Kirkland's, Inc.

Good morning, everyone, and thank you for participating in today's conference call to discuss Kirkland's financial results for the third quarter ended October 30th, 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 Cree. Following their remarks, we'll open up the call for your questions. Before we go further, I would like to turn the call over to Mr. Cree as he reads the company's safe harbor statement within the meeting of the Private Securities Litigation Reform Act of 1995 that provides important caution regarding forward-looking statements. Cody, please go ahead.

Thanks, Tom. 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 December 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'd 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. Thank you all for joining us today, and I'd like to extend my gratitude to our dedicated employees and stakeholders They continue to support our efforts in executing upon our long-term transformation strategy. As we look at our performance during the third quarter, we had an unexpected softness in sales to the end of the quarter, along with ongoing macro conditions related to supply chain and labor made this quarter more difficult than we originally anticipated. However, this does not affect our unwavering commitment to executing our strategic initiatives and achieving our long-term financial targets that we have outlined. So let's dive into the drivers of the quarter. Looking at sales, our total year over year comp was down less than 1%. This decline was primarily a result of two things. The late arrival of Christmas product, which began to significantly impact our sales the last two weeks of October, and challenges staffing up with seasonal employees to be able to execute getting that product on the floor. On the first point, we entered this quarter knowing that Christmas would arrive three weeks late this year. But we planned to cover the marginal impact with excess inventory we had for harvest. However, harvest sales started the month of October slow and then fell off the last half of the month. Our customers had already moved on from the harvest shopping season to that point to holiday, entertaining, and Christmas. The other related driver of the miss was how the Christmas inventory flowed and our understaffed stores' ability to handle significant receipts late into October and early November. While for the most part, the Christmas merchandise arrived in the timeframe expected on our last call, it arrived in stores not in the usual ways, but as we received it. For example, we received ornaments weeks before we had any trees. And as you can imagine, it's very difficult to highlight ornaments in stores without having a tree to hang them on. This led to our Christmas products not consistently being on the sales floor until mid-November and not any normal presentations that helped the customers know how to put it all together. Combined with this, our stores struggling to hit their seasonal staffing goals, it became more challenging to unload the trucks and get everything in the store on display for customers to make purchases. Our in-store inventory is, on average, 37% better than the same period last year. But when you normalize the incremental freight cost included in those numbers, it's closer to 20%. I would like to highlight that our third quarter two-year same-store sales comp was an increase of just over 8%, which was also a further improvement from the two-year same-store sales comp increase of 5% we reported last quarter. This is important as we think of how far we've come since embarking on this journey and our ability to sustain long-term growth with less stores and significantly reduced cost structures. Based on what our customers are buying, we're seeing great success with a higher AUR product in both seasonal and everyday categories, and our price increases have not seemed to impact purchasing decisions. This is important data as it underscores our confidence in our long-term merchandise transformation strategy. Heading into the holiday season, we focused heavily on our new customer acquisition efforts. nearly doubling our marketing spend in the quarter. We believe this might have impacted the sales cycle with our current customers. In hindsight, the holiday quarters have such a compressed selling time frame that we've learned it may not be appropriate to rely so heavily on new customer acquisition, particularly amidst our transformation journey during this period. To account for this, we pivoted in November to spend more on existing customers who have proven to be avid holiday decorators. We'll continue to focus on new customer acquisition strategy balanced with the current customer retention strategy. We will wait to advance acquisition efforts into the first half of 2022 when we are adding new merchandise with our furniture and overall lifestyle assortments. As we look at category performance across both channels, AUR or average unit retail for furniture in the third quarter increased 18% year over year to $217. And AUR for mirrors increased 38% to $90. Within the holiday assortments, we saw strong results with higher AUR items, including upgraded wreaths and garland. Despite the low inventory levels in our core furniture collection, the Jackson, we continue to see great sell-throughs of our new YA collection, which includes the first sofa introduced in our stores. Lastly, four of the top 10 sellers in the third quarter were upgraded higher AUR items that are new to the assortment. We also remain on track to source just under 40% of our product in 2021, direct from factories, and we have planned further expansion in 2022. We believe our strong focus on increasing direct sourcing for our product will continue to be a long-term driver of unique to Kirkland's upgraded quality merchandise that supports a higher AUR across the board. Now given that we're a month into the quarter, I wanted to discuss what we're seeing as we close out the year. November started off tough for the same reasons that October ended slow. With our comp for the month being down 9.5% for the week of Black Friday, inclusive of Cyber Monday, our demand comp sales were flat. So we did see improvements from how we started the month. Outside of the late Christmas arrival, there were other complementary products that have historically been strong traffic and conversion drivers, which our customers often use as gifts during this seasonal period that weren't able to get onto the floor this year due to supply chain issues. One example of this was our holiday throw program. We had approximately 130,000 holiday throws on order that we had planned to promote at $10. However, we simply didn't receive them in time for the holiday selling period and missed out on the boost in sales that we typically experience. So those throws and other late arriving gifts will be held in our distribution center and included in Christmas 2022. When we provided back half guidance on our call in September, we expected significant upside from being in better inventory position in December and January than we were last year. specifically in furniture and wall categories, which have a higher AUR. After prioritizing Christmas receipts, we shifted focus to these categories and our spring set that we expected to be on the sales floor the day after Christmas. We were successful in getting that product on the water, but late October began to see a significant slowdown in moving this product through the LA port. As a result of the challenges we've experienced, we're revising our outlook for the remainder of the year, lowering our year-over-year sales and earnings expectation for the fourth quarter. We do believe there is upside to this guidance and if we see improvement in the port throughput. Nicole will provide more detail regarding this outlook later on. Looking ahead to the first half of 2022, we're incredibly excited for some of the initiatives that we expect to roll out. Now that Christmas shopping is already here, We're working on prioritizing the in-store floor setups for the first several months of 2022, in which we will be rolling out some great new products and we believe consumers will love. We initially expected to introduce our modular sofa with our Christmas collection, but given that we are still awaiting its receipt at the port, we plan to introduce this in early 2022. Consumers have expressed an appetite for this type of sofa and we will be pricing it very favorably at $1,500 versus $3,500 at the competitors. We expect this modular sofa to be a cornerstone of our furniture offerings in the first half of 2022, along with our Wyatt collection, and we look forward to introducing it to our customers. Our goal has always been to become less dependent on the seasonality that comes with holiday shopping, which is why we have focused heavily on expanding our furniture and outdoor living merchandise that typically has higher sell-throughs in the first two quarters of the year. The third quarter, the third, fourth quarters are examples of how too much heavy reliance on the limited selling period can have a sizable impact on the results if you don't have more balance selling throughout the year. Additionally, we're excited to announce that we will be starting a brand awareness campaign to launch our rebrand of Kirkland's Home in the first quarter of 2022. This initiative will be a significant step towards our customers acquisition efforts as we look towards a bright future to give our company a brand name that more appropriately reflects our merchandise assortment while continuing to pay homage to our past. We look forward to sharing further details about these marketing efforts once we have officially launched the rebrand. Our commitment to transforming Kirkland's into a specialty retailer where customers are able to furnish their entire home on a budget is unwavering. As we've begun refreshing our store base, introducing a higher quality and more stylish merchandise assortment, and bolstering our omnichannel capabilities, we believe we started to make a meaningful impression on the current and potential customers. With a leaner infrastructure we put in place, an aggressive customer acquisition strategy, and continued progression in our sourcing efforts, we are in tune with customer buying preferences and can be quite nimble to evolve our assortment for when those preferences shift. Overall, we remain confident in our long-term transformation strategy and the progress we've made since we embarked on this journey. Since I've joined, we've had a long-term vision for what we believe this company could become, and I remain incredibly proud of how far we've progressed in a relatively short period of time. It gives me the utmost confidence in our ability to continue executing on these initiatives, even in the face of macroeconomic challenges outside of our control and quarterly anomalies that may arise from time to time. I look forward to continuing to share our progress along this journey, and I hope that you all have a healthy and happy and safe holiday season. With that, I'll now turn the call over to Nicole Strain, our Chief Financial Officer, who will provide additional commentary on our performance in the third quarter and future detail in our outlook. Nicole?