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What’s Causing At Home’s Operating Margin Contraction?

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Store openings, ad spending bump up expenses

At Home Group (HOME) has been witnessing rising expenses, mainly due to store openings and advertising spending. The company has been increasing its ad spending to boost awareness for its business. For fiscal 2019, it expects to bump up its advertising spending to ~3% of net sales.

It plans to spend seven times more on its social media spending than in fiscal 2018. To drive its top line, the company is on a store expansion drive. For fiscal 2019, it expects 31 net new store openings.

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Recap of past performance

In the first quarter of fiscal 2019, At Home reported a gross profit of $85.2 million, representing a growth of 18.6% YoY (year-over-year), mainly driven by higher sales. However, due to higher occupancy costs and costs related to snow removal, its gross margin contracted 60 basis points to 33.3% for the first quarter.

Also, SG&A (selling, general, and administrative) expenses increased 24.2% due to higher new store openings and advertising costs. Its adjusted SG&A expense rate increased 60 basis points to 22.5% in the fiscal first quarter due to higher ad spending. Higher sales and higher gross profit led to a 13.6% increase in operating income to $24.2 million. However, a lower gross margin led to a 70-basis-point decline in operating margin to 9.4% in the fiscal first quarter. Its adjusted operating margin was down 110 basis points to 10.2%, given its lower gross margin and higher marketing spending.

Fiscal 2019 outlook

For fiscal 2019, the company expects marginal expansion in its operating margin, driven by a higher gross margin. Analysts project a gross margin for fiscal 2019 of 32.6% compared to 32.3% reported in fiscal 2018. Its adjusted operating margin is expected to be almost unchanged at 10.8%.

For the second quarter of fiscal 2019, At Home expects to drive a sizable improvement in its adjusted operating margin. Analysts project the company’s gross margin for the second quarter at 32.7% compared with 31.5% in the second quarter of fiscal 2018. Its adjusted operating margin is expected to be 10.7% compared to 9.9% in the corresponding quarter last year.

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