Kirkland's, Inc.

Good morning and welcome to Kirkland's fourth quarter 2020 earnings 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 touchtone 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 Tripp Sullivan of SCR Partners. Please go ahead.

Thank you. Good morning, and welcome to Kirkland's conference call to review results for the fourth 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 on 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 risk 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. I'll now turn it over to Woody.

Good morning. As we begin, I want to thank the entire Kirkland's team for their commitment throughout this year and how they worked together, wherever they were and doing whatever it takes to produce the results we'll discuss today. This was a crazy year in many respects, and we were focused forced to innovate. Our people were more than ready to meet the challenge. We always want to finish the year strong in our most important quarter, and 2020 was no exception. We had momentum coming into the holidays with a robust November, then some disruptions in December related to the new wave of COVID. And then when our new product set hit the stores and online, we saw double-digit gains we previously disclosed. February started off strong as well with a two-week period where we were impacted with the winter storms, but we've come back from that as well. For the quarter, we generated a comp increase of 1.8%, which reflects a decline in the store comp, but a 36% increase in e-commerce growth. GAAP earnings for the quarter were $1.36 and adjusted earnings were $1.40. That brought us to $1.09 and 93 cents respectively. for the year and reversed sizable losses from a year ago. We are continuing to evolve into a value-oriented specialty retailer. We've been very deliberate about this pace of our transformation, but we expect the differences we are making in our assortments will be even more evident in 2021 than it was in the past two years. I want to walk through the four components of this strategy and describe how we're bringing our customers along with us plus the investments we're making in technology and infrastructure to support the strategy. Let's start with direct sourcing. We are continuing to mature our direct importing business and achieved our multi-year growth plan despite this pandemic related cancellations in 2020. Until these cancellations and the impact from COVID, we were on pace to exceed our goal of 20% penetration in 2020. That being said, some of our categories such as mirrors, textiles, floral, outdoor, and gifts exceeded our goals. For 2021, our goal is to achieve 30% direct sourcing, and we had the potential to exceed that. Our agents are really hitting their stride, and the products look great from Vietnam, China, and India. We've been able to diversify our products by moving our core furniture program from China to Vietnam. We also consolidated our basic mirror program to direct from factory vents As you've heard us describe before, we're investing some of this benefit from sourcing in margin and some of it in design and quality improvements. With pricing, we continue to elevate style and quality, allowing us to gradually increase our overall pricing threshold in key categories such as furniture. We've experienced an increase in AUR with these improvements and a sustained trend here. Plus, the larger penetration of furniture should keep that growth on a steady path for the next several years. While we've kept our opening price points, we are slowly growing our better and best offerings. Our customers are voting yes on the upgrades in style and quality, allowing us to be less promotional. We've also made progress on reducing discount layering, which was hard for customers to understand, and rationalizing price points to make sense to the customers and improve our margins. We are constantly benchmarking our competitors and the general market to ensure Kirkland's is still a strong value player with more style to bring to our customers along with us on this journey. As it relates to design, our cohesive brand style point of view has allowed us to streamline the aesthetic of our brand so that customers can mix and match with confidence. We have invested in specific design projects with an eye towards improved design, efficiency, and function. We're also setting a trend-forward color palette each season that crosses all facets of the business. Additionally, we're partnering with third-party design support to continue to bring unique yet timeless designs and graphics to our assortments as we evolve. And on quality, we continue to raise the bar at each category, improving materials and make. Furniture has seen the most significant increase as we have redesigned and resourced best-selling items to give the customer more style and quality at the same value. Direct sourcing has allowed us to have more control over the craftsmanship of our assortment while still allowing us to be competitive in pricing. We've also invested in improved packaging to reduce damaged product. If we look back where we were two years ago as compared with the rest of the home furnishings landscape, we were in the wrong place in the spectrum. We had the value pricing, but the quality and style were sorely lacking and we certainly didn't have a point of view about where we fit in and what could help our customers. While I'm hesitant to pinpoint exactly where we are today in the broader home furnishing spectrum, we can still say we offer tremendous value, but with a much higher level of quality, design, style of our merchandise. We're supporting the rollout of new merchandise in 2021, and our biggest initiative on that front is the launch of our loyalty program, which took place in October. Earlier this month, Newsweek named our loyalty program the number one program of all home decor. Even with that recognition, we believe there are opportunities to continue evolving in 2021 and beyond. The home furnishings trends have worked in our favor with people staying at home more and shopping online as well as less store-based competition. At some point, there will be headwinds for the industry, but we believe wallet share for home furnishings will remain fairly sizable with consumers as the economy improves. Another area of our business I want to highlight is our ongoing digital transformation. We've seen the continued growth and profitability of e-commerce all year, and this is a large part of our overall business. E-commerce was 24% of our sales in the quarter compared to 17% a year ago, and it continues to be profitable as well. The specific improvements we are making in our merchandise requires that we also make specific investments in our technology and infrastructure in addition to the direct ship from Vendor Group and the e-commerce hubs I noted last quarter. For 2021 and beyond, we are prioritizing our capital expenditures to continue to fuel our digital transformation. To help lead these efforts, we've recently brought on Mike Holland as Senior Vice President, Chief Technology Officer. He has vast experience in leading similar digital and technology transformations. One item to note on our direct shift from vendor channel before I talk about stores, We gave a preview last quarter that we expected to add some select brands this year to extend where we've been strong in kitchen and tabletop. I'm pleased to report that we've partnered with brands such as Cuisinart, KitchenAid, and Viking, which will be added to our website. These leading brands will only be available on our website, and we're very excited about the potential these brands have on the e-commerce business. Nicole will get into this in more detail, but I want to call out how successful she's been on leading the charge with rationalizing the store base, negotiating our landlords, and ensuring that the new cost structure we put in place is sustainable. During the fourth quarter, we had 59 less stores than a year ago, and total net sales were only down 7%. We've clearly rationalized the base to a more productive stores, and the strength in e-commerce business is helping to offset the continued challenges in store traffic. Our stores remain a critical component of our omnichannel strategy and the maximum expression of the Kirkland's brand and our assortments. That being said, we believe we can improve performance in the stores, and that will be an opportunity we will continue to pursue in 2021 and beyond. The strong merchandising, the efficiencies in our infrastructure and costs, direct sourcing, and the growth of e-commerce all create substantial leverage in our business model. The earnings posted during the quarter and for the year were above what we had planned this time a year ago, but the improvements in cash and liquidity were equally impressive. A portion of this liquidity at year end was related to the inventory orders we canceled early on in the pandemic. As Nicole will describe in a moment, we will put some of that liquidity back to work with our inventory. The majority of this improvement in cash flow and liquidity, however, was due to operating costs that we pulled out of the business through cost containment and efficiencies and changes in our labor costs and staffing model. We will look to benefit from the embedded leverage in the business in 2021 and will continue to actively explore the best ways to allocate our capital to fuel additional growth and returns to our shareholders. Nicole, why don't you walk us through some of the activity in more detail and the adjustments we've made to our strategic and financial goals?