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At Home's (HOME) Shares Decline Despite Q3 Earnings Beat

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At Home Group Inc. (HOME - Free Report) recently reported better-than-expected results in the fiscal third quarter, given strong performance from new stores and comparable store sales (comps).

Despite delivering solid results in the fiscal third quarter, shares of At Home declined more than 14.5% on Dec 6, owing to the company’s cautious view for fourth quarter of fiscal 2019. The company expects delays in receipt of product and additional costs, which will hamper fiscal fourth-quarter performance. It has been facing higher transportation costs over the past few weeks due to tariffs and port congestions, as retailers pull forward their shipments.

Adjusted earnings of 18 cents per share surpassed the Zacks Consensus Estimate of 15 cents by 20%. Notably, the reported figure also increased significantly from the prior-year figure of 7 cents.

At Home Group Inc. Price, Consensus and EPS Surprise

Revenue Discussion

The company’s net sales of $267.2 million surpassed the consensus mark of $265 million by 0.8%. Also, the reported figure was up 25.5% year over year. The improvement was driven by net addition of 29 stores during the quarter and a 5.2% increase in comps.

Operating Highlights

Gross margin was 32.2%, up 280 basis points (bps) from the year-ago figure. The upside was attributable to higher selling margins, partially offset by increased occupancy costs resulting from fiscal 2018 and 2019 sale-leaseback transactions.

Adjusted selling, general and administrative (SG&A) expenses were 23.9% of net sales, reflecting an increase of 120 bps year over year, owing to a rise in store labor hours and advertising.

Adjusted operating margin was 7.7% in the quarter, expanding 170 bps year over year. Adjusted EBITDA grew 41.4% to $39.1 million during the quarter.

Store Update

As of Oct 27, 2018, the company had 173 stores in 36 states, reflecting an increase of 20.1% store count from the prior-year period. Out of these, eight new stores were opened, including one store relocation, during the fiscal third quarter.

Financials

At Home reported cash and cash equivalents of $12.9 million as of Oct 27, 2018 compared with $8.5 million on Jan 27, 2018. Total debt came in at $297.0 million compared with $308.8 million in the prior-year period.

As of Oct 27, 2018, the company’s merchandise inventories worth $ 349.4 million were up 25.8% from $ 277.8 million on Oct 28, 2018.

Fiscal Fourth-Quarter Guidance

At Home expects net revenues in the range of $347-$352 million. Comparable brand revenues are likely to grow 1-2%. Seven new store openings will be held in fiscal fourth quarter.

Gross margins are anticipated to remain flat with the prior-year figure of 33.8% due to higher occupancy costs. Adjusted operating margins are expected to decline due to estimated $4 million pre-opening costs related to its second distribution center.

The company currently expects earnings in the band of 44-47 cents. Pro-forma adjusted earnings are anticipated in the range of 45-48 cents.

Fiscal 2019 Guidance Reaffirmed

At Home reiterates its full-year 2018 view. The company expects its total revenues in the $1.159-$1.164 billion range, reflecting 22-23% year-over-year growth. Comps are expected to grow in the range of 2.2-2.5% (growth of 8.7-9.0% from a year ago) during the quarter, with 31 net new store openings.

Gross margin is likely to expand approximately 75 bps and operating margin is expected to witness marginal expansion. At Home expects earnings within 73-76 cents per share and pro-forma adjusted earnings in the range of $1.28-$1.31.

Zacks Rank & Key Picks

Currently, At Home carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the Retail-Wholesale sector are BJ's Restaurants, Inc. (BJRI - Free Report) , Darden Restaurants, Inc. (DRI - Free Report) and Dunkin' Brands Group, Inc. (DNKN - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BJ's Restaurants has an expected earnings growth rate of 66.7% for the current year.

Darden’s expected fiscal 2019 earnings growth rate is 16.7%.

Dunkin' Brands is expected to register an EPS growth rate of 16.9% this year.

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