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spk05
Good morning, everyone, and thank you for participating in today's conference call to discuss Kirkland's financial results for the fourth quarter and full year ended January 29th, 2022. Joining us today are Kirkland's president and CEO, Steve Woody Woodward, COO and CFO, Nicole Strain, and the company's external director of investor relations, Cody Cree. 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. Cree as he reads the company's safe harbor statement within the meetings of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Cody, please go ahead.
spk02
Thanks, Betsy. For historical information discussed during this conference call, 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, as 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 March 24, 2022. The webcast replay will also be available via the link provided in today's press release, as well as on the company's website at kirklands.com. I would like to turn the call over to Berkland's President and CEO, Bobby Woodward. Bobby, over to you.
spk01
Thank you, Cody, and good morning, everyone. As always, I'd like to first recognize our dedicated employees and stakeholders that continue to believe and support our efforts in executing our long-term transformation strategy. This past year has been challenging, to say the least, given all the macro environment unknowns that come with a pandemic, social unrest across the country, high inflation, and now the current war in Ukraine. I'm incredibly proud of everyone stepping up to the plate and exceeding my expectations in controlling the things that we can control and executing our strategic goals at the pace that would have been challenging even in normal times. I cannot thank all of you enough for your dedication and commitment. In the past year, we've taken a series of meaningful steps to transform Kirkland's into a true home furnishings specialty retailer with high quality, high style products at affordable price points. Our advances made in diversifying our product mix, improving our direct sourcing capabilities, and reinforcing our infrastructure have put us in a strong position for a healthy future. As we look back at the progress we have made, we realize we may have driven our merchandise transformation efforts faster than our ability to migrate customer base and make the necessary changes to our customer experience and infrastructure. While we have no intention of going backwards from here or wavering on our overall strategy, we do intend to alter the pace of change within our merchandise mix and style elevation. We believe this will allow our customer acquisition efforts time to catch up. The persistent macro environment constraints seem to be having a tangible effect on our consumer. And we believe the impact is exaggerated since we are evolving our target customer, product sets, sourcing and customer experience in an already difficult environment. I'd also like to remind everyone why we're making this transformation and why we believe and why we continue to believe in it so strongly. When I initially joined Kirkland's, our brand suffered from low customer awareness, We lost our way from a brand point of view and as a result, our customer base, sales and margins were on the decline. At the same time, customers were shifting to online shopping and brick and mortar traffic was declining. We were also continuing to compete from a product perspective with a much larger big box stores and growing online commodity retailers resulting in ever increasing promotional discounts which offered a growing number of unprofitable stores. We had merchandise that was not exclusive and quality that we weren't always proud of. We had to find a place in the market where we could be successful long-term. Based on our store footprint and an obvious white space in the market, we believe we could transition our business into a curated specialty retailer where customers can furnish their entire home on a budget. We believe we can create looks comparable to the higher-end home furnishings retailers, but at a discernible value of 20% to 40% less. We believe we can be the high-quality, high-style value option for the consumer that wants that more expensive look but can't afford the higher-end offerings in the market. From a profitability perspective, the increased ticket that comes with the broader selection of merchandise will allow us to grow brick-and-mortar sales even with less traffic. Additionally, we believe we can continue to sell the exclusive, higher-quality merchandise with less discounts. Over the past few years, we've made a lot of changes in our infrastructure, including removing $45 million in operating expenses, while improving our profitability significantly. Through these changes, we have solidified our foundation to build from and one that can support a meaningful transformation. We are creating a brand that has a very clear point of view and a focus on serving an underserved customer. And we've seen meaningful progress in these efforts. We've been successful in the larger ticket offerings of furniture and mirrors. We've seen success in upgrading textiles, decorative accessories, and fragrances. A large portion of our customer base is moving with us and loves the new product. Have we lost customers along the way? Yes. Have we had a portion of our customer base that only purchased product at a deep discount? Yes, we did have those customers. We didn't make money from those customers, but we did generate sales. Additionally, we closed over 15% of our store base. Those stores didn't make money, but they did generate sales. So in the end, we made the right long-term decisions focused on making a profit and returning money to our shareholders. So why is it going slower than expected? Last year, we shifted our focus to ramping up customer acquisition efforts, which aimed to target customers that spend, oh, somewhere in the $1,500 range with their retailers of choice each year instead of $150. However, we started these efforts in the middle of our holiday season, impacted by supply chain challenges, and weren't happy with the results. Then to start the fiscal year, we saw macroeconomic issues dampen the discretionary consumer spending. As a result, we're taking an alternate approach. Instead of aiming to transform all of our markets at once during these uncertain times, in April, we are beginning an exciting and significant brand awareness market test in two of our key markets. This test will include mass media marketing of our Kirkland's Home rebranding. We believe if we can put the new Kirkland's Home in front of target customers while not abandoning our legacy customers, our company will begin to recognize the true potential it has to offer without taking a meaningful hit to our sales in the near term. Do we have other things to solve? Of course. For our existing customers, we have to prove that our quality has consistently improved We have improvements to make in our store footprint, to our online experience, and to our supply chain infrastructure. We have a roadmap for each of these and believe we can execute without significantly impacting the profitability or capital needs. As mentioned above, we're adjusting the merchandise pace to allow us to accelerate improvements in each of these areas. Meanwhile, we will continue to focus on day-to-day execution and managing through the current macroeconomic challenges. Finally, we will continue to be opportunistic in buying back our own shares as a means to maximize shareholder return. As we look at our performance during the fourth quarter, we were challenged by late arriving merchandise products in November and December, which impacted sales during our critical holiday selling season and led to increased clearance sales in January. As a result, we are holding approximately 8 million of Christmas related inventory that we plan to sell in holiday 2022. While I certainly would have liked to see different results, we were able to report financials that are in line with the revised expectations we announced in December 2021. Diving into some sales highlights for the quarter, we were encouraged by our furniture sales, which had a 28% year-over-year increase in AUR, as well as a large increase in mirrors and lighting. Our furniture offerings become a larger percentage of our product mix and we generate more customer interest, we anticipate the higher AUR this category offers to further benefit our overall mix. Within our e-commerce channel, AUR also increased across all categories as we benefited from a more favorable category mix, selling a larger percentage of offerings within our better and best product options than the prior year. As we continue to evolve our merchandise strategy, These early successes in driving higher AUR give us confidence we will start seeing meaningful improvements as we generate more traffic and ultimately conversion in the furniture category and e-commerce channel. I'll let Nicole provide a more in-depth review of the nuances within our financial results for the fourth quarter in a moment, but I'd like to focus on what we are excited about for 2022 and where we currently sit within our overall transformation strategy. We started this fiscal year with the motto of reclaiming our rhythm. There were plenty of surprises within the macroeconomic environment last year, but I don't want that to overshadow the progress that we've made and how hard our entire organization has been working to set Kirkland's up for success in 2022 and beyond. At the center of our transformation strategy is a goal to evolve into a high performance, especially home furnishings retailer. With that, we anticipate furniture being the largest our largest growth category this year, and have stocked our shelves to ensure that we have the necessary amount of inventory to sell in the first half of the year. As supply constraint constraints have continued throughout the industry, we made it a priority to be in a strong inventory position so we don't get caught flat-footed by running out of products to sell. Now that we are confident in our inventory position, we have started to roll out our new furniture offerings this month. In fact, we held our first major furniture event over the past two weeks, and we were pleased with the initial customer feedback that we received. This is a great indicator of the potential of this category and how it can be transformative to Kirkland's. To truly succeed, we have to get our furniture offering right with the consumer, and so far we've had nothing but positive feedback. In addition, we need to ensure that customers are aware of these new furniture offerings and thinking of Kirkland when looking to furnish and style a living space. To accomplish this, we are taking several steps to drive consumer acquisition and awareness. As I mentioned earlier, in April, we will launch advertising tests in two key markets, Nashville and Atlanta, to drive brand awareness and generate meaningful improvements in traffic and conversion. As we start to see more and more success within these regional advertising campaigns, We will begin to roll out similar strategies on a broader scale to further drive consumers to our in-store and e-commerce channels. One of the main marketing initiatives that we've spoken to in the past is our rebranding effort to Kirkland's Home, which we believe is better aligned with where we aim to be and how we want customers to view us. We've already begun launching these efforts and will have transitioned most touchpoints by the end of the first half, updating signage and branding in stores and online. In addition to our advertising and marketing efforts, we are also going to focus on investing and bolstering the omnichannel experience throughout the year. In today's competitive environment, it's imperative that consumers have a positive experience across all channels. One of the most important near-term initiatives that we are on track to accomplish in May is introducing in-home deliveries. which is our version of white glove delivery service. Currently, if a customer orders a piece of furniture in store, they need to personally move the item from the store back to their home. And in many cases, our larger furniture options aren't available to customers who don't live near a store. With in-home delivery, we can finally have the capability to deliver these larger items directly to the customer, which is a must-have service for a value-focused furniture retailer to be an attractive choice for consumers. As we roll out these new furniture offerings and make investments to further improve the customer experience, we will also be launching an internal customer data platform that will help us better track and understand customers' behavior. This will be key in our decision-making process as we test and evaluate the best strategies to drive in-store and online traffic and generate meaningful sell-throughs with our customers. Additionally, it allows us the ability to message existing customers differently than newly acquired customers. As we start to gauge the success of our first major push into furniture, we're focused on two KPIs, average ticket and percentage of revenues this category generates. Part of our rationale in evolving and expanding our merchandise into furniture was to gain meaningful increases in the average ticket size per customer with larger pieces of furniture commanding higher prices than our historical home decor offering. The goal of this category is to scale so that we aren't so reliant on the holiday season to make or break our year. For context, the furniture category has been in the low to mid teens as a percentage of total revenue over the past two years. We expect to expand that figure to greater than 25% of our mix over the next several years. We're going to be deeply focused on executing what we can control within our key strategic initiatives. And we look forward to unlocking the true potential of Kirkland's. Thank you again for all the support along the way. With that, I'll turn the call over to our CFO and COO, Nicole Strain, who will provide additional commentary on our performance in the fourth quarter and further detail on our outlook. Nicole?
spk06
Thank you, Woody, and good morning, everyone. Before we get into our results for the fourth quarter, I wanted to add to Woody's comments on our transformation progress. In 2019, we started this journey with an adjusted EPS loss of $1.39, declining comp sales, gross profit of just under 27%, and growing operating expenses at almost 32% of sales, excluding depreciation and impairment. In the past two years, we have closed 71 underperforming stores, or over 15% of our store base, through e-commerce by 50 million or 51%, increased landed margin by over 10 percentage points with comparable freight rates, consolidated distribution centers in Jackson, Tennessee, and reduced square feet of fixed costs by 16% while adding our first two regional e-commerce hubs. Successfully negotiated occupancy cost reductions on average of 13% per store, removed $45 million of operating expenses, and created a leaner, more nimble infrastructure. We purchased $1.8 million, or 13% of our outstanding shares. To further highlight how far we've come, we ended 2021 with adjusted EBITDA of $47.8 million, or 8.2% of sales. If you remove year-over-year incremental freight costs, EBITDA margin would have been 13.9%, and our operating margin would have been 10.3%. Additionally, we no longer have any stores with negative four-wall EBITDA. Even with the freight impact and inventory challenges, we still had our most profitable year in over a decade, which we believe is a testament to our organization and the significant progress we've made within our transformation strategy. Again, as Woody mentioned, we made decisions to move away from customers who only shopped at a deep discount in order to improve margins. And we decided to close a significant portion of our stores to improve profitability. We are now in the middle of our transformation, which includes the rebuild of our customer base and the re-messaging of our brand. Making these changes in the middle of so many macro challenges has been difficult. but we continue to believe in our strategy and that we have built the financial infrastructure to allow us to make the needed changes. While we may need to adjust and pivot on timing and sequencing from time to time, we remain steadfast in our commitment to executing on the overarching strategy we've communicated. Now to the financial results for the fourth quarter. Net sales were 176.2 million compared to 194.9 million in the year-ago quarter. which included a comparable store decline of 8.5%. The decline was primarily a result of late holiday inventory receipts, slowing traffic, and comping a stronger January 2020 from stimulus benefits. We did see an increase in average ticket during the quarter in both stores and online, driven by an increase in average unit retail from the higher mix of furniture and the shift to more better and best options within categories. In breaking down sales within the quarter, we had a total comp decline of 9.5% in November, a comp decline of 3.3% in December, and a 16% decrease in January. On a two-year basis, our comparable sales were down 6.8%. eCommerce accounted for approximately 24% of our sales in the quarter. We closed 10 stores during the quarter. and reopen two that had previously closed to end the year with a total of 361 stores. We still believe our ideal store count to be approximately 350 stores, which will include limited additional store closures, the relocation of 40 to 50 stores, and store refreshes across the remaining base. We expect these changes to take place over the next two to five years. Gross profit was 33.3% of sales compared to 38% in the prior year quarter. Landed product margin was 54.9% compared to 57.6% in the fourth quarter of 2020. Excluding the year-over-year incremental freight costs, landed margin improved approximately 330 basis points in the fourth quarter of 2021. E-commerce shipping increased 70 basis points compared to the fourth quarter of 2020, due to the increase in ship-to-home sales. Store occupancy costs increased to 9.1 percent of sales compared to 8.8 percent in the prior year quarter, primarily as a result of having a lower base of sales this quarter. Given that all of our stores are now profitable, we have shifted our strategy in regard to rent negotiations. We continue to get meaningful rent reductions in some locations, especially if there are vacancies in the center or in certain markets. However, in higher performing locations, we are balancing rent rates with locking in control of the space for longer periods, which in some cases does come with slight rent increases from the lower base we negotiated in the past two years. Costs were 4.8% of sales compared to 4.4% in the prior year period from a labor ramp up in order to expedite late holiday arrivals and handle larger than normal receipts in December and January. Also impacting DC costs was labor inflation due to hiring challenges and also the decline in sales. Outbound freight also increased by 20 basis points from more routes to stores due to late arriving holiday products and higher inventory receipts the remainder of the quarter. Lastly, other cost of goods sold increased 40 basis points, mainly due to a slight uptick in damages with the increase in inventory. Operating expenses excluding depreciation and impairment were $42.9 million or 24.3% of sales compared to $43.9 million or 22.5% of sales in the prior year. Compared to the fourth quarter of 2020, we had a decrease in store operating expenses of $1 million from fewer stores and favorable insurance claims. A decrease in e-commerce operating expenses of $300,000 and a decrease in corporate operating expenses of $900,000. These decreases offset the $1.3 million increase in advertising expenses. Adjusted EBITDA excluding impairment and other minor non-operating expenses was $20.3 million or 11.5% of sales compared to $34.3 million or 17.6% of sales in the same period last year. Our normalized tax rate in the fourth quarter was 25% compared to 26% in the prior year period. Adjusted earnings per share, which excludes non-cash impairment, normalized tax rate, and other minor non-operating adjustments, was 84 cents compared to $1.42 in the prior year. GAAP earnings per share, including these items, was 91 cents compared to $1.39 in the prior year. We ended the quarter with $25 million in cash, no outstanding debt, and $75 million available on our revolving credit facility. Our cash balance to end the year was lower than expected due in large part to the larger amount of holiday products we packed away for sales in 2022 instead of 2021, along with the timing and payment of inventory receipts. We chose to continue to ship past due products in the back half of 2021 and reduced buys in the first half of 2022. The result is a short-term negative impact on cash as we will have paid an early Q1 for the product we will sell in the first half of the year, but we will have inventory available to sell. This will result in a need to use our revolving credit facility in the first half of the year. Inventory at the end of the quarter was $114 million, which was an increase of $52 million from the end of fiscal 2020. The significant increase in our inventory position is largely due to the prior year inventory being abnormally low and the timing shifts I just mentioned with the current year inventory, which also carried a higher freight burden, and the $8 million in seasonally relevant inventory carried forward. Our average in-store inventory levels ended the year up $56,000 per store, or up 80% compared to January in the prior year. We continued our share buyback program in the fourth quarter with approximately 395,000 shares repurchased for $7.5 million at an average cost of $18.92 per share. In total for the fiscal year, we repurchased 1.8 million shares for $37.3 million at an average cost of $20.61 per share. Within the year, we repurchased 13% of our outstanding shares to start the year. In early January, we announced an additional $30 million share repurchase authorization, and at year end, we had a cumulative authorization available of $32.6 million. Now looking forward to fiscal 2022 and our longer-term financial targets. With all the macro uncertainties facing the broader industry, we've temporarily suspended providing a near-term outlook in terms of the top and bottom line range. However, we do want to provide some helpful context. Our Q1 today top line sales comp is trending slightly better than the Q4 sales comp. We expect gross profit margins in the first half of the year will be lower than the prior year by 200 to 250 basis points, which we expect to more than recover in the back half of the year. And we expect operating expenses to increase 150 to 200 basis points. From a top line perspective, we expected better performance to start the quarter as we comp the negative impacts from weather last February and lower inventory levels. But the macro challenges affecting discretionary spending are currently impacting customer traffic. The margin declines are driven by higher freight costs with clearer visibility in the first half of the year and how much freight will exceed the prior year. Assuming freight rates continue to be elevated but we manage holiday flow better this year, we expect similar upside in the back half of the year. From an operating expense perspective, we have labor inflation of approximately 100 basis points, primarily from store wage increases taken in Q4 2021, and an incremental technology budget to start advancing projects needed to support growth. Two of those projects that Woody mentioned are in-home delivery, which we believe carries a significant sales benefit once fully ramped, and the customer data platform, which we believe will allow us to understand customer behavior at a much deeper level and provide us the ability to segment and customize consumer messaging. Having said that, we did leave the organization relatively lean after the $45 million of cost reductions, but we do have levers to reduce operating expenses if sales continue to decline. We also extended the timelines to achieve the long-term financial targets that we've previously laid out for gross profit margins EBITDA as a percent of sales and operating income as a percentage of sales. For these metrics, our original targets remain the same, but now we expect to achieve them in the next two to three years instead of the next one to two years. Echoing Woody's closing remarks, despite the challenges we face to close out fiscal 2021, we remain confident that we are on the right track and executing according to our strategic transformation. 2022 is going to be a pivotal year for Kirkland's as we start to see positive impacts of our merchandise improvements and drum up brand awareness to drive new customer acquisition. We made it to this point in the plan much sooner than anticipated, which is a testament to the efforts of all of our leaders and personnel across the organization. We will continue to excel in the areas we can control, and we firmly believe that we have a solid foundation to begin capitalizing on our transformation efforts. Thank you all for joining us today, and we are now ready for Q&A.
spk05
Thank you, ma'am. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Anthony Lebendzinski from Sudoti. Please go ahead.
spk00
Good morning, and thank you for taking the questions. So, you know, first, you know, as far as the commentary about the Q1 so far, Can you give us a sense as to whether March has been better so far versus February? I know there were some weather issues versus last year, so just wanted to get a little bit more details as far as, I know you said for the quarter to date it's trending better than Q4, but just wanted to dig in a little bit more into what you're seeing here as of late.
spk06
Within the quarter, February is a much softer comp, so we actually saw March from a a comp decline be a little bit higher than February, but on a much tougher comp. And we shifted, as Woody mentioned in his script, into the furniture event in March. And I've been really happy with some of the results. Obviously, consumer traffic, which is impacted by all of the things that are happening in the world right now, is a piece that we're not as happy with. But as far as the customer's acceptance of the furniture and the average ticket increase that we've seen from that,
spk00
been happy with those components so within q1 there's a little bit of noise from from what was happening last year month to month got it okay and then speaking of furniture um can you give us a sense as to you know uh what that it was for for the fourth quarter for last year as far as percentage of sales and um what your expectation is for the year um and also are you are you including outdoor furniture when you when you speak about furniture are you including outdoor furniture within that as well, or is that going to be a separate initiative that you think you'll benefit from?
spk06
Yeah, I'll start and then Woody may have something to add. So our plan this year is for furniture to be 19% of our sales, and that's up about 400 basis points from where we were last year. Historically, we have not included outdoor furniture in the furniture category, but going forward, We're looking at that a little bit differently so that the comp numbers will change as we roll outdoor furniture in the future into that category.
spk01
Yeah, we're trying to make sure that our furniture assortments are more in line with the, you know, specially competitive environment and less accessory driven and more furniture driven. We also had to really step back and evaluate our quality of what we're offering. The outdoor category is a big growth opportunity for us. Luckily, we do have our outdoor furniture in stock and ready to go, which should be a win for us, you know, in April and May as that season comes on board. And then ultimately, you know, we've just, you know, we're in a pretty good stock situation in our furniture, so we're really optimistic that as this gets set and as customers start walking into Kirkland, they'll see the new fresh look that we have at a great value. And some of the indicators of some of the specific pieces have been very very optimistic and very promising. So, yeah, we're excited. We're excited, one, to have the inventory excuse off our back and have any inventory to sell, and we're also excited about how our stores look and how our assortment has finally evolved into the place where we feel like we can invite customers in and have them have a wonderful experience.
spk00
Great. And then you mentioned also that in April you will be launching a new brand awareness test in two markets. So, you know, First, how many stores does that involve, those two markets? And then as far as spending on that initiative, can you give us a sense as to how much you plan to spend on that?
spk06
Yeah, it's two of our bigger markets and also closer to home. So I think that's the reason we're starting there.
spk01
Nashville and Atlanta.
spk06
Yeah, Nashville and Atlanta. And at this point, we're not looking at it as spending incremental dollars. We're really trying to shift some of the performance marketing that hasn't proven as successful at acquisition efforts mainly we believe because our brand awareness is so low and for performance marketing to be successful people have to start with knowing your brand and knowing what you stand for so overall not looking at it as incremental advertising year-over-year unless it takes off quickly and we love the results and we're getting enough sales in order to support us expanding it. But I would say in those two markets, it's a pretty significant increase. Overall, we are just reallocating our marketing budget, though.
spk00
Got it. All right. Well, thank you, and best of luck.
spk05
Thank you, Anthony. The next question comes from John Lawrence with Benchmark. Please go ahead.
spk03
Thanks. Good morning and congrats on the course.
spk05
Good morning.
spk03
So, Woody, would you talk a little bit in the stores over the last couple of weeks and, first of all, some of the outdoor furniture appears to be, can you talk about some of that transformation appears to be a lot better quality than maybe several years ago and some of that and is that, first of all, is that correct?
spk01
That's absolutely correct. You know, we had gotten into a situation where we found ourselves having the kind of quality that you would find at the big box or even the home improvement stores. And we wanted to move away from that and be more aligned with the specialty retailers where we could be, you know, interestingly styled but at a significant lower price point. So we kind of recalibrated our entire mix. And this is, you know, last year was supposed to be the test of that and we got most of our product in late. This year I feel really it is a great reflection of who we are and where we're going. We do have different price points. We are taking a little bit of a different approach that we are including the cushion pricing with the furniture price because sometimes our customers feel like, oh, this is the price of the furniture and now I have to buy the cushions on top of it. So we try to make some adjustments that are more related to our kind of furniture shopping. Our scale is slightly smaller. than maybe some of the other specialty retailers, but that seems to fit in with our consumers, you know, whether they're living in apartments or smaller homes. But, yeah, it is hitting the floors right now. Our first ad, I think, came out today in the email, and I'm really proud of the way it looks. So now we have to give the consumer the chance to purchase it. We're fully in stock this year, and we're really excited about it.
spk03
So just one more question for me is are there still some, can you comment on, is there still some product or availability that still you're missing or would like to fill a couple of holes from a supply standpoint?
spk01
You know, Anthony, that's a good question because there's always something. But I feel like we've finally gotten into the position where our store looks set and and we're ready to invite those new consumers into our stores. So it would be probably less obvious to the consumer, whereas last year we were really worried about completing big sets. Part of it was stepping back on our strategy and feeding our collections into a set that kind of blends with the entire store. And so I think we've made really good progress on that. So, yes, there's always going to be something, but I don't think that, the consumer will see it. I think that they'll walk in and see complete, beautiful upgrades to our furniture quality, upgrades to our styling at reasonable prices when compared with some of our specialty competition. And so I think this, you know, despite having the constraints of the macroeconomic environment, this could be our time to shine in the next, you know, several months.
spk03
Great. Thanks. Good luck.
spk05
Thank you.
spk06
Thank you, Jeff.
spk05
The next question comes from Matt Schwartz with Mays Investments. Please go ahead.
spk04
Hey, good morning, guys. Thanks for taking my question. Good morning. I want to make sure I heard you correctly. When you were talking about, I believe it was gross margins being down, was it 200 to 250 basis points? Were you talking about the first quarter for that?
spk06
So the first half of the year and then I think the back half of the year should be up a similar amount. And it really is when we talked about the inventory flow and shipping the past two products, the back half of last year, we know what we paid to ship all the things that will sell for the first half of the year. And it was at a higher freight rate than what we were paying last year to ship the first half of the year product. But then as we go into the back half, We paid a lot of excess freight to try and expedite holiday product that was late, and that goes into not expecting freight rates this year to necessarily decline, but if we manage our flow better, we should have the same similar 200 to 250 basis point upside in Q3 and Q4, and then Q1 and Q2 being down by about that much.
spk01
Matt, one of the things that we've done, and I'm proud of how we handled this, was you know, with the increase of freight costs that happened to us, you know, in the back half of last year and early into this year, we did have to go through and take some strategic price increases that we felt like were warranted, one, to just be competitive and help us with our profitability. And at the same time, we've also, you know, reduced some of our discounting because we've worked so hard to get this new product here. We don't want to bring it in and immediately put it at a deep discount. So those two things, I think, have maybe had an impact on consumers. Like, they're waiting to see what's going to happen. I think the whole world is doing that, too. It's like, you know, they're still waiting for us to go 50 off because that's maybe how we've trained a lot of customers over the years. And so I think it's a change of behavior, and it's also setting us up for a future where we can be more profitable and not have to be as deeply discounted as our pattern has been in the past.
spk04
Okay, and... And the reason I ask is because I know, you know, as you get into Q2 and Q3, your merchandise margins this past year were very strong. So you still feel confident as you get into the back half that you could generate, you know, landed margins that are actually above those levels?
spk06
Definitely in Q4. I think the 200 to 250 basis points for the back half, the bulk of that will be in Q4 with some benefit in Q3.
spk04
Okay, great. And then just so I have some sense of how things are working with store closures versus comps and things, for the first quarter, you know, if comps run, let's say, similar to Q4, what would total sales be? Total sales would be down a little more than the fourth quarter?
spk06
Yeah, down about 100 basis points on top of the comp.
spk04
Okay, got it. And then just lastly, do you think that the occupancy deleverage that you experienced in the fourth quarter at that type of sales level, do you think that's pretty representative of a go-forward basis for this year?
spk06
I do. You know, I think we are not expecting to have sales be down, you know, where what we talked about in Q4 in the first part of Q1 for the full year. But I think on a, if we are down a similar comp, that amount of deleverage makes sense.
spk04
Okay, great. All right. Well, thank you both so much. Congrats on a good. Thanks.
spk05
This concludes our question and answer session. I would like to turn the conference back over to Mr. Woodward for any closing remarks.
spk01
Thanks, operator. We really appreciate it, Betsy. We'd like to thank everyone for listening to today's call, and we look forward to speaking to all of you when we report our first quarter 2022 results. Thank you.
spk05
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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