Q3 2020 Kirkland's Inc Earnings Call

Good morning, and welcome to the Kirkland's third quarter 2020, <unk> earnings conference call at.

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I would now like to turn the conference I've heard of Tripp Sullivan of S. C or partners. Please go ahead.

Thank you good morning, and welcome to Kirkland's Conference call at Jersey results from the third quarter fiscal 2020.

On the call. This morning are moving were Chief Executive Officer at coal strain Chief Financial Officer.

Oh, well at notice of the accessibility of this conference call.

Based on sort of ended up.

Earlier this morning at approximately covered by the financial media, except for historical information on stuff.

At this conference call statements made by the company management.

Our forward looking at made pursuant to the safe Harbor provision of price.

At Securities Litigation Reform Act like you've gotten caught on.

Forward looking statements involve known and unknown risks and uncertainties.

Which may cause <unk> actual results in future period to differ materially from forecasters on those.

Those risks and uncertainties of were fully described in person of filings at scale.

At each of Exchange Commission, including the company reported fourth Okay. Bob on people cap 2020, [laughter] end quarterly reports on form 10-K at Q.

On June four 2020 separate at night.

Now I'll turn it on.

[music] space trip and thank you to all of our Kirkland's team members, who take care of our customers and each other in our stores distribution standard at home office, they make the success of possible debt.

One of your presents a continuation of the momentum established late last year, where steps, we took to make the company nimbler than ever.

We now have a better cost structure.

More efficient infrastructure merchandise mix that continues to feel free.

And overall bar cooler reported.

Our ultimate goal is to be especially retail where customers can force their entire home on a budget.

Well at the beginning of a cycle, where we are making that goal achievable at kirkland's and making use of free that's sustainable.

These are exceptional results reported for the third quarter, which sets up well for what is typically our strongest quarter.

On the coming year on.

Unlike past years, when the third quarter was mostly about creating at launching point.

Next on velocity in the fourth quarter net.

We're able to generate a pause at store comp and ecommerce comp of nearly 50% and increasing our cash position to 37 million GAAP earnings of 82 cents and adjusted earnings of 66 cents.

The significant improvements on our merchandise ankles gross margin and the reduction in operating expenses were evident in the results. In addition to admit day contributions from E Commerce.

We generated a 1.2% increase in net sales was 51 less stores.

On a comparable period, a year ago, with an 8.9% comp and total reported.

Well I've ever we were able to maintain strong momentum, particularly in E Commerce and continue.

To prioritize marginal profitability.

Black Friday has become more spread out over the month when we're still pleased with the sales at that day and on cyber Monday as well.

Shifting to online at the expense of store traffic that we had previously referenced was evident last month, we were able to capture that demand.

There are a number of well documented trends of the industry that at.

Working in our favor with people stay at home.

Choppy online as well as less store based competition.

[noise] weak end market share.

Several of these competitors in bankruptcy or liquidation and our omni channel presence that's produced from the right place at the right time.

We got the message that customers love to buy online and they are leading us to the right places however.

However, they are far more trends occurring at their business that we are creating.

At our within our control and more importantly, we believe are sustainable over the long term I want to spend a little time. This morning exploring these adjustments in our merchandise mix and model in more detail.

We have purposely bought our existing laws are existing customers with us on this transition in our merchandising strategy, we didn't leave them behind why we grew at a customer base.

I recognize that was a concern at the most brands that have undertaken of transition like we have taken over the past two years, we didn't abandon our price point windows.

Well, that's our customers options to buy at better quality.

They have a relevant assortment at a great value.

We've maintained a steady pace to improve quality of stable pricing because we've taken a portion of the savings gain from our direct sourcing strategy and put it into the quality of the merchandise.

As I've noted before the customers are already getting you're pretty good we're putting out there they're seeing me of quality and approved design as well.

We are increasingly coming to us for their complete decorating projects instead of only buying the finishing touches.

A great example would be on our furniture store along the tabletop furniture has been at runaway success for us in that category, we've been able to a group of products from now onwards to all wood furniture at the same price point, but.

Transformation, we are making in our existing bottle is evident in our more effective marketing the continued growth and profitability of you call of nurse and the significantly improved margin profile and leverage inherent in our business.

Our marketing is on point, we have a more mature way of handling promotions.

Big initiative, we have been ramping up.

Is the launch of our new loyalty program that took place the third week of October end.

In the weeks offense on large we're seeing an increase from sign up and we've already added hundreds of thousands of people to our loyalty program.

During the quarter E commerce accounted for almost 24% of our sales compared to 16% of total sales just a year ago and ecommerce is profitable in every month of the quarter for the second quarter into growth.

Our ship direct from vendor channel was out of 100 end, 22% sort of quarter with 480 basis points of margin gains as we noted last quarter in the very near future. We expect to add some select brands in this channel as we grow with the focus on extending from where we've been strong end kitchen at Teva.

The dedicated group of incorporate the focus is on this channel has made a lot of progress since we formed at earlier last year of this year and we expect to have more to report early next year end of years volume.

During the third quarter, we replaced our existing E Commerce distribution center of two.

Sure at Bisha clubs.

Hub should begin to help the profitability in our ship direct to consumer channel beginning in the fourth quarter.

The store base is more productive with 51 less stores.

The growth in E. Commerce is offsetting the lost sales from these clothes stores, we're still working to overcome the challenges of foot traffic in the end the stores.

Is that a problem he needs to carbon and is more structural in nature, but we have a higher mark up in an increased basket him at stores that we believe is sustainable.

We are clearly able to be more productive with a type of inventory condition than in past years as at coal described later at the type of inventory if somewhat of a governor on our topline. This quarter index. This is particularly partially at legacy of the orders we need to cancel during the pandemic and also supply constraints of metric of sector.

Well, we might have fewer skews in the short term, we're selling at a higher price point, we are maintaining of promotional discipline and we're getting a larger portion of the newer products.

Well leveraging on models it is substantial.

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

While we are right 'cause it while at the right way to think about this improvement is more sequential benefit year over year basis in terms of our overall profitability. We believe are treated through your EBITDA margin targets are certainly achievable.

With the cash we generated this quarter of a level of cash we are now expecting at year end and the increased visibility of the business. The board has authorized a new $20 million stock repurchase authorization.

During the last quarters at wanted to see another quarter of results before we consider to allocating capital to repurchase.

With our expectations that we will be debt free at year end and cash is expected to growth in our historically strongest quarter. We believe this is a good weighted to play a portion of our capital.

Nicole why don't you walk us through our results in more detail.

Thank you Larry what we saw on the third quarter result would be incremental consumer demand that is benefiting from many of our home decor competitors, but also at the beginning of what our model can look like for the foundational changes we have initiated with end.

At quarter, we had strong ecommerce sales with a year over year increase of 50% on.

Store traffic improved from Q2 levels and out before outperformed our segmented shopper track it continues to be negatively impacted by pandemic related challenges.

It changes we've made to improve the quality of design of our merchandise as well as category shifts towards higher ticket items continued to have a positive impact on our sales.

We at early sell through of our harvest. These non merchandise at a similar trend in our Christmas collection.

Let's see on November sales comp increase of five.

Five and a half percentage, which included a year over year increases E commerce with over 50%.

At all is significant increase in our gross profit margin of 840 basis points, which was driven largely by gains on product margin from simplifying our promotional message and also on reducing the depth of offer and the inherent backing of entire store couponing, we will continue to move towards more targeted customer specific.

Discounting, while always having incentive to encourage customers to purchase.

We benefited from lower store occupancy costs from the closure of underperforming stores and negotiated rent reduction. We also saw favorability from lower freight costs from our DC to our stores driven by lower inventory levels at a rate decline compared to 29.

Gross profit margin was negatively impacted by E commerce shipping with online sales, making of 24% of our total sales.

On the store of fulfill no dropping to 35% of income sales.

We do expect the percentage of building store, some moderate closer to 45% to 50% in the midterm sign.

Finally distribution costs increased year over year, driven by a capitalization entry based on inventory level and timing.

We saw the benefit of our cost reductions with a decline of operating expenses of 810 basis points or 11.3 million driven by the more efficient store labor model corporate head count reduction any justification exercise for all overhead expenses.

Excluding current year performance related compensation accrual just from this represents a 25% reduction in operating expenses, which we expect to be largely sustainable.

We expect to continue to see improvements in profitability from higher margin and reduce costs along with further leverage from continued growth on top line sales all of which at better position us to reach our long term financial goals.

Breaking down the comparable sales increase of 8.9% we had strong comp increases on the first two months of at border driven by the earlier sell through of seasonal harvest product.

I would buy at drop off of a flat comp in October with seasonal sales, having been pulled forward into selling into September.

As a reminder, beginning in September of last year, we were much more promotional so we are comping not impact on both sales and margin.

49.9% ecommerce comp increase was driven by the direct to consumer channel.

At our third party dropship revenue of 122%.

And our own product shipped directly to customer of 77%.

Both of which were offset by lower increases and the store sales channel.

During the quarter, we closed six stores, resulting on account of 381 stores yours.

Year to date, we have opened new stores and closed 51 underperforming stores or 12% of absorbing the start of the year.

We expect roughly 10 additional closures near the end of it there from here, but are still working through negotiations with landlords.

Gross profit was 36.1% of sales compared at 27.7% in the prior year quarter.

Of the 840 basis point increase 940 basis points related to an improvement of Atlantic product margin primarily from reduced discounting.

Direct sourcing accounted for roughly 100 basis points of a land at product margin improvement.

In the latter part of the quarter. We saw initial cost pressure from shipping can strength and rate premium specifically on product sourced from China.

Well, we have clearly been able to navigate through these pressures and we expect significant year over year margin improvement in the fourth quarter. The negative impact on landed margin is expected to increase throughout the remainder of the fiscal year, causing year over year gains to be less than what we experienced in the third quarter.

Store occupancy cost declined by 300 basis points from the prior year due to the closure of underperforming stores negotiated rent reduction and the leverage of increased sales breaking.

Breaking that down 280 basis points was generated by rent restructuring and the remainder by sales leverage.

On the prior call I mentioned at close to a third of our lease of had of term renewal in the next six to 12 months.

We are actively working through those renewals and are continuing to have success in locking in lower rate.

Non freight which.

Which is the movement of our merchandise from the distribution center sort of stores decreased by 70 basis points from the 2019 border driven by reduced drought rate decreases and sales leverage they're.

Read he dropped from driven by store closures and your route from continuing stores, primarily due to higher inventory levels in the prior year.

We also saw rate reduction of roughly 10% year over year.

D B cost increased to 170 basis points, driven by the timing of inventory capitalization and the year over year decline in inventory.

Excluding this timing of fact distribution cost declined by 20 basis points with productivity improvement offset by the channel mix shift.

Labor cost of Pickens ship ecommerce orders.

Feeding labor cost of ship cases to our stores as a percent of sales.

We completed the closure of the Jackson E Commerce distribution center at the end of September we allocated a portion of our retail distribution center to fulfill E Commerce and set up our second ecommerce have within the corridor.

This reduced our distribution center total square footage by over 200000 feet or roughly 16%.

Enslaved ecommerce distribution much closer to the end customer, which will decrease parts of costs, but also increased speed of the customer we.

We are still in ramp up mode for these new facilities and expect to improve throughput and efficiency in the upcoming year.

Ecommerce shipping costs increased 180 basis points as a percentage of total sales used at a higher mix of shift at home sales.

Operating expenses, excluding impairment improved to 27% of sales compared to 35.1% in the third quarter of 2019 or a reduction of 11.3 million on a higher sales day.

Store operating expenses made up of 600 basis points of a reduction driven by the store labor model implemented at the beginning of the fiscal year end aided by our allergies operating hours leverage from closing underperforming stores and it overall her view of operating costs.

He called operating expenses increased 10 basis points as a percentage of total sales leveraged 160 basis points as a percentage of E com sales.

At dollars increased by only 167000 on a 12 million dollar growth in revenue.

Advertising expenses declined by 1 million or 70 basis points compared to the prior year, which included advertising support for the new product category rollout we.

We continue to shift our spend heavily towards digital channel.

Corporate operating expenses decreased by 2 million or 140 basis points, driven by reduced headcount reduced corporate office space and an overall expenses of you perform.

Performance related compensation accruals in the current year accounts for an additional 100 basis points relative to the prior year.

EBITDA, excluding impairment and other minor non operating expenses for the quarter was 18.7 million or 12.7% of sales compared to a loss of 3.1 million in the prior year quarter or an improvement of 21.7 million.

End of quarter, our tax rate was based on a year to date of discrete calculation further impacted by a valuation allowance.

Normalized rate of 23.3% was used in the non-GAAP adjusted calculation.

Our earnings per share, excluding non cash impairment normalized tax rate and other minor non operating adjustments.

36 cents compared to a loss of 53 cents from the prior year.

The GAAP earnings, including these items was 82 cents.

Moving to a loss of $1.61 in the prior year.

We ended the quarter with 37.2 million in cash and no outstanding debt, which is a build of 9.6 million from the Q2 level and an increase of 33 million year over year.

58 million considering that revolver draw on the prior year.

Combined with availability on our revolving credit facility, we had total liquidity of 106.9 million.

At our typical cash build on the fourth quarter, we expect to conserve of conservatively end of year with approximately 65 to 75 million of cash we do not anticipate any borrowings for the remainder of the year.

Inventory at the end of the quarter was 83.9 million compared to 140.2 million in the prior year well at 40% lower.

The five year level of were elevated by the rollout of new category and we currently have 12% fewer stores, we are down approximately 20% work plan.

A significant receipt types of me. Meanwhile, our stores of oppose in April followed by vessel at work shipping constraints of impacted our sales to some degree of the latter part of the second quarter.

Because we protected seasonal buys the inventory shortages have been in our core everyday products and it's been much deeper in some key product categories. We.

We expect to continue to see a sales impact on those categories in the fourth quarter, but expect to return to near plan inventory levels by the end of the school year.

Your today cash provided by operations of 14.5 million compared to cash used of 62.4 million in the prior year or a change of 76.9 million.

The improvement is due to better operating performance in the second and third quarter 42.3 million improvement year over year and changes in working capital 34.6 million year over year improvement work.

Working capital changes are primarily driven by lower inventory level.

Related accounts payable.

Additionally, we received at $12.3 million or income tax refund from the carriers at NLL here at back in the second quarter.

Capital expenditures of 7.6 million compared to $12.8 million in the prior year end were primarily driven by investments in supply chain in E Commerce, we stay.

We'll expect capital spend to remain below the low end of the the initial range, we communicated of 10 million for the year.

The financial goals, we provided on the second quarter earnings call continues to be relevant as we execute the transformation of our business over the next two to three years.

To summarize those goals on our earnings release this morning.

Rather than reading through those again I'd like to reinforce the overall message, we're communicating with our long term annual financial targets.

First they all indicate how we expect to achieve top line growth margin improvement and cost reduction over the multi year period.

[laughter] specific targets to improve our gross profit rate to the low to mid 30% range improved EBITDA margins at a high single digit range and improve operating income margins at a mid single digit range.

Second it's worth noting that those are annual target with the seasonality in our business. We typically see stronger performance in the second half of the year compared with the first half.

And lastly, with from a liquidity perspective, our main goal of continued to be maintaining a healthy balance sheet.

Within this model, we expect to generate excess cash annually.

We'll allocate first of projects to drive growth and or reduce costs.

But are also happy to announce that the board authorized at $20 million share repurchase program.

We intend to be disciplined on opportunistic with our share repurchase program and will provide updates with each earnings announcement regarding activity and at a plan.

With that we're ready we're now ready to take questions.

[laughter].

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

If you are using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then too.

And our first question will come from Jeremy Hamblin of Craig Hallum Capital Group. Please go ahead.

Thank you and congratulations on the really strong results I wanted to start of by by asking you about the composition.

Your same store sales for Q3, what did you see on average ticket in the quarter of how was that split between average unit retail.

For transaction.

So we are basically a 20% increase on a quarter and net average unit retail our items per transaction, how relative returns that Ben.

Got it at.

And in terms of your view of provided so much great detail on that I missed some of the things, but in terms of the components of the 840 basis points year over year improvement of gross margin just run through those again.

Sure so product margin at was favorable by 940 basis points.

Ecom shipping on favorable 180 basis points.

Store occupancy favorable 300 basis point.

Outbound freight favorable 70 basis points.

DC costs on favorable 170 basis points that was a at timing and on accounting entry that that will flip and then the fourth quarter and then miscellaneous other on favorable 120 basis points.

Okay got it and then if at all just looking forward in a kind of running through how those various components you expect to.

Way out here in Q4, it sounds like a you know again there so maybe some impact on a you know.

Your inventory levels and a you know maybe not quite as much on.

Product margin benefit in the quarter, but can you run through kind of your range of expectations around.

Those particular line items.

Yeah, I think the only thing I would say they're in the only real difference going from Q3 to Q4 is the the inbound freight that we talked about in end again, you know, we still expect to see significant improvement at maybe closer to the Q2 level than the Q3 level, we will continue to have free.

The variability in the store occupancy line, we will likely still haven't unfavorability of E. Com shipping just based on consumer preference that likely continue throughout the rest of the year on the DC cost on timing impact that we had in this quarter, we would expect to see some of that reverse end of the next corner.

Part of that one will definitely slip.

Got it and I wanted to just get into the direct sourcing initiative here.

That's been a big success improving quality of.

From a product and keeping prices low you know what did you learn and so forth. So far in the last 12 months from this initiative and how do you expect [laughter] because I'm guessing that you probably see a margin that would be 500 to 600 basis points low on the direct source versus third party source.

But how do you expect.

To use the potential benefits of that program is going to be going to the consumer with low in the form of lower prices is some of that going to flow through on.

To your bottom line of terms of higher gross margins.

Any color you could provide on that.

Great. Thanks, Jeremy I'm first of all of what we've learned so far on direct sourcing says it's new for our company is slow and steady is low winds.

Wins the game I mean.

We might have gone a little faster on direct sourcing from remember that this is on the infrastructure change and it's a change to our company. There's been a couple of known benefit we received from the direct sourcing.

One of them was the sharper price points, we got from our wholesale central.

Centers that were knowing that they were now happy to be with US is really getting a direct sourcing pricing. So I'm still there's been kind of of benefit on both sides, both at better pricing certainly the better quality and Ah.

Out there from both both sides of the balance both the direct sourcing and the a and B a whole sales forces.

The other thing is that we are still like we're still on the ramp of stage. This is a multi year program. They will help us we've learned that meets abroad provided more design came from information to get the kind of products that we're looking for and I would say that from a costing standpoint, we're just at the beginning of real.

Realizing where those costs can be passed on day, the financial benefits of the company or whether we should be doing continued upgrades of quality, but we are further along on the quality of price or more and more of the benefit of that becomes just and it kind of financial way.

As we grow that sector of the business, but like I said at the very beginning slow and steady is the way to go on the sourcing because there's lots of for us to learn we never got most of your competitors do the majority of their sourcing through the.

The drug stores when we're still at the early stages of that I do think that it's healthy the look of our product in our stores more exclusive at more cohesive. It's certainly more design oriented and we've been able to maintain prices and get better quality.

Great. Thanks for that color and then you know in terms of thinking about you've got to think of the two to three year target of getting to 40% to 50% can you give us a sense of where you might expect at the 12 months from now on your direct sourcing initiative, we kind of.

Looking at like 30, 35% or.

How much progress can you make at 2021.

Well, we will make more progress from 21, because remember that in light of this year, we had to cancel significant amount of orders due to the pandemic at a lot of those orders were direct source. So I would say they are growing at all by 10, 15 20 basis points, but we're in a lot of happen naturally organically because.

We don't want to force it, especially since there some or other vendors are coming true with such desirable price points and we need to make.

Make sure that they get the benefits of the long term supply.

Suppliers and and so we're looking at at very evenly but it is a huge opportunity force over the next two or three years.

Great and then on your loyalty program I wanted to you mentioned that you've gained a substantial number of come from customers here just in the last six weeks on where does your total loyalty programs Stan.

And you know are there additional benefits you know to thinking about her at additional color I should say on how those royalty members are spending versus your non loyalty customers in terms of your ticket size frequency of transaction et cetera.

Jimmy Let me take the first part and then on the Woodford already cold she might have some of their specific on me information on.

Remember that our loyalty program at a multiphase program, we launched it but there's a lot more excitement company as we learn more about what triggers customers' behavior as we get more in should be on a CRM aspects of our business or customers have always been.

Total critical items and now and you know when we launched the program.

We just kind of coaching for a while but now that we instituted here, we're getting a big surge of customers and not only the current customer base, but it looks like a younger more affluent customer. So we're excited about that and hope that at some possible specifics that she's looking at her phone right now [laughter] Oh.

Yeah, I don't have I wasn't looking at not on my phone. So I think two to be the remainder of the loyalty program in an asset purchases. So roughly 7 million people end up the plan what I would say about historically when we had of loyalty program before we changed at a few years ago is.

We really saw a lot more frequency of purchases and the top tier group end when we change the loyalty program and took away the points accumulation, we really saw on drop off and not that area. So that is really one of the I think you know, adding new customers is definitely a piece of it and having fun.

Thing that we can promote to push return visit that having something that benefit that you know baked at higher here and most important customer I think is going to be one of the biggest wins at reinstituting the program.

Great. Thanks for that just a couple of things at I'll hop out you know.

Back of life into Q on just shipping rates.

We've seen surcharges being placed by.

He.

Distributors in terms of you know the impact, which we're seeing you know are you looking at your shipping rates in terms of.

You know, what you're potentially charging for your customers for kind of sub $100.

Orders you know any any changes that you potentially implement to that to help offset.

You know some of the higher costs associated with higher.

Higher higher or surcharges.

Yes couple of things so actually within the quarter, because we have done on one thing with the hubs and getting closer to the customer even though our shipping costs were up at the shipping cost as a percentage of ship at home sales actually with favorable year over year. So we have been able to absorb that I think a lot of of things that were.

Doing now on the direct to consumer channel in General is looking at the things that we shipped via that channel, meaning you know historically, we might ship at an eight dollar item in pay $8 to ship at and they're really looking at that as you know at a minimum of me you are how can we bundle things happen.

We looked at that a little bit differently. There had already done a lot of those analytics on beforehand. We are seeing at rate increases due to some degree. We're also seeing caps on the on.

Pick up from from our parcel of partner, which is made at zones, given do additional things to try and get around that but I would say all in all we are actively working on all options to offset cost increases on don't expect that to be material as we move forward.

Right and then you guys have made some changes to your operating hours at obviously reduced substantially the number of stores you had one of the total number of operating hours down in Q3.

And then.

What do you expect in terms of operating hours to be down for Q4.

Yeah, I don't know that calculation at the top of my head, but I can definitely work on that one and get back to you I will say in general we have taken three hours out of the of every store when we reopened the after closing down for Kobe. We had made the decision in November in December that we would expand back out for peak and so.

So I would expect the decrease in operating hours to be much lower in the fourth quarter of but that after Christmas Pete will go back down to the hours that we had before which was a three hours per store at less than what we were last year.

Great. Thanks for the company color I'll hop back end of the Q.

Hey, Jeremy.

The next question comes from John Lawrence of they're at the gross please go ahead.

Thank you good morning.

Morning.

No what do you would you give a little bit a little more color on.

Oh on the product categories throughout the quarter at sort of how they wind up with what's your total <unk> on for the first half of the year end just a you.

You know when you came aboard and some of those projects some of those new categories that you talked about.

How big of live work them themselves into the end to the mix and a.

While you're excited about those.

Okay, well first of all I'm going to go back to kind of the on the thing that weve been establishing over the years and that sort of seasonal product. It was exceptionally we see [noise].

Better quality and and we had you know a very improved sell throughs spoke of our.

Harvest product and now into Christmas would be Christmas product, so that would be one of the biggest balance and that's something that we've learned well good at customers recognize this is a great price and buy their seasonal product, but underlying that we've seen some very very impressive of.

Benefits to a couple of categories, one furniture weve been able to end furniture to like I said on the call earlier improve our quality and improve our design and we redesign some of our most of some of our largest volume wise and they're now just hitting the stores are being received its level, it's not dramatic.

Still going to be a best selling well, we were able to improve the quality of keep the price points of the same sort of virtuous day kind of on all of your overall runaway success and we have a lot of runway there we had a very big.

So I saw on the future of at furniture business within Kirkland's.

As we learned how to deal with it through our infrastructure and learning how to source at in a more effective way.

The second category that has just at a runaway success of anything related to take hold on.

Came out with our own exclusive line of dinnerware simple thing of some textiles called simple things and it's just at a resounding success and what's also been successors are things that surround that you have that glass glassware block where.

Just to the ins and outs of that business and so we're going to be expanding that in most of our stores certainly testing at first in 30 to 40 stores are really expanding that table top assortment.

To really show you know a little bit more of a dominant suite of this is probably where we're getting the benefit of one of our major competitor is not being here and that was a huge category for them.

The growth category I guess I'd say, it's still in development is improving as we speak we're not giving up on it it's pretty good but we just need to try and make sure that we were satisfying the customer with what they were really looking for.

Our core categories.

At probably be hit the hardest in terms of of.

Some of the inventory shortages, but I look at that as a real positive we needed to make changes at our art and wall decor category of your category and at pandemic, allowing us to lower the inventory allows us to look at fresh eyes and look to at future as to what our customers really want from us in our.

We used to be much more dominant player at wall decor, and our business and were trustworthy tends to gain at that but we had to kind of do a pause in its given us a chance to look forward. The assortments that are kind of here for January and February I think are a spectacular improvement to what we had before interest.

As of smoke and design at the same kind of price force. So I think we're gonna be giving our customers a real reason to shop, hopefully they'll be using their gift cards at their purchasing now at December I mean in January and February and March.

With a whole new fresh freshly.

Fresh look of some well designed products, but still on the line of our casual from kind of start of the.

So does that answer your question or do you would you like you did those force. That's that's that's great. Thanks for that color.

Sure.

Andrew the follow up to that as you're much of some of these categories and and.

The factories and some of your vendors that that realize now that you're in this space.

Sort of that's what you're talking about when you mention of butter wholesale deals and obviously are more or less putting some of these vendors against each other is that fair.

Yeah on maybe not hitting them against each other but then looking across the balance I mean like I got to sharpen. My game. You know we had he had you asked to kind of packaging because rabbie yell at me at last year, we had some damage issues of it there's just no excuse for that so we went back to all of our vendors at simultaneously both sales and.

Sure actually improved our packaging sort of getting to the customer at a more elegant way and and I think everybody is just realize that we have a big opportunity here at Kirkland, and we should take advantage of the fact that some of what kind of competition is gone and maybe we have a new opportunity.

To satisfy customers at a bigger way and I think the.

Overall thing Thats, helping our vendors right now is looking at us as a holistic home furnishings resource versus just buying items at key items and trying to.

Deliver that through high traffic traffic is on all of this and complex thing.

Aim at we all have to deal with in retail right. Now. So we had a couple of the solutions of how do we win even with flat or declining traffic and that's why we went on the on the basis of at a higher is large and better designs of the product. So that we can sell more to each customer of the walks in the door.

Thanks, a lot congrats on the progress you're thinking John.

The next question comes from Chris The Chi of singular research. Please go ahead.

Hi, Good morning, I, just sort of question I guess.

Certainly.

What did you guys are experiencing is in store foot traffic due to covance restrictions and this is better or worse than expected.

[laughter], that's a really good question because we all read all of those articles that were in the news about that people were going to not shop on Black Friday.

We did work very diligently to pool is many sales force from the Black Friday weekend, not really knowing what to expect.

And then on Cold people came I mean I was in the stores on Friday.

We're busy and people were really not somebody where they were being respectful of each others are on space and you know I think that we're a little bit of a low risk place to shop, because we're not you know one of the worlds a huge volume. This warehouse stores that had hundreds of thousands of people ours is a little bit more patients but ours.

One of the busy and we were proud of the results of we got from our Black Friday and then for follow on Cyber Monday, I think people just love commodity kirkland's, because one of our messages is to bring happy at home, we try to be happy place brought customers to shop, we really take that seriously our store associates at improved.

So much for doing such a great job and they are really embracing the factor that yeah. We've got a we've got a really offer the best we can to our customers every single day every single customer yeah.

Yeah, I think I would just add to that we are definitely down more than we would like to be we had improvement as we mentioned in Q.

Q3, and we are ahead of shopper track, which is what we always measure ourselves against and they all say break that down into the home furnishings end and ahead of that measure as well, but I'm definitely are seeing pandemic related traffic impact in and luckily or space.

Being a lot of that shift to online to support our ecommerce growth. So at this point just trying to make sure that we can can offer at a customer at a weighted purchase that is most comfortable for her and and expect that things will settle back out to the north of more normalized space one.

One of them.

Things are under control with the current issues.

Okay.

Great and I guess the to go to online.

Does break out the online sales for the quarter.

Meaning that comp increase for that.

Total dollars one.

Oh, yeah. The the I guess the total dollars. The total dollar sales I guess as a percentage of the total.

Yeah. So total dollar sales of just over 35 million at a 24% of total sales.

Okay at.

And then I guess lastly on.

Do you as far as curbside pickup growth has has that been of success and then what are you experiencing there.

You know I'm going to give our stores such credit for this during that first of all the couple of weeks. It depends on if we didnt have curbside pickup of we also did even really I imagine the contactless portion of that but our stores organization of rallied and within two weeks, we got that set up and yes, it's an issue.

Success. He will also be a benefactor if we do have certain stores of director of closed temporarily at some some way to satisfy our customers Oh, we've gotten better at better at it now most of our customers are coming inside of picking it up versus the Super curbside, but those customers at you asked for a more color.

Tactless of way, we've set up signs of special parking spaces in front of our stores that if they just call number one degree of their product out to them and have no contact. So yes, I think it's at a runaway success of there's been a lot of learning on how to get better and better at that.

Okay, great. Thanks.

The next question comes from Matt Schwartz of Maze investments. Please go ahead.

Hey, guys congratulations.

Oh I got a couple of quick questions. So.

Obviously, the first quarter was rough on a lot of companies, including yours with the dramatic decline due to cope with so.

You know when I neutralize.

That number.

Just kind of growth conservative Q on in there.

You know I already have your.

Your EBIT margin running at this year at once I started to plug in some of these assumptions you gave.

Fourth quarter I get you know EBIT margins that are already well ahead of.

Your target like approaching 8% EBIT margin.

I guess, the EBITDA margin would probably be you know something like 400 basis points better. So can you walk me through.

Your assumptions with those margin targets because to me it looks like you're there and they're going to be substantially better than that going forward.

Yeah, I think the thing that I would just say on that Matt is there. There's a lot of unknown, we have a lot of moving pieces on the transformation that we're going through I do think if everything works as we'd like it to then we can hit those targets earlier in the window and you know at this.

Point, well continue to update those as it makes sense, but there are a lot of people. There's a lot of unknown in the macro environment right now and what that May look like as far as on topline impact next year. So just wanted to make sure of that what we've put out there is something that we know we can achieve end and it's all day.

Well I do think there's upside to that.

Okay. Thank you.

And then also in terms of capital allocation I think it's great that you announced the buyback I mean.

Your.

Certainly on my number is your car at multiple is still you know.

Half of what your competitors are.

And you're generating a ton of cash so what are your thoughts on.

Capital allocation for.

You know the addition of buyback even beyond what you've announced or dividend or other.

So right now we are continuing to be somewhat conservative about how we look at that end and there will be dollars that we want to allocate to growth into our own internal investments outside of that they're at the share repurchase I would say probably starts out somewhat conservative.

I do we all believe that our stock is undervalued and we'll continue to look at that as we move forward with at $20 million authorization I don't I think at this point you know again, if we hit the goals that we have in our model, we will generate significant cash and we'll continue to look at what the right.

Right ways artists to spend that money in end has the best return.

Okay, Great and then and then lastly, obviously you've done a great job rationalizing the cost structure.

Can you help us understand.

At <unk> E Com business continues to grow net.

Next year.

How should we think about your ability to sustain.

Your ass DNA dollars next year.

The way that we are looking at that is that I mean, I think it's important for us as we move forward for a lot of reasons to remain lean I actually think we operate much better than we did before and have much more of a sense of urgency. So the way I look at that as we move forward is as of the business of on.

We will need to reallocate dollars from one area of the next in order to support at the right growth, but are not looking at GE at a as having any sort of significant increase based on that growth.

Okay.

All right. Thank you very much congratulations and I look forward debt.

Chatting on offline. Thanks.

Thanks, Matt.

Our next question is a follow up from Jeremy Hamblin of Craig Hallum Capital Group. Please go ahead.

Thanks for taking the extra question here I wanted to get into your you know Nicole I know you've got a third of your leases up for renewal of.

And that you've been diligently working on it I wanted to just get a sense for you know the conversations you're having with Lambert Edwards.

How effective you know at I know you are can drive a tough bargain but.

What percentage of those lease renewals are you seeing.

<unk> dollars and sense of lower than what you had before and can you give us any color on the types of you know maybe total rent reduction that you might expect for 2021.

I Wonder, who Nicole has ever imagined that she would have a master's degree in real estate negotiations, but I think she's earned at this year. So go ahead [laughter] enjoy the.

The benefits of that and end, we actually have I really dedicated person that that works on net day to day, but what I would say, it's probably 90% of the negotiations were able to get some benefit in and you know at a lot of cases. It if it's good real estate and they don't have vacancies and at.

So what we're getting in those is negotiating to continue at flat rent instead of the Escalations that are built into the lease there aren't good percentage, where we are getting significant up you know to 50% rent reductions and and at this point because we have worked quite at you know where through I'd say the majority of them at don't.

Fully executed deals I would rather not put out a number on what that looks like but we'll be able to do that in the in the near future on what debt year over year savings are for next year.

Great. Thanks for the color of best wishes from holiday season.

Thank you. Thank you.

Okay. Thank you operator as always we're available for follow on questions over the next several days or weeks, but before I sign off I want to wish everyone on the call a wonderful holiday stay safe and healthy and we look forward to see you online and in our stores. Thank you.

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