Kirkland's, Inc.

Good morning and welcome to Kirkland's second quarter 2020 earnings conference call. All participants will be in a 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 telephone keypad. 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 Trip Sullivan with FCR Partners. Please go ahead.

Thank you. Good morning, and welcome to Kirkland's conference call to review results for the second quarter of fiscal 2020. On the call this morning are Willie Woodward, Chief Executive Officer, and Nicole Strain, Chief Financial Officer. The results, as well as notice of the accessibility of this conference call, are a listen-only basis over the Internet. were announced earlier this morning in a press release that's been covered by the financial media. Except for historical information discussed during this conference call, the statements made by company management are forward-looking and made pursuant to the 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 company's annual report on Form 10-K, filed on April 10, 2020, and quarterly report on Form 10-Q, filed on June 4, 2020. I'll now turn it over to Woody.

Thanks, Tripp. Once again, I would like to begin my remarks by thanking all of our Kirkland's team members. The operating performance we will discuss this morning is a direct result of their commitment to taking care of our customers and each other in our stores, distribution center, and home office. Historically, the second quarter is a tough one for Kirkland's due to category mix and seasonality. That's why this quarter was such a significant achievement. We reported a 10.2 percent comparable sales increase with a 77% increase in our e-com business. Calculating that comp increase solely based on the stores that were open for the entire period, comparable sales overall would have increased 16%. We had a flat comp in May, an accelerating positive comp in the remainder of the quarter, and August was up low double digits. For the first time since 2010, we were profitable on an adjusted basis in the second quarter. We also significantly narrowed our year-over-year gap net loss, increased our cash position, and eliminated our outstanding debt ahead of schedule. None of this was a coincidence. We earned it with a lot of heavy lifting over the past year focused on improving merchandise assortments, increasing brand awareness, driving our omnichannel strategy, improving our infrastructure, and significantly reducing our operating costs. Last quarter, I noted that our confidence was growing on the direction of the business for the balance of the year. This improving confidence was based on the steps we took to right-size the company and make it more nimble than it's ever been. It was also based on the fact that a number of our store-based competitors are in bankruptcy or liquidation, which is allowing us to gain market share. The return of the accelerating trends we were experiencing pre-COVID in the stores and online, as well as margin-friendly promotion, and first-time shoppers that continue to fuel our online business have likewise given us a lot of confidence. So three months later, I don't believe it's a stretch to say that I'm the most optimistic about the near-term future in the next several years at Kirkland's than I've ever been. The tide is turning. And that's due to the long-term structural changes we've implemented in the business. In fact, the customers are emphasizing home over most other discretionary spending and the nature of our competitive landscaping changing in our favor. I want to briefly share with you some of what we're seeing in each of those areas that's driving its improved outlook. It all starts with merchandising and branding. More and more customers are beginning to see us as a resource for furnishing a home of any size on a budget. We still have more work to do to be even more relevant than we've begun to be, but new customers are starting to come to us for their complete decorating projects rather than just the finishing touches. We're a lot cooler than we were, but there's true sustainability in all of our recent gains, and it comes from our merchandise, and it's fully in stock. We're investing in better assortments, design, and quality. With the significant savings we've achieved with a higher level of direct sourcing, we've been able to invest some of those savings into better assortments. Some of the other savings are showing up in our improved margins. As Nicole will discuss with you in a moment, our merchandise margin is up year over year by over 400 basis points, and our higher AUR is driving our comparable sales. It's clear to us that these investments really are driving both our top and bottom line improvements. Our marketing has also been more on point of late. Our digital spend has been more impactful, and the de-layering of promotions has helped us as well. While we have kept our spend flat from a year ago, we've also focused on improving the customer experience to drive customer acquisition and brand awareness. In the second half of the year, we expect to relaunch our loyalty program, put in place extended credit options, as well as broader delivery options that we're all very excited about. We also have worked hard to improve our omnichannel presence. During the quarter, e-commerce accounted for almost 30% of our sales, with lots of room for growth and improvement. That's up from 17% of total sales just a year ago, and e-commerce was profitable in every month of the quarter. Our accelerating e-commerce business has maintained its strength and momentum all year. Looking at the e-commerce business by channel, during the quarter, we saw an 83% increase in buy online and pick up in store. For July, we were up 100%. We believe buy online, pick up in store can be an even better contributor to our profitability as it continues to mature. Our direct ship from vendor channel was up 170% for the quarter with a 270 basis point of margin gain. We've been very successful in creating our own endless aisle as customers are testing the waters on pricing and quality. They're leading us to better quality and designs. And we will look for other opportunities in the very near future to add some select brands in this channel as we grow with a focus on extending from where we've been strong in kitchen and tabletop. We now have a dedicated group within Kirkland that is solely focused on growing and building out this channel. And I expect it can be even more meaningful to our overall results in the future. We are working to get better in our ship direct to consumer channel. And this, of course, is a tougher channel for most retailers. But we're improving here and it's becoming more profitable with the stand-up of two more efficient hubs which should be fully completed in the third quarter to replace our existing e-commerce distribution center. The structural improvements we've made in our e-commerce business have enabled it to become a larger component of our overall business and created a true omnichannel presence. When we combine this work with what we've done to accelerate the transition in our store base and the and significant reductions in our operating expenses, we have tremendous margin leverage now in the business model. Our net sales for the quarter, up 4%, with 44 fewer stores than a year ago, and that speaks volumes not only to how well e-commerce is performing, but also how well we've been able to continue to cull the underperforming stores from the base. While we still need more foot traffic in the stores, the improvements in our assortments and the less promotional environment are driving the higher markup and increased basket in our stores. We have pulled $45 million of annualized operating costs out of the business through cost containment, efficiencies, and changes in our labor costs and staffing model. We believe these cuts are sustainable and can drive meaningful improvements in the profitability for the balance of the year as we leverage continued growth in e-commerce and improving trends in the stores. I'm also encouraged about the second half of the year as it relates to our inventory position. Recall that we cut back on orders in a very meaningful way early on in the pandemic. That's kept us lean, but it's also given us the confidence to be less promotional and help our merchants become more nimble. More importantly, it's allowed new product to flow in. All of the new inventory for the second half of the year will be fresh. This discipline with our inventory and the positive results in the quarter enabled us to improve our cash at quarter end to $28 million with zero debt. Based on our results today and our projections in hand, we anticipate remaining debt-free for the balance of the year and expect that our cash balance will continue to grow through the year end. Being debt-free and having a positive cash position by year end has been a top priority for us, and we're already well on our way. While it's tough to gauge how much of our success so far this year is related to the rising tide that is lifting home furnishings and the changing landscape, I can say with utmost conviction that we've earned most of this success. We have significantly improved our merchandise and our brand, as well as our infrastructure to generate tremendous leverage in our business. And with continued positive trends, that bodes very well for the immediate and long-term future of Kirkland's. Now I'll turn it over to Nicole.