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 29th, 2022. Joining us today are Kirkland's President and CEO, Steve Woody Woodward, EVP and CFO, Mike Madden, and the company's External Director of Investor Relations, Cody Cree. Following their remarks, we'll open with 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 meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Cody, please go ahead.

Thanks, Jason. Except for historical information discussed during this conference call, the statements made by company management are forward-looking and may be 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 this call will be available for replay through December 9, 2022. 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 Kirkland's Home President and CEO, Woody Woodward. Woody, over to you.

Thank you, Cody, and good morning, everyone. We continue to operate our business in one of the more dynamic and unpredictable macro environments I've ever experienced in my career. From a global pandemic to geopolitical unrest to inflationary and recessionary pressures, the challenges we faced over the past two years have been tough. That being said, I'm proud of how resilient our organization has become at adapting to these challenges. As we head into 2023, I firmly believe we are on track for a more stable year that will allow us to advance our transformation efforts. Before I address our strategic priorities for 2023, I'd like to discuss our third quarter. While volatility within the consumer environment made it difficult to predict sales patterns heading into the quarter, our financial results were generally in line with our internal expectations. Importantly, we also remained well on track to achieve our year-end inventory number and liquidity targets we set for ourselves. Consumer spending habits were volatile throughout the quarter. Early on, we saw an improvement in our trend throughout the month of August. which resulted in sales comp decline of only 3%. As we started the month of September, the momentum continued with our Labor Day sale, backed by a strong promotional offering spurring customer demand. Unfortunately, business softened for the balance of September and into early October, as customers proved very price conscious and less interested in harvest decor than in years past. This resulted in total comp sales being down around 7% for Q3. However, we began seeing improvements toward the end of October as our customer base shifted to holiday shopping. I'll dive further into what we currently are experiencing later in the call. During the quarter, we focused on weathering a difficult consumer spending environment by leaning on our improved messaging around pricing and online promotions to capture more of our discount-oriented customer base. Our furniture and textile categories continued to perform well. while most other categories delivered performances in line with our internal exit projections. I'm encouraged to see that our furniture assortment is connecting with our customers and delivering fairly consistent results as we utilize a high-low retail pricing strategy to generate more demand from our value-oriented customers, and we are gaining awareness for our high-value merchandise items from customers that historically would have looked elsewhere. Our CUR continues to grow. supported by larger ticket items and more products within the better and best categories compared to the prior year. The macroeconomic environment continued to hamper our trafficking conversion rates for both our stores and e-commerce, though the compression in conversion rates was relatively minimal by the end of the quarter. Our store conversion declined around 1%, while our e-commerce declined around 3%, both year-over-year comparisons. While conversion rates are down, it could have been much worse. This leads me to believe that customers are still connected to our assortments, even amidst a challenging environment. After launching our in-home delivery service last quarter, we are seeing relatively healthy adoption from our customers. While we don't expect this to be a significant growth driver for the near term, we are pleased with our customer response so far and expect in-home delivery to gradually become a more meaningful revenue stream in the future. We will continue to develop our back-end operations to ensure that our program remains scalable and easy to use for customers across our omnichannel platform. As we move into the fourth quarter, we are encouraged by the improvement in trends we have observed thus far in the holiday season. This momentum continued over Black Friday weekend as we experienced increased demand in response to our promotion, and our results were in line with internal forecasts. The sell-through we experienced thus far has allowed us to strengthen our balance sheet, which I'll discuss in a minute. While the consumer is beginning to shift away from holiday decor spending at this point in the season, we're focused on capturing remaining holiday sales through a wide assortment of merchandise that can be used for gifting and final decorating touches. With a clear promotional strategy in place, we will continue to look on our touching strategy to ensure we are capturing our historically discount-oriented customer base to drive further holiday spending as we close out the season. Turning to our liquidity, I firmly believe we are on track to restoring and maintaining a healthier balance sheet. All that might go into further detail shortly, but I'd like to highlight that we've already paid down $30 million of our borrowing so far in the fourth quarter and expect to achieve a year-end target of net borrowing in the $10 million or less range. We also continue to successfully work through our peak inventory position from August. In fact, we believe that we will be below our initial year-end inventory target, and now we expect to end the year with inventory in the $70 to $80 million range. As we continue to convert existing inventory into cash, our margins will remain relatively compressed due to the high cost in which we procured that inventory. However, supply chain tensions are starting to ease, and we expect to begin meaningfully recapturing margin in the new year. Coupled with the disciplined cost structure we've implemented, our profitability has room to grow in 2023. We have identified several initiatives in the coming quarters that we believe will get us back on track with our transformation strategy. After executing towards our critical objectives to manage inventory to appropriate levels and decrease our borrowing needs, we can begin to focus more on other objectives such as stabilizing store costs, growing e-commerce sales, and targeting high ROI projects that enable sales growth and improvement. Our projects include using our customer data platform, or CDP, to carefully manage price points and create targeted promotions, increasing the effectiveness of our marketing program through improving ROI on existing advertising spend. The reorganizing of our distribution panels to ensure optimum inventory distribution to stores and our e-commerce channel. Throughout this past year, we targeted our historically price-sensitive customer base through tailored promotions, and we look to continue to capture their demand by rebalancing our furniture growth with diverse opening price points across multiple categories. While we are committed to adding more high-value items, we're going to be thoughtful in curating items at price points that appeal to a broad base. The CDP will be an integral part to finding the right price points for the right customers, as well as providing the data necessary for developing targeted promotions. We will also evaluate our marketing strategy to ensure that we maintain the highest ROI for marketing dollars spent. As we acquire new traffic, we plan to invest in our stores to increase coverage during peak selling hours, and in turn, drive increased conversion rates. Our stores have undergone dramatic changes throughout these past years, including refreshed arrangements and a shift towards an engaged selling culture by our team members. We'll continue our transformation and support our stores with additional investments in the coming quarters. With the development of our omni-channel platform, it is important that we optimize our inventory distribution capabilities to provide added flexibility to our customers. We have identified technology investments to our existing point of sale and order management system that will enhance inventory availability across the system. We believe these investments will make our DC and delivery channels better optimized, improving margins, inventory turn, and leading to more efficient working capital use. Our e-commerce platform will also undergo operational enhancements to drive growth and support a better user experience. We look forward to sharing more with you on the upcoming months. As we begin ordering new inventory for 2023, we'll be maintaining a leaner inventory flow and delivering margin improvements throughout involuntary cost reduction and targeted initial markup increases. While we are uncertain of the sales landscape for next year, we're diversifying our opening price points to ensure that we can operate successfully in a shifting market environment. Overall, I would like to reiterate that we are sticking with our plan to manage inventory to appropriate levels, improve our liquidity position, and set the table for stabilization in 2023. We're firmly committed to our shareholders, including investing class companies that can unlock the immense potential and value we believe it has. Before I turn the call over to our new CFO, Mike Mann, I'd like to officially welcome him back to Kirkland's home. Mike's substantial executive experience and previous long tenure with this organization has helped him transition quickly into our operations and make an instant impact as we navigate through the current macroeconomic landscape. Mike's deep understanding of our business model makes him a superb fit to lead our financial operations and support the execution of our long-term growth strategy. And I'm grateful to have him back on our team. With that, I'll now turn the call over to Mike who will provide detailed commentary on our performance in the third quarter and our outlook. I'll be back for the Q&A to answer any questions you might have.