift we're still in the middle of our largest volume weeks of the year, therefore it's still too early to fully diagnose the season and diagnose our action plan and design our action plan. To a lesser extent, recently we've also seen more customer resistance, particularly in our furniture related categories to some of the retail price increases we took in response to tariffs. On our last earnings call, I discussed how our buyers, sourcing teams, and product partners have been relentless in finding ways to mitigate tariffs over the last year through a mix of costs negotiations, direct sourcing, country diversification and strategic price increases. As more of the price impacted products have arrived in our stores, our analysis has shown that a more unfavorable sales impact began in Q3. While we believe the price position of our assortment is competitive among our peers, the customers beginning to pull back from higher prices on certain tariff impacted items. With that said, we have a clear plan to address these challenges and we are taking immediate action through disciplined strategies. First, our initial analysis customer sensitivity indicates that we need to implement selective price reductions which we are executing in the next coming weeks. Second, we believe the launch of our upcoming EDLP Plus, go-to-market strategy in January will be an excellent way to highlight our low prices and compelling value to customers. Third, as online penetration continues to grow in our industry, we believe more strongly than ever in giving our customers an omni-channel option. We look forward to launching our Buy Online Pickup in Store tests across 28 stores in late January to confirm the operational requirements and the economics for our model. Once confirmed, we expect to expand it to approximately 100 additional stores during fiscal 2021. As Jeff will discuss shortly, although we are pleased with our third quarter performance, we are reducing our full-year guidance to incorporate the softness in Christmas and the traffic - excuse me, the tariff related headwinds. Our team is solidly focused on mitigating these issues. Before I elaborate on the actions we're taking, let me provide some context. Knowing we faced a compressed holiday calendar in a more traffic challenged environment, our merchant and marketing teams diligently prepared for the Q4 holiday seasons throughout this entire year. We repurposed our traditional November Flash Finds to early Black Friday decor busters and we increased an emphasis on hosting and entertaining as areas of product leadership for us. We also expanded and extended our typical Black Friday deals. These deals highlighted not only our holiday products, but everyday products throughout our store to appeal to a broad set of customers. We also introduced more gifting options than in prior years. I am really proud of our Home office team developed and our field teams executed these initiatives. However the environmental [ph] category has proven to be more promotional than we originally anticipated. As a result of soft trends continuing to Black Friday weekend, beginning today we are launching new discounts on our Christmas assortment. As for the furniture related categories most affected by tariff induced price increases, we're still finalizing our strategy on an item by item basis. However, we will be executing price reductions in the upcoming weeks. The fourth quarter price reductions on both our Christmas and selected everyday categories are incorporated into our revised fiscal 2020 guidance. Going forward, our approach on tariff affected products will include additional value engineering in order to reduce both costs and retail price. Our direct sourcing program is on track to exit fiscal 2020 to exit at 15% of purchases and we plan to expand the program to 20% next year. The team is also working through additional country diversification efforts that should reduce our tariff exposure over time. With respect to EDLP Plus, our merchant and marketing teams are geared up for a full rollout next month. The strength of our model is our broad based assortment, product newness and everyday low prices. However, our customer research has shown that we have an opportunity to better emphasize these strengths to our customers. EDLP Plus is a way to highlight these unique and compelling aspects of our model in a more prominent way, through focused campaigns around specific categories and seasonal events. Important to remember that on its own it's not a change in our pricing. It's a shift how we visually merchandise our stores and layer on storytelling through marketing to drive customer interest and highlight the incredible value in constant refreshes that are in stores today, but not as obvious to our customers as they should be. As part of this initiative, we will invest more in store labor to reflect the highlighted categories prior to their events, consolidate clearance inventory to improve its sell-through, inflow in new and fresh product, we will also position a portion of that category in the front of the store in the center aisles making our stores more dynamic and improving the treasure hunt for our customers. We will display new price point signage that will emphasize our deep everyday price. Finally, our traditional Flash Finds will better align with the category or season highlighted and they will last the duration of the multi-week events. While our marketing outreach has reflected the storytelling focused since August, the merchandising aspects of EDLP Plus will roll out in late January. We believe that over time, EDLP Plus will give customers a better appreciation for the breadth of our assortment, continuous product newness and most importantly, the exceptional value proposition of our everyday low prices. Finally, we are also excited about launching our Buy Online Pickup in Store test next month. We're driving more customers than ever to our website in fiscal 2020 and half of the customers that we surveyed indicated they would buy more if we offered a store pickup option. We plan to learn from this test across a selection of 28 stores in six markets and we look forward to analyzing the learnings for a broader rollout next year. Switching gears, we continue to feel good about how we're strengthening the company's foundation and managing it operationally. I'd like our President and Chief Operating Officer, Peter Corsa to discuss the team's continued focus on inventory management, controlling strength in ramping up our second DC to increase product speed to stores. Peter?

Thanks Lee, and good afternoon everyone. With over 50,000 skews in our broad assortment, the health of our inventory is paramount. I'm incredibly pleased with the effectiveness of our targeted efforts to improve our clearance inventory sell-through. We've invested in store labor and consolidated clearance in select categories. Our store teams are focused on markdown compliance, cleanliness and merchandising. Operational standards have risen and we've normalized record levels of inventory growth. Additionally, the warmer, dryer fall, enabled us to sell through more of our patio and garden clearance in Q3 than we originally planned. As a result of our focused efforts, year-over-year inventory growth has moderated substantially from 44% in Q1 down to less than 24% at the end of Q3. We expect year-end inventory growth to be in line with full-year sales growth. We've driven a notable improvement in shrink compared to Q4 last year by investing in internal and external labor to better prepare stores for inventory counts several weeks in advance. So far the results have outperformed our expectations. We have refined an inventory playbook this year that we can carry into future periods to benefit us operationally and improve customer shopability. Lastly, our largest operational initiative has been the launch of our second distribution center in Carlisle, Pennsylvania. I could not be prouder of the Carlisle team's execution of this new facility. Not only did it open on time, but it has repeatedly come in under budget. In fact, our team in Pennsylvania has ramped so efficiently, they already service more stores than and are as productive as our original Plano facility. Our Plano DC has also improved its productivity this year and both facilities have driven labor savings as a result. We look forward to seeing more of the transportation savings from the Carlisle distribution center flowing through gross margin in Q4 and into next year. Overall, the success of these fiscal 2020 initiatives is driving savings and operational efficiencies that in turn enable us to reinvest in our strategic priorities and lower prices for our customers. With that, I'd like to turn the call over to Chief Financial Officer, excuse me, Jeff Knudson, who will recap our Q3 financial performance and our outlook for Q4. Jeff?

Thank you, Peter, and good afternoon everyone. As a reminder, additional information is available in our earnings release, which is posted to our Investor Relations website and includes reconciliations illustrating our non-GAAP results as of the new lease accounting standards have been effective in fiscal 2019. 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. During the third quarter we drove top-line growth of 19.3% to $318.7 million. Comparable store sales decreased 2% in line with our outlook but towards the lower end due to customer sensitivity to tariff related price increases. Our top-line was driven by a strong store opening plan. During the third quarter, we opened 12 new stores, slightly weighted to existing markets. Cannibalization from new store expansion was inline with our expectations. It is a byproduct of strengthening our position in existing markets, but it has had a larger impact on comp store sales throughout fiscal 2020 due to the mix of stores opened in the last year. We are very pleased to have opened all of our fiscal 2020 pipeline within the first three quarters of the year, which enables new stores to deliver our full holiday headquarters experienced during the fourth quarter. By comparison, we opened 20% of our pipeline during Q4 last year. Third quarter gross profit decreased 0.7% to $85.4 million. Adjusting for the new lease standard, gross margin decreased 430 basis points to 26.8% slightly ahead of our expectations. As planned, gross margin continued to be impacted by product margin contraction including incremental markdowns as we normalized our inventory position this year. Overall, we have been very pleased with the sell-through of clearance merchandise following the adverse weather in the first half of the year. We remain on track to make solid sequential progress in our inventory and expect year-end inventory growth to be in line with full-year sales growth. Net operating costs from our recently opened second distribution center were also a headwind to gross margin of approximately 75 basis points, better than our 110-basis-point expectation due to the DC productivity Peter mentioned earlier. Finally, we incurred occupancy cost deleverage on lower comp store sales in addition to approximately 50 basis points of increased occupancy costs from sale leaseback transactions. Adjusted SG&A of $74.9 million improved 80 basis points to 23.5% of net sales, above our expectations due to lower incentive compensation expense. We delivered $8.5 million of adjusted operating income and our 2.7% adjusted operating margin was above our outlook of 1.9% to 2.4%. While average interest rates decreased slightly during the quarter, interest expense grew to $8.5 million due to increased borrowings to support our growth initiatives, including a 23% increase in open stores year-over-year. We recognized $8.1 million of income tax expense in the third quarter, which was primarily driven by $9.3 million of deferred tax expense related to the cancellation of a one-time CEO stock-option grant that was made in the second quarter of fiscal 2019. By comparison, we recognized only $1 million of income tax expense in Q3 last year which included $1.4 million of tax benefit related to the exercise of stock-based awards. In total, we are pleased to deliver flat adjusted EPS for Q3, above our guidance of down $0.04 to down a penny. During September, we generated $50.5 million in proceeds on a 4-store sale leaseback transaction and we ended the quarter with a $140 million of total liquidity. Looking to the fourth quarter. As Lee mentioned, we have seen much softer performance in our Christmas offering and to a lesser extent tariff related challenges in certain everyday categories. Based on current trends, we expect to generate $385 million to $393 million in net sales representing 9% to 11% growth year-over-year. We expect our comp store sales to be down 4% to down 6% in the fourth quarter compared to comp sales increase of 2.1% last year. Our fourth-quarter guidance assumes adjusted operating margins of 8.8% to 9.6% or lease adjusted decline of 290 basis points at the midpoint. We expect continued gross margin pressure from occupancy deleverage due to lower comp growth in fiscal 2020 sale leaseback transactions as well as product margin contractions for markdowns and tariff driven cost inflation. This outlook also incorporates roughly 40 basis points of second DC net operating costs. For context, the second DC was a headwind of 115, 85, and 75 basis points respectively in the first three quarters of fiscal 2020 We are very pleased with the sequential improvement expected in Q4 due to distribution center efficiencies flowing through gross margin as inventory turns. We expect the overall gross margin headwind in Q4 to be partially offset by improvement in shrink as well as SG&A rate improvement from reduced store and distribution center pre-opening expenses as well as lower incentive compensation. In all, we expect Q4 adjusted net income of $20 million to $23 million inclusive of a 23% adjusted tax rate versus a 19.3% adjusted rate in the fourth quarter last year. Assuming approximately 64 million shares outstanding, our Q4 outlook calls for adjusted EPS of $0.31 to $0.36 per share. As we've shared previously, we expect the fourth quarter to represent a significant portion of full-year earnings in fiscal 2020, primarily due to the timing dynamics around sales volume, the second DC, new store preopening costs, shrink improvement and a more comparable tax rate year-over-year. Turning to the full year. We expect net sales to be in a range of $1.352 billion to $1.36 billion, representing strong 16% to 17% growth over fiscal 2019. Our updated full-year comp store sales outlook is down 2.6% to down 2%. Our reduced top-line expectations have led us to revise our profit outlook for this year, based on lower sales flow-through and the pricing measures we are taking to sell-through our Christmas assortment within the fourth quarter. Our new guidance reflects gross margin of 28.2% to 28.5% and adjusted operating margins of 5.6% to 5.9% down roughly 375 basis points at the midpoint when compared to last year on a lease adjusted basis. Compared to our previous full-year guidance, our fiscal 2020 interest expense outlook is slightly lower at approximately $32 million and we expect a slightly higher adjusted effective tax rate of 23.9%. With adjusted net income of $33 million to $36 million and approximately 65 million diluted shares, our adjusted EPS outlook is $0.51 to $0.56. We have also lowered our fiscal 2020 outlook for net capital expenditures, primarily to reflect reduced capital spending on the fiscal 2021 pipeline. We expect net CapEx of $115 million to $125 million compared to prior guidance of $135 million to $155 million, each net of $125 million in sale leaseback proceeds. As we noted last quarter, we have moderated our new store growth rates as a result of our heightened focus on delivering positive free cash flow in fiscal 21. With the new store growth rate of 10% in each of the next three years we'll be better positioned to balance new store growth and profitability with free cash flow and reduced leverage. Additionally, a 10% growth rate allows us to be even more selective about the sites we open in a given year in order to optimize store level profitability and reduce the cannibalization impact that has played a larger role in fiscal 2020. It also enables our teams to put even more care and attention into every opening as well as into our existing stores. We have already made significant progress improving our free cash flow during fiscal 2020 by lowering our inventory investment on a comp store basis. Between working capital efficiencies and reduced net capital spend, we expect to see meaningful sequential improvement in free cash flow from fiscal 2019 to fiscal 2020 despite a $23 million reduction in sale leaseback proceeds. That improvement, along with the following initiatives, give us great confidence in our path to positive free cash flow next year. First, we have roughly a dozen owned properties that can generate sale-leaseback proceeds over the next several years. Second, our new store pipeline for fiscal 2021 which is already fully approved requires less capital than fiscal 2020 given our moderated unit growth rate. Compared to 36 openings in fiscal 2020 we plan to open 21 new stores next year including 18 second-generation leases and three ground-up builds. Third, we continue to work with our large national RE partners on new store financing alternatives to more quickly recoup our capital investment on ground-up builds. We view this step as a critical transition into build-to-suit and buy-to-suit transactions over the next several years. Fourth, we are reducing our capital spend on second-generation sites due to fiscal 2020 initiatives around value engineering, strategic procurement initiatives, and a refined market-by-market approach. Overall, we are confident in our pathway to positive free cash flow in fiscal 2021. Our teams have also been diligently pursuing several strategic initiatives for next year, including EDLP Plus, enhancements to our growing loyalty program, and our omni-channel rollout. We look forward to sharing annual guidance with you during our fourth quarter earnings call in late March. With that, I will now turn it back over to Lee for his final remarks.

Thank you, Jeff. As we look back on fiscal 2020 and how it's played out, we are very disappointed. But we are pleased with the progress we've made on several key priorities. We didn't deliver the outcomes we expected. We're using our disappointment as fuel to energize us for the year ahead. We know we have a lot of opportunities still in front of us. Our teams are working diligently on several exciting organic initiatives including our EDLP Plus, go-to-market strategy omni-channel opportunities, increasing our direct sourcing penetration, diversifying our sourcing programs and leveraging our growing loyalty program to enhance our marketing effectiveness. Despite a challenging year we remain very confident in our business model as well as the long-term algorithm we provided just last quarter. We have the potential for 600-plus stores, nearly three times our current size. We have a highly differentiated concept. Our stores have compelling unit economics and we have strong new store pipeline, factors that enabled us to play from a position of strength. In addition, we have an increased emphasis on free cash flow, enhancing our liquidity and strengthening our balance sheet and we are well-positioned for sustainable long-term growth. With that, operator, please open up the line for questions.

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

Good afternoon, this is Steve Kowalski on for John. I wanted to touch on how are the categories are performing that have undergone some recent reinventions, such as the Home softgoods, bedding and towels and kitchen wares. Thanks.

Yes, I would tell you our reinventions as I mentioned in my prepared remarks have really delivered really nicely for us. They bring incremental newness to the sub category. And I would say we've had positive comps in total for our reinvented categories across the chain. What they also do is they provide the elevated visual merchandising and newness to the store. The most recent ones that we've launched the lamp [ph] reinvention with very strong results, we're pleased with that. Frames, window treatments and home world also have performed well. And bath and wedding, which was last fall, have had very positive returns and we're excited about the sheet reinvention that's coming through right now into our stores.

Thank you.

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

Hey there. I wanted to ask firstly, you've from time-to-time given us an assessment, if you look across the home furnishing landscape about Home's value proposition, where it's in a pretty unique place from a pricing perspective and from an assortment and then others didn't seem to be chasing you're catching up. Are you seeing that change as part of the landscape? And then I have one followup.

You know, I would say from an overall macro standpoint that from the home industry standpoint, we still have a very competitive proposition. Our prices are everyday low prices. We have seen that it's still highly promotional. The holiday season was especially promotional, more so than previous holidays, holiday Christmas seasons than we've seen. And it could have been because as we planned as well for a compressed calendar others may have had as well. I would say, as we comp shop, our team's comp shop every other week and I'm really pleased with their efforts to comp shop. We see that we continue to be very competitive. We offer the largest assortment at prices below our competitors' sales prices. Our everyday categories continued to be very competitive. Where we saw challenges really was in areas where we took price last fall that were in areas that were affected by tariffs. We saw recent pushback by our consumers to not pay those prices. And I would say that the marketplace it would seem is having similar situations. So what we've focused on is making sure that we've got the lowest prices out there. And as I mentioned we will take selective price decreases over the next few weeks in those tariff affected items to make sure that we continue to have the lowest price position. That's our emphasis always is to have the low-price position. As I mentioned in my prepared remarks about Halloween and harvest, they outperformed, we're thrilled with a combined low double-digit comps. So we're really pleased with that. But Christmas did not, it's not performing. And what I would say is the competition increased their game better than we did. I thought we had a very nice assortment. I was really pleased with our assortment and the team, but I would say that they increased their game and they became more promotional. And with the compressed selling season, now it had to be even more promotional than before.

And then my followup, realizing you don't have a traditional waterfall, but – and you may have said this in prepared remarks, which I missed, I apologize. Can you talk about how the newer crop of stores is and especially with respect to the fourth quarter guide, is it universal across stores or are you seeing some of the immature stores more protected or more insulated from some of these trends?

Yes, Simeon, this is Jeff. I would say when we look at our third quarter performance obviously total sales was above the high end of our guided range with comps slightly below the midpoint and that was driven by our new and non-comp store performance in the third quarter. As we've moved into the fourth quarter, I would say the Christmas softness that we're seeing is across the chain, both in our comp stores as well as our new and non-comp stores and that's reflected in our guidance.

Okay, thanks guys.

Thank you.

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

Yes, thanks for taking my questions. So it sounds like this holiday it was going to be kind of a story of leaning into some newer categories like hosting and entertaining and gifting to capture some additional wallet share this holiday season. But it seems like kind of efforts there were offset by some of the promotionality. So maybe just walk us through kind of what the issue was with that strategic initiative and results maybe for those categories and maybe why it didn't play out as you anticipated?

Sure, now I'll remind you we're in the middle of our biggest selling weeks right now. Unfortunately the timing of this call doesn't allow me to have a full diagnosis of where we are. We're just telling you where the trends are right now and we've still got to finish it out. And we've got work to do to do that. I can tell you from a preparation standpoint we planned for a compressed calendar. We repurposed our Flash Finds to these Black Friday to core busters and had them over a much longer period of time to fill that air pocket that we had last year that range. We've put in more deals that were a special buys. These are not discounts on our existing items. These are special buys like a Flash Find item. We did add, as you have brought up hosting, entertaining and gifting. I would tell you we're really pleased with those, especially hosting and entertaining. Our early reads right now is that's something that naturally falls into the home decor space and decorating and having people over into your home. So we're pleased that our broader assortment. And we're especially pleased with our effort to expand the product offering which I think will be good for us throughout the year going forward. But overall the Christmas business started slower in Q3 and that remained and it's been well below our expectations for Q4. And as we've seen, our business gets softer, we've also seen other people become much more promotional than we've seen before. So I can't speak to what their performance is. Obviously you'll find that out overtime as well. We're just providing ours. But it certainly affected consumer shopping. And I would tell you as we looked at our business, we see opportunities within our own assortment, but we also saw it became a lot more promotional. So that's why we're actually going to 25% off today which is earlier than we've gone in previous years. But I would tell you we remain price competitive. We continued to comp shop and we are price competitive. And even in those furniture areas that we said we've gotten pushed back by our consumer, we found that we may be priced competitive but the consumer is not pleased, increased caution for them to spend over these artificial price barriers that are out there. And we'll know further as we go through the quarter.

Great, and then just a quick followup. So, with the 4Q guide, how should we be thinking about kind of the medium-term comp algorithm of 1% to 2%? Does the promotionality that you witnessed during the holiday season kind of make you think differently about that? I know this quarter was a tougher compare and there'll be volatility quarter-to-quarter, but maybe just help us think about that 1% to 2% kind of medium-term formula and kind of the bigger strategic initiatives that can help us kind of sequentially accelerate from 4Q?

Sure, as I mentioned this is localized to Christmas and some areas of the tariff affected categories of furniture and Accent furniture. That's the areas of concern and Christmas will be out of it by the fourth quarter. I will tell you that we typically, we mark it down, we mark it down early. Our intention is to have it clean by the end of the quarter that's our intention too. So we will be aggressive in those markdowns to move through it, so that we will have a clean inventory position. So it's localized to that. We will also take price reductions in those tariff affected items before the end of the year and those will also be addressed by the end of the year. So our intention is to get clean through this year, address those surgical efforts and then move forward at the beginning of the year with our everyday low price plus campaigns and be ready to deliver what we've talked about in terms of those low-single-digits. Jeff, do you want to add anything to that?

No, I would say we will provide full guidance in March on our next call and give the outlook for next year, but to Lee's point we're very excited about EDLP Plus, our BOPUS launch as well as reenergizing our loyalty program as well over the next three years to achieve those long-term growth targets we set out last call.

Great, thank you very much.

Thank you.

[Operator Instructions] Our next question comes from the line of Chuck Grom with Gordon Haskett. Please proceed with your question.

Hey good afternoon. This is John Parke on for Chuck. I guess, first can you guys talk a little bit about the cadence during the quarter and I guess how should we think about November's performance relative to the 4Q guide?

Yes, Jeff do you want to cover it, the question was cadence throughout the quarter?

Yes, we normally don't get into those inter-quarter trends. I would say our guidance right now as Lee mentioned earlier we're in the middle of right now still one of our big selling weeks and we've reflected the current trends that we're seeing in that guide of down 4% to down 6% for the fourth quarter.

Got it, and then I guess can you talk a little bit about the progress more recently on the company's is direct sourcing program?

I can do that, this is Lee. When we think about direct sourcing, the benefit is going to come in product margin. And for us, two years ago we had nothing direct-sourced and then by FY 2019 our exit rate was 10%, exit rate for FY 2020 is 15% and I mentioned that next year it should be 20%. This obviously gives us more flexibility because we'll have lower prices. This allows us to partially offset the tariff impact. I would tell you as we've moved towards direct sourcing we've increased our penetration to countries like India and Vietnam and we will be more diversified even more over time. And the goal for direct sourcing is the goal of over 30% over the next three to four years.

We do have a question from the line of Brad Thomas with KeyBanc. Please proceed with your question.

Hey, good afternoon. My question was just as we start to think about refining our models for 2020, may be Jeff, if you could give us sort of latest thoughts on sort of good guys and bad guys as we think about margins for next year and what you would hope that we could recapture versus what you may still be lapping and may still wrap into next year?

Sure Brad. So as we think about next year as we said we will provide full guidance on our March call. But just from a high level there's a number of puts and takes next year as it relates to our margin profile. From a headwind standpoint, obviously we will continue to have occupancy cost deleverage from our sale leasebacks we executed this year as well as those that we will execute next year. We do have a freight headwind this year that's primarily isolated in late Q3 and Q4 this year that will wrap into next year as well as the tariff cost wraps that cost 25 basis points in gross margin this year that has a wrap impact into next year as well. And then obviously as we take selective price reductions on some of these tariff impacted categories, again primarily furniture and Accent furniture that will have an impact on our margins next year as well. And then we will continue to invest in store labor to support our EDLP Plus initiative. And then obviously in a normalized year incentive compensation expense next year will return to a normal level. From a tailwind standpoint, we would obviously expect both from both seasonal categories patio and garden as well as Christmas to have fewer markdowns next year. We'll also be lapping the DC 2 investment from this year that will provide a tailwind as well as further transportation efficiencies that we're starting to see in the fourth quarter now and those will wrap into next year and we'll get into more of those details when we speak again in March.

That's helpful, best of luck to you all the rest of the holiday season.

Thanks Brad, Happy Holidays.

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

Hi, this is Eric Cohen on for Zack. I know it's probably you didn't get as much of an impact this quarter from the list for tariffs that just went into effect. You've talked in the past about getting your vendors to absorb those headwinds – those costs. I was wondering if you could talk about the progress you're making there so far and if you can just remind us your impact your exposure to list 4A versus 4B?

Sure I would say list 4 was effective in September, 4A was effective in September over-indexed to wall art. We did ask our suppliers to absorb that. And we've been able to mitigate half through cost negotiations and I would say I want to thank them for their partnership. I would tell you that the rest of it we've just absorbed in our own model. We've continued to be focused on making sure we've got the lowest prices out there in our marketplace. And so that for us is the most important thing. Our partners have been great partners for us. We think about list 4B which is effective December 15th is primarily seasonal and textiles. The seasonal will be for this coming year. And for patio and garden, if you think about those have already been purchased and they're rolling into our supply chain already. And then obviously Halloween, Harvest and Christmas will be affected in the back half of the year which we've already been working with our suppliers on knowing that that was coming. Thankfully we had enough time to work with them to value engineer our products and work on cost reductions to be able to not affect price. We have continued to focus on prices set by the consumer and not by tariffs. And so we will continue to keep - make sure that our prices are always low. And we will continue to work with our product partners to mitigate that. They've been great partners. In fact our sourcing and product development merchant teams spent over 3.5 weeks in Asia in Q3 working on these specific areas to make sure that we can deliver on the outcomes that we need for next year.

Since there are no further questions left in the queue, I would like to turn the call back over to Mr. Lee Bird for any closing remarks.

All right. Thank you again for joining us this afternoon. We're excited about the opportunities in front of us and the long-term growth ahead and we look forward to talking to you in the next coming days and weeks. Thanks so much.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.