How Should You Play At Home Group (NYSE: HOME) Ahead of Earnings?

At Home Group NYSE: HOME is reporting its Q3 2021 earnings (the period ending October 24, 2020) tomorrow after the bell.

But the company already reported its preliminary numbers on October 29. So, we know what to expect and the reaction tomorrow should be pretty tame, eh?

Not exactly.

To try to understand where At Home is going, let’s look at where it’s been:

HOME Investors Got Too Excited After Q2 Preliminary Numbers

At Home Group also reported preliminary results for Q2 2021. Comps were up 42% yoy in that quarter, a massive turnaround after comps dipped 46.5% in Q1 2021. HOME shares, unsurprisingly, skyrocketed more than 30% on the news.

The company reported its official Q2 2021 results on September 1, and this is when things get extreme. Shares were up 22.1% ahead of the numbers, with investors clearly expecting strong guidance for Q3 and beyond.

There was some good news on that front as At Home Group noted a “stronger-than-expected start to Q3.” But the company didn’t provide any formal guidance. Furthermore, At Home Group admitted that the strong start to Q3 was depleting inventory, saying, “We now expect seasonal inventory to be down 20% at the end of Q3 and down nearly 10% at the end of Q4. This compares to our previous expectation of seasonal inventory to be down mid-single digits in the back-half.”

It’s important to note that the Q2 actuals were in line with the preliminary results.

The market reaction was shocking, with shares dipping 26% the day after the official release.

If you zoom out, you can see that shares nearly doubled between the Q2 2021 preliminary results gap-up and the Q2 official release. That move was excessive, even considering the S&P 500’s outstanding performance in August. At Home Group’s late July to early September performance looks like a classic case of investor irrationality.

Reaction to Q3 Preliminary Numbers Was Almost as Shocking

In its preliminary Q3 results, At Home Group said that Q3 comps are expected to be up 44% yoy. Its Insider Perks membership program now has 8.3 million members, up 42% yoy. In Q2, the program grew 45% yoy to 7.5 million members.

Surprisingly – or maybe unsurprisingly, by now – investors rushed to the exits. Shares dropped 22.3% the day after the numbers were released.

Shares stabilized over the next six sessions, but then the vaccine news came out. At Home Group plummeted another 18.8% on the news. I think that this move was overdone – like a few other post-vaccine moves – but at least there was some logic behind it.

But it didn’t last: Shares quickly turned it around, starting a 10-session winning streak that is still live today. Over the past two weeks, shares have increased by 36.8%.

How Do You Play HOME Now? Or Should You?

If your head is spinning by now, I apologize. If you’re tempted to avoid At Home Group shares, I understand.

But HOME, in addition to its outstanding growth rates, provides excellent long-term value at 9.7x forward earnings and .74x forward sales. And that’s why it’s worth trying to solve this puzzle.

Investors will likely focus on Q4 expectations tomorrow.

Management had this to say on the Q3 preliminary call: “The trends in our holiday assortment are off to a great start, but we are inventory constrained in that category. Strong customer demand pulled some fall, Halloween and Christmas upside into Q3. However, we still expect to generate a slightly positive seasonal comp in Q4 despite our inventory constraints.”

Not what you’d prefer to hear, but also well-in-line with what At Home Group said on the Q2 call.

But here’s why I’m optimistic about HOME and think you should get in ahead of tomorrow’s release:

 Though holiday inventory is constrained, the everyday business, according to At Home Group, is not inventory constrained.

That everyday business has been enough to drive explosive growth for the better part of the pandemic. With coronavirus cases near all-time highs, I think At Home Group could be set for a strong winter.

Yes, shares are up a lot over the past two weeks, but they are still down more than 10% from where they were just prior to the preliminary Q3 release.

I think there is more to gain than to lose by getting into HOME ahead of tomorrow’s release.