Q1 2020 Kirkland's Inc Earnings Call

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I would now like to turn the conference over to Tripp Sullivan of Investor Relations. Please go ahead.

Thank you good morning, and welcome to Kirkland's Conference call to review results for the first quarter fiscal 2020.

On the call. This morning are Woody Woodward, Chief Executive Officer, and Nicole strain Chief Financial officer their results as well as notice or the accessibility. This conference call when I listen only basis over the Internet that were announced earlier. This morning in a press release has been covered by the for names.

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 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 risk and uncertainties are more fully describing kirkland's filings with the securities and exchange Commission, including the Companys.

And your report on form 10-K filed on March 29, 2019, and I'll turn it over to what do you think.

Thanks trip.

I'm proud of how nimble and resilient our team has been throughout the last several months.

Many of our customers were at home looking at their wallets through this period and decided to make some changes when they were ready to shop, we were ready for them. The adjustments, we made to our business model the rightsizing and the significant upgrading of our merchandise assortments.

All came together at the right time I would also like to knowledge. The continued support in partnership with our vendors who enabled us to work to this unprecedented time they deserve much of the credit for the improvement in our trends.

We've learned a lot about ourselves our customers and what our team is capable of achieving during one of the most challenging periods in the history of retail.

There are many aspects of the home furnishings industry that are already returning to normal but as we've seen with a number of announcements in the store club store closings competitors liquidating and consumers adopting new shopping behaviors and priorities. There are many aspects of the business that might not ever be the same again.

We think that's a good thing for the future of Kirkland's, We started 2020 with tremendous momentum from the significant year of transformation achieved in 2019. The key priorities. We outlined a few months ago continue to guidance for 2020 and beyond that and provide the foundation for the confidence we haven't our business for the back.

So the year.

Before I get into what's driving that confidence level, let me update you on where we are with these priorities.

Recall that our goal is to be in the consideration set for a complete decorating project.

In addition to different finishing touches we want our customers to see us.

As the resource for furnishing home furnishing a home of any size on a budget and we want to continue to move away from the mass merchant retailers to be the value home retail store within the specialty world.

That all starts with further accelerating our product development to reinforce quality and relevancy.

For the balance of the year, we will continue to build on the tabletop and other select furniture pieces and we continue to test upholstery.

These new Assortments are resonating with our customers as Nicole will discuss later, our selling at a higher margin rate than a year ago.

We also set a goal to improved omni channel via web site enhancements incremental digital spend and expanded online assortment.

We also want an in store experience that closely is aligned with our omnichannel capabilities based on the strong E commerce sales before during and after the pandemic, especially in fiscal May I believe E. Commerce ecommerce will remain a key driver of our overall business strategy.

Buy online pickup in store now in place and all of our stores and the improvements we've already completed in our supply chain with the replacement of our distribution center with three more efficient hubs operating by third quarter, we can support that growth with better speed and profitability.

While we expect to keep our overall marketing spend flat with last year, we're investing in improvements to the customer experience to drive customer acquisition and brand awareness.

Over the next several months, we are relaunching, our loyalty program.

And we'll offer extending credit options and broader delivery options beginning this quarter.

Additionally, we will utilize our hard one leaner infrastructure to be Nimbler in response to changes in customer preferences in buying behaviors.

These last few months have brought us closer to the customer.

They've told us and as a result bear it out so far.

That they've missed kirkland's, and they're really really leaned into the stores they like.

And lastly, well continue to preserve our capital to invest in the business Nicole will describe in a moment. The extensive measures we took keep us on track for our year end goal of no debt and positive cash.

Now in closing, let me spend a few moments on for reasons why we're confident about the direction of our business for the balance of the year first we took the opportunity to rightsize the company and make it nimbler than it's ever been.

Capabilities on display very early on and in the pandemic when we.

One of the first in the country to stand up contact list curbside pickup to great success second we have less store based competition with the ongoing liquidation appear one and last weeks announcement of Tuesday, morning's bankruptcy and the closing of a third of their stores, we're seeing a significant amount of our stores news competition within their markets.

Third we entered the pandemic with strong trends in the stores and online and those accelerated online while the stores were closed and the trends have returned in both channels since the stores have begun reopening.

Fourth quarter.

Our online business is being fueled by margin friendly promotions and first time shoppers collectively. These four factors have had a positive effect on our results to date in the second quarter.

While there is much work ahead of us to continue to translate this confidence and nimble to us into sustained result, we believe we have a more favorable environment in which operate and innovate going forward.

Now I'll turn it over to Nicole strain, our Chief Financial Officer. Thank you Wendy I would like to begin by also expressing our appreciation for our store employees, our distribution center employee and those in our corporate offices. The past few months have been more challenging than we ever would have expected and I'm proud of the strength flexibility and the blood the lawyer.

LT of our team you are the core Kirkland's and the reason we will be successful.

I would also like to thank our vendors landlords and other partners, what we have asking to ask of them. During this time has been difficult and in many cases added hardship to their business and.

And we are grateful.

Our first quarter results were significantly impacted by the temporary closure of our stores for the second half of the quarter I wanted to touch on a few highlights of the corridor and the first month of our second quarter and then is to the actions we have taken and how we expect those actions to benefit the remainder of this fiscal year and beyond.

Quarter, our comparable sales were down just under 40% with February flat to the prior year and the other two months impacted by the slowing demand in early March followed by the store closures on March 19th.

The positive comps and momentum we experienced in the fourth quarter continued into February which gives us confidence that the merchandise changes we made our working.

The E commerce comp for the quarter was 32.3% with a slow March as consumer demand focus potential product and increasing to 97% in April.

A third party dropship revenue has particularly has been particularly strong with an over 80% increase for the quarter and over 200% in the month of April.

During the quarter, we closed 27 stores.

Product margins for the quarter was down 340 basis points from the prior year and down 140 basis points in the month of April which included the shift to a higher mix and ecommerce sales and more specifically dropship sales.

We recorded an impairment charge within the quarter of 3.2 million, which included 2.2 million related to fixed asset impairment at 16 stores is carrying value exceeded their fair value.

And 1 million for right abuse asset impairment six stores.

The results of the quarter also include the continued pay a certain employees, while the source workload.

Well as fixed occupancy distribution center and corporate overhead expenses.

Further we continue to pay merchandise and freight costs and other essential payables.

Earnings per share for the quarter was a loss of 53 cents compared to a loss of 62 cents in the prior year Q1.

Tax benefit allowed by the net operating loss carry back provision of the care that had a significant benefit on the quarter.

Adjusting for store closing costs severance asset impairment the tax benefit from the net operating loss carry back the tax valuation allowance on our remaining state deferred tax assets.

Adjusted loss per share was one dollar and 29 cents and that's relative to a loss of 51 cents in the prior year.

We did not adjust for the store closures or any additional impacts of the pandemic.

As of the ended the quarter, we had 30.1 million of cash 40 million drawn on our revolving credit facility and 22.6 million remaining availability on this facility.

Now for a quick update on where we stand today and some preliminary results for the month of May we continue to be encouraged by our sales and margin trends for the month of May we had a flat comp which included an increase in ecommerce sales of 95%.

This comp increase is with less than half of our stores open to customer traffic going into the month with stores, adding as stay at home orders lifted.

We use the limited overall demand during the store closures to reset our mindset on discounts and the results continue to the encouraging.

We have and will continue to offer incentives to purchase and offers to drive drive traffic to our stores and our website.

But with lower depth of offer unlimited stacking the month of May our product margin exceeded the prior year by over 150 basis points. We intend to continue this discipline as we move forward.

As of today, we have 357 of our 404 stores opened to customer traffic with reduced hours of operation 43 stores with curbside pickup only and another two stores in the process of permanently closing.

We have over $17 million of cash and have repaid 20 million of the 40 million draw on our credit facility.

Other actions taking during the store closures included.

We paid our part time team members during the first two weeks of store closure and continue to pay our store managers and key employees at reduced rates for the entire period of closure.

This allowed us to reopen our stores quickly as stay at home orders were amid.

The furloughs part time store employees and the reduced store hours upon reopening resulted in a $5.6 million reduction of labor expense compared to the prior year quarter.

We expect the reduced store hours and more efficient labor model to have a significant benefit for the remainder of the fiscal year.

We permanently reduced a third of our distribution and our indirect labor and furloughed additional direct labor According to demand, which resulted in a 900000 dollar reduction in cost in Q1.

We utilize the remaining distribution center resources to ensure our supply chain projects remain on track.

To include the implementation of a warehouse management system consolidation of our two Jackson, Tennessee distribution centers and the stand up of two regional ecommerce have one in each of the second and third quarters.

These projects will benefit supply chain costs and speed of shipment to customers ongoing.

We significantly reduced store transportation expenses with limited deliveries to stores and the delay or reduction of merchandise receipts, which resulted in $5.2 million expense reduction relative to the prior year quarter.

In April we reduced our corporate office head count by 18%. In addition to the 14% reduction in January for a total annualized expense reduction of 8.4 million.

We temporarily reduce the salary of the executive leadership team and our board of directors.

We reduced our corporate office space by a third and implemented a further reduction across all corporate overhead expenses.

For the quarter alone. The result was at 3.1 million dollar reduction and expense relative to the first quarter of 2019.

We realigned advertising expense to 2019 levels as a percent of sales and further shifted funding to digital which has been effective over the past two months driving sales and introducing new customers to kirkland's.

Our merchandise team worked tirelessly with our vendors to cancel or delay orders, which removed over 80 million of merchandise receipts from our plan.

Which were heavily weighted to the second and third quarters.

This will allow us to sell through our current inventory without reaching levels significantly above our plan and also opened up received for our important seasonal merchandise.

These are seat reductions will have the largest benefit to our cash flow in the second and third quarters.

We haven't continue to work with our landlords to negotiate rent abatements or deferrals during the period when our stores were closed as we reach agreements with landlords. We are paying current per the terms of the agreement.

We expect to have these completed.

In the month of June and be back to normal payment timing as part of the landlord negotiations. We do expect further store closures in this fiscal year as we exit out of unprofitable locations and continue to optimize our brick and mortar footprints.

Lastly related to benefits provided by the Cures Act, we filed our 2019 tax return taking advantage of the expanded net operating loss carry that provisions and expect a refund in excess of 12 million within the third quarter.

We recognize the payroll tax credit in the amount of 1.4 million in the quarter through the qualified wages credit for wages paid to employees not working.

And we will continue to defer the employer of course payroll taxes for the remainder of the year, which we expect to exceed 2 million and must be repaid half in each of 2021 and 2022.

With our expected sales trends and the actions we have taken to reduce expenses and improved cash flow. We expect to continue to build cash throughout the year and in the year with positive cash and no outstanding borrowings.

We further expect the leverage of the actions taken any acceleration that our infrastructure changes to return kirkland's to profitability.

And with that I'll turn it back to what do you for some closing comments.

Thanks.

Thanks, Nicole I want to thank our employees, who worked so hard everyday to make kirkland's especial shopping experience and our customers who are visiting our stores and online with that I'll turn it over to any questions you may have.

We will now begin the question answer session.

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At this time pause momentarily to assemble a roster.

My first question will come from John Lawrence with.

ARPU growth. Please go ahead.

Oh, sorry, it's a good morning.

Good morning mining Yeah, what do you would you start off just a little bit and you talked about.

In February continuing the momentum from the fourth quarter.

You gave us a lot of information at the end of the year about some of those categories that you stood up.

Just just can you sort of continue that discussion a little bit on the things that tabletop I guess, the bedding and just some of those trends and I know obviously once it got to.

In the March.

I think changed but.

Just some of the some of those merchandised categories that you feel good about and those changes Peter.

Good question. Thank you John.

I think that the answer is probably got two parts to it one party as the ongoing upgrade of our dot design in style overall categories and the effort to really improve quality.

One of our initiatives over the past couple of years has been to start doing some direct sourcing.

And that allows us to have more exclusive merchandise add better price points and rather than take all that margin benefit we put a lot of that back into the quality and I think we're getting noticed by from the customer that our products are better quality and still reasonably priced and so.

Thats kind of the overall the other part of it is before I talk about the new categories is that furniture has continued to be strong for us.

And in part of that is the upgraded quality and more concise direction and really a look that that we're starting to own in the marketplace and not looking.

Like we're trying to please everybody, but we've got a really special look in our stores right now and it's resonating with the customer on the new categories. The runaway success has been the tabletop we entered that category because we knew that that was strong in other retailers and we were not in that particular category. So our dinnerware.

Tabletop textiles, glassware flatware have all been a runaway success and for the third and fourth quarter, we are expanding the space within our stores to show a widened assortment of those goods their margin rich.

They build a relationship with the customer in that they can buy products and then come back and add to it in layer on for the holidays. So it's a really great category for us to be successful it.

A little bit less successful, but still doing well was our run category and we're just finding our way and making sure that we have the right looks for our stores, we're very committed to it we put a run fixture in the stores and that's one of the ones where.

Editing and changing the assortment to be more relevant to what the customers are asking for the third one bedding.

Has been our slowest to come around.

Tom is still an opportunity for our future and so were fully committed to that and we are editing the assortment and adding and subtracting and it's been overall a fairly good success, but not a runaway success like the tabletop.

The last one and or add for this year is our out of upholstery, we've got a grouping of for refiners that we have in all four are all all stores and they're doing very very well and it's something that the customer can really relate to and they have kind of a accrual casual looked it looks formats related and.

They come from a vendor that's really well known Alain in the industry for making a great quality recliner.

And then we're also testing in several stores a full blown.

Upholstery program that we will monitor very closely and rollout to stores as appropriate we needed to get some other things in place to make the upholstery category. The full upholstered category successful and those would be we mentioned in our call would be the addition of credit programs. So that people can finance for 12 months with no end.

Trust delivery programs, where it's just a simple delivery within the marketplace or white glove delivery.

For the choice of the customer and so all these things work hand in hand, but I think the one thing.

When we're talking about merchandise assortment irrelevancy is the clarity of direction.

In our stores, we we picked a color we picked delayed we're not trying to be everything to everyone. We're just being really successful in that casual American farmhouse look and that gives us a lot of legs to be able to be flexible and continue the program going forward. So thanks for the question.

Thanks, and just to add on to that some of the old traditional categories. Some continue to get squeezed is that correct.

Well, yes, and no. So we had we had to go through a real process of looking at every category and doing a financial.

Look at everything so some categories did get expanded we're really well known for our harvest and our Christmas or program. So those have expanded our.

Candle category has really expanded because it's something that customers are telling us they love other category, we're probably over spaced.

I will tell you that we were able to.

We'll get our entire upholstery presentation in our stores that are testing data that program without reducing.

Taking categories out of the store so I feel really good about that through I think we were just oversized.

Art is an area that we're now getting some pretty good responses on but it took a little bit of a space reduction and then lighting with something that we had been struggling with to be differentiated in so we took some spacing away from lighting.

Great. Thanks.

Showing no further questions I would like to turn the conference back over to Mr. Woodward for any closing remarks.

Just to thank you for.

Calling our coming on the call today, we appreciate your attention and we look forward to.

The balance of the year. Thank you.

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