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S&P Sees These Key Problems for At Home

After a disappointing second quarter, At Home Group Inc. received a downgrade from “B” to “B-“ from S&P Global Ratings.

The home goods retailer reported a nearly 1,500-basis-point decline in adjusted EBITDA margin during the second quarter, which ended July 30. At Home pointed to freight costs as a major impediment on profitability for the quarter. Those elevated costs came on top of softening demand, which led to a comparable store sales decline in the high single digits for the quarter.

“We expect elevated freight costs to ease but continue to hurt profitability through at least the first half of fiscal 2024,” S&P analysts said in the report. “At the same time, we expect demand for discretionary home merchandise to be soft amid a weaker economic environment and a slower housing market. As a result, we now expect At Home’s leverage to remain high through next year at more than 7x.”

S&P Global also lowered At Home’s senior unsecured notes rating from “CCC+” to “CCC,” while recovery ratings remain unchanged.

At Home reported negative free operating cash flow (net of proceeds from sale leasebacks) of more than $160 million for the six months ending July 30. The company also recently upsized its ABL by $275 million to $675 million.

“We believe the incremental availability under the ABL will support the company’s adequate liquidity position,” analysts said.

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As of the second quarter, At Home reported $18 million of cash on its balance sheet and more than $280 million of availability under its revolving credit facility, with no material upcoming maturities. S&P pointed to the retailer’s ability to slow its store expansion and generate good levels of cash, as it did at the start of the COVID-19 pandemic, which will likely enable it to maintain sufficient liquidity, even under less-favorable operating conditions. However, the company opened eight new stores in June and July in California, Connecticut, Illinois, New Mexico, New York, Pennsylvania,

Honeybloom

That said, S&P analysts said they expect some continued cash burn through the end of this year as the company pursues a high in-stock inventory strategy to increase consumer relevance. With freight costs still high, analysts believe this could result in further ABL draws before the holiday season.

And while At Home’s low-price strategy has allowed it to stay competitive, and it has upped its ad spend to support brand awareness, S&P analysts see inflation continuing to negatively impact consumer spending on discretionary categories such as home goods. Couple that with the retailer’s lag behind competitors on omnichannel platforms, and S&P sees the possibility of a further reduction of At Home’s rating.

“The negative outlook reflects the potential for a lower rating over the next 12 months if anticipated cost improvements do not materialize, delaying the rebound in earnings and cash flow that we expect in fiscal 2024 and leading to a potentially unsustainable capital structure,” analysts said. “We could lower the rating if At Home’s operating prospects remain weak and we do not see a path for leverage to decline significantly, or if we expect free operating cash flow (FOCF) to remain meaningfully negative, resulting in an unsustainable capital structure.”

S&P analysts said At Home’s rating could potentially improve in fiscal 2023, if the company is able to maintain liquidity and improve cash flow. The retailer launched the Honeybloom private label last month offering home décor for kitchen, dining, entertaining, living, bedroom, entryway and outdoor. Owned brands typically generate stronger margins and could support At Home’s cash flow.

“We could revise the outlook to stable if we believe At Home were on track to reduce leverage below 7x in the next year and liquidity remained adequate with improving cash flow prospects,” S&P analysts said. “Given its growth strategy, we would also expect the company to fund store growth largely through internally generated cash flows, reserving the ABL for unforeseen liquidity needs.”