Kirkland's, Inc.

Good morning and welcome to the Kirkland's third quarter 2020 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 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 Tripp Sullivan of SCR Partners. Please go ahead.

Thank you. Good morning and welcome to Kirkland's conference call to review results for the third quarter of fiscal 2020. On the call this morning are Woody 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 has 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 reports on Form 10-K and Q, filed on June 4, 2020 and September 9, 2020. I'll now turn it over to Rich.

Thanks, Tripp, and thank you to all of our Kirkland's team members who take care of our customers and each other in our stores, distribution center, and home office. They make this success possible. This quarter represents a continuation of the momentum we established late last year with steps we took to make the company nimbler than ever. We now have a better cost structure, a more efficient infrastructure, a merchandise mix that continues to improve, and an overall far cooler brand. Our ultimate goal is to be a specialty retailer where customers can furnish their entire home on a budget. We're at the beginning of a cycle where we are making that goal achievable at Kirkland's and making these improvements sustainable. These are exceptional results we are reporting for the third quarter. which sets up well for what is typically our strongest quarter of the coming year. Unlike past years, when the third quarter was mostly about creating a launching point for maximum velocity in the fourth quarter, we were able to generate a positive store comp, an e-commerce comp of nearly 50%, an increase in our cash position to $37 million, GAAP earnings of $0.82, and an adjusted earnings of $0.66. The significant improvements in our merchandise and gross margin and the reduction in operating expenses were evident in the results, in addition to big contributions from e-commerce. We generated a 1.2% increase in net sales with 51 less stores from a comparable period a year ago, with an 8.9% comp in total for the quarter. For November, we were able to maintain strong momentum, particularly in e-commerce, and continue to prioritize margin and profitability. While Blockbody has become more spread out over the month, we were still pleased with the sales that day and on Cyber Monday as well. The shift to online at the expense of store traffic that we have previously referenced was evident last month. And we were able to capture that demand. There are a number of well-documented trends in the industry that are working in our favor with people staying at home, shopping online, as well as less store-based competition. We came to market share with several of these competitors in bankruptcy or liquidation, and our omnichannel presence has put us in the right place at the right time. We got the message that customers love to buy online, and they are leading us to the right places. However, there are far more trends occurring within our business that we are creating, that are within our control, and more importantly, we believe are sustainable over the long term. I want to spend a little time this morning exploring these adjustments in our merchandise mix and model in more detail. We have purposely brought our existing customers with us on this transition in our merchandising strategy. We didn't leave them behind while we grew the customer base. I recognize that was a concern for most brands that have undertaken a transition like we have taken over the past two years. But we didn't abandon our price point. We left our customers options to buy with better quality and have a relevant assortment at a great value. We've maintained a steady pace to improve quality with stable pricing because we've taken a portion of the savings gained from our direct sourcing strategy and put it into the quality of the merchandise. As I've noted before, the customers are already getting the improvements we're putting out there. They're seeing the improved quality and improved design as well. They are increasingly coming to us for their complete decorating projects instead of only buying the finishing touches. A great example would be in our furniture assortment. Along with tabletop, furniture has been a runaway success for us. In that category, we've been able to improve our product from non-wood to full wood furniture at the same price point. The transformation we are making in our existing model is evident in our more effective marketing, the continued growth and profitability of e-commerce, and the significantly improved margin profile and leverage inherent in our business. Our marketing is on point, and we have a more mature way of handling promotions. The big initiative we have been ramping up is the launch of our new loyalty program that took place the third week of October. In the weeks since that launch, we're seeing an increase in sign-ups, and we've already added hundreds of thousands of people to our loyalty program. During the quarter, e-commerce accounted for almost 24% of our sales, compared to 16% of total sales just a year ago. And e-commerce was profitable in every month of the quarter for the second quarter in a row. Our shift direct from vendor channel was up 122% for the quarter, with 480 basis points of margin gains. As we noted last quarter, in the very near future, we expect 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. The dedicated group within Kirkland that focuses on this channel has made a lot of progress since we formed it earlier this year. And we expect to have more to report early next year and in the years to follow. During the third quarter, we replaced our existing e-commerce distribution center with two more efficient hubs. These hubs should begin to help the profitability in our shift direct to consumer channel beginning in the fourth quarter. The store base is more productive with 51 less stores. The growth in e-commerce is offsetting the lost sales from these closed stores, but we are still working to overcome the challenges with foot traffic in the stores. This is not a problem unique to Kirkland and is more structural in nature, but we have a higher markup and an increased basket in the stores that we believe is sustainable. We were clearly able to be more productive with a tighter inventory position than in past years. As Nicole will describe later, the tighter inventory is somewhat of a governor on our top line this quarter and next. This is particularly partially a legacy of the orders we needed to cancel during the pandemic and also supply constraints across much of the sector. While we might have fewer SKUs in the short term, we're selling at a higher price point We are maintaining a promotional discipline, and we're getting a larger portion of the newer product. The leverage in our model is substantial. With the $45 million of annualized operating costs we have pulled out of the business through cost containment, the efficiencies and changes in our labor costs and staffing model, while the right way to think about this improvement is more sequential than a year-over-year basis in terms of our overall profitability, We believe our two to three year EBITDA margin targets are certainly achievable. With the cash we generated this quarter, the level of cash we are now expecting at the year end, and the increased visibility in the business, the board has authorized a new $20 million stock repurchase authorization. We noted last quarter that we wanted to see another quarter of result before we considered allocating capital to repurchases. With our expectations that we will be debt free at year end and cash is expected to grow in our historically strongest quarter, we believe this is a good way to deploy a portion of our capital. Nicole, why don't you walk us through our results in more detail?