Kirkland's, Inc.

Good morning, everyone, and thank you for participating in today's conference call to discuss Kirkland's financial results for the second quarter, ended July 31st, 2021. Joining us today are Kirkland's President and CEO, Steve Woody Woodward, Executive Vice President and CFO, Nicole Strain, and the company's External Director of Investor Relations, Cody Slaw. Following their remarks, we'll open the call for your questions. Before we go further, I would like to turn the call over to Mr. Slaw as he reads the company's Safe Harbor Statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Cody, please go ahead.

Thanks, Betsy. 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 provision 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. I'd like to remind everyone that this call will be available for replay through September 9th, 2021. A webcast replay will also be available via the link provided in today's press release, as well as on the company's website at Kirkland's.com. Now, I would like to turn the call over to the Kirkland's president and CEO, Woody Woodward. Woody, over to you.

Thank you, Cody, and good morning, everyone. As always, I'd like to start our call today by thanking our entire organization for their unwavering commitment to continuously providing best-in-class service to our customers and driving our transformation story. The progress we've made to date could not have been possible without our dedicated teams across the business. Now let's jump into the quarter. We faced headwinds that could have driven significant weakness across our business, but the steps we've taken to transition our company has driven resilience to dynamic markets like we faced in the second quarter. Looking at our total comp, we were down about 5% compared to the prior year period. Two things drove this performance. The second quarter of 2020 had unusually high comparable store sales due to the significant increase in demand for home furnishings and decor brought on by the pandemic last year. So we knew the quarter would be a tough comparison from the start. Second, we struggled to maintain inventory as we continued to be impacted by global supply chain constraints and shipping delays that are affecting our industry at large. This included some key outdoor pieces that arrived about a month later than expected, which impacted our sales in May. While our overall inventory position improved as the quarter progressed, we continued to experience volatility across specific products. We would see availability for certain items return to normal, only to experience issues that resulted in shortages for other categories. This just goes to show that the global supply chain issues continue to be unpredictable and will likely remain a challenge in the near term. But a bright spot to this situation is the fact that we have seen high sell-throughs of new, updated merchandise as soon as we get it in stores. We've made significant strides over the past few years improving our inventory control, primarily around improved planning and product flow by destination, down to specific shipping ports, which resulted in changes of how we write our orders specific to the back half of 2021. We've added weeks to our order flow process to allow for supply chain delays. We also experienced volatility in traffic patterns within our stores throughout the quarter. For example, in the month of June, we saw less traffic on weekends, but more traffic on the weekdays, whereas July was more of our typical in-store traffic with weekends picking up. And additionally, we also experienced an in-store sales increase during the latter portion of the quarter. We believe this reflects customers' appetite to get back outside to shop, particularly as vaccination rates have improved or customers have generally been more comfortable resuming some state of pre-pandemic shopping behavior. No matter what medium our customers choose to shop, we're ready to serve them, and we continue to build out our omni-channel approach in the quarter. We also remain well on track with our direct sourcing. As we stated on the last call, expect to procure about 38% of our merchandise from direct sourcing for the year. However, we're not stopping there. And with all the recent success in ramping up this percentage much faster than anticipated, we believe we will have 50% to 75% of our product from direct sourcing in the next three to five years, with a goal to have at least 75% by the end of 2025. We also spent a significant amount of time looking at our optimal store count for the quarter. With all the successful changes we've made to our store profitability, we're revising our optimal store count to approximately 350. This will include additional store closures in the future, limited opportunistic store openings, store relocations, and extensive updates and enhancements to the existing store base. Now let's discuss our product category performance. Despite a tough comp, we experienced healthy improvements in AUR across multiple categories, resulting in total AUR increases of approximately 5% over the same period last year. Although this was less than our annual target of 10 to 15% due to inventory shortages in outdoor and furniture, we still experienced positive momentum, such as in our furniture category, whose AUR was up 26% to $197.06. In addition, we saw a 44% year-over-year increase in mirrors along with improvements in other categories like outdoor living, holiday, wall decor, frames, and lamps. We believe AUR will continue to improve in many of our categories as we increase our direct sourcing and continue selling larger ticket items like furniture. With higher AUR, we can better offset the recent declines in traffic and lower store count to continue driving sales in our key product categories. AUR will be an important KPI we track as we continue our transformation to unfold because it represents our customers' continued acceptance of our shift towards higher quality merchandise. So we look forward to continuing to report on our progress. In past calls, we've talked in length about our key strategic initiatives and financial goals for the next two to three years to transform Kirkland's into a specialty retailer where customers are able to furnish their entire home on a budget I'm happy to say that Q2 is a better data point that shows we are on the right track. We're accelerating our product development to reinforce the quality and relevancy of our assortment so that we are viewed as a high-performance specialty home furnishings store offering immense value through an omnichannel experience. One of the major ways we're accomplishing this is through significantly enhancing our furniture offerings and providing customers with quality and stylish products at an affordable price point. We've continued to see increased demand for home furnishings and shopper track data shows that industry traffic for this product category was up approximately 61% during the second quarter. To better highlight these products, we've been working on adding various upholstery items to our floor because at the end of the day, how do your customers know that you're a home furnishing store without having sofas on the showroom floor? So we recently added new chairs and sofas to our floors. This includes our vegan leather sofa at $999 price point and matching chairs at a $599 price point. We've seen great success with an early 25% sell-through in the first few weeks. And we plan on introducing our modular sectional in the coming weeks at a $1,200 price point. We were able to accomplish this without having to do significant work reorganizing our floors. It was really just a matter of cutting down on the number of units on the floors. rather than eliminating assortment. So our customers are seeing the same product offerings they've come to expect with the added benefit of now having chairs and sofas to touch and feel. These products also have proven to help sell ancillary offerings like pillows or side tables, and the customer can see how these items tie a room together rather than just being highlighted in a standalone manner. As we make enhancements to grow our furniture category, we're focused on expanding our outdoor offerings This includes moving away from outdoor wicker, which is a commodity at this point and can be purchased at places like Home G4 or Lowe's, towards a higher quality in-house design teak offering. We will look to shift towards selling more outdoor furniture rather than having a heavy focus on outdoor accessories to further drive an increase in AUR. This will allow us to leverage our e-commerce channel to sell those accessories and existing lines that customers still desire online, while pushing our higher quality new product offerings both in-store and online. If we can bolster our offerings in both furniture and outdoor product categories, we believe this will enable us to drive profitable growth across all four quarters, moving beyond our traditional seasonality and dependency on harvesting Christmas holidays to drive growth for the whole year. Now turning to the other side of the growth formula, our customer base. We've done an excellent job maintaining our core customers by providing enhanced product offerings and relaunching our loyalty program. But now we're really focusing on driving new customers and improving our customer acquisition strategies. In fact, we've recently brought on Lisa Foley, who I've had the pleasure of working with in the past to lead our marketing department and strengthen these efforts. Lisa brings a proven track record from notable retailers, including Crate and Barrel, where she used an analytical approach to drive both e-commerce and in-store traffic and sales through revamped digital marketing efforts. As we look to drive customer growth, the biggest thing for Kirkland's is to increase awareness of our brand. We need to get in front of the right people, those who are looking to furnish an entire home, to show them we've changed and now have an extensive merchandise assortment that can fulfill all their home furnishings needs without breaking the bank. We believe Lisa will be instrumental in driving our efforts here with her in-depth knowledge of high-end specialty retailer customers and look forward to sharing more details on these digital marketing strategies as they begin to roll out. Once we've attracted new customers to our stores or e-commerce channel, then we're going to be focused on what we can do to keep them as customers and further increase their visits. Keeping them as a customer will really come down to the further expanding of our assortment and consistently providing high quality, stylish offerings that are up to date with the latest trends. After we've landed them as a customer and proven we can meet their needs, then our focus will shift to what we can do to increase the number of times they shop with us. We will primarily do this through our revamped loyalty program. With a reward program that provides a 3.3% reward for all purchases, and was recognized by Newsweek as a number one loyalty program in the home decor sector earlier this year. We plan to further enhance this program with added benefits, including VIP shopping hours, advanced shopping on new collections, and more targeted offerings towards specific customers. It will also be imperative that we continue to improve the overall customer experience, such as adding delivery options that consumers have and expect from other specialty retailers, to ensure that we're providing convenient options that drive customers back to us time and time again. Overall, I'm incredibly pleased with where we sit today. I believe we're just getting started in realizing the true potential of Kirkland's. We're a much leaner organization with a more efficient cost structure and a strong focus on delivering relevant product offerings that are both stylish and affordable. As we begin to ramp up our customer acquisition efforts and better showcase the company Kirkland's is today, I firmly believe we'll achieve the financial goals we've laid out. I want to thank all of our stakeholders for their support in getting us this far, and I could not be more excited for the future of this company. With that, I will now turn the call over to Nicole Strain, our Chief Financial Officer, who will provide additional commentary on our performance in the second quarter and detail on our outlook. Nicole?