At Home’s Earnings Plunge Is Your Ticket to Upside

In late October, home goods retailer At Home (NYSE:HOME) reported strong preliminary third-quarter revenue and profit numbers that were much, much better than expected. And yet, HOME stock plunged about 20% in response to those blowout numbers.

Beautiful colorful shelves with different home related objects.

Source: Shutterstock

What gives?

There are some macroeconomic and public health concerns at play. Specifically, new home sales momentum slowed in September, hinting that the pandemic boon to the housing market may be moderating somewhat. At the same time, Covid-19 cases globally are surging, and many countries — like Germany and France — are responding by reinstituting lockdown measures.

Of course, that’s a cocktail of bad news for a physical-focused home goods retailer like At Home, and investors appears to be concerned that although the company reported super strong third quarter numbers, the good times won’t last much longer.

But that’s an overly pessimistic take which will ultimately prove wrong. The smart thing to do here is buy the dip in HOME stock.

Here’s a deeper look.

At Home’s Strong Momentum

As a physical home goods retailer, At Home has experienced strong business momentum over the past two quarters as retail stores have reopened and demand for home decor has surged amid a housing market and home remodeling boom.

In the second quarter of 2020, At Home reported 51% sales growth on the back of a 42% rise in comparable sales. The retailer followed that up with 47% revenue growth in the third quarter, on the back of a 44% rise in comparable sales. Concurrently, profit margins are meaningfully expanding thanks to increased scale and higher revenue per store, while profits are surging significantly higher.

It’s been a perfect cocktail of growth for At Home over the past few months. That’s why HOME stock has surged from a $1.20 in back in April, to over $23 by late October.

Still, there are some concerns that, amid a fresh round of lockdowns and a slowing economic recovery, the good times won’t last for At Home. Those concerns are overstated. The good times will last.

Here’s why.

Here to Stay

The trends promoting robust growth at At Home in the second and third quarters of 2020 are here to stay for the next few years.

Long story short, the Covid-19 pandemic has permanently increased the value of the home.

On one end, the pandemic has ushered in a new era of work-for-home that’s here to stay because employees are just as efficient working from their homes as they are working in offices. On the other end, the pandemic has forced us to discover all the cool things we can do at home, like have Zoom (NASDAQ:ZM) parties, watch Netflix (NASDAQ:NFLX) shows, workout with Peloton (NASDAQ:PTON) machines, shop on Shopify (NYSE:SHOP) websites, discover things on Pinterest (NYSE:PINS), so on and so forth.

Net net, the pandemic has once again made the home the center of our lives. Today, it is where we are eating, working and playing.

Sure, as the pandemic passes, we will go outside more, and the value of the home will drop off. But that’s still a few months off, and it won’t ever fall back to pre-Covid levels, because many of these shifts — like WFH, e-commerce and streaming TV — are permanent.

So, too, is the elevated value of the home.

And accelerated levels of retail spend on home decor items.

To that end, At Home should sustain healthy growth trends for the foreseeable future, and HOME stock should keep pushing higher.

Compelling Long-Term Growth Narrative

Zooming out, the big picture, long-term growth narrative supporting At Home and HOME stock is very compelling.

In short, the company has a unique opportunity to leverage its all-in-one, superstore shopping experience to nationally consolidate the fragmented U.S. home goods retail market.

If you’ve ever remodeled your kitchen, spruced up your bedroom, or upgraded the patio furniture, then you know that the home goods shopping process is not simple. That’s because the market is highly fragmented. Whereas companies like Best Buy (NYSE:BBY) and Home Depot (NYSE:HD) offer an all-in-one, superstore shopping experience for buying consumer electronics and building materials, respectively, no such store exists in home goods.

At Home has an opportunity to turn into that superstore for the home goods sector, and consolidate this retail category that is overly fragmented.

That’s because At Home has all the ingredients necessary to be a home goods superstore.

The stores are massive. They average about 100,000 square feet, so on par with a Walmart or Target (NYSE:TGT) store. That’s about 2X the size of your average Bed Bath & Beyond (NASDAQ:BBBY) store and 4X the size of your average HomeGoods store.

The product selection is enormous. Every At Home superstore has over 50,000 product SKUs. And the prices are cheap. The average price point at At Home is just $15.

Leaning into its size, product and price advantages, At Home has a compelling opportunity to turn into the Home Depot or Best Buy of the home good sector over the next 10 years.

Tons of Upside Potential

The numbers imply significant upside potential for HOME stock in the long run.

At Home exited Q2 with 219 stores.

HomeGoods has 800-plus stores. Bed Bath & Beyond has 1,000-plus stores. There’s tons of real estate growth potential here. Indeed, management thinks At Home can continue to grow its store base by ~10% per year to 600-plus stores at scale.

Each one of those stores does about $6 million in annual sales today. I think the elevated value of the home could push that number up to $8 million over time. Store level profit margins at the stores hover around 30%. The math there implies $4.8 billion in 2030 sales, and $1.4 billion in store-level profits.

Taking out $250 million for corporate overhead, $150 million for depreciation and amortization, $40 million for interest expense and 20% for taxes, you’re left with potential net profits in 2030 of over $800 million.

A 20X multiple on that implies a potential future valuation for At Home of $16-plus billion.

This is a $1.1 billion company today.

Bottom Line on HOME Stock

At Home stock is one of my favorite long-term, small-cap growth stocks to buy for the next 5 to 10 years. The post-Q3 earnings selloff does not change the long-term bull thesis. Rather, it’s just the stock taking a breather after a torrid run higher.

To that end, long-term investors shouldn’t run from HOME stock here. They should embrace current weakness. Buy the dip. Weather the storm. And hold for the long haul.

On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

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