At Home Group Inc. (NYSE: HOME) Q3 2021 earnings call dated Dec. 01, 2020
Corporate Participants:
Arvind Bhatia — Vice President, Investor Relations
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Peter S. G. Corsa — President and Chief Operating Officer
Jeffrey R. Knudson — Chief Financial Officer
Analysts:
John Heinbockel — Guggenheim — Analyst
Simeon Gutman — Morgan Stanley — Analyst
David Bellinger — Wolfe Research — Analyst
Jeremy Hamblin — Craig-Hallum — Analyst
Curtis Nagle — Bank of America/Merrill Lynch — Analyst
Bradley Thomas — KeyBanc — Analyst
Jonathan Matuszewski — Jefferies — Analyst
Anthony Chukumba — Loop Capital — Analyst
Presentation:
Operator
Greetings and welcome to the At Home Third Quarter Fiscal Year 2021 Earnings Conference Call. [Operator Instructions]
I would now like to turn this conference over to your host, Mr. Arvind Bhatia, Vice President, Investor Relations. Please go ahead, sir.
Arvind Bhatia — Vice President, Investor Relations
Good afternoon everyone and thank you for joining us today for At Home’s third quarter fiscal year 2021 earnings results conference call. On the call today are Chairman and Chief Executive Officer, Lee Bird; President and Chief Operating Officer, Peter Corsa; and Chief Financial Officer, Jeff Knudson.
After the team has made their formal remarks, we will open the call to questions. Before we begin, I need to remind you that certain comments made during this call may constitute forward-looking statements within the meaning of the Federal Securities laws. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause our actual results or performance to differ materially from such statements. Known risks and uncertainties are referred to in At Home’s press release issued today and in our SEC filings, including our Annual Report on Form 10-K and subsequent reports.
The forward-looking statements made today are as of the date of this call or other specified dates and At Home does not undertake any obligation to update any forward-looking statements except as required by law. Any discussion during this call of our results for the current quarter to date are subject to variability and may not be indicative of our results or trends for any full reporting period.
Finally, the speakers may refer to certain non-GAAP financial measures on this call. A reconciliation schedule showing the comparable GAAP versus non-GAAP financial measures is available in At Home’s press release issued today. If you do not have a copy of today’s press release, you may obtain one by visiting the Investor Relations page of the website at investor.athome.com.
I will now turn the call over to Lee. Lee?
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Thanks, Arvind. I hope all of you are staying safe and healthy. Along with the rest of our team, I’d like to express my heartfelt gratitude for those who will continue to serve on the front lines and our hope for a swift end to the current health crisis.
With respect to the third quarter, I’m pleased to report the highest ever comp and the best Q3 in our history as a public company. Our Q3 comp growth was a record 44% and our total sales were $470 million, up more than 47%. Our new non-comp store performance was also strong reflecting the successful execution of our real estate strategy. These stores are performing well above our expectations in terms of sale, profits and return on investment.
Q3 GAAP EPS of $0.71 was significantly above our preliminary expectations of $0.58 to $0.62 due to stronger-than-expected flow-through. Our leverage ratio at the end of Q3 was 0.9 times, our lowest ratio ever as a public company, beating the record of 1.4 times that was achieved just last quarter. This was driven by continued strength of our business and the significant transformation of our balance sheet. Strong ticket and traffic growth both contributed to our incredible performance and market share gains in Q3.
From a departmental standpoint, our everyday categories delivered comps about 50% and seasonal comps were in the low 20%s. While our strength was broad-based and all departments comp solidly positive wall decor, textiles, accent decor, kitchen and entertaining and home organization were exceptional. Our back-to-campus assortment, which benefited both Q2 and Q3 ended their seasonal comps double the Company average. Our seasonal performance was above expectations driven by three key factors. One, the resurgence in patio and garden after we restocked key items; two, strong Halloween and fall performance which sold through at 90% of full price; and three, robust early demand for our reinvented Christmas assortment. Our redefined go-to-market approach within the At Home 2.0 strategic framework is continuing to propel us forward. All three of our EDLP+ campaigns in Q3, Bed Bath and Storage, Labor Day and fall refresh were highly successful. Year-to-date, we’ve run 10 strong campaigns validating our approach. Our reinventions once again comped significantly above the Company average and I’m particularly pleased with our success in decorative accents, Christmas and check lane. The reinvention engine is working well for us and reflects our team’s renewed focus on this important ongoing comp driver.
Customer response to FAO Schwarz in Grace Mitchell, our first two multi-year collaborations, has exceeded our expectations and reinforced our confidence in this strategy. We are working on additional exciting collaborations and plan to share the detail near to launch.
Under the leadership of Chief Merchant Chad Stauffer we are striking the right balance between the art and science and merchandising. We’re offering unique on-trend products that are resonating with our customers. At the same time, our data-driven approach to pricing and inventory management is proving invaluable.
As we look back at our history, our best comps have been during periods when we have excelled in keeping our pricing very sharp. That has certainly been true this year. We identified sharper pricing as an opportunity for us last year and we’ve put an intense focus on it. We are now benefiting from the changes we made and believe this back to basics approach will continue to have a positive impact on us for the long term. Value has never been more important than in the current macro environment.
On the loyalty front, we ended the quarter with 8.3 million Insider Perks numbers, adding another 2.4 million new members year-over-year, representing 42% growth. This stellar growth underscores the value our customers continue to see in joining the program. Not surprisingly Insider Perks members engage with us at a deeper level and have bigger baskets than our average customer. Customer loyalty is obviously a competitive advantage for any business. But based on our research this is especially true in our category. Ashley Sheetz, our Chief Marketing and Digital Officer, and her team have consistently delivered strong results in this area and developed it into a strategic asset for us.
Our BOPIS, curbside and delivery offerings are continuing to grow and provide our customers alternative ways to access our holiday and everyday products at great prices. Our standard delivery partnership with PICKUP and Postmates is also helping us better serve customers during a busy Q4.
Speaking of Q4, our quarter-to-date performance, including during the Thanksgiving weekend over the Black Friday weekend has remained strong as our customers continued to find joy in refreshing their homes and decorating for the holidays. Our customers are shopping and decorating earlier than in past years and we are delivering on our promise to be the holiday headquarters for them. Our everyday trends are robust, especially as we’ve been successful in replenishing inventory over the past few months and our reinvented Christmas assortment is performing extremely well. Based on quarter-to-date trends, we expect total Q4 comps to be in the mid to high teens and are on track to deliver some of the best fourth quarter results in At Home’s history.
With that, I’ll turn the call over to Peter to share an update on our operational initiatives. Peter?
Peter S. G. Corsa — President and Chief Operating Officer
Thanks, Lee. Good afternoon, everyone. I want to take a moment to thank each of our store and distribution center employees as well as our field leadership. Their passion and dedication to the brand and our unrelenting focus on our key strategic priorities have been essential to delivering record results.
Q3 was not only a record in terms of comps, but it was also driven by accelerating traffic. Our field teams handled the increase remarkably well as evidenced by strong customer satisfaction and higher net promoter scores. Our stores successfully put on three EDLP+ events during the quarter and our execution continues to improve with each campaign.
We expanded the rollout of our omnichannel offerings to additional stores during Q3 and are pleased with the execution at the store level. As Lee mentioned, Q4 is off to a strong start. We’re appropriately staffed and well equipped to handle a busy season. The unique advantage of our large store format has never been more evident than during traffic surges, including over the Black Friday weekend.
The health of our customers and team members remains paramount and our heightened safety protocols continue to be in place. With the recent resurgence in coronavirus cases, we’re taking extra precautions and monitoring the situation carefully. As was the case earlier this year, we do not expect to be significantly impacted by potential capacity restrictions due to our large store size, which could further differentiate us from some of our smaller format competitors.
In addition to strong traffic, our DCs and the stores have been handling extraordinary levels of receipts to support demand. Despite challenges such as international container shortages and production and shipping delays due to COVID, our improved processes and supply chain mitigation strategies have minimized disruption. I’m pleased with the momentum and our improving inventory position as we get ready for spring.
We’re also making good progress on our direct sourcing and country diversification initiatives. With respect to direct sourcing, we’re on track to achieve our long-term goal of 30% compared to 15% at the end of last year. Direct sourcing can add hundreds of basis points to item level product margins in addition to providing us greater control and visibility on product development.
In terms of country diversification, we continue to source more products from countries such as Vietnam, India, Indonesia and Malaysia, which is helping mitigate the impact on some of the high-tariff categories. We’re pleased with our ongoing work on SKU rationalization. Our focus this year has been on four departments, decor, textiles, accent furniture and rugs. Within these departments, we’ve reallocated inventory dollars from lower-performing items to those with higher returns and these efforts are paying off. We will continue to work on these departments and expand this strategy to at least another two departments next year.
I believe operationally we have never been stronger. Our stores are clean and well organized. Our DCs are functioning smoothly, our amazing field team is energized and focused and our customer satisfaction scores are strong. We’re seeing broad geographical strength despite the increase in coronavirus case counts. The unique challenges of managing through the pandemic have sharpened the team’s focus and positioned us to emerge from the pandemic even stronger than before.
With that, I’ll turn the call over to Jeff to provide a financial update.
Jeffrey R. Knudson — Chief Financial Officer
Thank you, Peter, and good afternoon everyone. As Lee mentioned, Q3 net sales grew 47.5% to $470 million and comparable store sales were a record 44.1%. I’m pleased to echo that while total sales and comps were in line with our pre-announcement, the flow through to the bottom line was stronger than expected, leading to meaningful upside in earnings per share.
Q3 gross profit doubled year-over-year and gross margin increased 950 basis points to 36.3%. Occupancy and depreciation leverage on the record comp drove most of the margin improvement along with more than 200 basis points of product margin expansion, driven by more full price selling and higher clearance margins. To a lesser extent, the timing of transportation costs from the reduced inventory flows at the onset of the pandemic also benefited freight expense this quarter. As a reminder, our outbound freight costs impact cost of goods sold as inventory turns.
Third quarter adjusted SG&A increased 29.8% year-over-year to $97.2 million, which includes incentive compensation expense that was $10 million higher due to the record-setting year we’re having. While we significantly reduced discretionary expenses during portions of the first and second quarters when stores were closed, during Q3 we are rebuilding towards more normalized levels of store labor, home office expenses and other traditionally fixed costs.
Marketing expenses at 2.4% of sales were below our usual target of 3.5% due to our significant top line outperformance. As a percent of sales, Q3 adjusted SG&A improved 280 basis points year-over-year to 20.7% because of operating leverage and lower new store pre-opening expenses, partially offset by incentive compensation. Despite year-to-date total sales growth of 21.5%, adjusted SG&A through the third quarter has only increased 2%.
Q3 adjusted net income was $49.6 million and pro forma adjusted EPS was $0.74 compared to flat in Q3 last year. Due to better than expected sales flow through, GAAP EPS was $0.71 versus the anticipated range of $0.58 to $0.62 we provided during our pre-announcement at the end of October. Finally, adjusted EBITDA grew nearly 185% to $93.8 million, up from $32.9 million in Q3 last year.
Turning to our balance sheet. As we discussed on our Q2 earnings call, one of the key elements of our At Home 2.0 strategy is optimizing our financial model. We have been laser-focused on improving the health of our balance sheet, extending our debt maturities and providing a longer runway for growth as evidenced by our successful debt refinancing in August. Last fall, we shared our goal of better balancing the new store growth with free cash flow generation and heading into this year we are targeting modestly positive free cash flow for all of fiscal 2021. With that context in mind, I’m exceptionally pleased to share that we generated almost $70 million of free cash flow in the third quarter alone, bringing our year-to-date total to nearly $300 million.
We ended Q3 with nothing drawn on our $425 million ABL Facility and more than $360 million of total liquidity, up nearly $55 million from Q2. Our leverage ratio, which we define as net debt to adjusted EBITDA was already at a record low of 1.4 times on a trailing 12-month basis at the end of Q2.
During the third quarter, our strong adjusted EBITDA growth further reduced our leverage to only 0.9 times, earning us credit ratings upgrades from both S&P and Moody’s in November and cementing our current balance sheet as the healthiest in At Home’s history. From an everyday inventory standpoint, we improved our position as expected. Overall net inventory was down nearly 20% year-over-year versus down 30% at the end of Q2, marking continued substantial improvement in our inventory turns.
We ended the quarter with nearly $350 million of inventory, coincidentally the same level as Q3 fiscal 2019, but third quarter fiscal ’21 sales were nearly 50% higher. We plan to continue building our everyday inventory position throughout the fourth quarter and into fiscal ’22 to support strong customer demand. However, this year has clearly demonstrated that we can deliver a fantastic top line without proportionate inventory growth. So we expect that fiscal ’22 inventory turns and efficiency will be an improvement over past years.
In terms of Q4, while we’re not providing formal guidance, I’d like to take a moment to reiterate some of the dynamics we expect to play out this quarter. As Lee mentioned, the strong early momentum in our Christmas assortment and continued performance in everyday are exceeding our expectations and we now expect Q4 comps to be in the mid to high teens. From a gross margin standpoint, we expect year-over-year expansion from the same factors that generated margin improvement in Q3, fixed cost leverage, product margin expansion and lower freight expenses. Finally, our SG&A ratio expectations for the back half remain relatively unchanged from our pre-announcement. We still anticipate a low 20%s [Phonetic] SG&A rate for Q4.
As we round out fiscal ’21, our business has rebounded tremendously from the disruption caused by COVID-19. We’re pleased that the remarkable top and bottom line performance we’ve delivered since our stores were temporarily closed earlier this year should enable us to significantly increase incentive compensation for our eligible team members in both the home office and the field. We look forward to closing out a record year and we’re rewarding our team members for the strength, perseverance and dedication they’ve shown to At Home and especially to our customers during these unprecedented times.
With that, I’ll turn the call back over to Lee.
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Thanks, Jeff. We continue to see significant growth opportunities for At Home and we believe we have the right strategy to unlock our future potential. Specific to next year, I did share a few high-level thoughts during our most recent call. But I thought it might be helpful to provide a quick recap. We expect to benefit from our strategic comp drivers, a positive macro backdrop and accelerated new store openings next year.
As I mentioned previously, we have acquired many new customers this year and they indicate strong satisfaction and intend to repurchase from us. We’re most focused on customer retention, engagement and new customer acquisition, especially with several competitors permanently closing their doors this year. With the continued success of our EDLP+ strategy, incredibly strong performance in our reinvented categories and recent and upcoming collaboration, we like our positioning. We also believe our rapidly-growing loyalty membership, improving inventory availability and a more robust omnichannel offering next year will enhance our ability to retain existing customers and acquire new ones. We also believe the tailwinds of strong home sales which have historically been a lagging indicator for us as well as nesting and de-urbanization trends should continue to provide a strong macro backdrop next year.
With respect to new store openings, recent discussions with our real estate partners have been highly productive. We now expect to open 12 to 15 new stores next year, higher than our prior plan at seven to 10 stores. As I look beyond next year, I could not be more excited about our ability to capture the opportunity that lies in front of us. We operate in a highly fragmented industry approaching $200 billion that is expected to grow annually at a low single digit rate. For the past many years we have been growing at much faster pace than the industry and picking up market share. This has been especially true this year.
Our long-term goal is to continue to expand our market share significantly. We have potential for 600 plus stores, which is nearly three times larger than our current footprint. Additionally, while our revenue per store average is $7 million, several of our more mature markets already average about $10 million per store, or about 40% higher with the primary difference being the age of the stores and therefore the level of brand awareness.
Finally, our omnichannel strategy which launched just this year is evolving. When you combine our store expansion potential, our ability to increase revenue per store and the power of omnichannel, you can see why we believe we have a long runway ahead. In terms of stores, we’ve mapped out all of our future markets and in many cases the exact retail areas and our real estate opportunities are only getting stronger.
After next year we plan to resume 10% annual unit growth as we grow in new and under-penetrated markets. Let me share some examples. We believe that in California where we have only four stores, there is a potential to 80 to 90 stores. Similarly in the New York Tri-State area where we have 11 stores could support 50 to 60 stores. There’s also a tremendous opportunity in the Midwest where we have 50 stores and see potential for 120 stores. In markets such as Southern Florida, we have only one store and are barely scratching the surface.
Our target new store economics include first year revenue and EBITDA margins of $6 million and 30% respectively and a payback period of approximately two years. As I mentioned earlier, our recent stores are on track to outperform these expectations. Our customer value proposition is simple, but powerful, offer the widest selection of home decor products at the lowest prices. This formula has stood the test of time and we believe will continue to serve us well into the future.
In addition, our evolving omnichannel approach will not only allow us to prioritize customer convenience but also significantly expand our customer reach. A large warehouse-like stores offer the flexibility to pivot and adapt as our channel mix changes while sustaining a highly profitable model, both in store and online. Our profitability, free cash flow and balance sheet have never been stronger and we remain incredibly well positioned to drive continued growth in market share gain.
We have the most talented team in the industry. We want to thank each and every one of them for their remarkable resilience and intense focus, particularly during the ongoing pandemic. Our team has made us fundamentally stronger.
With that, operator, please open up the line for questions.
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from the line of John Heinbockel with Guggenheim. You may proceed with your question.
John Heinbockel — Guggenheim — Analyst
Hey, Lee. Let me start with EDLP+. Can you talk about learnings? And then as you think about how many campaigns you want to run next year, how you want to structure them and the learnings that you picked up this year that possibly can make them more productive next year?
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Yeah, John, obviously this is our first year with EDLP+. We’re excited about it. We’re pleased with the performance. We’ve run nearly a dozen campaigns so far. Q3 events were really successful. We had Bed, Bath and Storage, which included a back-to-campus program which only [Phonetic] back-to-campus performed double the Company average from a comp standpoint. So we’re really pleased.
We know that some players didn’t have that same kind of success, but we certainly did. And we had great sales in textiles and home wards. [Phonetic] And what we found is that a third of these customers have never shopped Bed and Bath before, so introduced new customers into the new areas of the store. And obviously, new customer acquisition has been a big focus of ours with the Labor Day event was great.
The fall refresh event was great. We’ve had strong reg price selling as well as really nice clearance sell-throughs as well. So there is a lot of learnings that have gone on with these campaigns. What we’ve done is we’ve looked at the performance of each of those. We’ve adjusted our plans for next year. Some of them we’ve added, new campaigns that may be a little bit shorter, some are going to be a little bit longer. It allows us to highlight the reinventions that we have planned for next year.
As you know, that’s a big part of our playbook and we’re really pleased. We feel like we learned a lot. We can get even better at it. We feel like we can improve our performance. We like the click-through of our email messages out there to our loyalty members about the campaigns. We’re [Phonetic] sure enough people are looking at it. They’re also looking at it from a website standpoint. So a lot of learnings. We feel like we can get even better out of next year.
John Heinbockel — Guggenheim — Analyst
And then maybe secondly, the business was always very profitable. It’s sort of, at least once you reopened, gotten into higher levels and I recognize that some of that’s promotional. When you think about how much of the step-back in promotional activity, how much of that is structural? And then is this a business — because you’ve sort of been EBITDA margin high-teens in the past, is this a business that could be 20% or better or is there a guard against that because you want to reinvest to drive share, not move margin up too high?
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Yeah. I would say that from a performance standpoint versus promotions, if you think about the third quarter there was a lot of activity out there from a promotional standpoint. A lot of our competitors had their big selling events during that time and we delivered this great comp. So it tells you that we set the price right right from the beginning. Our EDLP approach is to set the price right.
As you know we took a sharper effort around pricing this year. We went back and rolled back prices in furniture and accent furniture, in mirrors as well. So in certain areas we felt like we weren’t as competitive as we needed to. We actually reduced the prices for Christmas. We’ve had the sharpest ever price moves that we’ve had for our Christmas assortment. So our prices were lower than last year. As a result of that we’ve had great full price selling. It doesn’t turn into a markdown that way right in the face of everyone else’s promotions. So we like the performance. Obviously a lot more full price selling than we had expected. But I would tell you we like that.
When you talk about EBITDA margins, yeah, we’re going to have an incredible year from an EBITDA standpoint. As you know, we always have strong EBITDA margins. Even in our worst year we had very strong EBITDA margins. So this year we will be back to kind of an average performance in the high teens EBITDA margin standpoint. We think that’s about the appropriate level for us over the next number of years as well. As we get gross margin improvement through our direct sourcing efforts and other activities we will take, we will reinvest that as we’ve mentioned to you before in terms of in marketing, in product quality, reducing prices, because it’s hard to beat these EBITDA margins. But we want to keep the top line growing stronger and that’s how we’ll reinvest our money that way.
John Heinbockel — Guggenheim — Analyst
Thank you.
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Thanks, John.
Operator
Our next question comes from the line of Simeon Gutman with Morgan Stanley. You may proceed with your question.
Simeon Gutman — Morgan Stanley — Analyst
Hey. Good afternoon. Lee, a short-term one and a long-term one. The short-term one, if you look at Q3 and think about it in relation to Q4 comps were very robust. Now we’re talking a little bit slower, may be half the rate. And I realize Q3 this was the beginning of the stores being fully open. So there’s probably a lot of release of demand and getting to the stores.
But can you just talk about what could be sequentially changing whether it’s inventory, demand vis-a-vis channels? How to think about what’s changing and evolving just so we have a roadmap to maybe thinking about going into 2021?
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Sure. Simeon. So Q3 to Q4 we talked about to be in the mid to high teens for Q4 as our outlook now which is obviously different than the amazing numbers that we had for Q3, but it’s very strong. I’m not going to apologize for that, mid to high teens from a comp standpoint. What’s different is just really seasonal inventory. I mean, I would tell you the everyday business continues to trend better than we initially expected.
Everyday inventory position continues to improve through the quarter. As you know, we just mentioned that we went from down 30% everyday inventory at the end of Q2 to down 20% at the end of Q3. So that obviously is improving. And now we’re looking to that continue to improve throughout the fourth quarter.
We’re excited about the reinvention we’ve had in check lane, fashion bath, healthy home, home office which will — home office will be showing up in the middle of this month. So we’re excited about that as well. Seasonal for us is the one that as — though the expectations haven’t changed for us for seasonal, just remember that we were constrained from the inventory standpoint. We made those decisions — we made the decision back on Christmas around March, April and the mix flips really to just Christmas in the fourth quarter compared to Q3 where we were able to sell patio and garden, fall and Halloween as well as Christmas. And Christmas sold through even more in Q3 than we’ve ever seen before.
So it’s really just that — all that’s left for us in Q4 is just Christmas and it had strong sell-through. And I would tell you the constraints will limit the upside for us. We’ve had early demand, as I mentioned. We did the reinvention, it’s working. The FAO Schwarz collaboration has been fantastic. And we didn’t have the Halloween and fall markdowns that we had last year to sell in Q4 because they sold through over 90% of full price selling in Q3. So that’s what limits our upside, but it’s not everyday.
Everyday is what’s continuing to be strong. We’re pleased with that. And I would say as we look through the quarter, we still see that continuing to remain very healthy for us as we continue to get back in inventory.
Simeon Gutman — Morgan Stanley — Analyst
Okay. And then — thanks for that, Lee. The longer-term question, a little bit related to what John just asked you. It seems like if the current backdrop stays in place you’ll still see outsized trends into next year. You mentioned accelerating some store openings. But I wanted to ask you if you have a sense of where the natural margin of this business should flow through, should get to over time, right?
And in theory you are going to be seeing a lot more dollars and you can let the margins flow up higher than that natural level. Is that your inclination or you’re going to continue to invest whether it’s digital? Is there — are there things to invest in or no, not enough and you’ll let the margin flow?
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Well, obviously we’ve got great margins. This is a super profitable business. It’s a lovely business model. When you have a vertical retailer that you design, develop your own product, you’ve got really nice margins, you set the price right upfront, you’ve got over 80% full price selling, you get really nice margins and you keep your cost structure super tight.
We’ve a low labor model, we’ve got low rent because of the second generation real estate. All of that equates to and results in a very nice EBITDA margin and we intend to continue to have that really strong EBITDA margin. We don’t intend it to get to too much better than our average in the high teens. We’re going to reinvest it. We’ve got an omnichannel business that we’ve launched that by the way continues to perform very well for us. We’re super pleased with that. And we’ve been making money at omnichannel. Other players don’t do that.
We’ll continue to invest in marketing. We’ll invest in quality. We will continue to make sure our prices are very sharp and that will continue to deliver an outsized EBITDA. I mean, you compare our EBITDA margin to the competition out there and we’re one of those profitable retailers in the whole industry, not just the home furnishings industry. I’m talking about all of retail. And that would tell you that we feel good about that number and we’ll continue to reinvest and keep it at that high level.
Simeon Gutman — Morgan Stanley — Analyst
Okay. Thank you, Lee.
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Thanks, Simeon.
Operator
Our next question comes from the line of David Bellinger with Wolfe Research. You may proceed with your question.
David Bellinger — Wolfe Research — Analyst
Great. Thanks for taking the question. Just as a follow-up on the Q4 comps, potentially mid to high teens. Still a very strong number given some of the supply constraints. But what could allow for an upside to that Q4 comp guidance? Is there anything around the end of the quarter, maybe in terms of seasonal merchandise you can bring in or maybe even less clearance activity or an aggressive new marketing campaign with some of the new customers you’ve added that could potentially reaccelerate sales growth post the holiday?
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
David, this is Lee. What I would say is, we don’t see much upside in Christmas. We’re already selling through so much already. So we already assume that we’re going to have as strong a sell-through as we’ve seen in our other seasonal products this past fall. So that’s not going to be much of an upside.
January is always a wildcard for us. It’s weather-dependent. It could be upside, it could be a bad guy. So we’ve tried to be very thoughtful about January. Even though it’s a smaller volume month for us, we’re thoughtful about it. One thing that we’ve done to help our chances for the early part of next year is bringing in patio and garden earlier this year. We’re bringing in four weeks earlier than last year. That could — if you end up with a very nice warm January, that could turn out very nicely for us as we will have patio and garden in the stores. So we’re excited about that. That’s potentially an upside.
I’m not going to bet on that, please don’t, because right now I’ve been here now through nine fourth quarters and we’ve had multiple ice storms and snow storms across the country and it’s wet and cold. And so you just never know how it’s going to play out. We set ourselves up for success, which is what you’d want us to do. And we won’t have the carryover for — we won’t have the sell-down of markdowns for Christmas. They’ll be sold at full price for the margins will be good, but we won’t walk into next year with markdown liability either. So we’ll finish the year clean. We will start the year with patio and garden set early and set ourselves up really for a nice start for the beginning of next year.
David Bellinger — Wolfe Research — Analyst
Got it. Okay. And then just my follow-up on the gross margin side. You’ll probably end up this year somewhere in the low 30% range or so. How sustainable is that level given the benefit from higher sales volumes this year? How much of the sourcing initiatives can help here? Maybe just walk us through the puts and takes on the gross margin line as we move into 2021.
Jeffrey R. Knudson — Chief Financial Officer
Yeah, David. When you think about the margins we are incredibly pleased with 950 basis points of expansion in the third quarter. Now the vast majority of that was driven by leverage on our fixed costs, so think about depreciation, occupancy, but we also saw several hundred basis points of product margin expansion due to better full price selling, not only in our seasonal assortment with fall and Halloween selling through 90%-plus at full price, but also in our everyday business. So moving forward as you think about gross margins, it’s really going to be a function of the sales expectation and the comp. But we do expect all of those tailwinds that drove nice gross margin expansion in the third quarter to persist into the fourth quarter.
David Bellinger — Wolfe Research — Analyst
Thank you and best of luck this holiday.
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
All right. Thanks, David.
Operator
Our next question comes from the line of Jeremy Hamblin with Craig-Hallum Capital Group. You may proceed with your question.
Jeremy Hamblin — Craig-Hallum — Analyst
Thanks and I’ll add my congratulations on the strong momentum in the business. I wanted to just come back to quarter-to-date trends for a second. And just — first thing, I know that seasonal you’re missing out on some opportunity by not having more in stock there, it’s performing really well. I just want to make sure within that comp guidance that you have of mid to high teens, does that assume that the seasonal category is providing a positive contribution for the quarter?
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Yeah, Jeremy, as I mentioned quarter-to-date trends have been really strong. We’re really pleased with that strong consistent performance, including Black Friday and Black Friday week. In fact if you look at the performance of our business we had really nice business, very strong business the week — the two Saturdays before Black Friday week as well.
So we saw with customers were buying earlier and they — maybe to avoid a little bit of the crowds for Black Friday, but not at our business. We still had strong traffic through the whole weekend. But we did see earlier demand. Everyday is trending better than we initially expected. Inventory position is improving as I mentioned before. Seasonal, our overall expectations are unchanged. We still say that we will be up slightly. So we will have a positive comp for Q4 in seasonal. But the upside, as I mentioned, was limited just because of the inventory constraints. But I would tell you really nice customer response to our Christmas assortment.
I feel like we had the best assortment I’ve ever had since I’ve been here in nine years. Chad and the team put together just an amazing assortment. The prices were sharp. Assortment was fantastic. The pricing as well as the quality and the unique product, which makes it a reason to come to our store, because you can’t find anywhere else, especially with our collaboration with FAO Schwarz shows that we have a unique product, also with Grace Mitchell. So we’re creating a franchise model where we’ve got unique product that people feel like they can only come to us for it. They are finding great prices and we’re delivering great outcomes with that.
Jeffrey R. Knudson — Chief Financial Officer
And Jeremy, I would just add that, that seasonal contribution that is roughly 40% of our business in the fourth quarter with everyday comprising the other 60%. So that’s how we’re thinking about those comp expectations for the fourth quarter.
Jeremy Hamblin — Craig-Hallum — Analyst
Thanks. That’s helpful color. I also wanted to just get into the online portion of your business and just get a sense for what you’re seeing in the evolution of that in terms of BOPIS here versus what you’re seeing now as we get into Q4, the end of Q3 into Q4? How you’re seeing the evolution now that your capabilities have improved so much in terms of whether it’s your delivery options in kind of your new initiatives here with Postmates but can you give some sense of how that business is evolving?
Are you seeing — kind of what percentage of your online transactions are BOPIS transactions versus delivery? Any color that you might be able to share with us on how that is evolving now over time as we’ve seen retailers fully opened up at this point?
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Sure. Well, as you know we started with a 20-store pilot with our BOPIS solution roll that out during the COVID store shutdown period for us to allow our stores to operate. We now have 98% of our stores now have BOPIS and curbside, 75% have local next day delivery starting at $10. We haven’t disclosed really the exact contribution because it flexes. And during this holiday season, we’ve seen that it’s continued to be an important part of our business and it has flexed.
Even where case counts have been adjusted — COVID case counts have been adjusted around the country and in some hotspots we’ve seen the BOPIS rate curbside pickup rate has gone up. But it’s allowed us to support our customer and the customers’ needs to be able to buy the product and not have to come into a store that they may not want to. But, obviously, our stores are big enough that they can social distance easily in our store and we put in a lot of capability to make sure our stores feel safe to shop in as well.
I would say that we had strong performance from an omnichannel over the last few weeks, including Black Friday weekend and it’s an important part of our playbook. And remember, the margins are comparable for us. So when we’re talking about higher ADSs, there is a little bit more in labor to cover that. But the margins are comparable from a dollar and margin percent standpoint. So we’re focused on doing it profitably and we’re doing that.
And Postmates has been a great partner for us, because if you think about small packaged delivery, we use them for that and we use pickup for the larger items. It’s been a great partnership now with both of them.
Jeremy Hamblin — Craig-Hallum — Analyst
Okay. Great. Thanks. Best of luck, guys.
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Thanks, Jeremy.
Operator
Our next question comes from the line of Curtis Nagle with Bank of America. You may proceed with your question.
Curtis Nagle — Bank of America/Merrill Lynch — Analyst
Good evening. Thanks very much. So it doesn’t sound like it, but I just wanted to clarify on the 4Q comp. So for the mid to high teens guide that you have for the quarter and your expectation, however you want to frame it, is that actually the numbers you guys saw before — I’m sorry, through November to-date or is that just kind of what you think for the blended number? How should we think about, I guess, the cadence?
Jeffrey R. Knudson — Chief Financial Officer
Yeah, that’s the blended number, that’s our outlook for the 13-week period in Q4. And we do have a 53rd week this week. But that’s on a 13-week basis right there. And that’s — so that’s not — we did not provide an update on quarter-to-date trends. Just with what we have behind us and our outlook for the remainder of the quarter that’s how we see things playing out right now.
Curtis Nagle — Bank of America/Merrill Lynch — Analyst
Got it. Presumably it would probably be fair to assume that November is probably ahead of that, maybe some deceleration just to get on the commentary of seasonal or the Christmas and that’s all fair. Is that the right way to think about it?
Jeffrey R. Knudson — Chief Financial Officer
Yeah, that would be fair.
Curtis Nagle — Bank of America/Merrill Lynch — Analyst
Okay. Awesome. And then I guess just — so we discussed this a little bit. Just kind of thinking about the setup a little bit more into 1Q, obviously a bit of a different seasonal setup. But theoretically you guys should be, I would assume, in a better position with more inventory coming in outdoor decor — outdoor I guess patio furniture and stuff like that, a bigger item. I guess how much of a step-up do you think you could see in your seasonal business? And typically how big is that category in kind of the first part of the year?
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Yeah. You may recall, I mean Q1 is when we closed a bunch of stores. So we have what we would consider an easy compare. So we try to think of things in the terms of the first half, which is if combined Q1 and Q2, you end up with a 0.3% comp for the two quarters combined. We’re excited about the opportunity there.
We saw a lot of strength in our patio and garden business. We saw strength in our everyday business as well. I mentioned earlier in one of the questions I answered earlier that we are setting up patio and garden four weeks earlier. So at the end of this quarter we will already be set to start the year out. So we will start the quarter strong and if weather holds and helps us then we could see a really nice start to it.
Everyday inventory we will exit the year in a much better inventory position than we found ourselves in Q2 or Q3. And so we’ll be in a really good spot from an everyday inventory as well to have a really strong quarter as well. So we’re looking at really setting ourselves up for a great first half, seasonal and everyday. And we are excited about the reinventions that are coming. We’re excited about the patio and garden improvements. We learned a lot this past year even though we had a great year. There is always the opportunity you find in the assortment. We made those adjustments. We feel like we’ve really taken a lot of market share, obviously. We had a lot of new customer growth in Q3. If you look at our overall growth and you’re growing 47% and the industry isn’t growing nearly as much, from the data we see we took a lot of market share.
And if we look at the overall sector, a lot of people were benefiting by just existing customers coming in more often. In our case, we had a huge benefit from a lot of new customers coming in. It was a significant portion of our growth and our existing customers did come in more often and spend more with the benefit of our loyalty program. With all those new customers now that we’ve built a relationship with now in Q3 and hopefully Q4 all the way through that we’ll be able to leverage those relationships for all of next year and that will set us up for a really great year as well.
Curtis Nagle — Bank of America/Merrill Lynch — Analyst
Terrific. Thank you.
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Thanks, Curtis.
Operator
Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets. You may proceed with your question.
Bradley Thomas — KeyBanc — Analyst
Hi. Thanks for taking my question. Congrats on a continued momentum here. My question was going to be around the store outlook for next year. You mentioned 12 to 15 stores planned for next year now. Can you talk a little bit about the timing of openings that we’re going to see as we map out 2021? What you’re seeing in terms of the quality of locations? How the costs look like they’re going to shape out and any more detail that you’re able to share would be wonderful.
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Sure. Brad. Our real estate pipeline is super deep. I’m really pleased with the quality of it as well, so not only the quantity, but the quality. The locations that we’re seeing, as you would expect, are quite good. The economics are working in our favor because of the supply of locations that are out there. It’s mostly second generation that we’re going to be doing next year and those locations are fantastic.
What I would say is, they’ll be evenly distributed in the first three quarters. We like not — we’d like to not open stores in the fourth quarter. So think of them about a third, a third, a third roughly in each of the first three quarters is how we’re looking at it. And then obviously we will resume 10% unit growth the year after that. All of this is enabling us to deliver that kind of growth and self-funded from our free cash flow so we can open up the stores and still have really great unit economics.
As you know, they pay for themselves back in two years. We’re looking at a nice mix between existing and new markets. And the rents that we’re getting are fantastic because we’re one of the only national retailers, if not the only national retailer, that looks for boxes that are 80,000 square feet and above and there’s a lot to look for out there.
Bradley Thomas — KeyBanc — Analyst
Really helpful. And if I could add a follow-up question on the Insider Perks number. You mentioned 8.3 million members. Can you give us any more color about how important the credit card itself is becoming as a percentage of your sales and maybe talk about strategies to leverage that next year?
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Sure. Yeah loyalty now 8.3 million member strong, 2.4 million members more than last year, 42% growth year-over-year which is in line with our comp growth, which shows you that that’s a lot of new customers coming in seeing the value in the program. From the minute they walk in, they see the flash volume price is only available for them if they join the loyalty program and they’ve done that. Our Black Friday offers that we had, the prices that were available for Black Friday were only available if you had the loyalty program. So people are seeing the reason to join it and they are joining it. And then their email open rate has been fantastic, very strong email opening rate. Great web traffic for us as well. These folks have bigger baskets to non-Perk members. So — and I would say the mix of sales driven by Perks members continues to grow inside of our overall mix.
And the credit card customer we like that credit card customer. We provide a solution. We opened the credit card program with Synchrony because we knew we had larger ticket items in patio sets and furniture that made it a little bit more challenging for our customer to buy a product like that without some type of financing solution. We offer a financing solution through our credit card and a credit card is made available to our customers right there through the same program that you can sign up to Insider Perks. We haven’t disclosed how much it is. But I would say it’s been growing and becoming a more meaningful part of our business. But I would tell you that the loyalty program which is far more democratic a lot of people feel like they already have a credit card. And so we don’t push that on people, we just make it available. It’s the loyalty program that’s the one that’s going to provide the biggest gain for us over time.
Bradley Thomas — KeyBanc — Analyst
Very helpful. Thank you, Lee.
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
You bet. Thanks, Brad.
Operator
Our next question comes from the line of Jonathan Matuszewski with Jefferies. You may proceed with your question.
Jonathan Matuszewski — Jefferies — Analyst
Hey, guys. Thanks for taking my questions and nice job on the momentum. Had a follow-up question on the Insider Perks program as you mentioned up to over 8 million members. How do you think about the penetration of that program for your active customer file over time? And can you give us any more color in terms of maybe how the basket or the average annual spend of that Insider Perks member looks relative to a non-loyalty member would be my first question? Thanks.
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Sure, Jonathan. So the IP customer they come in more often, they’re bigger baskets and the mix of their sales to our total sales continues to grow and become more meaningful to us. Ashley Sheetz who leads that team for us as well as our digital efforts has really focused on our CRM efforts, so we’ve been adding to the team. We’re now looking at our customer database in deciles and saying how can we get people to move up a decile from where they are, how can we get them to come in more often, how can we have get them to spend more money, what items were in the basket, what items could they have bought, they didn’t necessarily buy, how can we make them aware of the assortment that we have that they may have missed. What’s their life chapter, what’s going on in their family based on the demographic data we have about them, how can we better meet their needs. So we are doubling down on the program. We’ve got a lot more information from the program now.
We’ve added a VIP program in Q3. We added a boss program for decorators and stagers. All of that data and all of those services that we’re offering is showing value for our customer. And so we’re going to continue to double down on even more, because we feel like it’s going to add more and more value to our business in total.
Jonathan Matuszewski — Jefferies — Analyst
That’s great. Super helpful. And then just a quick question on some of the collaborations you guys have been doing. It sounds like you’re seeing success with that payer assureds and some of the other ones. And it sounds like you’re going to be kind of continuing that strategy next year. Anything to parse out in terms of are these kind of a driver of new customer acquisition or kind of more broadly resonating with your existing shoppers and just kind of the strategy there going forward in terms of sourcing some of these collaboration? Thanks.
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Jonathan, we focused on the collaborations to do a number of things for us. [Technical Issues] feel like it allows us to create newness and get a fresh point of view in our assortment, which we always feel like that’s important. It expands our reach to new customers and attract new customers because these partnerships have their own following and those followers then come to us. It also gives us style credibility. As a vertical retailer, we design, develop our own products. People look at us as a private brand. If you bring in people that they know about and that feel — they feel confident in their style capabilities has become a partner to us, it just gives us more credibility over time. We’re targeting two to three of these a year. They cover a lifestyle, for example. And if you take Grace Mitchell, for example, who is a rising TV star, she’s got four shows on two different networks.
All in the home decor space and even actually in the food space as well now. She is a traditional lifestyle look. So one of our lifestyle assortment is with her. And Grace Mitchell is across our entire store. It allows us to have her point of view across a group of assortment. It becomes a great way for us to broadcast our brand and work with her followers. It gives us credibility and it is for a multi-year benefit for us. A lot of other companies do collaborations as pop-up collaborations or flash collaborations. We think there is a multi-year benefit here for both parties to build the brand for each of them. [Indecipherable] the same thing exclusive decor on and around the street for us. People are aware of that brand. We created exclusive assortment with them. We will do that again. We’re excited about that performance. We’re excited about the new collaborations. Next year we will announce a few that’s coming next coming year. One this coming spring and that just continues to support our credibility in this phase of home decor and being the place to go, the one-stop shop for all things home decor.
Jonathan Matuszewski — Jefferies — Analyst
Great. Thanks for the all the color. Best of luck.
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
All right. Thanks, Jonathan.
Operator
Our next question comes from the line of Anthony Chukumba with Loop Capital Markets. You may proceed with your questions.
Anthony Chukumba — Loop Capital — Analyst
Good afternoon and thanks for taking my question. So I just wanted to clarify one thing. I was looking at my notes from your preliminary call and it sounded like you were exiting the third quarter with your comps, I have it up 30% and now you’re saying 10% to — or sort of mid-teens comps for the fourth quarter. So first of all, I just wanting to A, make sure that I understood that correctly, there is no disconnect, and then, B, just sort of understand the comp slowdown. Is that just really kind of the seasonal inventory issues that you spoke to or was there something else there? Thank you.
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Yeah, Anthony, what we had said on our pre-announcement call is that the everyday business had exited in the 30%s and that our seasonal business had exited in the mid single digit. So when you think about that 60%-40% that I spoke about earlier and our expectations for a low-single digit comp and seasonal, obviously those everyday trends have remained very strong and that’s the momentum we will be carrying in to next year in there — our everyday business as that inventory position continues to improve.
Anthony Chukumba — Loop Capital — Analyst
Got it. Okay. So on an apples-to-apples basis, your comp is roughly equal to kind of where — what your comp was running when you had the preliminary call. Is that a fair statement?
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Yeah, what I would say is we said it exited in the 30%s. That momentum continued. Seasonal is going to be the one that’s constrained. What we’re saying is we’re feeling a little bit better about our everyday business and the momentum continued. We felt like it was going to moderate a little bit. Now we’re saying that we’re feeling that momentum continues to be solid and we want to — and we expect that to continue through the entire quarter.
Anthony Chukumba — Loop Capital — Analyst
Got it. Okay. Thank you. That’s helpful. Keep up the good work.
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
All right. Thanks, Anthony.
Jeffrey R. Knudson — Chief Financial Officer
Thanks, Anthony.
Operator
Ladies and gentlemen, we have reached the end of today’s question-and-answer session. I would like to turn this call back over to Mr. Lee Bird for closing remarks.
Lewis L. Bird — Chairman of the Board and Chief Executive Officer
Well, thanks again for joining us this afternoon. We look forward to talking to you in the coming days and weeks and on behalf of At Home we wish you the best for the upcoming holiday season.
Operator
[Operator Closing Remarks]