Good morning and welcome to Kirkland's Fourth Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Jeff Black with SCR Partners. Please go ahead..

Thank you. Good morning and welcome to the Kirkland's conference call to review results for the fourth quarter of fiscal 2018. On the call this morning we have Woody Woodward, Chief Executive Officer; Mike Cairnes, President and Chief Operating Officer; and Nicole Strain, Interim Chief Financial Officer.

The results as well as 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 call, the statements made by the 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 risks and uncertainties, 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, including the company's Annual Report on Form 10-K filed on April 3, 2018. I'll now turn it over to Woody..

Thanks, Jeff, and good morning. Thanks for joining us to review the fourth quarter and our plans for 2019 and beyond. Today we'll spend more time than usual to review our plan in detail. Since speaking with you last quarter, I've had an opportunity to dig deeper to understand our customers, suppliers, and how our products resonate.

As we all know, this sector continues to experience rapid changes in consumer shopping and purchasing pattern and the challenges related to that are significant.

After a more full assessment of our strength, I remain optimistic that the issues that have hampered Kirkland's in the fall and we are in a position with the company for profitable long-term growth. We have a strong value proposition, great talent in the organization and a followup plan we're executing. Overall, 2018 was a challenging year.

Strength in e-commerce helped drive a modest increase in total sales for the year and the merchandise margin stabilized following several years of decline. We're pleased with the progress in these key areas, but it was not enough to overcome traffic challenges that persisted in the fourth quarter.

As we outlined in our third quarter call, we had a strong November. Seasonal categories, including fragrance and candles, textiles and floral, all performed well. December was more mixed. Gifting and service performed well. We had a continuing channel shift in the lead up and immediate aftermath of Christmas impacted brick-and-mortar sales.

January traffic was further hampered by weather and port delays that constrained inventory flow. We experienced solid traction on newness in the final month of the quarter, but we need to strike a better balance with clearance to drive post holiday traffic.

There are some very important learnings there and the teams did some heavy lifting during the year on operational and merchandise initiatives that can improve the business over time.

As we look forward, we're accelerating the pace of change and taking meaningful steps to further transform the business and address changes in the home décor retailing sector. The plan we're outlining today will define our path to accomplish our goal.

It starts with fast tracking our transition by building on the work begun in 2018 to enhance the customer experience and improve efficiency. For example, buy online and pick up in store is driving a better omnichannel experience, in its early stages in terms of its potential impact on revenue and profitability.

The same can be said of markdown and promotional optimization. We captured some low hanging fruit in 2018 as it relates to de-stacking promotions, but there's more value to come from leveraging analytics to improve promotional efficiency.

We also see significant opportunity to manage great headwinds and achieve lower product cost via the ongoing work in supply chain and direct sourcing. Mike will over these in more detail in a moment.

The takeaway is that we're pleased with our initial progress and believe each one of the major pillars we outlined in 2018 have further room to improve our business. The second part of our plan includes initiatives to increase traffic to Kirkland via our omnichannel platform. The first of these involves extending our assortments.

As many of you know, our mix of product is highly seasonal and we're known for seasonal and the next destination category in fall and holiday. While it differentiates Kirkland's, we believe that we can achieve this same recognition in additional categories which can positively impact performance outside of the fourth quarter.

These include new categories such as area rugs, tabletop and bedding products and accessories. Each of these have large addressable markets and each of these are important to our Kirkland's customers. The second involves addressing the existing assortment. We have some seasonal and fashion oriented categories that are doing well.

We have some areas of the assortment that need a reinvention. We improved elements of the art assortment in 2018, but we believe there is a big opportunity to introduce more freshness and add a stronger point of view in walls and lighting. Overall, we believe there's opportunity to invest in our key items with greater conviction.

Let me give you an example. In late fall we ran a one-day candle event and we sold over 50,000 candles and lifted sales across the brand. And it e accomplished several positive aspects.

It serves as a new handle to drive traffic in new customers, we were also able to do so in a margin positive way since the promotion was surgical and only Jar Candles were on sale. It also brought awareness to our fragrance category. In 2019 we want to take that key item theme and plan ahead.

This will allow us to buy better and deeper will mixing up our messaging to the consumer. This is an example where we will significantly increase our purchases on top key proven items. Finally, we're developing a future state plan for infrastructure. We're seeing traffic shift from stores to online. Our growth in e-commerce reflects that.

To address these long-term changes, we are testing a store of the future that has more elements geared towards improving the customer experience for omnichannel. We are slowing store growth as we continue to analyze this. At the same time we are evaluating our fulfillment model that moves the e-commerce distribution closer to the consumer.

Things we're doing have sizable, strategic, and financial benefit, but there's much to overcome and hard work ahead. Traffic trends remained under pressure thus far in the first quarter, and it will take time to see the benefits of our work.

While we're excited about the changes we're putting into place, we don't expect meaningful improvement to begin until the second half of 2019. We have a strong customer proposition, a healthy balance sheet to support our strategy, and we're optimistic about our prospects to improve performance and create long-term value for shareholders.

Now Mike will walk you through a bit more detail of our 2019 initiative..

Thank you, Woody. As Woody mentioned, we did not achieve all that we hoped in 2018. However, we were successful in laying the groundwork and making progress on the key initiatives in 2018. I want to add detail on what was accomplished in 2018 that resonated in the resulted and what is in progress and in play for 2019.

We strongly believe that as a pragmatic and focused plan to improve our performance while aggressively dressing the macro issues. Our collective plan in merchandising and operations can be summarized in four themes.

One, product revitalization and reinvention; two, merchandise margin expansion; three, omnichannel growth, profitability and infrastructure, and four supply chain optimization. I'll start with number one, product revitalization and reinvention.

In 2018 as Woody mentioned, we did make assortment improvements in many of the fashion oriented categories; furniture, fragrance, textiles seasonal, gift and floral. Collectively these categories represented positive comp sales. Our biggest lessons [ph] came in wall, frames, and lighting categories.

With that context we have taken the following actions. We've reorganized the merchandise organization. This will result in a stronger focus on wall décor as well as in-house design that will improve consistency and design across all categories.

The reorganization enables us to lean in on the categories we want to turn around and in support of the new categories producing second half. Table tops, rugs and beddings. It will ducktail into our direct sourcing initiatives, enable us sustain our private brands and ensure success of our new product categories.

These important organizational changes were made prior to the beginning of our fiscal year and the teams are up and running. Another key element to support our product initiative is the elevation of quality across the assortment as we create greater alignment with our vendors while raising the bar.

We believe that design, price and quality, are bundled together in how the consumer views value. In summary, for product revitalization and reinvention we have built the structure and we are actively getting ahead of the planning cycle to drive key items, address underperforming categories and add new products.

I'll now move to the second key initiative, merchandise margin expansion. We spoke about this in 2018 and we did make some progress, though not as much as we wanted. Merchandise margin was essentially flat, while product margin was up 30 basis points.

We were successful in putting in place the forecast tools to line up the marketing coupons and merchandise promotions to inform us of the overall margin rate. From there we were able to modulate or tweak our promotions to drive into our forecast.

As we move into 2019, we have added analytical muscles to identify the most productive promotions as well as root out the inefficient promotions and take a more aggressive approach in de-stacking our promotional cadence. In addition to the price and promotion work we're making rapid progress in another lever for merchandise margin, direct sourcing.

We're using an ancient [ph] model and building our capabilities as an importer of record. We have integrated direct sourcing as part of our process roadmap and begun collaborating with our merchandise team.

My prior experience in this space has told me that the hardest part of direct importing is not the sourcing aspect itself, it's the change management with the buying team. I'm really pleased with our merchandising organization in terms of adapting to this new model. Meanwhile we're building our penetration goals.

As this gets more definition we'll share those goals with you. Obviously we are starting from a place of virtually zero direct sourcing, therefore the up cycle tension is great. The benefit is not just the costs savings, but the ability to expand our network of factories of high design, high quality, affordable home décor product.

To tie up the merchandise margin expansion initiative, we have levers that have moved from concept to early adoption, price and promotion analytical effectiveness and direct sourcing. I'm now going to move to omnichannel growth, profitability and infrastructure.

Before I talk about our approach, I'll speak of the current landscape of our e-commerce business. We have three channels of e-commerce. One, pick up in store, either pick up from existing inventory or ship to store, vendor direct fulfillment, and three, direct to consumer where we ship directly to the consumer from our e-commerce fulfillment center.

Our overall e-commerce growth in 2018 was 22%. Our goals from a channel perspective are to accelerate growth in BOPUS and vendor direct and drive more profitability out of direct to consumer. Starting with BOPUS, we were able to state it up last year on schedule. In Q4 last year we did over $4 million in BOPUS sales.

We started at 250 SKUs and methodically ramped it up. Our goals are to accelerate SKU count and improve the service aspects to achieve growth. We're excited about the potential focus for multiple reasons. It's a service that consumers desire because she gets instant gratification, it drives the full margins and it drives traffic in add-on purchases.

Strategically, it allows us to compete against pure e-commerce players. Today we've got over 1000 items of BOPUS which is over 15% of our total e-commerce sales and we'll continue to build on that. Turning to vendor direct.

We're excited about our growth in this channel because it is very profitable, allows us to grow assortment without assuming inventory liability and impacting our logistics. That segment grew over 70% last year with over a 100 vendors.

To drive this business more aggressively, we're currently scoping a new platform that will enable better scalability of the product management workflow reporting and lead to a more cohesive consumer experience. We'll have this implemented by Q3 of this year.

Moving to direct-to-consumer, this is a business where we have revenue and profit upside and opportunity to improve our customer service. Today we fulfill all e-commerce orders with our owned inventory, through one standalone fulfillment center that's based in Jackson Tennessee.

We're evaluating our options go get our distribution closer to the customer. Meanwhile we continue to make exciting enhancements to improve the aesthetic and streamline the navigation capability. We are leaning in on mobile improvement as we did a system enhancement that resulted in 60% faster page load speeds for mobile devices.

We are pleased with the progress of our digital marketing effort, at the number of followers on social media, Facebook and Instagram combined was up 36% to $1.9 million. Our active, loyalty email database has increased to 4.6 million with solid open encryption rates and our influencer community is expanding.

As we bolster our e-commerce capabilities, we are viewing the brick-and-mortar presence and store model that best complements our omnichannel strategy. Stores will remain an important ingredient of our digitally connected future. As such, we can see the next generation concept store and opened our first one last year.

In a [indiscernible] presence provides purposeful [ph] navigation, supports omnichannel. It has the potential to attract younger customers. We are very pleased with the sales lift and superb customer feedback.

Our goal in 2019 is to refresh our group of existing stores with key elements of the next in-store and measure the lift relative to the capital investment. This is exciting and potentially will add more arrows to our quiver to drive topline sales.

In summary, we have a solid and thoughtful omnichannel growth, profitability and infrastructure approach that's rooted in developing a more profitable model that differentiates from the prototypical e-commerce only competition. Number four, supply team optimization.

As Kirkland's presents more stores, increasing proximity from one single distribution center along with the macro pressures of rising transportation cost has further burdened product flow and profitability. This is part of the escalating gross profit challenge in 2018 and previous years.

In 2018 we accomplished something to mitigate these pressures by relaying out the current DC operations at 20% more capacity, and we improved our [indiscernible] utilization and streamlined our route. We're now putting in place a more permanent and systemic solution that will have material impact.

First, we will be standing up at 3PL, which stands for third party logistics, distribution center in Texas by the end of Q3 that will serve approximately 100 stores. This will create significant efficiencies and improve flow. Normally, 3PL bills add additional operating costs until you achieve scale.

In our case, we'll see an immediate annualized savings of over $1 million. In addition, we are further expanding our West Coast bypass. The West Coast bypass allows us to drop ship and transport allocated product directly to the West Coast store which bypasses all the transportation costs to and from Jackson.

We are very confident in the leadership and the team to make significant strides in supply chain optimization in 2019. To wrap up, in 2018 we made some progress and we laid the groundwork in the four key initiatives that are now in full swing for 2019; product, merchandise margin, omnichannel, supply chain. These initiatives are proven and pragmatic.

Our eyes are wide open and acknowledge the environment transfer date [ph] 2019 are headwind for us. The leadership team is hyper focused and we believe the plans can start to improve second half performance in significantly beneficial long-term. I'll now turn it over to Nicole..

Thank you, Mike. Net sales for the fourth quarter decreased 3.8% or $8.5 million compared to the fourth quarter of 2017. Fiscal year 2017 included a 53rd week which accounted for approximately $10 million of sales.

Comparable store sales decreased 3.3% which included an approximately 15% increase in e-commerce revenue and that's on top of the 2% combined comp increase and 35% increase in e-commerce in the prior year.

In our brick-and-mortar stores in November we continue to see the strength of our seasonal decorating assortments with both positive traffic and a high single-digit comp sales increase. As we moved into December we saw traffic declines driven heavily by the week before and the week of Christmas.

Those trends continued through the month of January with double-digit traffic and comp store decreases. But weather definitely played a role in the January sales decline. We saw softness in traffic across our store base. Overall the traffic decline was partially offset by an increase in conversions.

We opened three new stores and closed seven during the quarter ending the year with 428 stores which is a net year-over-year gain of 10 stores or 2.4%. E-commerce accounted for $25.1 million in revenue during the quarter or approximately 12% of total revenue.

Traffic increased during the quarter by over 35% which was offset by a decrease in both conversions and average order value. For the quarter, approximately 45% of our e-commerce sales were fulfilled in stores. This percentage increased throughout the quarter as we added SKUs and further messaged our buy Online, Pickup in Store option.

The third-party drop ship channel also continued to grow as a percent of our e-commerce revenue. As we move forward we intend to focus on increasing the in-store fulfilment and the third-party drop ship channels, as well as focusing on improving profitability in the direct to consumer channel.

Moving on to margins, gross profit margin in Q4 decreased 85 basis points from the prior year to 34.4%. Merchandise margin decreased from the prior year by 40 basis points to 52.6%, primarily driven by an increase in inbound freight and a decrease in product margins which was partially offset by an initiative to improve vendor compliant [ph].

We continue to see an increase in inbound rates affecting both ocean and Intermodal and an increase in fuel costs. And again these increases in rates were partially driven by the supply shortage as many U.S. importers accelerated shipments before tariffs went into effect.

Additionally inbound freight costs were impacted by port delays on the West Coast in January. Outbound freight costs, which includes e-commerce shipping decreased 15 basis points as a percentage of net sales.

The higher e-commerce penetration and resulting increase in shipping costs was more than offset by improved route efficiently and truck utilization for transportation of products from the distribution center to our stores. Store occupancy costs increased 5 basis points over the prior year quarter.

Central distribution cost increased 60 basis points as a percentage of sales compared to the prior year quarter, primarily due to increased labor caused by product load disruptions. Moving on to operating expenses, operating expense for the fourth quarter was 24.7% of sales which was down approximately 30 basis points to last year.

Store operating expenses decreased 30 basis point as a percentage of store sales over the fourth quarter of 2017 due to a decrease in store labor which was partially offset by incremental advertising expense.

E-commerce expenses increased 280 basis points as a percent of e-commerce sales, primarily due to incremental software cost and advertising expense. Corporate expenses decreased $1.2 million or 30 basis points over the prior year due to a severance charge in the fourth quarter of 2017 and lower corporate salaries.

Depreciation and amortization remained flat for the prior year as a percent of sales. The tax expense for the quarter was approximately $5.2 million or 27% of the pre-tax income compared to 40% in the prior year period. The lower federal rate in 2018 was due primarily to changes included in the Tax and Jobs Act of 2017.

Our full-year tax rate was 35% which included 9% related to stockboard activity and a 14% state tax rate from the lower pre-tax income as it relates to our tax structure. We ended the quarter with net income per diluted share of $0.95 or $0.97 adjusted compared to income of $0.79 in the prior year quarter.

And moving on to the balance sheet and the cash flow statement, at the end of the quarter, we had $57.9 million of cash on hand and that's compared to $80.2 million in the prior year period. We had no long-term debt or borrowings outstanding under our revolving line of credit.

The year-over-year decrease was primarily driven by share repurchases of $15.7 million during the year and timing around payables. Our inventory balance at the end of Q4 was in line with our expectations at $84.4 million compared with $81.3 million in the year ago quarter or an increase of 4%.

The increase in inventory is primarily due to store growth over the prior year. Year-to-date fiscal 2018 tax provided by operations was $22.3 million compared to $45.1 million in the prior year. The primary driver for working capital changes specifically related to accounts payable and payroll related accrual timing.

Capital expenditures were $28.8 million compared to $28.4 million in the prior year. Of the $28.8 million just over 40% related to new stores, 30% to technology investments and the remainder to existing store and distribution center maintenance, store remodels, and lease buyout.

During the fourth quarter we repurchased approximately 569,000 shares at an average cost of $9.42. For the year we repurchased just under $1.7 million shares at an average cost of $9.52. As of our fiscal year-end we had $3.7 million remaining under our existing authorization.

And now turning to our expectations for fiscal 2019, for the full-year we anticipate total sales to be flat to up 2% compared with fiscal 2018. This level of sales increase implies no net new store growth and same-store sales in the range of flat to up 1%. We expect to open five to seven new stores and close roughly the same number.

The openings will be concentrated in Q2 and Q3 and the closings near the end of the year. We are seeing traffic pause [ph] since the start of the quarter at similar levels to what we experienced in January.

We expect to see continued traffic challenges throughout the year with improved trends in the back half of the year as we implement the merchandising strategies we discussed. We expect negative comp sales in the first half of the year with some improvement in trend in the second quarter in part due to the easier comp over the second quarter of 2018.

Full year diluted earnings per share are expected to be in the range of $0.15 to $0.30. We expect earnings improvement in the third and fourth quarters with a sales lift from new product assortments and the realization of many of the profitability initiatives mentioned by Woody and Mike earlier in the call.

We expect a higher loss relative 2018 in each of the first and second quarters, with the most significant decrease in the first quarter due to the comp store decline and investments related to initiatives which we expect to have long-term financial benefit. Our income tax rate is anticipated to be 25%.

We expect total capital expenditures in the range of $21 million to $23 million. As mentioned we are further slowing store growth which reduces the allocation of capital expenditures for new stores to approximately $3.5 million.

Over 50% of the capital will be dedicated to e-commerce and supply chain initiatives focused on long-term revenue and profitability growth. Based on our earnings estimate for 2019 and the projected level of capital expenditures and share repurchases, we expect a similar cash position at the end of fiscal 2019 to the balance of the end of 2018.

We do not expect any borrowings on our line of credit during the year. Thanks and now I’ll turn it back to Woody for some closing comments..

Thanks Nicole. Despite the tough year, we’re optimistic that we can achieve improvements in the back half of this year and roll [ph] forward. We are moving quickly on a range of initiatives that will improve the business. On our merchandising side, product timelines are a reality, particularly as we're talking about adding substantial new category.

We have a solid leadership team in place and a plan that can change the course of the business. I want to thank all of our associates for working hard to bring our initiatives to life.

And now operator, do you want to open it up for questions?.

Certainly, and thank you, sir. [Operator Instructions] Our first question today will come from Jeff Van Sinderen of B. Riley FBR. Please go ahead..

All right, good morning, good to see you here taking the bull by the horns to accelerate the programs that are working.

Maybe you can speak more about which merchandising initiatives you feel are most critical to your plan in 2019 and when we’ll start to see those reflected in the stores, and then maybe speak to how much of your plan you feel sort of falls under the test and the act category for 2019 and how much are you building on areas of success from 2018?.

Great. Thanks Jeff. Okay, so the minute, we realized that we needed to absolutely diversify from the fourth quarter we started investigating and asking customers and also looking at the industry.

Remember that I have about 40 years experience in the home furnishings industry, so I was really kind of amazed that we were lacking some of the large category drivers that really benefit most retailers in the first, second, and third quarters, and we just didn’t have that in our midst.

We were into many tertiary categories that we were able to cut off a long tail and have a SKU rationalization. So let me get into the specifics. Of the three, wall decor and bedding and table cloth, which are all three very large categories in the total scheme of home furnishings that we really weren’t participating in.

We have a plan for the back half of the year. Let me back up just a second. We wanted to make sure that when we introduced those that they were proprietary which is taking us a little longer than going into the open market.

Because we felt like we needed to if we’re going to introduce those new large categories, we needed them to be proprietary and unique and not following things on the same looks that other retailers had, to really approach it with our modern farm house aesthetics.

We’ve also done some of these new categories with our direct sourcing model and that’s why most of these categories land at the beginning of the third quarter and will between in the third quarter and fourth quarter. I would say that that’s about two thirds of our growth. The other third comes from taking our proven key item winners.

They have been actually key item winners for years, like we mentioned in the candle and we fixed the top 10 and we bought them double with conviction. So that provides us about a $10 million incremental lift in the third and fourth quarter, as we are roll those out and hit bottom with almost no risk because the customer has already voted for those.

We also make sure that as we were looking at these new categories and we wanted to lean in to our benefit that our customers believe we have about being a value-oriented retailer. And so for example, we’re introducing rugs, 20 rugs on to the floor in a new fixture that was custom built for us and we had to take some time to get that rolled out.

And these rugs, all 20 of them are price tagged in your choice of $199, which puts us significantly below the marketplace for – like we feel like, our customers are really – so that’s why most of this benefit that we are seeing comes in the third and fourth quarter.

But then real, I think benefits that we hope for and we will achieve is that it will help us next year in the first and second quarters, especially to offset some of our poor performances that we've hard over the years d ton of our poor performances that we’ve had over the year, in two quarters that we just weren’t set up for success yet.

Does that answer your question Jeff or do you have a follow up?.

No, yes that helps, and I do have a couple of follow on the, I guess, being in a better position as you think about 2020, early 2020, do you feel like you didn’t have enough merchandise that was clearance on promotion. I think you talked about changing the mix there, balancing the mix of promotion and new merchandise in early 2020.

Maybe just touch on what you feel like was not right in the mix in early 2019..

Let me answer that in a couple of parts. One, coming in from other retailers, and looking at our churn, we probably churn our merchandise too quickly because we're so many install many seasonally independent category.

So we need to build up a core business that we can rely on, that delivers sales growth over the regular times, because all we seem to be chasing that next seasonal category and we didn’t have the emphasis to build up on our core business.

So we’ll be slightly, we’re actually going to treat the churn the same on all of our current assortment and the whole inventory investment will come from the new category and the key items that I listed earlier..

Okay. That’s helpful, and I do have another one and it’s kind of a multipart one, so if you could bear with me a little bit.

Woody, I know it’s early and it changes the process but now that you’ve been there a little bit of time, could you maybe give us a little bit more on your longer term vision for Kirkland’s without giving away any sensitive competitive information obviously? So may be talk about how you'd like to see the store environment.

So maybe talking about how you’d like to see the store environment evolved, and the customer experience improved, how marketing promotions this kind will plan to that and then I respect to conservative target metrics you provided for 2019 and as we think further out about FY20, what do you see has the most impactful TNL to drive improved margins? And then if you could comment on how you’re thinking about real estate lease renewal to new stores e-commerce and how you’d like to see that mix evolve.

I know it is a lot better. All I know that’s a lot there, something you can just hit some of the highlights..

That's good. And I'm going to answer first part I mentioned and turn to over to mike to answer the first part and then turn it over to Mike to answer the FY 2020 in real estate and some of the things that we have, we think really deliver a much improved year for both 2020 and the future.

First of all, The long term vision we actually started with some groups that came in and gave us, did a lot of market research and lo a lot of customer research, we are going to be rolling out a new brand logo message, that kind of ties around our next generation store learnings. I feel really excited about it.

The long term vision for Kirkland's seems to be the best home furnishing in the specialty retailer in the value space. So we think that there is space above the bin bar less service oriented and retailers. And the very specialized retailers with that however at a higher price point.

So we do have some editing to do in that particular area, we could run some tertiary products. But I think that what we have to do is find out definable space. What are the things that customers only come to Kirkland's for or what do they think of they think of Kirkland's and i think we have some of those that we already win at.

We win at the sentimental wall decor area. We win at our seasonal products which will probably have one of the best seasonal buyers and the best seasonal assortments out here.

We win in the fragrance and the floral, but some of those are relatively small and the impact that we need to win at some of the bigger categories to make a small rubber band to really furnish her home and still do that at a value proposition.

So our long term vision is to really be more relevant to the customer in the home furnishing retail arena, but not change our value proposition. We kind of like where we sit right there and I think that we require the customer then to expect that for a better look for the dollars that she can find at other retailers.

From a marketing standpoint, we are being very cautious this year.

We were not landing most of our new categories in back half of the year and we'll be doing launch marketing for each one of those categories through all of our 4.6 million in the data base, but we want to make sure that we're fully set before we can in 2020 for a very extensive rebranding and look to our marketing. I'll talk a little bit.

Mike?.

Good morning, Jeff. So let me answer your question on merchandise margin and I'll pack in two areas. As I mentioned in the script, we have now stood up a price and promotional analytical team as of this year and in doing so, with this team will now start to do is look at our overall price and promotional effectiveness.

Last year, we built in the forecasting capabilities.

Now we are in a position take another bigger step forward to look at the overall effectiveness of what we do when we combine our marketing coupon and our merchandise promotions, so that we can lean in on the promotions that are working the best and then we can rid out the ineffective promotions that are affecting overall merchandise margin.

And that has kicked off and I expect that we will start to see some benefit in Q2, more of that benefit later in the year in Q3 and Q4. On direct sourcing, we needed the merchandise vision to catch up with our direct sourcing efforts and we are now there. We have hired a Director of Direct Sourcing.

We signed on agents that are focused on China we're now interviewing agents for India. We have built it into our process roadmap and we have already now started talking orders direct or factory. So we are often running on it. I 'm really pleased with where we are at this point.

We are now in the process of defining what we believe those penetration and the financial goals will be as it relates to that.

And the way we're getting there is we have taken some products that we already purchased where we already know the cost of from our current vendors and we are looking at what that cost benefit will be direct the factory and then we are looking at a rollout category, by category. What makes sense in terms of what we move direct to factory.

We will bundle that up, roll it up and we'll be in a position later on to let you know what that whole benefit will be over the next three years. We're very excited about what that – those prospects could be. We will get some of that benefit later this year, but most of that is definitely going to come in 2020 and beyond on that.

Relative to real estate, I'll break it down into several parts. So last year we did a [indiscernible] on real estate and then looking at multiple equity [ph] in terms of market type, co-tenancy, positioning and I felt like the class of 2018 was much more dialed in, performed reasonably well and exceeded the previous classes.

And as I also mentioned, last year we split off –what we refer to as a next generation store. It provided purposeful navigation, it updated the visual presence. It supported omnichannel and we think it will lean in on attracting younger consumers. We are really excited about how that store performed.

Now we need to do a full on test of that store and compare that to the capital investment that goes into that. So that is in full swing as we speak. And then finally, we're now prepared to deal with the store model as the consumer shifts more to online.

And so we are evaluating that store model as it relates to the omnichannel world and the footprint it represents and more to come on that..

Thanks Jeff..

Okay, thanks so much and best of luck in 2019..

I appreciate that..

The next question will come from Anthony Lebiedzinski of Sidoti & Company. Please go ahead..

Good morning, everyone and thank you for taking the questions and thank you for the thorough review of your strategic plans.

So as you look at the new product categories that you are about to launch, just wondering about the addressable market if you could just do a deeper dive into that and as well as the competitive nature within that is it as competitive as your core existing categories or less or more, if you could just maybe touch on that please first?.

Sure, thanks Anthony for the question. Of course you know there are no categories that are uncompetitive at this stage of the game. We seem to be wind in some of the most competitive categories such as floral, Christmas, other seasonal products, fragrance, which are very much competitive categories. We just look in the big one.

So I would say the addressable market in all three of those categories is in the 60 to 70 billion range and we weren’t participating in those. I mean it's – yes, our shifted reps from the consumer showed that our customers really come to us all rugs already. We just came in the store.

And a part of it was that we were slightly worried about giving up big stream space and really leaning into some of these categories. But they are the categories that really drive the home furnishing business, all three of those categories which will include rugs, and which we said they were going to be at a value price range your choice, 199.

Table top which we approached totally different than my [indiscernible], so we'll be very differentiated from other consumers and we're leaning into a very maxed out value oriented price point, all revolving around the farm house look.

So I'm really excited about that and that category involved dinnerware, glassware, table top textiles, flat wear, so it's more than just, it's a bigger area. Now also to support some of these new categories and new businesses, we've had to make some decisions on our floor spacing.

We had de-clouded the store, so we took about a 15% reduction out of the store and moved those SKUs online. And now we've added in a dining table to show off our table top business, a queen sized bed that will show off our bedding business and a loveseat that will show off our rug business.

And those actually we really need to include those because while there are very good sellers on the ship direct we just felt like that was just potential to get on to the floor to make us look more meaningful.

For example, we saw a tremendous amount of dining chairs, but we don’t have a table to put it around, so a lot of these really made sense to make us look like more of especially lifestyle retailer added great value. And so we've already got these products that we developed.

They are now on order and that's why and I'm a little bit disappointed that we can't get them in quicker, we've certainly tried and done everything we could, but generally when you're doing proprietary product it does take at least six or seven months to get those developed and written. So yes, your question is right. These are competitive categories.

We're approaching it in a uniquely pertinent way and exceptional value and I feel very confident that they are going to win..

Got it, yes, thank you for that thorough explanation.

So, just getting back to the quarter, I know you guys touched on whether I know it's something that probably you don’t want to comment on too much, but just wondering if you could perhaps share with us what you thought was the impact of the weather and obviously a lot of other companies have talked about the polar vortex also.

Just wondering if you could just comment and what you thought that was in the quarter as well as the first quarter to date?.

Yes, Anthony, this is Nicole. So we have done calculations internally. It is probably not something we're going to talk about specifically, but definitely just with the number of store closings we saw week to week weather definitely played a role. I think I mentioned in my comments that we also saw softness across the rest of the chain.

So I don’t want to blame it all on weather, it definitely played a role in the quarter and in the first part of Q1, but as far as quantifying specifically, but there is again there softness across the category, but I don’t get into that..

Okay, got it.

And then as far as the impact of tariffs, anything that you can share with us as far as what that was for the quarter or anything that's you want to call out as far as 2019?.

Anthony, yes for tariffs, as you know we, as it relates to the 10% level tariffs we were able to bring in vendor contributions. We cut surgical price increases and we feel like we adequately mitigated any impact on the tariffs as of yet. But we are obviously, like everybody else, in a wait-and-see mode to any changes in the tariffs.

The postponement of the 25% tariffs is one we'll continue to keep an eye on. With that, if that were to be enacted we already have a plan in place for that.

But right now we're going to continue on with what we have already put in place for those plus price increases that we have in place and we see very little impact of that in 2019 unless something else changes..

Got it, okay.

And lastly, within your EPS guidance for the year, are there any embedded additional share repurchases in that number?.

There are. I think what I'd generally say is, we want to continue to be on the market repurchasing shares as it makes sense. We are expecting that number to be lower than the reported number for 2018..

Got it, okay. Okay thank you..

[Operator Instructions] Our next question will comes from Brad Thomas of KeyBanc Capital Markets. Please go ahead..

Hi, good morning everybody. Thanks for taking questions.

Thank you, Brad..

Good morning..

And thanks for all the details on the strategic plan. My first question was around stores and you've given a lot of color around that on the call today here and working towards the store of the future if you will.

I guess my questions was, for one I apologize if I missed it, but which's was the gross openings and gross closings here for this year? and then I guess Woody, as you think about ,you know turning around the business, trying to accelerate same-store sales, are you committed to continuing to open stores, are you still signing leases or do you think maybe it makes sense to look at, putting a hold on opening new stores until you accelerate same-store sales?.

Yes, good morning Brad. In terms of new stores in 2019, what we indicated is we will open up a small number of stores in the range of six to eight and we'll close about the same numbers. So we are slowing the pace down of new stores. We are doing that as we evaluate our model going forward..

Also Brad, just you lean to the question that you had about our current store base. I felt like we needed to make some changes in categorizing the merchandise further was clear when the customer walked in the door.

So, we used to be kind of a scattered approach and now we are trying to pour anything that's floral together, anything fragrance together or anything in a furniture shop, wall décor, so that we look more meaningful and destination oriented as the customer walked to the store.

We also tried to reduce some of the clutter in our stores so we actually allowed some of these new categories which are bigger. We've also de-cluttered the store with what I call the long tail of things that aren’t really that productive. And some of those went away and some of them went online. So it accounts for about 15% SKU reduction in store..

Got you, okay.

And then I apologize if I missed it, I'm sure it will be in the K, but do you have the merchandize margin percentage for the full year and what it ended at?.

54.2, which was basically flat the prior year..

Great, and then clearly there are a lot of levers that you pull and initiatives you have in place to try to reduce the cost of inventory you are procuring.

I guess, Woody as you think about the value proposition to Kirkland's for the customer, obviously there are some things you feel like you should be able to charge more for others that you needed to provide a better value, but as you blended altogether what you think can drive the most success for Kirkland's as you think about that merchandise margin and trying to pull that as a lever?.

Yes, you know our merchandise margins, our product margins are currently healthy.

It is what we do to it afterwards and that we're really working I think Mike mentioned the whole initiative for pricing and promotion, sometimes we are so, we have a merchandise promotion have a coupon laid on top of it and I 'm sure the customers actually gets exactly what the price is going to be.

So we're decoupling those and layering it all, so they will have a much clearer value proposition. I think our product represents a good value and our direct sourcing will enhance the costing of that, but really I'm not planning on having to take a lower price point across the board, but also not significantly higher.

I think that we do win but being a value retailer in this space and I really like that part of our DNA and want to make sure that we are providing the lower alternative cost than some of our specialty retailers that we compete with. So that can be the ongoing goal.

The direct sourcing count of course we are one of the very few retailers left that don’t do direct sourcing. And so, that should give us a benefit, although it 's small in this year's plan because we are just rolling that out.

But I think by the end of the day when we have that up to a much higher percentage of our total purchases we could help sustainable on our chronic margins and our value equation..

Great and then just as couple of modeling questions as it relates to how we're thinking about seasonality, I think if I heard you right, you are thinking 1Q same-store sales potentially negative, but the earnings will be lower year-over-year? If you can confirm that, that would be great? And then, as we think about 2Q, I mean it is the easiest comparison of the year in terms of the same-store sales.

Are you thinking that we can get on to positive territory for same-store sales in 2Q?.

Yes, so just high-level. I think when we look at Q1 and a lot of it is just based on traffic trends rolling from January into February are expecting a down comp in the mid to high single digit, also expecting for Q1 expecting product margins to be and March margins to be relatively flat to Q1 of 2018.

And I think we mentioned in the call there also are some OpEx initiate dollars buried in Q1 and Q2 that are related to standing out a lot of the initiatives that we talked about.

So definitely look at Q1, year-over-year as lower earnings per share for Q2, we're basically looking at it and getting a lot closer to comp sales because again the comps that we're comping against in 2018 was down over 3, so I think we will continue to be on an EPS standpoint, negative 2/2018 but making up some of that ground from Q1 to Q2..

Got you.

And then the big wild card is of course 4Q and at present at this point you're modeling for 4Q 19 to have I guess higher EBIT year-over-year?.

Yes, actually, yes. It is actually Q3 and Q4. A lot of that is based on the new experiment of the first part of Q3, so it's not all weighed to Q4 that maybe improvements, but equally between Q3 and Q4,.

Got you. Very helpful, thank you all so much..

Thank you, Brad..

Thank you..

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference over to Mr. Woodward for any closing remarks..

Thank you very much and we appreciate your interest and we're optimistic about the future. Thanks..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line..