Kirkland's, Inc.

Good morning and welcome to Kirkland's first quarter 2021 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 SCR Partners. Please go ahead.

Thank you. Good morning and welcome to Kirkland's conference call to review results for the first quarter of fiscal 2021. 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 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 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 filing with the Securities and Exchange Commission. I'll now turn it over to Woody.

Good morning. Before we begin, I want to recognize the skill, commitment, creativity, and innovation of the entire Kirkland's team. They responded well to every challenge we faced. and they delivered on the opportunities to serve our customers, drive profitability, and evolve the Kirkland's brand. For the quarter, we generated a comp increase of 75.3%, which reflected a 95.1% increase in store comps and a 42% increase in e-commerce. Gap earnings for the quarter were 11 cents, and adjusted earnings were 12 cents. Our most profitable first quarter in over five years. As As will become evident in our prepared remarks, this performance could have been even stronger absent the weather impacts and inventory constraints, but we were pleased with the profitability we're generating. While we started off the quarter with a multi-week period of winter storms in our markets, we made a nice recovery in our comp trends in March and April. We were very deliberate in choosing profitability over promotions this quarter and maintaining our focus on key items. As the economy began to reopen with vaccinations and state restrictions dropping in most of our largest markets, we began to see a little more competition for the wallet share that we expect to be short-term in nature. We're seeing signs that the big lift to home furnishings that was happening pre-pandemic and throughout the past year are sustainable due to the appeal of work from home and hybrid approaches to work. Other factors such as strong housing market and the decreased store-based competition further support the sustainability. The momentum created by our evolution into a value-oriented specialty retailer continued this quarter. Our profitability is accelerating, even with very deliberate pace of transformation. We've provided a strong foundation for a robust outlook over the next two to three years, so I want to spend some time this morning on what's driving our confidence in the business and our outlook. Let's start with direct sourcing. Our goal for 2021 was to achieve 30% direct sourcing, and we already are well ahead of that target with 38% of our product coming primarily from agents in Vietnam, China, and India. Diversifying our product by moving to Southeast Asia has helped us improve design and quality of our merchandise, but the tighter shipping capacity has affected overall inventory availability and inbound freight costs. We're managing through these challenges. While improving, we expect them to continue at least in the first half of this year. All of our merchandise categories delivered strong comps, but overall we missed our expectations due to inventory shortages that negatively impacted our overall mix and ticket. Recall that we have been elevating our style and quality, allowing us to keep our opening price points, but gradually increasing our overall pricing threshold in key categories such as furniture. We've also streamlined the aesthetic of our brand with an eye towards improved design, efficiency, and function. As expected, we continue to see very positive sell-through in each category as consumers are responding to our cohesive style point of view and elevated quality. The best performing categories in the quarter were holiday, textiles, and fragrance. Holiday success was driven by Valentine's and Easter, both of which we were in great inventory positions and exceeded expectations. Textiles was an all-around success with winds and pillows, throws, and tabletop textiles. Fragrances had a strong quarter, largely driven by the continued success of our jar candle program. We saw the biggest impact from availability of inventory throughout the quarter in wall decor, outdoor, housewares, and furniture categories. Wall decor, outdoor, and furniture specifically drive a higher ticket, and the lack of inventory impacted the sales performance. We expect to be in a better inventory position in these higher ticket categories early in the second quarter. One of our strategic goals is to continue the transformation of Kirkland's brand into a specialty retailer where customers are able to furnish their entire home on a budget. We will continue to do the heavy lifting with our merchandise to slowly grow our better and best offerings while keeping us on the path for the upgrades in style and quality that are resonating with our customers. The addition of brands such as Cuisinart, KitchenAid, and Viking to our website this quarter was a great example of this gradual improvement along with very positive customer response and a specific benefit to our e-commerce business. We have a number of exciting things happening within our categories later this year that should provide momentum heading into the back half. The digital transformation of our business is in progress, and we will continue to focus on our investments on improvements that drive the e-commerce operations. E-commerce was 30% of our sales in the quarter, up from 24% in the fourth quarter, and e-commerce profitability continues to be up year over year. We have prioritized our capital expenditures to fuel this digital transformation, and I'm pleased to note that these past investments such as our e-commerce hubs and our ship direct from vendor channels, are paying real dividends. I'm going to ask Nicole to address the specifics, but it's been clear for us for some time, and more directly evident in the quarters, such as the one we're in, that we're generating profitability when historically we couldn't. That we are building a sustainable and formidable business model, the model is born of an intentional plan a sustainable and efficient cost structure, improving execution, and a distinct point of view in style and design. I will admit that we have been helped by charting this course at the right time. However, without the vision of all the hard work during the past few years, we would have been unable to fully benefit from the positive secular trends that continue to drive the home furnishing sector. There is more growth ahead for Kirkland's and our shareholders. and we look forward to reporting on our progress throughout the balance of the year. Nicole, why don't you provide some color on the details in our outlook?