Kirkland's, Inc.

Good day and welcome to the Kirkland's second quarter 2019 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Jeff Black of SCR Partners. Please go ahead.

Thank you. Good morning and welcome to Kirkland's conference call to review results for the second quarter of fiscal 2019. On the call this morning are Woody Woodward, Chief Executive Officer, Mike Carnes, President and Chief Operating Officer, and Nicole Strain, Chief Financial Officer. The results, as well as a notice of accessibility of this call on a listen-only basis, were announced earlier this morning in a release that's been covered by the financial media. Except for historical information discussed in this call, the statements made by the company management are forward-looking and made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause Kirkland's actual results in future periods to differ materially from forecasted results. Those risks and uncertainties are more fully described in Kirkland's filings with the Securities and Exchange Commission, including the annual report on Form 10-K filed on March 29, 2019. I'll now turn it over to Woody.

Thanks, Jeff, and good morning to everyone on the call. We appreciate you joining us to review the second quarter and our plans for 2019 and beyond. Trends in the business remain challenging in the second quarter, driven primarily by weak store traffic. We're taking additional steps to address near-term concerns, including tariffs, and we're focused on accelerating the existing initiatives we've outlined to transform the business. We have much work ahead of us, but I want to start this call by stressing that our team is executing against a carefully thought-out plan, a plan we firmly believe will improve the vibrancy of the brand and return the company to profitable long-term growth for our shareholders and associates. We believe that we have the capital and the talent to accomplish our objectives, and we're doing everything we can to accelerate the execution of these goals. While we'd obviously like to see better top-line trends here in the short term, we've made notable progress on several important initiatives in this quarter. E-commerce sales re-accelerated in Q2, with increases in both traffic and conversion in the channel. We're also seeing solid performance from the new categories that we've added to broaden Kirkland's reach with new and exciting customers. Sales of rugs as well as the new tabletop assortments in textiles and housewares and dining products are encouraging, have made plans, and have ample room to grow. In launching new categories, considering our price value equations and our curated assortments, we've placed our emphasis on offering better quality. The Kirkland's brand must stand for great value and great quality. For example, our Turkish 5x7 rugs for $199 come in at a compelling value price point. And there's the same quality and designs available that you might see in premium home decor retailers, but at a significantly lower price. So we want to remain below the specialty luxury market at a great Kirkland's price point with quality that reinforces that value. Margins are above our plan in these categories thus far, given a high proportion of full price sales. The performance to date confirms that our strategy to showcase curated product can drive better results. Bedding, our third important launch for 2019, is being introduced to the chain this month in September. As we work to improve merchandising across the chain, the continuing shift in our customers' shopping patterns is putting pressure on our stores and related infrastructure. The new categories, while promising, are not yet offsetting the drag from the brick-and-mortar traffic. As we've discussed, we're supporting the launches with direct mail, digital marketing, and we're confident the product additions will gain momentum. Given current top line trends, we're making adjustments where needed. In addition to product launches that will add opportunity in the first half of 2020, we're also launching new excitement into existing assortments such as our art category. As many of you may have seen, yesterday we launched an exclusive art collection from Dolly Parton called From the Heart. which is a collection of nine canvas art interpretations of Dolly's most iconic songs. Check out on our Kirkland's website for new exciting news on this launch. Given current top-line trends, we're also making other adjustments where needed. For example, as we look to the second half of 2019, we're addressing promotional levers to right-size inventory with optimal margin. We're working hard to ensure that the supply chain supports plans for the heavy per-month seasonal periods. We've applied learnings from the fourth quarter last year, which included an earlier drop of the post-Christmas floor set, and we believe we'll benefit from a second warehouse in Dallas and a more efficient supply chain overall. We're continuing to focus on removing costs that do not impact the customer, and we're moving forward on the program to reduce operating costs by $10 million in 2019, and we're analyzing additional levers that we believe can make the business stronger and more effective. These are important initiatives that support our long-term transformation, and we're optimistic that they can help stabilize our financial performance. We will continue to update you on progress to broaden our brand appeal and drive profitable growth. Before I hand the call over to Mike, I want to take a moment to speak to the main pillars of the plan, which include merchandising, omnichannel growth, infrastructure improvement, and disciplined capital management. Let me start with merchandising. As I discussed, Kirkland's strategy is to improve the assortment's overall relevance while reinforcing simplicity, utility, and value. This includes a sharper focus on key items and product introductions in adjacent categories that are particularly relevant to home shoppers. We're entering the back half with more purposeful depth in key items to complement our seasonal merchandise. And our new categories reinforce Kirkland's long heritage of offering shoppers values. In addition to rugs, our tabletop launch has been received extremely well by current customers. Turning to Omnichannel, we're pleased with the sales re-acceleration in e-commerce. Both the sales accounted for a growing share of the e-commerce sales in the channel and we're encouraged about its potential to improve traffic and profitability. The teams are working to streamline checkout, increase speed, and elevate the design elements of Kirkland's.com. and we believe we can significantly reduce pickup times and add ancillary services over time. As it relates to infrastructure, Kirkland is focused on realigning its supply chain and store infrastructure to support optimizing operating costs and support a more efficient omni-channel strategy. There are a number of important levers here, which Mike will address in a moment. And lastly, we're focused on preserving our capital to execute our plans. We have a strong balance sheet, and we intend to continue to exercise discipline in our capital allocation by investing in the critical components of our business as a first priority. We're fully aware of the challenges facing our sector. Home decor has experienced dramatic shifts in consumer taste and shopping patterns, and we see that continuing. We have a loyal customer base that treasures value and expects us to remain on trend and competitively priced. and there is a large uncapped base of consumers that are not yet familiar with Kirkland's. We believe we have struck a balanced approach with our merchandising to appeal to all of our customers and fully confident that we have the right plan in place to return Kirkland's to long-term profitability. Mike?