UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 1, 2021
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 001-37849
AT HOME GROUP INC.
(Exact name of registrant as specified in its charter)
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Delaware | | 45-3229563 |
(State of other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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1600 East Plano Parkway | | 75074 |
(Address of principal executive offices) | | (Zip Code) |
(972) 265-6227
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | |||
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | | HOME | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer | ☐ | | Accelerated Filer | ☒ | | Non-Accelerated Filer | ☐ | |
Smaller Reporting Company | ☐ | | Emerging Growth Company | ☐ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
There were 65,572,833 shares of the registrant’s common stock, par value $0.01 per share, outstanding as of June 2, 2021.
AT HOME GROUP INC.
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 17 | |
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Unregistered Sales of Equity Securities and Use of Proceeds. | 37 | |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can generally identify forward-looking statements by our use of forward-looking terminology such as “anticipate”, "are confident", "assume", “believe”, “continue”, “could”, “estimate”, “expect”, “intend”, “look ahead”, "look forward", “may”, “might”, "on track", "outlook", “plan”, “potential”, “predict”, "reaffirm", “seek”, “should”, "trend", “will”, or “vision”, or the negative thereof or comparable terminology regarding future events or conditions. In particular, forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, statements about our financial and operating performance, cash flows, liquidity, financial condition, inventory, the markets in which we operate, expected new store openings, our real estate strategy, the impact of the global pandemic of the novel coronavirus disease (“COVID-19”), growth targets, potential growth opportunities, market share, competition, the impact of expected stock option exercises and future capital expenditures, estimates of expenses we may incur in connection with equity incentive awards to management, customer and macroeconomic trends, expectations regarding the closing of the merger (as described herein) and other statements regarding our expectations, beliefs, plans, strategies, objectives, prospects, assumptions or future events or performance.
Such forward-looking statements are based on our current beliefs and expectations, which we believe are reasonable. However, forward-looking statements are subject to significant known and unknown risks and uncertainties that may cause actual results, performance or achievements in future periods to differ materially from those assumed, projected or contemplated in the forward-looking statements, including, but not limited to the following factors: the ongoing global COVID-19 pandemic and related challenges, risks and uncertainties, including historical and potential future measures taken by governmental and regulatory authorities (such as requiring store closures), which have significantly disrupted our business, employees, customers and global supply chain, and for a period of time, adversely impacted our financial condition (including resulting in goodwill impairment) and financial performance, and which disruption and adverse impacts may continue in the future; the recent and ongoing direct and indirect adverse impacts of the global COVID-19 pandemic to the global economy and retail industry; the eventual timing and duration of economic stabilization and recovery from the COVID-19 pandemic; general economic conditions in the United States and globally, including consumer confidence and spending, and any changes to current favorable macroeconomic trends of strong home sales, nesting and de-urbanization (which were enhanced and accelerated due to COVID-19, and may not continue upon a successful vaccine rollout in significant numbers that impacts consumer behavior); our indebtedness and our ability to increase future leverage, as well as limitations on future sources of liquidity, including debt covenant compliance; our ability to implement our growth strategy of opening new stores, which was suspended for fiscal year 2021 (with the exception of stores that were at or near completion) and, while ramping significantly, will be limited in the near term; our ability to effectively obtain, manage and allocate inventory, and satisfy changing consumer preferences; increasing freight and transportation costs (including the adverse effects of international equipment shortages and shipping delays) and increasing commodity prices; reliance on third-party vendors for a significant portion of our merchandise, including supply chain disruption matters and international trade regulations (including tariffs) that have, and may continue to, adversely impact many international vendors; the loss or disruption to operating our distribution network; significant competition in the fragmented home décor industry, including increasing e-commerce; the implementation and execution of our At Home 2.0 and omnichannel strategies and related investments; natural disasters and other adverse impacts on regions in the United States where we have significant operations; our success in obtaining favorable lease terms and of our sale-leaseback strategy; our reliance on the continuing growth and utility of our loyalty program; our ability to attract, develop and retain employee talent and to manage labor costs; the disproportionate impact of our seasonal sales activity to our overall results; risks related to the loss or disruption of our information systems and data and our ability to prevent or mitigate breaches of our information security and the compromise of sensitive and confidential data; our ability to comply with privacy and other laws and regulations, including those associated with entering new markets; the possibility that we may be unable to obtain required stockholder approval or that other conditions to closing the proposed merger may not be satisfied, such that the proposed merger will not close or that the closing may be delayed; general economic conditions; the proposed merger may involve unexpected costs, liabilities or delays; risks that the transaction disrupts our current plans and operations; the outcome of any legal proceedings related to the proposed merger; the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement (as defined herein); and the significant volatility of the trading price of our common stock.
1
Additional information about these and other factors that may cause actual results, performance or achievements in future periods to differ materially from those assumed, projected or contemplated in the forward-looking statements may be found in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended January 30, 2021 as filed with the Securities and Exchange Commission (“SEC”) on March 24, 2021 and as updated in “Part II, Item 1A. Risk Factors” herein.
You are cautioned not to place undue reliance on the forward-looking statements included herein, which speak only as of the date hereof or the date otherwise specified herein. Except as required by law, we do not undertake any obligation to update or revise any forward-looking statements for any reason, whether as a result of new information, future events or otherwise.
2
PART I — FINANCIAL INFORMATION
ITEM 1. — CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AT HOME GROUP INC.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(Unaudited)
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| May 1, 2021 |
| January 30, 2021 |
| April 25, 2020 |
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Assets | | | | | | | | | | |
Current assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 150,547 | | $ | 125,842 | | $ | 43,640 | |
Inventories, net | | | 369,014 | | | 364,473 | | | 406,972 | |
Prepaid expenses | | | 14,665 | | | 13,456 | | | 12,254 | |
Income taxes receivable | | | — | | | 22,223 | | �� | 38,536 | |
Other current assets | | | 16,967 | | | 11,619 | | | 10,325 | |
Total current assets | | | 551,193 | | | 537,613 | | | 511,727 | |
Operating lease right-of-use assets | | | 1,313,104 | | | 1,289,991 | | | 1,237,563 | |
Property and equipment, net | | | 713,187 | | | 688,295 | | | 715,427 | |
Trade name | | | 1,458 | | | 1,458 | | | 1,458 | |
Debt issuance costs, net | | | 4,984 | | | 5,264 | | | 1,096 | |
Other assets | | | 1,845 | | | 2,292 | | | 1,091 | |
Total assets | | $ | 2,585,771 | | $ | 2,524,913 | | $ | 2,468,362 | |
Liabilities and Stockholders' Equity | | | | | | | | | | |
Current liabilities: | | | | | | | | | | |
Accounts payable | | $ | 123,219 | | $ | 130,327 | | $ | 114,504 | |
Accrued and other current liabilities | | | 162,537 | | | 184,850 | | | 78,099 | |
Revolving line of credit | | | — | | | — | | | 342,000 | |
Current portion of operating lease liabilities | | | 78,106 | | | 78,634 | | | 82,040 | |
Current portion of long-term debt | | | 1,037 | | | 4,563 | | | 5,050 | |
Income taxes payable | | | 19,637 | | | — | | | — | |
Total current liabilities | | | 384,536 | | | 398,374 | | | 621,693 | |
Operating lease liabilities | | | 1,337,578 | | | 1,315,625 | | | 1,257,430 | |
Long-term debt | | | 308,555 | | | 314,300 | | | 334,174 | |
Deferred income taxes | | | 6,034 | | | 9,716 | | | — | |
Other long-term liabilities | | | 2,864 | | | 2,738 | | | 3,349 | |
Total liabilities | | | 2,039,567 | | | 2,040,753 | | | 2,216,646 | |
Stockholders' Equity | | | | | | | | | | |
Common stock; $0.01 par value; 500,000,000 shares authorized; 65,484,047, 65,342,489 and 64,185,751 shares issued and outstanding, respectively | | | 655 | | | 653 | | | 642 | |
Additional paid-in capital | | | 688,023 | | | 682,304 | | | 659,084 | |
Accumulated deficit | | | (142,474) | | | (198,797) | | | (408,010) | |
Total stockholders' equity | | | 546,204 | | | 484,160 | | | 251,716 | |
Total liabilities and stockholders' equity | | $ | 2,585,771 | | $ | 2,524,913 | | $ | 2,468,362 | |
See Notes to Condensed Consolidated Financial Statements.
3
AT HOME GROUP INC.
Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
(Unaudited)
| | | | | | | |
| | Thirteen Weeks Ended | | ||||
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| May 1, 2021 |
| April 25, 2020 |
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Net sales | | $ | 537,078 | | $ | 189,846 | |
Cost of sales | | | 336,803 | | | 173,496 | |
Gross profit | | | 200,275 | | | 16,350 | |
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Operating expenses | | | | | | | |
Selling, general and administrative expenses | | | 108,536 | | | 66,466 | |
Impairment charges | | | — | | | 319,732 | |
Depreciation and amortization | | | 2,317 | | | 2,213 | |
Total operating expenses | | | 110,853 | | | 388,411 | |
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Operating income (loss) | | | 89,422 | | | (372,061) | |
Interest expense, net | | | 8,119 | | | 6,971 | |
Loss on extinguishment of debt | | | 5,253 | | | — | |
Income (loss) before income taxes | | | 76,050 | | | (379,032) | |
Income tax provision (benefit) | | | 19,727 | | | (20,090) | |
Net income (loss) | | $ | 56,323 | | $ | (358,942) | |
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Earnings per share: | | | | | | | |
Net income (loss) per common share: | | | | | | | |
Basic | | $ | 0.86 | | $ | (5.60) | |
Diluted | | $ | 0.81 | | $ | (5.60) | |
Weighted average shares outstanding: | | | | | | | |
Basic | | | 65,405,610 | | | 64,130,000 | |
Diluted | | | 69,544,441 | | | 64,130,000 | |
See Notes to Condensed Consolidated Financial Statements.
4
AT HOME GROUP INC.
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)
(Unaudited)
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| | | | | | | Additional | | | | | | | ||
| | Common Stock | | Paid-in | | Accumulated | | | | | |||||
| | Shares | | Par Value | | Capital | | Deficit | | Total |
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Balance, January 25, 2020 | | 64,106,061 | | $ | 641 | | $ | 657,038 | | $ | (49,068) | | $ | 608,611 | |
Stock-based compensation | | - | | | - | | | 2,063 | | | - | | | 2,063 | |
Exercise of stock options and other awards | | 79,690 | | | 1 | | | (17) | �� | | - | | | (16) | |
Net loss | | - | | | - | | | - | | | (358,942) | | | (358,942) | |
Balance, April 25, 2020 | | 64,185,751 | | | 642 | | | 659,084 | | | (408,010) | | | 251,716 | |
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Balance, January 30, 2021 | | 65,342,489 | | | 653 | | | 682,304 | | | (198,797) | | | 484,160 | |
Stock-based compensation | | - | | | - | | | 4,116 | | | - | | | 4,116 | |
Exercise of stock options and other awards | | 141,558 | | | 2 | | | 1,603 | | | - | | | 1,605 | |
Net income | | - | | | - | | | - | | | 56,323 | | | 56,323 | |
Balance, May 1, 2021 | | 65,484,047 | | $ | 655 | | $ | 688,023 | | $ | (142,474) | | $ | 546,204 | |
See Notes to Condensed Consolidated Financial Statements.
5
AT HOME GROUP INC.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
| | | | | | | |
| | Thirteen Weeks Ended | | ||||
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| May 1, 2021 |
| April 25, 2020 |
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Operating Activities | | | | | | ||
Net income (loss) | | $ | 56,323 | | $ | (358,942) | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | | | | | |
Depreciation and amortization | | | 18,323 | | | 18,148 | |
Non-cash lease expense | | | 21,076 | | | 19,420 | |
Impairment charges | | | — | | | 319,732 | |
Loss on extinguishment of debt | | | 5,253 | | | — | |
Non-cash interest expense | | | 1,496 | | | 550 | |
Deferred income taxes | | | (3,681) | | | 16,965 | |
Stock-based compensation | | | 4,116 | | | 2,063 | |
Other non-cash losses, net | | | 237 | | | 7 | |
Changes in operating assets and liabilities: | | | | | | | |
Inventories | | | (4,541) | | | 10,791 | |
Prepaid expenses and other current assets | | | 15,666 | | | (43,213) | |
Other assets | | | 457 | | | (48) | |
Accounts payable | | | (9,047) | | | (7,261) | |
Accrued liabilities | | | (23,971) | | | (31,933) | |
Income taxes payable | | | 19,280 | | | (137) | |
Operating lease liabilities | | | (23,207) | | | (1,345) | |
Net cash provided by (used in) operating activities | | | 77,780 | | | (55,203) | |
Investing Activities | | | | | | | |
Purchase of property and equipment | | | (19,272) | | | (19,236) | |
Net proceeds from sale of property and equipment | | | 59 | | | — | |
Net cash used in investing activities | | | (19,213) | | | (19,236) | |
Financing Activities | | | | | | | |
Payments under lines of credit | | | — | | | (98,310) | |
Proceeds from lines of credit | | | — | | | 204,640 | |
Payment of Term Loan | | | — | | | (880) | |
Payment of FILO Loans and prepayment premium | | | (35,225) | | | — | |
Payments on long-term debt | | | (232) | | | (102) | |
Proceeds from issuance of long-term debt | | | — | | | 664 | |
Proceeds from (payments for) stock, including tax | | | 1,605 | | | (16) | |
Net cash (used in) provided by financing activities | | | (33,852) | | | 105,996 | |
Increase in cash, cash equivalents and restricted cash | | | 24,715 | | | 31,557 | |
Cash, cash equivalents and restricted cash, beginning of period | | | 125,877 | | | 12,085 | |
Cash, cash equivalents and restricted cash, end of period | | $ | 150,592 | | $ | 43,642 | |
| | | | | | | |
Supplemental Cash Flow Information | | | | | | | |
Cash paid for interest | | $ | 13,579 | | $ | 6,689 | |
Cash received for income taxes | | $ | (18,076) | | $ | (10) | |
Supplemental Information for Non-cash Investing and Financing Activities | | | | | | | |
Increase in current liabilities of property and equipment | | $ | 4,079 | | $ | 157 | |
Property and equipment acquired under finance lease, net | | $ | 20,160 | | $ | — | |
See Notes to Condensed Consolidated Financial Statements.
6
1. Summary of Significant Accounting Policies
Basis of Presentation
These condensed consolidated financial statements include At Home Group Inc. and its wholly owned subsidiaries (collectively referred to as “we”, “us”, “our” and the “Company”).
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information in accordance with Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations, financial position and cash flows for the periods presented have been included.
The condensed consolidated balance sheets as of May 1, 2021 and April 25, 2020, the condensed consolidated statements of operations for the thirteen weeks ended May 1, 2021 and April 25, 2020, the condensed consolidated statements of stockholders’ equity ended May 1, 2021 and April 25, 2020 and the condensed consolidated statements of cash flows for the thirteen weeks ended May 1, 2021 and April 25, 2020 have been prepared by the Company and are unaudited. The consolidated balance sheet as of January 30, 2021 has been derived from the audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021 as filed with the Securities and Exchange Commission (“SEC”) on March 24, 2021 (the “Annual Report”), but does not include all of the information and notes required by GAAP for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the fiscal years ended January 30, 2021 and January 25, 2020 and the related notes thereto included in the Annual Report.
The Company does not have any components of other comprehensive income recorded within its condensed consolidated financial statements, and, therefore, does not separately present a statement of comprehensive income in its condensed consolidated financial statements.
Fiscal Year
We report on the basis of a 52- or 53-week fiscal year, which ends on the last Saturday in January. References to a fiscal year mean the year in which that fiscal year ends. References herein to “first fiscal quarter 2022” relate to the thirteen weeks ended May 1, 2021 and references herein to “first fiscal quarter 2021” relate to the thirteen weeks ended April 25, 2020.
Consolidation
The accompanying condensed consolidated financial statements include the accounts of At Home Group Inc. and its consolidated wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
Preparing condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Because of the use of estimates inherent in the financial reporting process, actual results may differ from these estimates.
7
AT HOME GROUP INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Seasonality
Our business has historically been moderately seasonal in nature and, therefore, the results of operations for the thirteen weeks ended May 1, 2021 are not necessarily indicative of the operating results that may be expected for a full fiscal year. Historically, our business has realized a slightly higher portion of net sales and operating income in the second and fourth fiscal quarters attributable primarily to the impact of summer and the year-end holiday decorating seasons, respectively.
Restricted Cash
Restricted cash consists of cash and cash equivalents reserved for a specific purpose that is not readily available for immediate or general business use. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows (in thousands):
| | | | | | | | | |
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| May 1, 2021 |
| January 30, 2021 |
| April 25, 2020 | |||
| | | | | | | | ||
Cash and cash equivalents | | $ | 150,547 | | $ | 125,842 | | $ | 43,640 |
Restricted cash | | | 45 | | | 35 | | | 2 |
Cash, cash equivalents and restricted cash | | $ | 150,592 | | $ | 125,877 | | $ | 43,642 |
2. Fair Value Measurements
We follow the provisions of Accounting Standards Codification (“ASC”) 820 (Topic 820, “Fair Value Measurements and Disclosures”). ASC 820 establishes a three-tiered fair value hierarchy that prioritizes inputs to valuation techniques used in fair value calculations.
● | Level 1 - Unadjusted quoted market prices for identical assets or liabilities in active markets that we have the ability to access. |
● | Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data. |
● | Level 3 - Valuations based on models where significant inputs are not observable. The unobservable inputs reflect our own assumptions about the assumptions that market participants would use. |
ASC 820 requires us to maximize the use of observable inputs and minimize the use of unobservable inputs. If a financial instrument uses inputs that fall in different levels of the hierarchy, the instrument is categorized based upon the lowest level of input that is significant to the fair value calculation.
The fair value of all current financial instruments approximates carrying value because of the short-term nature of these instruments. We have variable and fixed rates on our long-term debt. We determine fair value on our fixed rate long-term debt by using quoted market prices and current interest rates. We had no variable rate debt outstanding as of May 1, 2021.
8
AT HOME GROUP INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
At May 1, 2021, the fair value of our $275.0 million aggregate principal amount of 8.750% Senior Secured Notes maturing on September 1, 2025 (the “Notes”) was $299.8 million, which was $24.8 million above the carrying value of $275.0 million. Fair value for the Notes was determined using Level 2 inputs.
At May 1, 2021, the fair value of our fixed rate mortgage due August 22, 2022 approximated the carrying value of $5.6 million. Fair value for the fixed rate mortgage was determined using Level 2 inputs.
3. Goodwill
During the first fiscal quarter 2021, because we continued to experience a decline in operating performance and a sustained decline in our market capitalization substantially driven by the global outbreak of COVID-19, coupled with a decision to further reduce our near-term growth model, we conducted an interim impairment testing of goodwill. Based on the results of that test, we concluded that goodwill was fully impaired and we recognized a non-cash impairment charge of $319.7 million, which is presented on the condensed consolidated statement of operations for the thirteen weeks ended April 25, 2020. The projected cash flows used in the income approach for assessing goodwill valuation included numerous assumptions, such as sales projections assuming positive comparable store sales growth, operating margins, store count and capital expenditures, all of which were derived from our long-term forecasts as of such testing date. Additionally, the assumptions regarding weighted average cost of capital used information from comparable companies and management's judgment related to risks associated with the operations of our reporting unit.
4. Accrued and Other Current Liabilities
Accrued and other current liabilities consisted of the following (in thousands):
| | | | | | | | | | |
| | May 1, 2021 | | January 30, 2021 | | April 25, 2020 | | |||
|
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| | |
| |
| |
Inventory in-transit | | $ | 22,878 | | $ | 30,553 | | $ | 2,161 | |
Accrued payroll and other employee-related liabilities | | | 28,293 | | | 42,592 | | | 10,239 | |
Accrued taxes, other than income | | | 29,398 | | | 25,124 | | | 19,830 | |
Accrued inbound freight | | | 25,207 | | | 27,511 | | | 4,760 | |
Accrued interest | | | 4,234 | | | 11,304 | | | 5,069 | |
Insurance liabilities | | | 4,252 | | | 1,344 | | | 2,494 | |
Gift card liability | | | 10,631 | | | 10,732 | | | 8,898 | |
Construction costs | | | 7,906 | | | 5,231 | | | 5,550 | |
Sales returns reserve | | | 7,420 | | | 3,790 | | | 4,129 | |
Accrued marketing | | | 3,372 | | | 5,831 | | | 855 | |
Other | | | 18,946 | | | 20,838 | | | 14,114 | |
Total accrued liabilities | | $ | 162,537 | | $ | 184,850 | | $ | 78,099 | |
5. Revolving Line of Credit
In October 2011, we entered into a senior secured asset-based lending credit facility (the “ABL Facility”), which originally provided for cash borrowings or issuances of letters of credit of up to $80.0 million based on defined percentages of eligible inventory and credit card receivable balances. We have subsequently amended the credit agreement that governs the ABL Facility (the “ABL Agreement”) from time to time to, among other things, increase the aggregate revolving commitments available thereunder. After giving effect to prior amendments to the ABL Agreement, the ABL Agreement currently provides for (i) aggregate revolving commitments of $425.0 million, with a sublimit for the issuance of letters of credit of $50.0 million and a sublimit for the issuance of swingline loans of $20.0 million and (ii) a tranche of term loans in a principal amount of $35.0 million on a “first-in, last out” basis (the “FILO Loans”). The
9
AT HOME GROUP INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
ABL Agreement was further amended in fiscal year 2021 to extend the maturity date of the revolving credit loans under the ABL Facility as described below. For more information on the FILO Loans, see “Note 6 – Long-Term Debt”.
On August 28, 2020, At Home Holding III Inc. (“At Home III” or the “Issuer”), and At Home Stores LLC (collectively, the “ABL Borrowers”) and the guarantors under the ABL Facility entered into an amendment to the ABL Agreement (the “Ninth Amendment”) with Bank of America, N.A., which, among other things, extended the maturity of revolving credit loans provided thereunder to the earlier of (i) August 28, 2025 and (ii) the date of termination of the commitments under such revolving credit facility pursuant to the terms of the ABL Agreement.
As of May 1, 2021, we had 0 borrowings outstanding in respect of the revolving credit loans under the ABL Facility, $1.2 million in face amount of letters of credit had been issued and we had availability of $325.2 million.
Revolving credit loans outstanding under the ABL Facility bear interest at a rate per annum equal to, at our option: (x) the higher of (i) the Federal Funds Rate plus 1/2 of 1.00%, (ii) the agent bank’s prime rate and (iii) LIBOR plus 1.00% (the “Base Rate”), plus in each case, an applicable margin of 0.75% to 1.25% based on our average daily availability or (y) the agent bank’s LIBOR plus an applicable margin of 1.75% to 2.25% based on our average daily availability; provided that a 1.00% interest rate floor is applicable to all revolving credit loans irrespective of rate used. The effective interest rate of borrowings under the ABL Facility was 2.80% during the thirteen weeks ended April 25, 2020. There were 0 borrowings during the thirteen weeks ended May 1, 2021.
The ABL Facility contains a number of covenants that, among other things, restrict the ability of the ABL Borrowers, subject to specified exceptions, to incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves; engage in businesses that are not in a related line of business; make loans, advances or guarantees; pay dividends; engage in transactions with affiliates; and make investments. In addition, the ABL Agreement contains certain cross-default provisions. The ABL Agreement includes a minimum availability covenant whereby the ABL Borrowers and their restricted subsidiaries must maintain at all times availability (i.e., an amount equal to (i) the lesser of (A) the aggregate revolving credit commitments at such time and (B) the revolving borrowing base minus (ii) the total revolving credit loans outstanding) in excess of the greater of (x) $35.0 million and 10.0% of the combined loan cap specified in the ABL Agreement (i.e., the sum of (i) the lesser of (A) the aggregate revolving credit commitments at such time and (B) the revolving borrowing base and (ii) the total outstanding amount of FILO Loans). As of May 1, 2021, the minimum availability required by the covenant was $35.0 million. The ABL Agreement also includes a mandatory prepayment provision requiring the ABL Borrowers to prepay any outstanding revolving credit loans to the extent the total amount of cash and cash equivalents of At Home Holding II Inc. (“At Home II”), the ABL Borrowers and their restricted subsidiaries (subject to certain exclusions) exceeds $35.0 million. As of May 1, 2021, we were in compliance with all covenants prescribed in the ABL Facility.
10
AT HOME GROUP INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
6. Long-Term Debt
Long-term debt consists of the following (in thousands):
| | | | | | | | | | |
|
| May 1, 2021 |
| January 30, 2021 |
| April 25, 2020 |
| |||
| | | | | | | | | | |
Senior Secured Notes | | $ | 275,000 | | $ | 275,000 | | $ | — | |
Term Loan | | | — | | | — | | | 335,102 | |
FILO Loans | | | — | | | 33,250 | | | — | |
Note payable, bank(a) | | | 5,635 | | | 5,675 | | | 5,800 | |
Note payable | | | — | | | — | | | 664 | |
Obligations under finance leases | | | 36,064 | | | 16,260 | | | 1,456 | |
Total debt | | | 316,699 | | | 330,185 | | | 343,022 | |
Less: current maturities | | | 1,037 | | | 4,563 | | | 5,050 | |
Less: unamortized deferred debt issuance costs | | | 7,107 | | | 11,322 | | | 3,798 | |
Long-term debt | | $ | 308,555 | | $ | 314,300 | | $ | 334,174 | |
(a) | Matures August 22, 2022; $34.5 thousand payable monthly, including interest at 4.50% with the remaining balance due at maturity; secured by the location’s land and building. |
On June 5, 2015, our indirect wholly owned subsidiary, At Home III, entered into the first lien credit agreement (as amended from time to time), by and among At Home III, At Home II, certain indirect subsidiaries of At Home II, various lenders and Bank of America, N.A., as administrative agent and collateral agent, which provided for a term loan in an aggregate principal amount of $350 million (the “Term Loan”) maturing on June 3, 2022. On August 20, 2020, in connection with the issuance of the Notes, we used the net proceeds of the issuance of the Notes together with cash on our balance sheet to repay in full the principal amount of indebtedness outstanding under the Term Loan. The repayment resulted in a loss on extinguishment of debt in the amount of $3.2 million, which was recognized during the third fiscal quarter 2021.
On June 12, 2020, we entered into the Eighth Amendment to the ABL Agreement to provide for the FILO Loans, subject to a borrowing base. The net proceeds of the FILO Loans were used to repay a portion of the outstanding revolving credit loans under the ABL Facility. On April 30, 2021, we used currently available cash to repay in full the principal amount of indebtedness outstanding under the FILO Loans for total cash consideration of $34.6 million. The repayment included a $2.0 million prepayment premium, $0.3 million of accrued interest and resulted in a loss on extinguishment of debt in the amount of $5.3 million, which was recognized during the first fiscal quarter 2022.
On August 20, 2020, At Home III completed the offering (the “Notes Offering”) of $275.0 million aggregate principal amount of the Notes. The Notes Offering was conducted pursuant to Rule 144A and Regulation S promulgated under the Securities Act, and the Notes have not been registered under the Securities Act or applicable state securities laws and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state securities laws. The Notes are governed by an indenture dated August 20, 2020 (the “Indenture”), by and among At Home III, the guarantors from time to time party thereto, and Wells Fargo Bank, National Association, as trustee (the “Trustee) and as collateral agent (the “Collateral Agent”). Net proceeds of the issuance of the Notes were used, together with cash on our balance sheet, to repay all amounts outstanding under the Term Loan. The Notes bear interest at a fixed rate of 8.750% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2021, and will mature on September 1, 2025.
The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by (i) At Home II, a Delaware corporation and direct parent of At Home III and (ii) certain of At Home III’s existing and future
11
AT HOME GROUP INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
wholly owned domestic restricted subsidiaries (collectively, the “Guarantors”), all of which also guarantee the ABL Facility.
The Notes and the related guarantees are secured (i) on a first-priority basis by substantially all of the assets of At Home III and the Guarantors other than the ABL Priority Collateral (as defined below) (such assets, the “Notes Priority Collateral”) and (ii) on a second-priority basis by substantially all of the cash, cash equivalents, deposit accounts, accounts receivables, other receivables, tax refunds and inventory, and certain related assets of At Home III and the Guarantors that secure the ABL Facility on a first priority basis (such assets, the “ABL Priority Collateral”), in each case subject to certain exceptions.
7. Related Party Transactions
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360 Holdings III Corp (“360 Holdings”) has historically been a related party to us by virtue of common ownership through funds of AEA Investors LP, one of our prior significant stockholders. We are parties to a royalty agreement with 360 Holdings whereby we develop and sell branded product that incorporates intellectual property of 360 Holdings. Additionally, MerchSource LLC is a direct subsidiary of 360 Holdings (and together with 360 Holdings, “360 Brands”) from which we purchase inventory. On November 5, 2020, AEA Investors LP sold the remainder of its stockholdings and ceased to be a stockholder of the Company and 360 Brands is no longer a related party.
8. Revenue Recognition
We sell a broad assortment of home décor, including home furnishings and accent décor, and recognize revenue when the customer takes possession or control of goods at the time the sale is completed at the store register. Accordingly, we implicitly enter into a contract with customers at the point of sale. In addition to retail store sales, we also generate revenue through the sale of gift cards and through incentive arrangements associated with our credit card program.
As noted in the segment information in the notes to the consolidated financial statements included in our Annual Report, our business consists of 1 reportable segment. In accordance with ASC 606, we disaggregate net sales into the following product categories:
| | | | | | | |
| | Thirteen Weeks Ended | | ||||
| | May 1, 2021 |
| April 25, 2020 | | ||
|
| | |
| | |
|
Home furnishings | | 49 | % | | 48 | % | |
Accent décor | | 48 | | | 48 | | |
Other | | 3 | | | 4 | | |
Total | | 100 | % | | 100 | % | |
Contract liabilities are recognized primarily for gift card sales. Cash received from the sale of gift cards is recorded as a contract liability in accrued and other current liabilities, and we recognize revenue upon the customer’s redemption of the gift card. Gift card breakage is recognized as revenue in proportion to the pattern of customer redemptions by applying an estimated breakage rate that takes into account historical patterns of redemptions and deactivations of gift cards.
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AT HOME GROUP INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
We recognized $5.0 million and $2.3 million in gift card redemption revenue for the thirteen weeks ended May 1, 2021 and April 25, 2020, respectively, and recognized an immaterial amount in gift card breakage revenue for each of the thirteen weeks ended May 1, 2021 and April 25, 2020. Of the total gift card redemption revenue, $1.8 million and $1.2 million for the thirteen weeks ended May 1, 2021 and April 25, 2020, respectively, related to gift cards issued in prior periods. We had outstanding gift card liabilities of $10.6 million, $10.7 million and $8.9 million as of May 1, 2021, January 30, 2021 and April 25, 2020, respectively, which are included in accrued and other current liabilities.
In fiscal year 2018, we launched a credit card program by which credit is extended to eligible customers through At Home branded credit cards with Synchrony Bank (“Synchrony”). Through the launch of the credit card program, we received reimbursement of costs associated with the launch of the credit card program as well as a one-time payment which has been deferred over the initial seven-year term of the agreement with Synchrony. We receive ongoing payments from Synchrony based on sales transacted on our credit cards and for reimbursement of joint marketing and advertising activities. During the thirteen weeks ended May 1, 2021 and April 25, 2020, we recognized $0.8 million and $0.5 million, respectively, in revenue from our credit card program within net sales when earned.
Customers may return purchased items for an exchange or refund. We utilize the expected value methodology in which different scenarios, including current sales return data and historical quarterly sales return rates, are used to develop an estimated sales return rate. We present the sales returns reserve within other current liabilities and the estimated value of the inventory that will be returned within other current assets in the condensed consolidated balance sheets.
9. Income Taxes
Our effective tax rate for the thirteen weeks ended May 1, 2021 was 25.9% compared to 5.3% for the thirteen weeks ended April 25, 2020. The effective tax rate for the thirteen weeks ended May 1, 2021 differs from the federal statutory rate primarily due to the impact of state and local income taxes and executive compensation limitations. The effective tax rate for the thirteen weeks ended April 25, 2020 differs from the federal statutory rate primarily due to the goodwill impairment charge that was non-deductible for income tax purposes, the income tax benefit of $5.2 million from a tax loss carryback under the CARES Act and to a lesser extent the impact of state and local income taxes.
10. Commitments and Contingencies
Leases
We assess whether a contract contains a lease on its execution date. If the contract contains a lease, lease classification is assessed upon its commencement date under ASC 842. For leases that are determined to qualify for treatment as operating leases, rent expense is recognized on a straight-line basis over the lease term. Leases that are determined to qualify for treatment as finance leases recognize interest expense as determined using the effective interest method with corresponding amortization of the right-of-use assets.
We enter into leases primarily for real estate assets to support our operations in the normal course of business. As of May 1, 2021, our material operating leases consisted of our corporate headquarters, distribution centers and the majority of our store properties. We also had 4 real estate leases for store properties that qualify for treatment as finance leases. Our leases generally have terms of 5 to 20 years, with renewal options that generally range from 5 to 20 years in the aggregate and are subject to escalating rent increases. Our leases may include variable charges at the discretion of the lessor. Certain of our leases include rent escalations based on inflation indexes and/or contingent rental provisions that include a fixed base rent plus an additional percentage of the respective stores’ sales in excess of stipulated amounts. Operating lease liabilities are calculated using the prevailing index or rate at the commencement of the lease. Subsequent escalations in the index or rate and contingent rental payments are recognized as variable lease expenses. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
13
AT HOME GROUP INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The components of lease cost were as follows (in thousands):
| | | | | | | | | |
| | | | | Thirteen Weeks Ended | ||||
| | | | | May 1, 2021 | | April 25, 2020 | ||
| | | | | | | | | |
Operating lease cost(a) | | | | | $ | 41,780 | | $ | 39,646 |
Variable lease cost | | | | | | 6,603 | | | 6,212 |
Finance lease cost: | | | | | | | | | |
Amortization of right-of-use assets | | | | | | 326 | | | 74 |
Interest on lease liabilities | | | | | | 252 | | | 29 |
Total lease cost(b) | | | | | $ | 48,961 | | $ | 45,961 |
(a) | Net of an immaterial amount of sublease income. |
(b) | Short-term lease cost for the thirteen weeks ended May 1, 2021 and April 25, 2020 was immaterial. |
The table below presents additional information related to our leases as of May 1, 2021.
| | | | |
Weighted average remaining lease term | | | | |
Operating leases | | | 11.8 | years |
Finance leases | | | 14.2 | years |
Weighted average discount rate | | | | |
Operating leases | | | 6.06 | % |
Finance leases | | | 5.82 | % |
Supplemental disclosures of cash flow information related to leases were as follows (in thousands):
| | | | | | | | | |
| | | | Thirteen Weeks Ended | |||||
| | | | May 1, 2021 | | April 25, 2020 | |||
| | | | | | | | | |
Cash paid for operating lease liabilities(a) | | | | | $ | 43,798 | | $ | 22,414 |
Right-of-use assets obtained in exchange for operating lease liabilities | | | | | $ | 44,189 | | $ | 60,643 |
Cash paid for finance lease liabilities | | | | | $ | 193 | | $ | 77 |
(a) | During the thirteen weeks ended April 25, 2020, we had negotiated or were in the process of negotiating rent deferral or abatement with certain lessors. |
In response to the COVID-19 pandemic, we began renegotiating certain store lease agreements in the first and second fiscal quarters 2021 to obtain rent relief in an effort to partially offset the negative financial impacts. On April 10, 2020, the Financial Accounting Standards Board (“FASB”) staff issued guidance for lease concessions provided to lessees in response to the effects of the COVID-19 pandemic. This guidance allows lessees to make an election not to evaluate whether a lease concession provided by a lessor should be accounted for as a lease modification in the event the concession does not result in a substantial increase in the rights of the lessor or the obligations of the lessee. We elected this practical expedient in our accounting for any lease concessions provided in connection with our renegotiated lease agreements that did not result in a substantial increase in the rights of the lessor or obligations to the lessee. As a result of this election, we had deferred payments of $9.6 million in operating lease costs on our condensed consolidated balance sheet as of May 1, 2021.
14
AT HOME GROUP INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Litigation
We are subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolution of such claims and lawsuits will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
11. Earnings Per Share
In accordance with ASC 260 (Topic 260, “Earnings Per Share”), basic earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period and include the dilutive impact of potential shares from the exercise of stock options and restricted stock units. Potentially dilutive securities are excluded from the computation of diluted net income (loss) per share if their effect is anti-dilutive.
The following table sets forth the calculation of basic and diluted earnings (loss) per share for the thirteen weeks ended May 1, 2021 and April 25, 2020 as follows (dollars in thousands, except share and per share data):
| | | | | | | |
| | Thirteen Weeks Ended | | ||||
|
| May 1, 2021 |
| April 25, 2020 |
| ||
Numerator: | | | | | | | |
Net income (loss) | | $ | 56,323 | | $ | (358,942) | |
| | | | | | | |
Denominator: | | | | | | | |
Weighted average common shares outstanding-basic | | | 65,405,610 | | | 64,130,000 | |
Effect of dilutive securities: | | | | | | | |
Stock options and restricted stock units | | | 4,138,831 | | | — | |
Weighted average common shares outstanding-diluted | | | 69,544,441 | | | 64,130,000 | |
| | | | | | | |
Net income (loss) per common share: | | | | | | | |
Basic | | $ | 0.86 | | $ | (5.60) | |
Diluted | | $ | 0.81 | | $ | (5.60) | |
For the thirteen weeks ended May 1, 2021 and April 25, 2020, 812,457 and 6,534,874, respectively, of stock options and other awards were excluded from the calculation of diluted net income (loss) per common share since their effect was anti-dilutive, of which 24,709 stock options and other awards would have been included as dilutive had we not recognized a net loss for the thirteen weeks ended April 25, 2020.
12. Stock-Based Compensation
On March 30, 2021, we made grants of 347,408 stock options and 229,250 performance share units (“PSUs”) to members of our senior management team and 61,777 restricted stock units (“RSUs”) to our independent directors and members of our senior management team under the 2016 Equity Plan. Non-cash, stock-based compensation expense associated with the grant of stock options is $5.6 million, which will be expensed over the requisite service period of three years. Non-cash, stock-based compensation expense associated with the grant of RSUs is $1.6 million, which will be expensed over the requisite service period of one to three years.
The PSUs will be earned based on the achievement of the following performance metrics: (i) adjusted net income (representing 50% of the PSU target value) and (ii) total sales growth (representing 50% of the PSU target value), in each case, with three discrete performance target goals, the first of which was approved on March 30, 2021
15
AT HOME GROUP INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
with the remaining two performance target goals to be approved at or near the beginning of fiscal year 2023 and fiscal year 2024, respectively. Non-cash, stock-based compensation expense associated with the first performance target goal of the PSUs is $1.8 million at target, which will be expensed over the requisite service period of approximately three years. Following approval of each remaining performance target goal, the related expense will commence being recognized for the applicable service period. Any earned PSUs shall vest in full on the later of (i) the third anniversary of the grant date or (ii) the performance determination date, subject to the participant's continued employment through each vesting date, or other vesting conditions specified therein.
Forfeiture assumptions for the grants were estimated based on historical experience.
13. Subsequent Event
On May 6, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ambience Parent, Inc., a Delaware corporation (“Parent”), and Ambience Merger Sub, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Parent (“Merger Sub”). Parent and Merger Sub are affiliates of investment funds advised by Hellman & Friedman LLC. The Merger Agreement provides that Merger Sub will be merged with and into the Company, with the Company continuing as the surviving corporation and as an indirect wholly owned subsidiary of Parent. The Merger Agreement provides that each outstanding share of common stock of the Company will automatically be cancelled and converted into the right to receive $36.00 in cash, without interest and subject to applicable withholding taxes. The obligation of the parties to complete the merger is subject to customary closing conditions, including, among others, (i) the adoption of the Merger Agreement by a majority of outstanding shares of common stock entitled to vote thereon, (ii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and (iii) the expiration of a 40-day “go-shop” period. The Merger Agreement contains certain termination rights for the parties. Upon termination of the Merger Agreement under specified circumstances, the Company will be required to pay Parent a termination fee of $77.2 million; provided, that if the Company terminates the Merger Agreement during the 40-day go-shop period to enter into a definitive agreement for an alternative acquisition, then the termination fee payable by the Company to Parent will be $38.6 million. The Merger Agreement further provides that Parent will be required to pay the Company a termination fee of $128.7 million if the Merger Agreement is terminated under specified circumstances.
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ITEM 2. — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis of the financial condition and results of our operations should be read in conjunction with the unaudited condensed consolidated financial statements and related notes of At Home Group Inc. included in Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes thereto in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021 as filed with the Securities and Exchange Commission (“SEC”) on March 24, 2021 (the “Annual Report”). You should review the disclosures under the heading “Item 1A. Risk Factors” in the Annual Report, as well as the disclosure under the heading “Part II, Item 1A. Risk Factors” and any cautionary language in this report, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by any forward-looking statements contained in the following discussion and analysis. All expressions of the “Company”, “us”, “we”, “our”, and all similar expressions are references to At Home Group Inc. and its consolidated wholly owned subsidiaries, unless otherwise expressly stated or the context otherwise requires.
We operate on a fiscal calendar widely used by the retail industry that results in a given fiscal year consisting of a 52- or 53-week period ending on the last Saturday in January. In a 52-week fiscal year, each quarter contains 13 weeks of operations; in a 53-week fiscal year, each of the first, second and third quarters includes 13 weeks of operations and the fourth quarter includes 14 weeks of operations. References to a fiscal year mean the year in which that fiscal year ends. References herein to “fiscal year 2022” relate to the 52 weeks ending January 29, 2022 and references herein to “fiscal year 2021” relate to the 53 weeks ended January 30, 2021. References herein to “first fiscal quarter 2022” and “first fiscal quarter 2021” relate to the thirteen weeks ended May 1, 2021 and April 25, 2020, respectively.
Overview
At Home is a leading home décor superstore, and we believe our large format stores dedicate more space per store to home décor than any other player in the industry. We are focused on providing the broadest assortment of everyday and seasonal products for any room, in any style, for any budget. We utilize our space advantage to out-assort our competition, offering over 50,000 SKUs throughout our stores. Our differentiated merchandising strategy allows us to identify on-trend products and then value engineer those products to provide desirable aesthetics at attractive price points for our customers. Over 75% of our products are unbranded, private label or specifically designed for us.
As of May 1, 2021, our store base was comprised of 226 large format stores across 40 states, averaging approximately 105,000 square feet per store. Over the past three completed fiscal years, we have opened 77 new stores in a mix of existing and new markets and we believe there is significant whitespace opportunity to increase our store count in both existing and new markets.
We believe with the addition of our quickly expanding omnichannel offering, our broad and comprehensive assortment and compelling value proposition, we are a leading destination for home décor with the opportunity to continue taking market share in a highly fragmented and growing industry.
Pending Merger with Hellman & Friedman LLC
On May 6, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ambience Parent, Inc., a Delaware corporation (“Parent”), and Ambience Merger Sub, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Parent (“Merger Sub”). Parent and Merger Sub are affiliates of investment funds advised by Hellman & Friedman LLC. The Merger Agreement provides that Merger Sub will be merged with and into the Company, with the Company continuing as the surviving corporation and as an indirect wholly owned subsidiary of Parent. The Merger Agreement provides that each outstanding share of common stock of the Company will automatically be cancelled and converted into the right to receive $36.00 in cash, without interest and subject to applicable withholding taxes. The parties currently expect the merger to be completed during the third quarter of calendar year 2021. The obligation of the parties to complete the merger is subject to customary closing conditions, including, among others, (i) the adoption of the Merger Agreement by a majority of outstanding shares of common stock
17
entitled to vote thereon, (ii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and (iii) the expiration of a 40-day “go-shop” period. The Merger Agreement contains certain termination rights for the parties. Upon termination of the Merger Agreement under specified circumstances, the Company will be required to pay Parent a termination fee of $77.2 million; provided, that if the Company terminates the Merger Agreement during the 40-day go-shop period to enter into a definitive agreement for an alternative acquisition, then the termination fee payable by the Company to Parent will be $38.6 million. The Merger Agreement further provides that Parent will be required to pay the Company a termination fee of $128.7 million if the Merger Agreement is terminated under specified circumstances. The anticipated merger is described more fully in our Current Report on Form 8-K filed with the SEC on May 6, 2021. This summary of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement filed as Exhibit 2.1 to this Quarterly Report.
Recent Developments
The global COVID-19 pandemic has resulted in significant disruptions to the U.S. and global economies and retail industry, and it has substantially impacted our business, results of operations, financial condition and cash flows. In an effort to mitigate the continued spread of the COVID-19 pandemic, various government, regulatory and private entities periodically have implemented significant restrictions, including stay-at-home orders, quarantines, travel restrictions and restrictions on public gatherings. Due to these restrictions in the first quarter of fiscal year 2021 and a desire to take strong precautions, we closed all of our stores in late March 2020 and gradually opened stores in compliance with state and local mandates. As of April 25, 2020, approximately 14% of our stores were fully open to foot traffic and approximately 72% of our stores were open for curbside pickup only. For the first fiscal quarter 2022 and the last three quarters of fiscal year 2021, our operational and financial performance benefitted from a number of macroeconomic and consumer trends primarily due to the COVID-19 pandemic, including strong home sales, nesting and de-urbanization and pent-up demand for home décor products.
Recurring COVID-19 outbreaks have led to the re-introduction of some restrictions on retail operations in certain jurisdictions, and there can be no assurance that our stores will not be subject to modified hours, operations, capacity limitations and store closures in future periods. Due to the size of our stores, we do not expect to be impacted by capacity restrictions, which we believe differentiates us from some of our smaller format competitors. We remain committed to providing our customers with a seamless shopping experience and, in fiscal year 2021, we accelerated our omnichannel capabilities in response to the impact of the COVID-19 pandemic to provide our customers with additional options for purchasing our products.
At the onset of the COVID-19 pandemic, we implemented a number of other measures to help mitigate the operating and financial impact of the pandemic, including the suspension of all new store openings and remodeling projects with the exception of seven stores that were at or near completion. The COVID-19 pandemic also had, and continues to have, an impact on our third-party supply chain and our inventory. In the spring of 2020, while managing stay-at-home orders and store closures, we canceled orders and reduced the amount of inventory coming into our stores. As store traffic and net sales improved, we sought to strengthen our inventory positions. However, a general increased demand for shipping and other pandemic impacts has led to an increase in freight and transportation costs and product delivery delays, the impact of which is further exacerbated by the significant demand for our products and sales growth in recent quarters. We expect our cost of sales and gross margin will be significantly impacted by the increase in freight costs due to the global shipping shortage. There is also typically a two-quarter lag from when we ship product to when these costs are expensed, so recent shortages and delays and resulting incremental freight costs will impact our profitability greater in the second half of fiscal year 2022 and future impacts will have a similar time lag.
The future impact of the COVID-19 pandemic on our business, strategy and financial performance will depend largely on future macroeconomic, scientific, health, legal and regulatory developments. Accordingly, our historical financial information may not be indicative of our future performance, financial condition and results of operations.
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Trends and Other Factors Affecting Our Business
Various trends and other factors affect or have affected our operating results, including:
Overall economic trends. The overall economic environment and related changes in consumer behavior have a significant impact on our business. In general, positive conditions in the broader economy promote customer spending in our stores, while economic weakness results in a reduction of customer spending. Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include employment rates, business conditions, changes in the housing market, the availability of credit, interest rates, tax rates and fuel and energy costs, and localized or global events.
COVID-19 pandemic. In the first fiscal quarter 2021, the temporary closure of our stores and decline in store traffic resulted in, among other things, significantly reduced net sales and cash flows from operations. In the first fiscal quarter 2022 and the last three quarters of fiscal year 2021, we reported increased store traffic and strong net sales, gross margins and cash flows due to a number of macroeconomic and consumer trends in response to the COVID-19 pandemic, such as strong home sales, nesting and de-urbanization and pent-up demand for home décor products.
These results may not be indicative of results for future periods, including if current favorable trends do not continue, including due to the continued vaccine rollout and the significant reduction of government and regulatory restrictions in the U.S., or are offset by other adverse impacts, such as the increase in freight costs due to the global shipping shortage impacting our cost of sales and gross margin. For example, some of the increased customer demand beginning in the second fiscal quarter 2021 may have been due to temporary impacts of the pandemic, including an intense focus on a person’s home as well as U.S. stimulus payments in fiscal years 2021 and 2022.
Consumer preferences and demand. Our ability to maintain our appeal to existing customers and attract new customers depends on our ability to originate, develop and offer a compelling product assortment responsive to customer preferences and design trends. Our performance depends on the success of our product reinventions, collaborations and improved everyday low price strategy (“EDLP+”). If we misjudge the market for our products, we may be faced with excess inventories for some products and may be required to become more promotional in our selling activities, which would impact our net sales and gross profit. During fiscal year 2021, we began undertaking efforts to rationalize SKUs, in order to ensure our continuing competitiveness without sacrificing our wide and deep product assortment, by identifying the least productive SKUs with the goal to reduce overall SKU count. Within selected departments, we reallocate inventory dollars from lower performing items to those with higher returns.
New store openings. We expect new stores will be a key driver of the growth in our sales and operating profit in the future. Our results of operations have been and will continue to be materially affected by the timing and number of new store openings. As we continue to open new stores, competition among our stores within the same or adjacent geographic regions may impact the performance of our comparable store base. The performance of new stores may vary depending on various factors such as the store opening date, the time of year of a particular opening, the amount of store opening costs, the amount of store occupancy costs and the location of the new store, including whether it is located in a new or existing market. For example, we typically incur higher than normal employee costs at the time of a new store opening associated with set-up and other opening costs. In addition, in response to the interest and excitement generated when we open a new store, the new stores generally experience higher net sales during the initial period of one to three months after which the new store’s net sales will begin to normalize as it reaches maturity within six months of opening, as further discussed below.
Our planned store expansion will place increased demands on our operational, managerial, administrative and other resources. Managing our growth effectively will require us to continue to enhance our inventory management and distribution systems, financial and management controls and information systems. We will also be required to hire, train
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and retain store management and store personnel, which, together with increased marketing costs, can affect our operating margins.
A new store typically reaches maturity, meaning the store’s annualized targeted sales volume has been reached, within six months of opening. New stores are included in the comparable store base during the sixteenth full fiscal month following the store’s opening, which we believe represents the most appropriate comparison. We also periodically explore opportunities to relocate a limited number of existing stores to improve location, lease terms, store layout or customer experience. Relocated stores typically achieve a level of operating profitability comparable to our company-wide average for existing stores more quickly than new stores.
During the first fiscal quarter 2021, we suspended all new store openings and remodeling projects in response to the COVID-19 pandemic with the exception of seven stores that were at or near completion. We resumed opening new stores in the first fiscal quarter 2022. We intend to open approximately 15 net new stores in fiscal year 2022, of which we had opened seven net new stores during the thirteen weeks ended May 1, 2021, while also refreshing, remodeling or relocating a portion of our existing store base. We will continue to evaluate our future store opening plans, but currently we intend to grow our store base at a rate of approximately 10% beginning in fiscal year 2023.
Infrastructure investment. Our historical operating results reflect the impact of our ongoing investments to support our growth. In the past eight fiscal years, we have made significant investments in our business that we believe have laid the foundation for continued profitable growth. We believe that our strong management team, brand identity, upgraded distribution centers and enhanced information systems, including our warehouse and order management, e-commerce, POS, merchandise planning and inventory allocation systems, have enabled us to replicate our profitable store format and differentiated shopping experience. We made investments relating to our second distribution center in Pennsylvania, which opened in the beginning of fiscal year 2020 and incurred net operating costs in connection therewith during fiscal years 2020 and 2021 that impacted our operating margins. We made significant investments in our omnichannel capabilities during fiscal year 2021 and into fiscal year 2022 that allowed us to provide our customers with additional options for purchasing our products, including BOPIS, curbside pick-up and local delivery from select store locations. We expect to make additions and upgrades to these infrastructure investments in the future to continue to support our successful operating model over a significantly expanded store base and growing omnichannel offerings.
Pricing strategy. We are committed to providing our products at everyday low prices. We value engineer products in collaboration with our suppliers to recreate the “look” that we believe our customer wants while eliminating the costly construction elements that our customer does not value. We believe our customer views shopping At Home as an in-person experience through which our customer can see and feel the quality of our products and physically assemble a desired aesthetic. This design approach allows us to deliver an attractive value to our customer, as our products are typically less expensive than other branded products with a similar look. We employ a simple EDLP+ strategy that consistently delivers savings to our customer without the need for extensive promotions, as evidenced by over 80% of our net sales occurring at full price.
Our ability to source and distribute products effectively. Our net sales and gross profit are affected by our ability to purchase our products in sufficient quantities at competitive prices. While we believe our vendors have adequate capacity to meet our current and anticipated demand, our level of net sales could be adversely affected in the event of constraints in our supply chain, including the inability of our vendors to produce sufficient quantities of some merchandise in a manner that is able to match market demand from our customers, leading to lost sales. Tariffs could also impact our or our vendors’ ability to source product efficiently or create other supply chain disruptions. The tariffs enacted in fiscal year 2019 did not have a material impact on our gross margin due to a combination of supplier negotiations, direct sourcing (which improves item-level product margins) and strategic price increases. However, the additional tariffs enacted in fiscal year 2020 led us to institute strategic price increases, which had a direct negative impact on comparable store sales. In fiscal year 2021, we sourced additional product from various countries to mitigate the impact of high-tariff categories goods from China. In addition, future supply chain disruption for reasons such as the
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outbreak or persistence of epidemic or pandemic disease, such as the ongoing global COVID-19 pandemic, could lead to inventory constraints in certain product categories, which could have a negative impact on our results of operations. We expect our cost of sales and gross margin will be significantly impacted by an increase in freight costs due to the global shipping shortage. The increased demand in shipping in the global economy has caused a shortage of equipment available to ship product from overseas vendors and a shortage of longshoremen available to work the ports, due to the impact of social distancing and COVID-19 illnesses, which has caused a significant increase in shipping costs.
Fluctuation in quarterly results. Our quarterly results have historically varied depending upon a variety of factors, including our product offerings, promotional events, store openings and shifts in the timing of holidays, among other things. As a result of these factors, our working capital requirements and demands on our product distribution and delivery network may fluctuate during the fiscal year.
Inflation and deflation trends. Our financial results can be expected to be directly impacted by substantial increases in product costs due to commodity cost increases or general inflation, including with respect to freight costs, which could lead to a reduction in our sales as well as greater margin pressure as costs may not be able to be passed on to consumers. To date, changes in commodity prices and general inflation have not materially impacted our business. We have faced inflationary pressure on freight costs, which were heightened by tariff-related shipment surges and port congestion, and have also experienced supply chain disruptions relating to the global outbreak of COVID-19. In response to increasing commodity prices, freight costs or general inflation, we seek to minimize the impact of such events by sourcing our merchandise from different vendors, changing our product mix or increasing our pricing when necessary.
Other trends. In response to the COVID-19 pandemic, we began renegotiating certain store lease agreements in the first and second fiscal quarters 2021 to obtain rent abatements and deferrals in an effort to partially offset the negative financial impacts. The repayment of such rent deferrals has, and will continue to have, a negative impact on our cash position. In addition, due to the higher interest rate on our Notes compared to our Term Loan, annual interest expense has risen moderately compared to prior fiscal years, and may continue to rise to the extent that we increase the amount of borrowings under the revolving portion of our ABL Facility.
How We Assess the Performance of Our Business
In assessing our performance, we consider a variety of performance and financial measures. The key measures include net sales, gross profit and gross margin, and selling, general and administrative expenses. In addition, we also review other important non-GAAP metrics such as Adjusted EBITDA, Store-level Adjusted EBITDA and Adjusted Net Income.
Net Sales
Net sales are derived from direct retail sales to customers in our stores, net of merchandise returns and discounts. Growth in net sales is impacted by opening new stores and increases and decreases in comparable store sales.
New store openings
The number of new store openings reflects the new stores opened during a particular reporting period, including any relocations of existing stores during such period. Before we open new stores, we incur pre-opening costs, as described below. The total number of new stores per year and the timing of store openings has, and will continue to have, an impact on our results as described above in “—Trends and Other Factors Affecting Our Business”.
Comparable store sales
A store is included in the comparable store sales calculation on the first day of the sixteenth full fiscal month following the store's opening, which is when we believe comparability is achieved. When a store is being relocated or remodeled, we exclude sales from that store in the calculation of comparable store sales until the first day of the
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sixteenth full fiscal month after it reopens. In addition, when applicable, we adjust for the effect of the 53rd week. We have not excluded any stores from the comparable store sales calculation due to the impact of the COVID-19 pandemic. Sales resulting from our omnichannel initiatives occur at the store level and are included in the calculation of comparable store sales. There may be variations in the way in which some of our competitors and other retailers calculate comparable or “same store” sales. As a result, data in this report regarding our comparable store sales may not be comparable to similar data made available by other retailers.
Comparable store sales allow us to evaluate how our store base is performing by measuring the change in period-over-period net sales in stores that have been open for the applicable period. Various factors affect comparable store sales, including:
● | consumer preferences (including changing consumer preferences in response to unforeseen events such as the global COVID-19 pandemic), buying trends and overall economic trends; |
● | our ability to identify and respond effectively to customer preferences and trends; |
● | our ability to provide an assortment of high quality and trend-right product offerings that generate new and repeat visits to our stores; including products from our reinvention and collaboration initiatives; |
● | the customer experience we provide in our stores and online; |
● | the success of our Insider Perks loyalty program and other offerings; |
● | our ability to source and receive products accurately and timely; |
● | changes in product pricing, including promotional activities; |
● | the number of items purchased per store visit; |
● | weather; |
● | competition, including among our own stores within the same or adjacent geographic regions; and |
● | timing and length of holiday shopping periods. |
As we continue to execute our growth strategy, we anticipate that a portion of our net sales will come from stores not included in our comparable store sales calculation. However, comparable store sales are only one measure we use to assess the success of our growth strategy.
Gross Profit and Gross Margin
Gross profit is determined by subtracting cost of sales from our net sales. Gross margin measures gross profit as a percentage of net sales.
Cost of sales consists of various expenses related to the cost of selling our merchandise. Cost of sales consists of the following: (1) cost of merchandise, net of inventory shrinkage, damages and vendor allowances; (2) inbound freight and internal transportation costs such as distribution center-to-store freight costs; (3) costs of operating our distribution centers, including labor, occupancy costs, supplies, and depreciation; and (4) store occupancy costs including rent, insurance, taxes, common area maintenance, utilities, repairs and maintenance and depreciation. The components of our cost of sales expenses may not be comparable to other retailers.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses (“SG&A”) consist of various expenses related to supporting and facilitating the sale of merchandise in our stores. These costs include payroll, benefits and other personnel expenses for corporate and store employees, including stock-based compensation expense, consulting, legal and other professional services expenses, marketing and advertising expenses, occupancy costs for our corporate headquarters and various other expenses.
SG&A includes both fixed and variable components and, therefore, is not directly correlated with net sales. In addition, the components of our SG&A expenses may not be comparable to those of other retailers. We expect that our SG&A expenses will increase in future periods due to our continuing store growth. In particular, we have expanded our marketing and advertising spend as a percentage of net sales in each of the fiscal years since our initial public offering, with the exception of fiscal year 2021 due to the COVID-19 pandemic, and expect that we will continue to make investments in marketing and advertising spend in future fiscal years.
In addition, any increase in future stock option or other stock-based grants or modifications will increase our stock-based compensation expense included in SG&A.
Adjusted EBITDA
Adjusted EBITDA is a key metric used by management and our board of directors to assess our financial performance. In addition, Adjusted EBITDA is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. In addition to covenant compliance, we use Adjusted EBITDA to supplement generally accepted accounting principles in the United States of America (“GAAP”) measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. Adjusted EBITDA is defined as net income (loss) before net interest expense, income tax provision (benefit) and depreciation and amortization, adjusted for the impact of certain other items as defined in our debt agreements, including certain legal settlements and consulting and other professional fees, stock-based compensation expense, impairment charges, loss on extinguishment of debt, non-cash rent and other adjustments. For a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable GAAP measure, see “—Results of Operations”.
Store-level Adjusted EBITDA
We use Store-level Adjusted EBITDA as a supplemental measure of our performance, which represents our Adjusted EBITDA excluding the impact of costs associated with new store openings and certain corporate overhead expenses that we do not consider in our evaluation of the ongoing operating performance of our stores from period to period. Our calculation of Store-level Adjusted EBITDA is a supplemental measure of operating performance of our stores. We believe that Store-level Adjusted EBITDA is an important measure to evaluate the performance and profitability of each of our stores, individually and in the aggregate, especially given the level of investments we have made in our home office and infrastructure over the past eight years to support future growth. We also believe that Store-level Adjusted EBITDA is a useful measure in evaluating our operating performance because it removes the impact of general and administrative expenses, which are not incurred at the store level, and the costs of opening new stores, which are non-recurring at the store level, and thereby enables the comparability of the operating performance of our stores during the period. We use Store-level Adjusted EBITDA information to benchmark our performance versus competitors. Store-level Adjusted EBITDA should not be used as a substitute for consolidated measures of profitability of performance because it does not reflect corporate overhead expenses that are necessary to allow us to effectively operate our stores and generate Store-level Adjusted EBITDA. For a reconciliation of Store-level Adjusted EBITDA to net income (loss), the most directly comparable GAAP measure, see “—Results of Operations”.
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Adjusted Net Income
Adjusted Net Income is an additional key metric used by management and our board of directors to assess our financial performance and assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items we do not believe are indicative of our core operating performance. Adjusted Net Income represents our net income (loss), adjusted for impairment charges, loss on extinguishment of debt, the income tax impact associated with the special one-time initial public offering bonus stock option exercises and other costs. For a reconciliation of Adjusted Net Income to net income (loss), the most directly comparable GAAP measure, see “—Results of Operations”.
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Results of Operations
The following tables summarize key components of our results of operations for the periods indicated in dollars (in thousands), as a percentage of our net sales and other operational data:
| | | | | | | |
| | Thirteen Weeks Ended | | ||||
|
| May 1, 2021 |
| April 25, 2020 | | ||
| | | | | | | |
Statement of Operations Data: | | | | | | | |
Net sales | | $ | 537,078 | | $ | 189,846 | |
Cost of sales | | | 336,803 | | | 173,496 | |
Gross profit | | | 200,275 | | | 16,350 | |
Operating expenses | | | | | | | |
Selling, general and administrative expenses | | | 108,536 | | | 66,466 | |
Impairment charges | | | — | | | 319,732 | |
Depreciation and amortization | | | 2,317 | | | 2,213 | |
Total operating expenses | | | 110,853 | | | 388,411 | |
Operating income (loss) | | | 89,422 | | | (372,061) | |
Interest expense, net | | | 8,119 | | | 6,971 | |
Loss on extinguishment of debt | | | 5,253 | | | — | |
Income (loss) before income taxes | | | 76,050 | | | (379,032) | |
Income tax provision (benefit) | | | 19,727 | | | (20,090) | |
Net income (loss) | | $ | 56,323 | | $ | (358,942) | |
Percentage of Net Sales: | | | | | | | |
Net sales | | | 100.0 % | | | 100.0 % | |
Cost of sales | | | 62.7 % | | | 91.4 % | |
Gross profit | | | 37.3 % | | | 8.6 % | |
Operating expenses | | | | | | | |
Selling, general and administrative expenses | | | 20.2 % | | | 35.0 % | |
Impairment charges | | | — % | | | 168.4 % | |
Depreciation and amortization | | | 0.4 % | | | 1.2 % | |
Total operating expenses | | | 20.6 % | | | 204.6 % | |
Operating income (loss) | | | 16.6 % | | | (196.0)% | |
Interest expense, net | | | 1.5 % | | | 3.7 % | |
Loss on extinguishment of debt | | | 1.0 % | | | — % | |
Income (loss) before income taxes | | | 14.2 % | | | (199.7)% | |
Income tax provision (benefit) | | | 3.7 % | | | (10.6)% | |
Net income (loss) | | | 10.5 % | | | (189.1)% | |
Operational Data: | | | | | | | |
Total stores at end of period | | | 226 | | | 218 | |
New stores opened | | | 9 | | | 6 | |
Comparable store sales | | | 187.3 % | | | (46.5)% | |
Non-GAAP Measures(1): | | | | | | | |
Store-level Adjusted EBITDA(2) | | $ | 155,358 | | $ | 13,986 | |
Store-level Adjusted EBITDA margin(2) | | | 28.9% | | | 7.4% | |
Adjusted EBITDA(2) | | $ | 110,561 | | $ | (14,610) | |
Adjusted EBITDA margin(2) | | | 20.6% | | | (7.7)% | |
Adjusted Net Income(3) | | $ | 60,746 | | $ | (39,210) | |
(1) | You are encouraged to evaluate Adjusted EBITDA, Adjusted EBITDA margin, Store-level Adjusted EBITDA, Store-level Adjusted EBITDA margin and Adjusted Net Income (collectively, “non-GAAP financial measures”) and the reasons we consider them appropriate for supplemental analysis. In evaluating our non-GAAP financial measures, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in our presentation of non-GAAP financial measures. Our presentation of non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. There can be no assurance that we will not modify the presentation of our non-GAAP financial measures in the future, and any such modification may be material. In addition, our non-GAAP financial measures may not be comparable to similarly titled measures used by other companies in our industry or across different industries. |
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(2) | The following table reconciles our net income (loss) to EBITDA, Adjusted EBITDA and Store-level Adjusted EBITDA for the periods presented (in thousands): |
| | | | | | | |
| | Thirteen Weeks Ended | | ||||
|
| May 1, 2021 |
| April 25, 2020 |
| ||
| | | | | | | |
Net income (loss), as reported | | $ | 56,323 | | $ | (358,942) | |
Interest expense, net | | | 8,119 | | | 6,971 | |
Income tax provision (benefit) | | | 19,727 | | | (20,090) | |
Depreciation and amortization(a) | | | 18,323 | | | 18,148 | |
EBITDA | | $ | 102,492 | | $ | (353,913) | |
Impairment charges(b) | | | — | | | 319,732 | |
Loss on extinguishment of debt | | | 5,253 | | | — | |
Consulting and other professional services(c) | | | 686 | | | 275 | |
Stock-based compensation expense(d) | | | 4,116 | | | 2,063 | |
Non-cash rent(e) | | | (2,018) | | | 17,233 | |
Other(f) | | | 32 | | | — | |
Adjusted EBITDA | | $ | 110,561 | | $ | (14,610) | |
Costs associated with new store openings(g) | | | 5,282 | | | 3,579 | |
Corporate overhead expenses(h) | | | 39,515 | | | 25,017 | |
Store-level Adjusted EBITDA | | $ | 155,358 | | $ | 13,986 | |
(a) | Includes the portion of depreciation and amortization expenses that are classified as cost of sales in our condensed consolidated statements of operations. |
(b) | For the thirteen weeks ended April 25, 2020, represents a non-cash impairment charge of $319.7 million related to full impairment of goodwill. |
(c) | Primarily consists of other transaction costs, including $0.5 million in costs related to the pending merger with Hellman & Friedman LLC during the thirteen weeks ended May 1, 2021. |
(d) | Non-cash stock-based compensation expense related to the ongoing equity incentive program that we have in place to incentivize, retain and motivate our employees, officers, consultants and non-employee directors. |
(e) | Consists of the non-cash portion of rent, which reflects the extent to which our GAAP straight-line rent expense recognized exceeds or is less than our cash rent payments. The GAAP straight-line rent expense adjustment can vary depending on the average age of our lease portfolio, which has been impacted by our significant growth. For newer leases, our rent expense recognized typically exceeds our cash rent payments while for more mature leases, rent expense recognized is typically less than our cash rent payments. During the thirteen weeks ended April 25, 2020, due to the COVID-19 pandemic, we began renegotiating leases to include significant deferrals which resulted in higher non-cash rent expense. |
(f) | Other adjustments include amounts our management believes are not representative of our ongoing operations. |
(g) | Reflects non-capital expenditures associated with opening new stores, including marketing and advertising, labor and cash occupancy expenses. Costs related to new store openings represent cash costs, and you should be aware that in the future we may incur expenses that are similar to these costs. We anticipate that we will continue to incur cash costs as we open new stores in the future. We opened nine and six new stores during the thirteen weeks ended May 1, 2021 and April 25, 2020, respectively. |
(h) | Reflects corporate overhead expenses, which are not directly related to the profitability of our stores, to facilitate comparisons of store operating performance as we do not consider these corporate overhead expenses when evaluating the ongoing performance of our stores from period to period. Corporate overhead expenses, which are a component of selling, general and administrative expenses, are comprised of various home office general and administrative expenses such as payroll expenses, occupancy costs, marketing and advertising, and consulting and professional fees. See our discussion of the changes in selling, general and administrative expenses presented in “—Results of Operations”. |
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(3) | The following table reconciles our net income (loss) to Adjusted Net Income for the periods presented (in thousands): |
| | | | | | | |
| | Thirteen Weeks Ended | | ||||
|
| May 1, 2021 |
| April 25, 2020 |
| ||
| | | | | | | |
Net income (loss), as reported | | $ | 56,323 | | $ | (358,942) | |
Adjustments: | | | | | | | |
Impairment charges(a) | | | — | | | 319,732 | |
Loss on extinguishment of debt | | | 5,253 | | | — | |
Other(b) | | | 543 | | | — | |
Tax impact of adjustments to net income (loss)(c) | | | (1,373) | | | — | |
Adjusted Net Income | | $ | 60,746 | | $ | (39,210) | |
(a) | For the thirteen weeks ended April 25, 2020, represents a non-cash impairment charge of $319.7 million related to full impairment of goodwill. |
(b) | Other adjustments include costs related to the pending merger with Hellman & Friedman LLC during the thirteen weeks ended May 1, 2021. |
(c) | Represents the income tax impact of the adjusted expenses using the annual effective tax rate excluding discrete items. After giving effect to the adjustments to net income (loss), the adjusted effective tax rate was 25.8% and 33.9% for the thirteen weeks ended May 1, 2021 and April 25, 2020, respectively. |
Matters Affecting Comparability
As a result of the COVID-19 pandemic, our stores and distribution centers were closed or operated in a limited capacity during the first fiscal quarter and into the beginning of the second fiscal quarter 2021. During this period of lost revenues, we continued to incur expenses relating to our stores, distribution centers and home office. Once our stores reopened, we experienced a significant increase in foot traffic and sales that we believe was impacted by a number of macroeconomic and consumer trends in response to the COVID-19 pandemic, such as strong home sales, nesting and de-urbanization and pent-up demand for home décor products and may have been impacted by the U.S. stimulus payments in fiscal years 2021 and 2022. As a result, our fiscal year 2021 and first fiscal quarter 2022 results may not be indicative of results for future periods, including if current favorable trends do not continue, including due to continued vaccine rollout and the significant reduction of government and regulatory restrictions in the U.S., or are offset by other adverse impacts, such as the increase in freight costs due to the global shipping shortage impacting our cost of sales and gross margin, and comparisons as a percentage of sales and year-over-year trends may not be meaningful for certain financial statement items for the thirteen week comparative periods. See “—Trends and Other Factors Affecting Our Business” for more information.
Thirteen Weeks Ended May 1, 2021 Compared to Thirteen Weeks Ended April 25, 2020
Net Sales
Net sales increased $347.3 million, or 182.9%, to $537.1 million for the thirteen weeks ended May 1, 2021 from $189.8 million for the thirteen weeks ended April 25, 2020. Comparable store sales increased $331.1 million, or 187.3%, during the thirteen weeks ended May 1, 2021. The increase was primarily driven by increased demand during the first fiscal quarter 2022, including approximately $45.0 million of estimated sales benefit attributable to stimulus payments not expected to recur in future quarters, as a result of continuing macroeconomic trends as well as our successful execution of several internal initiatives, including the continued roll-out of our omnichannel offering, in addition to lost sales during the first fiscal quarter 2021 due to mandated store closures. The remaining increase was driven by the net addition of eight new stores opened since April 25, 2020 as well as a number of stores that were opened during fiscal years 2021 and 2020 but had not been open long enough to be included in the comparable store base.
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Cost of Sales
Cost of sales increased $163.3 million, or 94.1%, to $336.8 million for the thirteen weeks ended May 1, 2021 from $173.5 million for the thirteen weeks ended April 25, 2020. This increase was primarily driven by the 182.9% increase in net sales during the thirteen weeks ended May 1, 2021 compared to the thirteen weeks ended April 25, 2020, which resulted in a $148.1 million increase in merchandise costs. The increase was also due to a $7.0 million increase in store occupancy costs as a result of new store openings and sale-leaseback transactions since April 25, 2020 and a $3.1 million increase in distribution center costs related to increased labor hours.
Gross Profit and Gross Margin
Gross profit was $200.3 million for the thirteen weeks ended May 1, 2021, an increase of $183.9 million from $16.4 million for the thirteen weeks ended April 25, 2020. The increase in gross profit was driven by the increase in net sales during the thirteen weeks ended May 1, 2021. Gross margin increased 2,870 basis points to 37.3% of net sales for the thirteen weeks ended May 1, 2021 from 8.6% of net sales for the thirteen weeks ended April 25, 2020. The increase was primarily driven by leverage on occupancy costs, depreciation expense and distribution costs as a result of increased sales in addition to product margin expansion.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $108.5 million for the thirteen weeks ended May 1, 2021 compared to $66.5 million for the thirteen weeks ended April 25, 2020, an increase of $42.0 million or 63.3%. As a percentage of sales, SG&A decreased 1,480 basis points for the thirteen weeks ended May 1, 2021 to 20.2% from 35.0% for the thirteen weeks ended April 25, 2020, primarily due to the increase in sales.
Selling, general and administrative expenses include expenses related to store operations, which increased by $19.0 million, primarily driven by increases in store labor, incentive compensation and other administrative costs. Selling, general and administrative expenses also include corporate overhead expenses, which increased by $15.9 million, primarily driven by increases in incentive and equity-based compensation and labor costs. Increases in labor costs related to store operations and corporate overhead expenses were partially due to store closures and our efforts to curtail our spending during the thirteen weeks ended April 25, 2020 amid the COVID-19 pandemic.
The remaining change in selling, general and administrative expenses was related to marketing and advertising expenses. Total marketing and advertising expenses were $14.9 million for the thirteen weeks ended May 1, 2021 compared to $7.8 million for the thirteen weeks ended April 25, 2020, an increase of $7.1 million or 90.5%. The increase was driven by our efforts to increase traffic and build brand awareness during the thirteen weeks ended May 1, 2021 in addition to our efforts to curtail our advertising spend during the thirteen weeks ended April 25, 2020 amid the COVID-19 pandemic.
Impairment Charges
During the thirteen weeks ended April 25, 2020, we recognized a non-cash impairment charge of $319.7 million related to full impairment of goodwill. No impairment charges were incurred during the thirteen weeks ended May 1, 2021.
Interest Expense, Net
Interest expense, net increased to $8.1 million for the thirteen weeks ended May 1, 2021 from $7.0 million for the thirteen weeks ended April 25, 2020, an increase of $1.1 million. The increase in interest expense was primarily due to the interest incurred on our Notes and term loan tranche in a principal amount of $35.0 million on a “first-in, last out” basis (the “FILO Loans”) during the thirteen weeks ended May 1, 2021, which was partially offset by interest on our Term Loan and revolving credit loan borrowings under our ABL Facility during the thirteen weeks ended April 25, 2020.
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Loss on Extinguishment of Debt
During the thirteen weeks ended May 1, 2021, we recognized a loss on extinguishment of debt of $5.3 million resulting primarily from the write-off of unamortized deferred debt issuance costs and the prepayment premium in connection with the FILO Loans repayment. We did not incur losses on extinguishment of debt during the thirteen weeks ended April 25, 2020.
Income Tax Provision
Income tax expense was $19.7 million for the thirteen weeks ended May 1, 2021 compared to a $20.1 million benefit for the thirteen weeks ended April 25, 2020. The effective tax rate for the thirteen weeks ended May 1, 2021 was 25.9% compared to 5.3% for the thirteen weeks ended April 25, 2020. The effective tax rate for the thirteen weeks ended May 1, 2021 differs from the federal statutory rate primarily due to the impact of state and local income taxes and executive compensation limitations. The effective tax rate for the thirteen weeks ended April 25, 2020 differs from the federal statutory rate primarily due to the goodwill impairment charge that was non-deductible for income tax purposes, the income tax benefit of $5.2 million from a tax loss carryback under the Coronavirus Aid, Relief, and Economic Security Act (“CARES” Act) and to a lesser extent the impact of state and local income taxes.
Liquidity and Capital Resources
Our principal sources of liquidity have historically been our cash generated by operating activities, proceeds from sale-leaseback transactions and borrowings under our ABL Facility and debt offerings (as described in “—Term Loan Facility” and “—8.750% Senior Secured Notes due 2025”). Historically, we have financed our operations primarily from cash generated from operations and periodic borrowings under our ABL Facility. Our primary cash needs are for day-to-day operations, to provide for infrastructure investments in our stores (including remodeling), to invest in future projects related to omnichannel activities, to finance new store openings and relocations, to pay interest and principal on our indebtedness and to fund working capital requirements for seasonal inventory builds and new store inventory purchases.
The availability of liquidity from the sources described herein are subject to a range of risks and uncertainties, including those discussed under “Item 1A. Risk Factors” of our Annual Report and in “Part II, Item 1A. Risk Factors” herein.
As of May 1, 2021, we had $150.5 million of cash and cash equivalents, no borrowings outstanding under the ABL Facility revolving credit loans and $325.2 million in borrowing availability under our ABL Facility. At that date, there were $1.2 million in face amount of letters of credit that had been issued under the ABL Facility. The agreement governing the ABL Facility (the “ABL Credit Agreement”), as amended, currently provides for aggregate revolving commitments of $425.0 million, with a sublimit for the issuance of letters of credit of $50.0 million and a sublimit for the issuance of swingline loans of $20.0 million. The availability under our ABL Facility is determined in accordance with a borrowing base which can decline due to various factors. Therefore, amounts under our ABL Facility may not be available when we need them. On June 12, 2020, the ABL Facility was amended to provide for a new tranche of term loans in a principal amount of $35.0 million on a “first-in, last out” basis. See “—Asset-Based Lending Credit Facility”.
Our capital expenditures can vary depending on the timing of new store openings and infrastructure-related investments. Capital expenditures for the fiscal year ended January 30, 2021 were $39.7 million and consisted primarily of new store openings, net of proceeds from the sale of property and equipment, which includes sale-leaseback proceeds, of $32.5 million. We plan to invest in the infrastructure necessary to support the further development of our business and continued growth. During fiscal year 2021, we opened seven new stores. Net capital expenditures incurred to date have been substantially financed with cash from operating activities, sale-leaseback transactions and proceeds from our ABL Facility.
In response to the COVID-19 pandemic, in March 2020 we temporarily closed all of our stores nationwide for one week, after which we began to reopen stores in regions that were not required to remain closed by state or local mandates. All of our stores were fully open to foot traffic in June 2020. We took swift and decisive action to preserve
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liquidity, including temporarily suspending new store openings, collaborating with our vendors on payment terms and reducing non-essential expenses and inventory flows during the first and second fiscal quarters 2021. We have resumed new store openings in the first fiscal quarter 2022 and intend to grow our store base at a rate of approximately 10% beginning in fiscal year 2023. Any further curtailment of our store operations or delays in store openings could have a material adverse effect on the execution of our growth strategy and our business, financial condition and results of operations.
Based on our growth plans, we believe that our current cash position, net cash provided by operating activities, borrowings under our ABL Facility and sale-leaseback transactions will be adequate to finance our operations, planned capital expenditures, working capital requirements and debt service obligations over the next twelve months and for the foreseeable future thereafter. However, if cash flows from operations and borrowings under our ABL Facility are not sufficient or available to meet our operating requirements, including as a result of further restrictions on store operations in future periods, we could be required to obtain additional financing in the near future. We may not be able to obtain equity or additional debt financing in the future when we need it or, if available, the terms may not be satisfactory to us or could be dilutive to our stockholders.
Our indebtedness could adversely affect our ability to raise additional capital, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk and prevent us from meeting our obligations. Management reacts strategically to changes in economic conditions and monitors compliance with debt covenants to seek to mitigate any potential material impacts to our financial condition and flexibility.
From time to time, based on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors and subject to compliance with applicable laws and regulations, we may seek to utilize cash on hand, borrowings or raise capital to retire, repurchase or redeem our Notes, repay debt, repurchase shares of our common stock or otherwise enter into similar transactions to support our capital structure and business or utilize excess cash flow on a strategic basis.
Sale-Leaseback Transactions
As part of our flexible real estate strategy, we utilize sale-leaseback transactions to finance investments previously made for the purchase of second generation properties and the construction of new store locations. This enhances our ability to access a range of locations and facilities efficiently. We factor sale-leaseback transactions into our capital allocation decisions. In order to support the execution of sale-leaseback transactions, we have relationships with certain REITs and other lenders that have demonstrated interest in our portfolio of assets.
Term Loan Facility
On June 5, 2015, our indirect wholly owned subsidiary, At Home Holding III Inc. (the “Issuer” or “At Home III”), entered into the first lien credit agreement (as amended from time to time), by and among At Home III, At Home II, certain indirect subsidiaries of At Home II, various lenders and Bank of America, N.A., as administrative agent and collateral agent, which provided for a term loan in an aggregate principal amount of $350 million (the “Term Loan”) maturing on June 3, 2022. On August 20, 2020, in connection with the issuance of the Notes, we used the net proceeds of the issuance of the Notes together with cash on our balance sheet to repay in full the principal amount of indebtedness outstanding under the Term Loan. The repayment resulted in a loss on extinguishment of debt in the amount of $3.2 million, which was recognized during the third fiscal quarter 2021.
Asset-Based Lending Credit Facility
In October 2011, we entered into the ABL Facility, which originally provided for cash borrowings or issuances of letters of credit of up to $80.0 million based on defined percentages of eligible inventory and credit card receivable balances. We have subsequently amended the credit agreement that governs the ABL Facility (the “ABL Agreement”) from time to time to, among other things, increase the aggregate revolving commitments available thereunder. After giving effect to prior amendments to the ABL Agreement, the ABL Agreement currently provides for (i) aggregate revolving commitments of $425.0 million, with a sublimit for the issuance of letters of credit of $50.0 million and a
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sublimit for the issuance of swingline loans of $20.0 million and (ii) the FILO Loans. The ABL Agreement was recently further amended to extend the maturity date of the revolving credit loans under the ABL Facility as described below. For more information on the FILO Loans, see “Note 6 – Long-Term Debt”.
On August 28, 2020, At Home III and At Home Stores LLC (collectively, the “ABL Borrowers”) and the guarantors under the ABL Facility entered into an amendment to the ABL Agreement (the “Ninth Amendment”) with Bank of America, N.A., which amended the ABL Agreement to, among other things, extend the maturity of revolving credit loans provided thereunder to the earlier of (i) August 28, 2025 and (ii) the date of termination of the commitments under such revolving credit facility pursuant to the terms of the ABL Agreement.
As of May 1, 2021, we had no borrowings in respect of the revolving credit loans under the ABL Facility, $1.2 million in face amount of letters of credit had been issued and we had availability of $325.2 million. As of May 1, 2021, we were in compliance with all covenants prescribed in the ABL Facility.
Revolving credit loans outstanding under the ABL Facility bear interest at a rate per annum equal to, at our option: (x) the higher of (i) the Federal Funds Rate plus 1/2 of 1.00%, (ii) the agent bank’s prime rate and (iii) LIBOR plus 1.00% (the “Base Rate”), plus in each case, an applicable margin of 0.75% to 1.25% based on our average daily availability or (y) the agent bank’s LIBOR plus an applicable margin of 1.75% to 2.25% based on our average daily availability; provided that a 1.00% interest rate floor is applicable to all revolving credit loans irrespective of rate used. The effective interest rate was approximately 2.80% during the thirteen weeks ended April 25, 2020. There were no borrowings under the ABL Facility during the thirteen weeks ended May 1, 2021.
The ABL Facility contains a number of covenants that, among other things, restrict the ability of the ABL Borrowers, subject to specified exceptions, to incur additional debt; incur additional liens and contingent liabilities; sell or dispose of assets; merge with or acquire other companies; liquidate or dissolve ourselves; engage in businesses that are not in a related line of business; make loans, advances or guarantees; pay dividends; engage in transactions with affiliates; and make investments. In addition, the ABL Agreement contains certain cross-default provisions. The ABL Agreement includes a minimum availability covenant whereby the ABL Borrowers and their restricted subsidiaries must maintain at all times availability (i.e., an amount equal to (i) the lesser of (A) the aggregate revolving credit commitments at such time and (B) the revolving borrowing base minus (ii) the total revolving credit loans outstanding) in excess of the greater of (x) $35.0 million and 10.0% of the combined loan cap specified in the ABL Agreement (i.e., the sum of (i) the lesser of (A) the aggregate revolving credit commitments at such time and (B) the revolving borrowing base and (ii) the total outstanding amount of FILO Loans). As of May 1, 2021, the minimum availability required by the covenant was $35.0 million. The ABL Agreement includes a mandatory prepayment provision requiring the ABL Borrowers to prepay any outstanding revolving credit loans to the extent the total amount of cash and cash equivalents of At Home Holding II Inc. (“At Home II”), the ABL Borrowers and their restricted subsidiaries (subject to certain exclusions) exceeds $35.0 million.
On April 30, 2021, we used currently available cash to repay in full the principal amount of indebtedness outstanding under the FILO Loans for total cash consideration of $34.6 million. The repayment included a $2.0 million prepayment premium, $0.3 million of accrued interest and resulted in a loss on extinguishment of debt in the amount of $5.3 million, which was recognized during the first fiscal quarter 2022.
8.750% Senior Secured Notes due 2025
On August 20, 2020, At Home III completed the offering (the “Notes Offering”) of $275.0 million aggregate principal amount of its 8.750% Senior Secured Notes due 2025 (the “Notes”). The Notes Offering was conducted pursuant to Rule 144A and Regulation S promulgated under the Securities Act, and the Notes have not been registered under the Securities Act or applicable state securities laws and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state securities laws. The Notes are governed by the Indenture. Net proceeds of the issuance of the Notes were used, together with cash on our balance sheet, to repay all amounts outstanding under the Term Loan. The Notes bear interest at a fixed rate of 8.750% per annum, payable semi-annually in arrears on March 1 and September 1 of each year, commencing on March 1, 2021, and will mature on September 1, 2025.
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The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by the Guarantors, all of which also guarantee the ABL Facility.
The Notes are the senior secured obligations of the Issuer and the Guarantors. The Notes and the guarantees rank equal in right of payment with any of the existing and future senior indebtedness of the Issuer and the Guarantors and other obligations that are not, by their terms, expressly subordinated in right of payment to the Notes, including indebtedness under the ABL Facility. The Notes and the guarantees will rank senior in right of payment to any of the indebtedness of the Issuer and the Guarantors that is expressly subordinated to the Notes. The Notes and the guarantees will be effectively senior to any of the unsecured indebtedness of the Issuer and the Guarantors to the extent of the value of the Collateral (as defined below). With respect to the Collateral, the Notes and the guarantees will be (x) effectively junior to the obligations of the Issuer and the Guarantors under the ABL Facility to the extent of the value of the ABL Priority Collateral securing the Notes and (y) effectively senior to the obligations of the Issuer and the Guarantors under the ABL Facility to the extent of the value of the Notes Priority Collateral (as defined below) securing the ABL Facility. The Notes and the guarantees will be effectively subordinated to any indebtedness and other liabilities secured by any assets not constituting Notes Priority Collateral or ABL Priority Collateral, to the extent of the value of the assets subject to those liens. The Notes will be structurally subordinated to all indebtedness and other liabilities of the Issuer’s existing and future subsidiaries that do not guarantee the Notes.
The Issuer may redeem the Notes, in whole or in part, at any time prior to September 1, 2022 at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to, but not including, the redemption date plus a make-whole premium. In addition, at any time prior to September 1, 2022, but not more than once during each 12-month period commencing with the issue date of the Notes, the Issuer may redeem up to 10% of the aggregate original principal amount of the Notes at a redemption price of 103% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the redemption date. At any time prior to September 1, 2022, the Issuer may also redeem up to 40% of the aggregate principal amount of the Notes with the net cash proceeds from certain equity offerings, at a redemption price equal to 108.750% of the principal amount of the Notes redeemed plus accrued and unpaid interest, if any, to, but not including, the redemption date.
On or after September 1, 2022, the Issuer may redeem all or part of the Notes at the following redemption prices, plus accrued and unpaid interest, if any, to, but not including, the redemption date, if redeemed during the 12-month period commencing September 1 of the years set forth below:
Period | Redemption Price |
2022 | 104.3750% |
2023 | 102.1875% |
2024 and thereafter | 100.0000% |
Collateral under the ABL Facility and the Notes
The ABL Facility is secured (a) on a first-priority basis by substantially all of the cash, cash equivalents, deposit accounts, accounts receivables, other receivables, inventory and certain related assets of the ABL Borrowers and the guarantors party to the ABL Agreement (collectively, the “ABL Priority Collateral”) of the ABL Borrowers and the guarantors party to the ABL Facility and (b) on a second-priority basis by substantially all of the assets of the ABL Borrowers and the guarantors party to the ABL Agreement other than the ABL Priority Collateral (collectively, “Notes Priority Collateral”), in each case subject to certain exceptions (collectively, “Collateral”); provided, however, that since our amendment of the ABL Facility in July 2017, real property that may secure the Notes from time to time does not form part of the collateral under the ABL Facility. The Notes are secured (a) on a first-priority basis by the Notes Priority Collateral and (b) on a second-priority basis by the ABL Priority Collateral, in each case subject to certain exceptions.
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Summary of Cash Flows
A summary of our cash flows from operating, investing and financing activities is presented in the following table (in thousands):
| | | | | | | |
| | Thirteen Weeks Ended | | ||||
|
| May 1, 2021 |
| April 25, 2020 |
| ||
| | | | | | | |
Net Cash Provided by (Used in) Operating Activities | | $ | 77,780 | | $ | (55,203) | |
Net Cash Used in Investing Activities | | | (19,213) | | | (19,236) | |
Net Cash (Used in) Provided by Financing Activities | | | (33,852) | | | 105,996 | |
Increase in Cash, Cash Equivalents and Restricted Cash | | | 24,715 | | | 31,557 | |
Net Cash Provided by (Used in) Operating Activities
Net cash provided by operating activities was $77.8 million for the thirteen weeks ended May 1, 2021 compared to net cash used in operating activities of $55.2 million for the thirteen weeks ended April 25, 2020. The $133.0 million increase in cash provided by operating activities was primarily due to increased sales, a change in timing of payments relating to operating activities and an increase in cash received for income taxes of $18.1 million, which was partially offset by an increase in inventory purchases and an increase in cash paid for interest of $6.9 million.
Net Cash Used in Investing Activities
Net cash used in investing activities was $19.2 million for each of the thirteen weeks ended May 1, 2021 and April 25, 2020. Capital expenditures of $19.3 million for the thirteen weeks ended May 1, 2021 consisted of $12.8 million invested in new store growth with the remaining $6.5 million primarily related to investments in information technology, maintenance expenditures and existing stores. Capital expenditures of $19.2 million for the thirteen weeks ended April 25, 2020 consisted of $16.2 million invested in new store growth and $0.4 million invested in the second distribution center with the remaining $2.6 million primarily related to investments in information technology, maintenance expenditures and existing stores.
Net Cash (Used in) Provided by Financing Activities
Net cash used in financing activities was $33.9 million for the thirteen weeks ended May 1, 2021 compared to net cash provided by financing activities of $106.0 million for the thirteen weeks ended April 25, 2020. The increase in cash used in financing activities of $139.9 million was primarily due to the $106.3 million decrease in net borrowings under our ABL Facility and the $35.2 million payoff of our FILO Loans and prepayment premium.
Off-Balance Sheet Arrangements
We have not historically entered into off-balance sheet arrangements other than letters of credit and purchase obligations in the normal course of our operations.
Seasonality
Our business has historically been moderately seasonal in nature and, therefore, the results of operations for the thirteen weeks ended May 1, 2021 are not necessarily indicative of the operating results that may be expected for a full fiscal year. Historically, our business has realized a slightly higher portion of net sales and operating income in the second and fourth fiscal quarters, attributable primarily to the impact of the summer and year-end holiday decorating seasons, respectively. However, our broad and comprehensive product offering makes us less susceptible to holiday shopping seasonal patterns than many other retailers. Our quarterly results have historically been affected by the timing of new store openings and their associated pre-opening costs. As a result of these factors, our financial and operating results for any single quarter or for periods of less than a year are not necessarily indicative of the results that may be achieved for a full fiscal year.
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Critical Accounting Policies and Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, as well as the related disclosures of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates, and judgments on an ongoing basis. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions. Our critical accounting policies have not materially changed from those described in “Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report. A summary of our significant accounting policies is included in Note 1 to the audited consolidated financial statements included in our Annual Report and Note 1 to the unaudited condensed consolidated financial statements included in this report.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Interest Rate Risk
We have market risk exposure arising from changes in interest rates on our revolving credit loans under the ABL Facility, which bear interest at rates that are benchmarked against LIBOR. We had no variable rate debt outstanding as of May 1, 2021. A 1% increase or decrease in interest rates would impact the fair value of our long-term fixed rate debt by $2.8 million.
LIBOR has been the subject of recent regulatory guidance and proposals for reform, and it is currently expected that LIBOR will be discontinued generally after 2021. While our material financing arrangements indexed to LIBOR provide procedures for determining an alternative base rate in the event that LIBOR is discontinued, there can be no assurances as to whether such alternative base rate will be more or less favorable than LIBOR.
Impact of Inflation
Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our results of operations and financial condition have been immaterial. We cannot assure you, however, that our results of operations and financial condition will not be materially impacted by inflation in the future.
Foreign Currency Risk
During the first fiscal quarter 2022, we purchased approximately 65% of our merchandise from suppliers in foreign countries, however, those purchases are made exclusively in U.S. dollars. Therefore, we do not believe that foreign currency fluctuation has had a material impact on our financial performance for the periods presented in this report.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) of the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q are effective at a reasonable assurance level in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
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Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting during the thirteen weeks ended May 1, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are subject to various litigations, claims and other proceedings that arise from time to time in the ordinary course of business. We believe these actions are routine and incidental to the business. While the outcome of these actions cannot be predicted with certainty, we do not believe that any will have a material adverse impact on our business.
ITEM 1A. RISK FACTORS
Except as noted below, there have been no material changes to the risks that we believe are material to our business, results of operations and financial condition, as disclosed in our Annual Report on Form 10-K for the fiscal year ended January 30, 2021 as filed with the SEC on March 24, 2021, which is accessible on the SEC’s website at www.sec.gov.
The announcement and pendency of the transactions contemplated by the Merger Agreement may adversely affect our business or results of operations.
Uncertainty about the effect of the transactions contemplated by the Merger Agreement on our employees, customers, and other parties may have an adverse effect on our business or results of operations regardless of whether the merger is completed. These risks include, but are not limited to, the following, all of which could be increased by a delay in or abandonment of the merger:
● | our ability to attract, retain, and motivate employees, including key personnel, could be impaired; |
● | significant management time and resources could be diverted to the consummation of the merger; |
● | relationships with customers, suppliers, and other business partners could be affected; |
● | certain business decisions by our suppliers and other business partners could be delayed or changed; |
● | we may not be able to pursue alternative business opportunities or make appropriate changes to our business; |
● | litigation relating to the merger could arise; and |
● | significant costs, expenses, and fees for professional services and other transaction costs in connection with the merger have been and may continue to be incurred. |
Failure to consummate the merger within the expected timeframe, or at all, could have a material adverse impact on our business, financial condition and results of operations.
There can be no assurance that the proposed merger will be consummated. The consummation of the merger is subject to the satisfaction or waiver of specified closing conditions, including the approval of the Merger Agreement by a majority of the outstanding shares of our common stock entitled to vote thereon, the expiration or termination of certain United States antitrust waiting periods, the expiration of a 40-day “go-shop” period, and the completion of an agreed marketing period for Hellman & Friedman’s debt financing for the proposed transactions, as well as other customary closing conditions. There can be no assurance that these and other conditions to closing will be satisfied in a timely manner or at all.
The Merger Agreement also provides that the Merger Agreement may be terminated by us or by Hellman & Friedman under certain circumstances, and in certain specified circumstances upon termination of the Merger Agreement
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we would be required to pay Hellman & Friedman a termination fee of up to $77.2 million. If we are required to make this payment, doing so would materially adversely affect our business, financial condition and results of operations.
Our failure to consummate the merger could result in negative publicity and a negative impression of At Home among our customers, suppliers or in the investment and business community in general. Further, any disruptions to our business resulting from the proposed acquisition, including any adverse changes in our relationships with our suppliers and employees, could continue or accelerate in the event that the transaction is not completed. In addition, if the transactions contemplated by the Merger Agreement are not completed, and there are no other parties willing and able to acquire At Home at a price of $36.00 per share or higher, on terms acceptable to us, the share price of our common stock would likely decline to the extent that the current market price of our common stock reflects an assumption that the proposed acquisition will be completed. Also, we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed merger. Many of these fees and costs will be payable by us even if the proposed merger is not completed and may relate to activities that we would not have undertaken in the absence of the transactions contemplated by the Merger Agreement.
The Merger Agreement contains provisions that could discourage a potential competing transaction.
Under the terms of the Merger Agreement, we have agreed not to solicit or encourage discussions with third parties regarding other acquisition proposals, and we are subject to certain restrictions on our ability to respond to such proposals, except in circumstances permitted by the Merger Agreement. In the event that we receive a competing proposal from a third party that our board of directors concludes in good faith is superior to Hellman & Friedman’s proposal, we must notify Hellman & Friedman of that proposal and negotiate in good faith with Hellman & Friedman prior to recommending any such competing proposal to our stockholders. In the event that we were to accept a competing proposal, we would be required to pay the termination fee to Hellman & Friedman, except that if we were to enter into such an agreement during the 40-day “go-shop” period specified by the Merger Agreement, the amount of this fee would be $38.6 million.
These provisions could discourage potential bids or offers from other third parties, including third parties that might otherwise be willing to offer consideration with a higher value than the $36.00 per share cash price payable by Hellman & Friedman pursuant to the Merger Agreement. In addition, if the Merger Agreement is terminated and we decide to pursue another business combination transaction, we may be unable to negotiate a transaction with another party on terms comparable to those contemplated by the Merger Agreement.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
The following exhibits are filed or furnished as a part of this report:
Exhibit Number | | Description of Exhibit |
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**+2.1 | | |
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†10.1 | | |
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*31.1 | | |
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*31.2 | | |
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*32.1 | | |
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*101.INS | | Inline XBRL Instance Document. |
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*101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
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*101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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*101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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*101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
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*101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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*104 | | Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline Instance XBRL document. |
* | Filed herewith. |
** Schedules have been omitted from this filing pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally a copy of any omitted schedule to the SEC upon its request; provided, however, that the Company may request confidential treatment pursuant to Rule 24b-2 of the Exchange Act for any schedule so furnished.
+ Portions of this exhibit have been redacted in compliance with Regulation S-K Item 601(a)(6).
† Indicates management contracts or compensatory plans or arrangements in which our executive officers or directors participate.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| AT HOME GROUP INC. | |
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June 4, 2021 | /s/ LEWIS L. BIRD III | |
| By: | Lewis L. Bird III |
| | Chairman of the Board and Chief Executive Officer (Principal Executive Officer) |
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June 4, 2021 | /s/ JEFFREY R. KNUDSON | |
| By: | Jeffrey R. Knudson |
| | Chief Financial Officer (Principal Financial Officer) |
| |
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