Good morning and welcome to Kirkland's Second Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] I would now like to turn the conference over to Tripp Sullivan with SCR Partners. Please go ahead..

Thank you. Good morning and welcome to Kirkland's conference call to review results for the second quarter of fiscal 2020. On the call this morning are Woody Woodward, Chief Executive Officer; and Nicole Strain, Chief Financial Officer.

The results as well as notice of the accessibility of this conference call on a listen-only basis over the Internet were announced earlier this morning in a press release that's been covered by the financial media.

Except for historical information discussed during this conference call, the statements made by company management are forward-looking and made pursuant to the Safe Harbor provisions 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 the 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 10, 2020 and Quarterly Report on Form 10-Q filed on June 4, 2020. I'll now turn it over to Woody..

Thanks, Tripp. Once again, I would like to begin my remarks by thanking all of our Kirkland's team members. The operating performance we will discuss this morning is a direct result of their commitment to taking care of our customers and each other in our stores, distribution center, and home office.

Historically, the second quarter is a tough one for Kirkland's due to category mix and seasonality. That's why this quarter was such a significant achievement. We reported a 10.2% comparable sales increase with a 77% increase in our e-com business.

Calculating that comp increase solely based on the stores that were open for the entire period, comparable sales overall would have increased 16%. We had a flat comp in May and accelerating positive comp in the remainder of the quarter, and August was up low double-digits.

For the first time since 2010, we were profitable on an adjusted basis in the second quarter. We also significantly narrowed our year-over-year GAAP net loss, increased our cash position, and eliminated our outstanding debt ahead of schedule. None of this was a coincidence.

We earned it with a lot of heavy lifting over the past year, focused on improving merchandise assortments, increasing brand awareness, driving our omni-channel strategy, improving our infrastructure, and significantly reducing our operating costs.

Last quarter, I noted that our confidence was growing on the direction of the business for the balance of the year. This improving confidence was based on the steps we took to right-size the company and make it more nimble than it's ever been.

It was also based on the fact that a number of our store-based competitors are in bankruptcy or liquidation, which is allowing us to gain market share.

The return of the accelerating trends we were experiencing pre-COVID in the stores and online, as well as margin from these promotions and first time shoppers to continue to fuel our online business have likewise given us a lot of confidence.

So, three months later, I don't believe it's a stretch to say that I'm the most optimistic about the near-term future in the next several years at Kirkland's than I've ever been. The tide is turning, and that's due to the long-term structural changes we've implemented in the business.

In fact, the customers are emphasizing home over most other discretionary spending and the nature of our competitive landscaping changing in our favor. I want to briefly share with you some of what we're seeing in each of those areas that is driving this improved outlook. It all starts with merchandising and branding.

More and more customers are beginning to see us as a resource for furnishing a home of any size on a budget. We still have more work to do to be even more relevant than we've begun to be, but new customers are starting to come to us for their complete decorating projects rather than just the finishing touches.

We're a lot clearer than we were, but there is true sustainability in all of our recent gains, and it comes from our merchandise and it's fully in stock. We're investing in better assortments, design, and quality.

With the significant savings we've achieved with a higher level of direct sourcing, we've been able to invest some of those savings into better assortments. Some of the other savings are showing up in our improved margins.

As Nicole will discuss with you in a moment, our merchandise margin is up year-over-year by over 400 basis points and our higher AUR is driving our comparable sales. It's clear to us that these investments really are driving both our top and bottom line improvements. Our marketing has also been more on point of late.

Our digital spend has been more impactful and the delayering of promotions has helped us as well. While we have kept our spend flat from a year ago, we've also focused on improving the customer experience and to drive customer acquisition and brand awareness.

In the second half of the year, we expect to re-launch our loyalty program, put in place extended credit options, as well as broader delivery options that we're all very excited about. We also have worked hard to improve our omni-channel presence.

During the quarter, e-commerce accounted for almost 30% of our sales with lots of room for growth and improvement, that's up from 17% of total sales just a year ago and e-commerce was profitable in every month of the quarter. Our accelerating e-commerce business has maintained its strength and momentum all year.

Looking at the e-commerce business by channel, during the quarter we saw an 83% increase in buy online and pick up in store. For July, we were up 100%. We believe buy online, pick-up in store can be an even better contributor to our profitability as it continues to mature.

Our direct ship from vendor channel was up 170% for the quarter with a 270 basis point of margin gain. We've been very successful in creating our own endless aisle as customers are testing the waters on pricing and quality.

They're leading us to better quality and design, and we will look for other opportunities in the very near future to add some select brands in this channel as we grow with a focus on extending from where we've been strong in kitchen and tabletop.

We now have a dedicated group within Kirkland's that is solely focused on growing and building out this channel, and I expect it can be even more meaningful to our overall results in the future.

We are working to get better in our ship direct-to-consumer channel and this of course is the tougher channel for most retailers, but we are improving here and it's becoming more profitable with the stand up of two more efficient hubs, which should be fully completed in the third quarter to replace our existing e-commerce distribution center.

The structural improvements we've made in our e-commerce business have enabled it to become a larger component of our overall business and created a true omni-channel presence.

When we combine this work with what we've done to accelerate the transition in our store base and the significant reductions in our operating expenses, we have tremendous margin leverage now in the business model.

Our net sales for the quarter, up 4%, with 44 fewer stores than a year ago and that speaks volumes not only to how well e-commerce is performing, but also how well we've been able to continue to call the underperforming stores from the base.

While we still need more foot traffic in the stores, the improvements in our assortments in a less promotional environment are driving the higher mark-up and increased basket in our stores.

We have pulled $45 million of annualized operating cost out of the business through cost containment, efficiencies, and changes in our labor costs, and staffing model.

We believe these cuts are sustainable and can drive meaningful improvement in the profitability for the balance of the year as we leverage continued growth in e-commerce and improving trends in the stores. I'm also encouraged about the second half of the year as it relates to our inventory position.

Recall that we cut back on our orders in a very meaningful way early on in the pandemic. That's kept us lean, but it's also given us the confidence to be less promotional and help our merchants become more nimble. More importantly, it's allowed new product to flow in. All of the new inventory for the second half of the year will be fresh.

This discipline with our inventory and the positive results in the quarter enabled us to improve our cash at quarter end to 28 million with zero debt. Based on our results to date and our projections in hand, we're anticipating remaining debt free for the balance of the year and expect that our cash balance will continue to grow through the year-end.

Being debt free and having a positive cash position by year-end has been a top priority for us and we're already well on our way.

While it's tough to gauge how much of our success so far this year is related to the rising tide that is lifting home furnishings and the changing landscape, I can say with utmost conviction that we've earned most of this success.

We have significantly improved our merchandise and our brand, as well as our infrastructure to generate tremendous leverage in our business and with continued positive trends that bodes very well for the immediate and long-term future of Kirkland's. Now, I'll turn it over to Nicole..

to improve our gross profit rate to the low to mid-30% range; to improve EBITDA to the high-single-digit range and operating income to the mid-single digit range. From a liquidity perspective, our main goal will continue to be maintaining a healthy balance sheet.

Within this model, we will generate excess cash annually and we'll allocate first two projects to drive growth and/or reduce costs, but we will consider all options to maximize shareholder returns. And now with that, I'll turn it back to Woody for closing comments..

Thanks, Nicole. I’m proud of how our team came together and handled the initial store closing crisis and took the opportunity to accelerate the execution of our goals. We are collectively enjoying the momentum within our sector, as well as the success of our own initiatives. I want to thank our team and our customers as they support Kirkland's.

They're acknowledging how much of a cooler and more relevant brand we are becoming. Operator, now we're ready to take questions..

Thank you. [Operator Instructions] The first question will come from John Lawrence with Baraboo. Please go ahead..

Great, thank you. Congratulations, guys..

Thanks, John..

Yeah, could you – Woody, could you speak to a little bit about – let's just start with merchandising first, I mean -- when you came to Kirkland's and the vision you had to those pillars of the merchandising assortment, the furniture, the desktop – I mean the tabletop, can you sort of walk through that? Just give us a sense, sort of since year-end or maybe even a little further back of where that process is now and obviously just remind us of the process that you've been through and a little bit of a success factors that within this report that are yielding that..

Great. Thanks, John. Of course, this is my favorite topic to talk about, because I believe that as a retailer, we are what we sell. And one of the facts that I discovered early on when I came to Kirkland's just under two years ago was that we were really good at servicing a customer at the end of their decorating journey.

They will come to us for a wreath ora candle or some accent, and we were very appreciative of that, but to become a real home furnishings retailer, we had to dig deep into our souls and say, what are the categories that we're missing that could help us improve on that future, and so we added some new categories and we've extremely beefed up our furniture assortment.

We added tabletop knowing that there was a competitor out there that was very vulnerable and that has been wildly successful. Bedding, a little bit less successful, but we're still in the game and rugs, which is coming on pretty strong at this particular point.

So, all of our new categories seem to be working, but with a couple of them being runway successes with both the tabletop and the furniture. But I always want to point out that this is definitely – it's kind of a cliché word to use the word journey, but we are on a journey of our merchandise and we are only part way there.

We have so much more improvement, but the part that excites me is that the customers are already getting the parts of the improvement that we're already putting out there. They are seeing our improved quality. They are seeing our improved design. They're seeing our more mature way of handling promotions and not being so frenetic.

And so, I'm really excited about the next two years to three years as we really push on additional new categories that I may not able to talk about today, but also the direct-to-consumer from a vendor and all the opportunities that we have.

So, like I said, if I had to evaluate, we're probably 25% to 30% in on this journey with a lot of room for improvement for the future..

Great, thanks.

And just go along with that, is there any way to measure, Woody – I mean, it's probably an unfair question because of the mix, but is there any way to look at what percentage of sales today would you say is the new merchandising plan versus the traditional Kirkland's customer product mix?.

Probably hard. I mean we could take the entire tabletop business and say that that's all new. So, that's an easy one, because it's 100%, we didn't really carry that before, but hard to say because we're getting both a channel shift mix right now. We got a little -- some tailwinds from that.

We've had some competitors go out that were very dominant in some of these areas. And then I think that just bringing in all these new customers into our e-commerce site and then looking at us and saying this is a cool store. This has got – you got a relevant assortment at a great value.

I am going to check it out online first, and then I'm going to pop into one of the stores. Our stores look better than ever. And we've taken an initiative to really stabilize how much movement we have on the floors because what I find is that our customers come to us for consistent and stable assortments.

They want to know where to go to find their candle update, they want to know where to go to find their seasonal products. And so, we really cleaned up the store and it's a much better shopping experience for our consumers..

I think I'd just add to that, there is so much noise in Q1 and Q2[ph] and breaking apart of the pieces is definitely difficult, but I do think the merchandise we've been – Woody's team has been able to touch definitely creates an overall halo effect on the rest of the stores and the rest of the merchandise, but we'll continue to monitor that as we have more stable quarters..

Yeah. And just last question and I'll jump back in, but when you look at the store base, Nicole, when you look at those 10% to 20% more reductions, I assume with this tailwind, there's a handful of stores 5% to 10% that you're waiting to see if this tailwind helps them enough to stay.

Is it that clear cut or is it – what are the measuring – I mean the leases obviously are important, but what other factors go into of that store's reduction model?.

Yeah, I think it's a multi-phased approach. The first is profitability and I think it's top line tailwind. It's also the new labor model and it's a margin rate that we're running with.

So, I think that combined with what sort of rent terms we think we can renegotiate will play into what that number is and obviously we gave a range because it is to some degree dependent on how those stores perform from here on out..

Thanks a lot. Congrats again..

Thank you, John..

Thank you..

[Operator Instructions] The next question comes from John Lewis with Osmium Partners. Please go ahead..

Good morning, guys. Very, very strong results. So, nice work there. I guess my first question is, you guys – I think if I heard you right, Nicole, you generated around 40 million in cash for the quarter.

Is that right?.

Correct. Correct. 37.8 million..

37.8 million, okay.

And then for the year-end cash – net cash, did you say $50 million to $60 million?.

Correct..

Okay. And that's like $4 [indiscernible] the market cap.

And I guess with that, have you guys thought about repurchasing stock at all? Is that come up on the potential hit-list?.

Yeah, I think where we are now is, obviously, came out of Q1 and this has been a great quarter for us. There are some unknowns in the back half on what happens with COVID from here.

So, I think the way we're looking at it is, our models have generated significant amount of cash, especially with earnings that – the earnings that were trending towards now, but holding off for a period of time, but definitely open to evaluating what are the things that make the most sense and have the best return for our cash.

So, I would say open to all pieces, but definitely have a window of time where we want to make sure that we are conservative enough to weather whatever should happen over the next six months..

Got it. That makes sense. And then I guess my last question is, your call has been very helpful, you answered most of my questions. So, thanks for all the details.

I guess my last question is, over the next two years to three years with your current plus 10% comps on same-store sales, I think you said 25% to 35% growth in e-commerce and I guess then the offset would be you close may be 40 stores to 50 stores.

So should I expect a growing top line in addition to your margin targets?.

I think ultimately in the two-year to three-year time frame, yes, I think we're in this period now where the store closure is accelerating faster than the e-commerce is growing, but that will level out within that time frame.

So, we are taking advantage this year because we have some opportunities to be much more aggressive with landlords, but I do think that over the time frame, there will be top line growth overall..

Got it. Okay. Thank you very much, very helpful and great work..

Thank you..

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Woody Woodward for any closing remarks..

Well, thank you for both John’s on asking questions. I guess you have to have a first name of John to be able to ask a question and we certainly appreciate that, and we appreciate all the supporters that we got out in the world and we look forward to future good quarters. Thank you..

Thank you..

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