Funds advised by Honest Capital, LLC (“Honest” or “Honest Capital”), a long-term investor in high quality North American small and mid-cap equities and current stockholder of At Home Group, Inc. (NYSE:HOME) (“HOME” or the “Company”), today sent a letter to the HOME Board of Directors outlining why Honest Capital intends to vote against the proposed sale of the Company to funds affiliated with Hellman & Friedman (“H&F”), announced on May 6, 2021.
In the letter, Honest Capital outlines why the price of $36 per share is grossly inadequate, given HOME’s near- and long-term earnings power following the Company’s recent progress.
The full text of Honest Capital’s letter to the HOME Board of Directors follows:
May 11, 2021
Board of Directors
c/o Corporate Secretary
At Home Group, Inc.
1600 East Plano Parkway
Plano, Texas 75074
Ladies and Gentlemen:
Funds advised by Honest Capital, LLC (“Honest,” “we,” or “us”) are currently stockholders of At Home Group, Inc. (“HOME” or the “Company”). We are writing to express our strong displeasure with the recently announced acquisition of the Company by funds affiliated with Hellman & Friedman (“H&F”) for $36 per share, which we believe fails to provide adequate value to current shareholders.
As discussed in greater detail below, we believe this consideration is:
1) too low based on near-term earnings power;
2) too low based on long-term earnings power; and
3) misaligned with the best interests of the Company’s current owners: its public shareholders.
Price is Too Low Based on Near-Term Earnings Power
H&F’s valuation of HOME simply does not reflect the tremendous progress that HOME has made recently and its future prospects to generate value for shareholders. Over the last year alone, HOME has increased its market share after many of its competitors, including Pier 1 and JC Penney, went out of business, strengthened its balance sheet, enabling it to begin growing its square footage again, and accelerated its ecommerce initiatives and loyalty program membership.
HOME is also set to capitalize on what is expected to be a historic retail boom in the second half of 2021. The combination of pent-up demand as COVID-19 lockdowns end, consumer balance sheets and personal savings rates at record levels, and unprecedented amounts of monetary and fiscal stimulus is expected to generate staggering GDP and consumer spending growth.
Looking ahead, it is widely expected that strong housing and home décor markets in the near- and medium- term will be fueled by low mortgage rates, continued housing demand given a prior decade of underbuilding, demographic tailwinds as millennials enter their 30s, and the continued trend toward remote work.
Against this backdrop, we believe current sell-side research analyst consensus estimates for HOME’s 2021 earnings are unreasonably low. These estimates imply negative same-store sales for the year, despite 2020 results that were achieved when the Company was severely inventory constrained. The aforementioned 2021 market outlook, coupled with HOME’s Q1 guidance for same-store sales more than 30% higher than Q1 2019 levels (an estimate that may even be conservative according to widely available credit card data), leads us to believe these consensus estimates are misguided at best.
Even in our most conservative modeling scenarios, in which we assume material sales growth deceleration in the second half of this year, the acquisition still represents a valuation multiple of less than 8x 2021 EBITDA, which we believe is far too low for a company with HOME’s strong business model and compelling multi-year growth story. It is important to remember that from 2013 – 2019, when the Company was growing its square footage, as it is now doing again, shares regularly traded above 15x EBITDA.
Price is Too Low Based on Long-Term Earnings Power
It is also clear that the proposed acquisition price of HOME is materially inadequate in light of the Company’s long-term earnings outlook.
HOME has created a retail concept with a truly differentiated value proposition, offering a vast selection at extremely competitive prices, and maintains a highly efficient supply chain and warehouse model, with limited real estate and labor costs. Given HOME’s long-stated plan to grow from 225 to 600 stores, with a payback period of only two years for new stores, it can be reasonably expected that the Company will continue to earn excellent returns on invested capital for many years to come. We see no reason why the independent Special Committee of the Board wants to preclude the Company's shareholders from participating in this future value creation opportunity.
Management has repeatedly affirmed its long-term vision of becoming a $6 billion top-line company, with 600 stores and $10 million average revenue per store. This goal was communicated as recently as the Company’s Q4 2020 earnings call. Given the Company’s powerful whitespace opportunity, historic rates of square footage growth, and earnings trajectory, we believe this vision is eminently achievable within ~7 years, at which point HOME would be earning well over $1 billion of EBITDA.
H&F’s $2.8 billion offer does not come close to compensating HOME’s shareholders for the Company’s long-term value and future growth. If the Special Committee believes management’s long-term vision, this valuation makes little sense, and takes the future upside away from HOME’s current owners at an inappropriately low price.
Transaction Raises Questions About Management’s Alignment with Shareholders’ Best Interests
Lastly, while we understand that the transaction was negotiated by a supposedly independent Special Committee of the Board, it is hard not to notice that, based on management’s current holdings of stock and options (page 61 of the Company’s 2021 proxy statement), management stands to receive extremely generous compensation in a change of control scenario.
Given what we expect will be HOME’s short- and long-term growth trajectory, this surprisingly low acquisition price raises the question of whether management is properly aligned with the long-term best interests of the current owners of the Company.
For all of these reasons, we will vote against the proposed acquisition by H&F.
Sincerely,
HONEST CAPITAL LLC
Shawn Badlani
Managing Partner
CC:
Philip L. Francis, Lead Independent Director
Lewis L. Bird III, Chairman and Chief Executive Officer
Steve K. Barbarick
Wendy A. Beck
Paula L. Bennett
John J. Butcher
Elisabeth B. Charles
Joanne C. Crevoiserat
Kenneth M. Simril
Larry D. Stone
Cautionary Statement Regarding Forward-Looking Statements:
The information herein contains “forward-looking statements.” Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, words such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “projects,” “targets,” “forecasts,” “seeks,” “could,” “should” or the negative of such terms or other variations on such terms or comparable terminology. Similarly, statements that describe our objectives, plans or goals are forward-looking. Forward-looking statements are subject to various risks and uncertainties and assumptions. There can be no assurance that any idea or assumption herein is, or will be proven, correct. If one or more of the risks or uncertainties materialize, or if Honest’s underlying assumptions prove to be incorrect, the actual results may vary materially from outcomes indicated by these statements. Accordingly, forward-looking statements should not be regarded as a representation by Honest that the future plans, estimates or expectations contemplated will ever be achieved.
Certain statements and information included herein have been sourced from third parties. Honest does not make any representations regarding the accuracy, completeness or timeliness of such third party statements or information. Except as may be expressly set forth herein, permission to cite such statements or information has neither been sought nor obtained from such third parties. Any such statements or information should not be viewed as an indication of support from such third parties for the views expressed herein.
View source version on businesswire.com: https://www.businesswire.com/news/home/20210511005382/en/
Contacts:
Jonathan Gasthalter
Gasthalter & Co.
212.257.4170
