By Neil Saunders
In its first update since listing on the stock market, At Home Group has posted a robust topline growth figure of 20.8%. This is now the ninth consecutive quarter in which the group has posted a total net sales increase north of the 20% mark.
Such heady growth is a consequence of the aggressive expansion At Home has undertaken in pursuit of its ambition to grow its presence in the retail market. Most of this expansionary push has come from growth of the physical fleet and, with the 10 stores added over this quarter, At Home now has a respectable 115 shops across 29 states. That said, this number is still a long way shy of many retailers operating in the home space, which underscores the headroom available for future growth — even for the large format outlets the company operates.
To a certain extent, opening new stores is the easy part — especially if the proposition is solid, which we believe it is in the case of At Home. The greater challenge is to drive growth both from new and from existing stores; on this latter front At Home has been found somewhat wanting. Same-store sales growth of 0.9% across the period is disappointing, if only because the home retail market as a whole grew by 3.1% over the quarter. This is exacerbated by the fact that many of the stores included in the same-store comparison are relatively immature and should still be in the process of building up custom in their respective trade areas.
At Home is a savvy operator with excellent retail credentials. However, it needs to more effectively convey to customers that it is a place where they can shop easily and efficiently for their everyday needs, as well as their big projects. Executing this is a matter of marketing, promotion, and giving customers reasons to keep visiting stores.
One of the issues with At Home stores is that their size and product authority makes them a go-to destination for shoppers undertaking big improvement or decoration projects. Indeed, we believe that for customers on this type of mission At Home stores pull in trade from a large catchment area; and that they see a quick ramp up in terms of sales. However, outside of its loyal core customer base, At Home is relatively less successful at pulling in those shoppers making occasional home purchases or those who are just browsing for the odd product. This acts a brake on same-store sales growth.
This should not be taken to imply that the stores are poor, the assortment weak, or the general proposition unsound. On the contrary, At Home is a savvy operator with excellent retail credentials. However, it needs to more effectively convey to customers that it is a place where they can shop easily and efficiently for their everyday needs, as well as their big projects. Executing this is a matter of marketing, promotion, and giving customers reasons to keep visiting stores.
This is especially important in the home market which is very fragmented with lots of players. This dynamic is a double-edged sword, for while it allows At Home the space to expand and grow in a way that would be more difficult in a consolidated sector like grocery or even apparel, it also means that customers have lots of choice and are exposed to many different offerings, which they can buy into as and when they need. Against this backdrop, we believe At Home needs to stand out more clearly and shout louder about its credentials.
Despite the disappointment with comparable numbers, the overall financial picture is healthy. After making a loss of $46.1 in quarter two of last year (which includes a $36.0 million loss on the extinguishment of debt) the company delivered a net income of $6.3 million this time around. We believe that this figure will strengthen over time as the group attains better economies of scale. However, propelling it much further will also require better productivity growth at existing stores.
Over the longer term, At Home believes there is potential for 600 stores across the US. In our view this is a sensible target and one which the group should be able to attain, especially now it can access funding from the markets. However, it must not forget that it is expanding into a category where other players, like IKEA and HomeGoods, also have aggressive plans. That is a further reason to ensure that the uniqueness of its proposition is clearly enunciated to consumers.
Neil Saunders is CEO of research firm Conlumino.