Q1 2021 Kirkland's Inc Earnings Call
Okay.
Good morning, and welcome to Kirkland's for first quarter 2021 earnings Conference call.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by Christian you Starkey followed by the U.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then 1 on the telephone keypad to withdraw your question. Please press Star then 2.
Please note this event is being recorded.
I would now like to turn the conference over to Tripp Sullivan with <unk> partners. Please go ahead.
Thank you good morning, and welcome to Kirkland's Conference call up for review results for the first quarter of fiscal 2021 of.
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 for now.
Earlier this morning, and the press release, that's been covered by the financial media ex.
For historical information discussed during this conference call. The statements made the company management are forward looking and made pursuant to the safe Harbor provision for the private Securities Litigation Reform Act of 1995 forward looking statements involve known and unknown risks and uncertainties, which may cause kirkland's.
Actual results in future periods to differ materially from forecasted results those risks and uncertainties are more fully described in kirkland's filings with the Securities and Exchange Commission on the I'll turn it over the week.
Good morning, before we begin I want to recognize the scale commitment creativity and innovation of the entire cartoons team. They responded well to every challenge we face and they deliver on the opportunities to serve our customers drive profitability and evolve the kirkland's brand.
For the quarter, we generated the comp increase of 75, 3%, which reflected the 95, 1% increase in store comps in the 42% increase in E. Commerce GAAP earnings for the quarter were 11 cents and adjusted earnings for 12 cents.
Our most profitable first quarter in over 5 years.
And as will become evident in our prepared remarks. This performance could have been even stronger absent the weather impacts and inventory constraints and we are pleased with the profitability we are generating.
While we started off the quarter with a multi week period of winter storms in our markets. We made a nice recovery in our comp trends in March and April.
We were very deliberate in choosing profitability over promotions this quarter and maintaining our focus on key items.
As the economy began to reopen with vaccinations of state restrictions dropping in most of our largest markets. We began to see a little more competition for the wallet share. The we expect to be short term in nature.
Seeing signs that the big the rest of home furnishings that was happening pre pandemic throughout the past year are sustainable due to the appeal of work tomorrow.
From home and hygiene approach to work.
Other factors such a strong housing market and the decreased store based competition for their support the sustainability.
The momentum created by our evolution into a value oriented specialty retailer of continued this quarter, our profitability is accelerating even with very deliberate pace of transformation.
We provided a strong foundation for a robust outlook over the next 2 years of 2 to 3 years.
So I wanted to spend some time this morning of what's driving our confidence in the business and our outlook.
Let's start with direct sourcing our goal for 2021 was to achieve 30% direct sourcing and we already are well ahead of that target with 38% of our product coming primarily from agents in Vietnam, China and India.
Finally, our product by moving to South and South East Asia has helped us improve design and quality of our merchandise.
The tighter shipping capacity has affected overall inventory availability.
Inbound freight costs.
We're managing through these challenges while improving we expect them to continue at least in the first half of this year.
All of our merchandise categories delivered strong pumps, but overall, we missed our expectations due to inventory shortages that negatively impacted our overall mix of ticket.
Recall that we had been automating more of style and quality, allowing us to keep our opening price points the gradually increasing our overall pricing thresholds in key categories such as furniture.
We have also streamlined the aesthetic of our brand with an eye towards improved design efficiency and function.
As expected we continue to see very positive sell through in each category as consumers are responding to our cohesive style point of view and elevate the quality.
The best performing categories in the quarter were holiday textiles, and fragrance holiday success was driven by Valentines and Easter both of which we really great inventory positions and exceeded expectations cash.
Textiles, with an all round success with wins in pillows drove and tabletop textiles for.
<unk> had a strong quarter largely driven by the continued success of our jar candles program.
We saw the biggest impact from availability of inventory throughout the quarter and wall decor, outdoor housewares and furniture categories.
While the core outdoor furniture, specifically drive of higher ticket and the lack of inventory impacted the sales performance, we hope to be in better inventory position in these higher ticket categories early in the second quarter.
All of our strategic goals.
1 of our strategic goals is to continue the transformation of Kirkland's brand into a specialty retailer where customers are able to furnish their entire home on our budget.
We will continue to do the heavy lifting with our merchandize to slowly grow our better and best offerings, while keeping us on the path for the upgrades in style and quality that are resonating with our customers.
The addition of brands such as Cuisinart, Kitchenaid and Viking to our website this quarter, but the Great example of this gradual improvement along with very positive customer response, and the specific benefit to our E Commerce business.
We have a number of exciting things happening within our categories. Later this year that should provide momentum heading into the back half.
The digital transformation of our business is in progress and we will continue to focus on our investments.
Our investments on improvements that drive the E Commerce operations E. Commerce was 30% of our sales in the quarter up from 24% in the fourth quarter.
And e-commerce profitability continues to be up year over year.
We have prioritized our capital expenditures to fuel this digital transformation and I'm pleased to note that these past investments such as our e-commerce hubs and our ship direct from vendor channel are paying real dividends.
I'm going to ask Nicole to address the specifics, but it's been clear for us for some time and more directly evident in the quarters such as the 1 where.
When we're in there we're generating profitability when historically we couldn't.
They are building that that we are building of a sustainable for minimal business model.
The model is born of an intentional plan of sustainable and efficient cost structure, improving education execution and at the state point of view and style and design I will admit that we have been helped by charging this of course at the right time, however, without the vision.
Of all of the hard work during the past few years, we would have been unable to fully benefit from the positive secular trends that continue to drive the home furnishing sector.
There is more growth ahead for kirkland's, and our shareholders and we look forward to reporting on our progress throughout the balance of the year Nicole why don't you provide some color on the details of our outlook.
Thank you.
What do you mentioned the evolution of our merchandise and the changes in our infrastructure and cost structure generated of profitable first quarter, which included some significant headwinds from supply chain delays and abnormally tough weather impacting our store footprint in February.
Lastly, our full year profitability has been heavily weighted to the contributions in the second half of the year, while we have seen and expect to continue to see real improvement in profitability in the third and fourth quarter.
I'll leave there is more room for earnings improvement in the first half of the year as we continue to execute this transformation.
Before I get into the details of the quarter I wanted to make the overarching comment that the year over year comparisons for comp sales percentage of sales and other metrics are heavily skewed by the necessary actions. We took last year during the pandemic, let's start closures the channel shift to e-commerce and the macro trends that existed then and now.
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Breaking down sales within the quarter, we had a comp decline of 3% in February with a strong start and finish for the month of extreme weather in the southeast impacting the 2 weeks in the mail.
The stores closed last year in the middle of March and thus remain close for the remainder of the quarter, resulting in a comp increase of 134% in March and of 196% in April the.
Total comp increase of 75, 3%, including an increase of e-commerce of 42% and 32% increase in the prior year.
Excluding the impact of the Covid driven store closures from the prior year, we had a total comp increase of just under 16%.
The sales impact of the weather in February and inventory shortages within the quarter was approximately $12 million.
As expected we started to see some year over year softness of the back half of May due to the.
A spike in demand in the second quarter last year and further elevated by the macro shifts and share of wallet towards entertainment and travel as the.
The economy fully reopens, which we do expect to be of short term headwind.
Our store traffic outperformed the retail segment of shopper track and it was in line of slightly down compared to the home furnishing sub segment.
Let's store closures are impacting businesses differently than the prior year, it's tough to compare traffic year over year in the first quarter Inc.
Moving to store traffic and converting existing traffic to our more elevated assortment will continue to be the main priority throughout our brand transformation.
We did continue to see the sales benefit of the changes we've made to improve the quality and design of our merchandise with the.
The high single digit take an increase in stores the limb.
Inventory in the furniture outdoor and la categories prevented us from reaching our expected sales level.
Average ticket has increased from the later part of May as the inventory in France, and we expect to continue to see credit since we returned the planned inventory levels in the key categories in June.
Our E Commerce comp increase continues to be driven by our third party dropship channel with revenue up over 70%, which is significant considering the tougher comparison from the prior year when store closures force the channel shift towards ecommerce.
The channel made up almost half of our ecommerce sales within the quarter.
Our fulfill the in store e-commerce sales for the quarter were just over 30% compared to 35% in the prior year.
Lower in store inventory has continued to limit the volume of these channel and Basra strain our profitability.
Remain committed to the importance of our stores is delivering known for 40% to 50% of our E. Commerce sales and there is profitability upside as we return to those levels.
During the quarter, we closed 5 stores opened 2 new stores and relocated 1 store, resulting in a count of 370 stores.
Of the clothing, 3 where rollovers from yearend lease negotiations and closed in early February.
1 of the new store openings in the relocated store, we're opportunistic shorter term leases, we negotiated and locations that were previously pier 1 stores.
Gross profit was 32.6 percentage of sales compared to 13, 3% in the prior year quarter the pre.
The year included significant deleverage with the store closures and the current year includes approximately 400 basis points of incremental inbound freight costs.
The degree of the impact from the back half of unknown, we do not expect the Q3 and Q4 impact could be higher than the first half of the year, but have yet to see the softening in rates that we expected.
With the long term ease of freight rates and the continued push the elevated sales in the first half of the year, we expect upside in gross profit rates in the first and second quarters and the coming years.
Blended product margin was 57, 4%, which shows the growth from the first quarter of 2020, while absorbing the significant freight impact.
The games continue to be driven by direct store expense direct sourcing benefit simple.
Of the flying our promotional message and also reducing the depth of offers and the inherent stacking of entire store couponing.
Ladies and inbound freight that we're consistently in China in the fourth quarter.
The Indians that country struggled with the pandemic impacting production and shipping level.
While we made progress on inventory and much of that progress was in the later part of the quarter and the mix of receipts was not as we had planned.
I mean, that's the early part of the sales window for our outdoor collection, which included some testing related to larger scale items upgraded collection and outdoor dining table, which will be of key learning for improving sales in the first half of the year of.
Also lower inventory and higher ticket furniture, skus impacted the average ticket for the quarter we.
We do not expect the significant margin impact from the late arrival of these items, but also don't expect to fully recover the lost sales.
With the unknown surrounding supply chain, we are pulling forward purchase order timing.
Specifically in the time sensitive seasonal categories.
We'll have a short to midterm timing impact on cash flow.
So our occupancy cost for $13.6 per cent of sales we remain on track with the additional hundreds of 150 basis point improvement in occupancy costs in 2021 relative to the same quarter in 2020, excluding the much larger benefit in the first quarter due to the in comparable sales.
Freight costs from our D C to our stores with 2% of sales.
Was impacted by sales deleverage and an unfavorable capitalization of adjustment from lower store inventory, which will reverse as the inventory increase it.
D C cost for $4.6 per cent of sales and remained relatively flat to our expectations with the sales deleverage offset by reduced expenses from less inventory moves than expected.
For 2 quarters now I've noted that the reversal of the 150 basis point unfavorable <unk> in the third quarter of fiscal 2020 would reverse with improved inventory levels.
We should see that reversal in the second quarter of this year.
We continue to see productivity and infrastructure improvement offset the incremental cost to pick and pack ecommerce orders.
And are pleased with the performance of the T E Comm hubs, we added last year.
E Commerce shipping it for 5% of sales increased year over year as the volume of ship to home sales increase.
While we are seeing some rate improvement over the prior year as the average price point improve and we fully utilize the hub.
Again, as we improve the mix of in store fulfill e-commerce sales and are able to ship a larger percentage of the ship to home sales.
All of the closest distribution option, which was also impacted by lower inventory levels. There is leverage to the game here.
Operating expenses, excluding impairment at 37% of sales for $37.9 million was an increase over the prior year of $3.2 million due to reactionary measures taken while the stores were closed last year and some fully variable costs.
EBITDA, excluding impairment and other minor non operating expenses for the quarter was $7.7 million or 6.2% of sales of year over year improvement of $24.8 million.
For the quarter, our tax rate was 16, 1% compared to 73, 1% in the prior year period, both periods were impacted by a valuation allowance.
The normalized rate of 24, 7% was used in the non-GAAP adjusted calculations for the current year and 23, 8% for the prior year.
Earnings per share, excluding non cash impairment normalized tax rate and other minor non operating adjustments was 12 <unk> compared to a loss of $1.27 in the prior year.
The GAAP earnings, including these items with the 11 cents compared to a loss of 53 from the prior year.
We ended the quarter with $72.3 million of cash and no outstanding debt.
The reduction of $28.1 million from the Q4 level and an increase of $42.1 million year over year.
For an increase of $82.1 million, including the outstanding borrowing in the prior year.
As mentioned on the prior call we expected a reduction in cash of 30 to 35 million as we rebuild of inventory levels.
With pulling out purchase order timing to offset supply chain constraints for the balance of the year, we could see the timing impacts the closer to $45 million, but we will balance the appropriate inventory levels with sales risks for missing that date, specifically on the more time sensitive seasonal buys.
Combined with the availability on our revolving credit facility, which is based on our inventory position, we had total liquidity of $121 million.
Inventory at the end of the quarter was $76.3 million, which was the build of $14.2 million from the end of fiscal 2020 and compare the $99.1 million in the prior year for 23% lower.
The prior year levels were elevated due to the store closures and continued receipts within the first quarter and we currently have 9% fewer stores.
We ended the quarter approximately $5 million down through our inventory plan, but with the surging receipts came in the quarter. Our store inventories had a larger GAAP to plan with a significant amount of the inventory and transit within our domestic distribution network.
We repurchased 47000 shares within the quarter for $1.4 million at an average cost of $29 in the month of May we repurchased another 46000 shares for $1.3 million.
We have seen tail winds in consumer demand since early may of last year, which has allowed us to accelerate some of the more transformational aspect of our merchandizing pricing strategy.
We have also seen significant headwinds for supply chain delays and incremental cost of.
Although our strategy has remained focused and unaltered we have adapted our pace of change of the macro circumstances have allowed.
We have a growing level of confidence the customers approve of where we are moving the kirkland's brand and that of space exists within the market for higher quality curated merchandise at a meaningful value relative to other specialty retailers.
Our business model is set to allow us to pivot as needed and still deliver profitable results for our shareholders. We are now ready for your questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then 1 on the telephone keypad.
Using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then 2.
And the first question will come from Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead.
Thanks, and good morning.
I wanted to start with just getting a sense around trends in.
I'm thinking about it sounds like there's been some kind of positive and negative takes in may.
We look at.
Towards your expectations on Q2, and recognizing that this quarter probably has the most noise.
Is there a kind of a range of expectations that you were looking at based on the information you have now and understanding where.
Some of the inventory constraints have been you know anything that you can call out in terms of your expectations on Q2 sales.
Yeah, I think of couple of just to reiterate the positive definitely are we're getting back into a better inventory position in those key categories, which really has the most impact overall on our average ticket increase that we expected year over year and then on the downside the piece of what we are.
We're seeing and the softness we expected just as we're comping in Q2.
The pent up demand and a lot of focus on home decor things open back up last year.
But also you know.
We had expected at some point in time that there would be of temporary reallocation of spend towards the travel and entertainment as you know people felt more comfortable in getting out. So I definitely think that we're starting to see some of that but again expected for Q2 comp to be tougher based on what last year looks like I think.
On what we saw in May which may was impacted similar to the first quarter with limited inventory until we got into the last week I think it will be tough to call.
The positive comp last year in Q2, so I don't know if that helps give you any contacting some of that we expected when we planned out the year, we had a 77% increase of E. Commerce. So that we knew we would be tough to comp year over year. So I think I would say.
From here expecting to be slightly down from a comp perspective to where we to where we were last year.
Okay, that's consistent with our expectation.
In terms of I actually wanted to break it down into that E Commerce channel.
Where you have.
Kind of endless aisle, you're driving towards that and ship from vendor options that maybe are not as impacted with inventory constrained, but I wanted to just get a sense for performance with E Commerce.
A throughout Q1.
And whether or not that showed a little more consistency.
Were you know weather impacts probably.
The lower on E Commerce, and then you know as we are sitting here in Q2 is that of category.
Or a channel again, you you had huge performance up 77% last year.
Is that something where you're expecting E comm to be kind of flat or down here in the Q2 any color that you could share around the e-commerce business.
Yeah, I think I'll start with the numbers pizza and what it may have something to add about the the third party dropship channel. Because we are definitely continues to be I'm pleasantly surprised by that channel from an E. Commerce comp perspective, I do think that we can comp positive I think it will be a you know it'll be a single digit to low double digit comp.
The increase in a lot of that driven by that third party dropship channel and to your point, we did not see the same impact from inventory levels in that channel. It was about 50% of our E com sales for the quarter and it also drives the significantly higher ticket it was more than double our 1 day.
Inventory E Commerce ticket in Q1 and have continued to add elevated brands and think there's a lot of continued potential in that channel.
Nicole mentioned about the.
This particular ship direct from vendor channel they did experience some of the similar.
Problems with inventory that we experience in our own inventory. However, because we can toggle between what we're showing up on the website. We can kind of make those adjustments that are invisible to the consumer but we're really pleased we've built the team now that is really going after of the endless aisle curated endless aisle and our whole of Assortments.
To be kind of coming to a much improved way debt. The store Assortments look very similar to what we're doing from the chip for from vendors. So we're really optimistic that that's going to continue for the next several years of being a big opportunity for us.
Got it thanks and then.
Margins I wanted to just.
See if we could hone in a little bit more a lot of noise around gross margins wanted to make sure that I understood of the.
The callouts that you had so far.
Freedom Pact I think you called out was 400 basis points of drag in Q1 and that you expect it to be a similar level in Q2.
That you're going to have some positive.
Impact.
From the inventories normalizing for.
As you know I think where you would you'd been calling but calling out since Q3 of <unk> of last year.
And I think you called out that that would be roughly 100 to 150 basis points.
Hum.
Just in terms of any of the other items in kind of a you know.
I think typically Q2 has the lower gross margin.
Q1, I think some of that the seasonality of the products that you sell but any additional color you can point us to here in Q2 on gross margins.
Yeah, I think based on timing of inventory in all of those are the things that you mentioned I'd probably look at 2 group Q2 gross profit this year more similar to Q1 of this year than maybe it isn't most of the ears.
Okay great.
And then also wanted to just ask about capital allocation.
You had the a little bit of noise.
On the balance sheet, because I think you had.
Inventory drag on on your cash flows which was expected based on where you.
You know the the levels ended at the end of 'twenty 'twenty 4.
But you also had a little bit of a drag around your AP.
AP and accrued expenses.
Do you expect that to normalize it that just kind of tie.
The timing of when the quarter's end.
And so forth, but should some of that would be recaptured on the balance sheet. That's part 1 of the question of the part 2 is.
Your buyback program of Hasnt really gotten going yet.
And I don't know if that's just being opportunistic as you know there's levels of Youre looking at.
And per 3 of the question is you know are there other considerations.
You have such a significant cash balance have you looked at things like a special dividend as the perpetual option.
Starting at the the first 1 so when we ended the year with 100 million in cash. We've said, there's about a 30 million dollar impact as we rebuild inventory and part of that was actual and increase in inventory and the other piece was that we received more of the inventory towards the end of.
The the quarter, so that we hadn't paid for it the same that we would have in a normal cycle. So I think what we're going to see this year from a timing impact is potentially.
Working and negative working capital adjustment just because we are trying to pull forward inventory to make sure. We're not in the same place with sales misses because we didnt get inventory and so I think by the end of the year of that normalizes back out, but I think within the year and we're going to.
To be trying to pull off of orders within a 2 to 4 week timeframe. So already in the the Q2 Q3 timeframe, we're paying for some of the harvest and Christmas merchandise before we sell it and so that will just the elevated so I think they'll continue to be a little bit of noise, but the number I called out is from you.
And that reduction to fund that may get to 45 million, but I think things will recover back from from that and then.
On the share repurchase piece I noted in in Q1, we repurchased 1.4 million of shares and we actually had a new.
More aggressive plan that we put in place near the end of actually in the middle of the quarter. So I called out may be the same as the quarter, which again is 1.3 million, but in 1 month of more aggressive than we've been to date and to your point, we are considering all options and we'll continue.
To do so and if we don't need the cash then we are looking at what are the right things to do with that and definitely returning it to shareholders in either share repurchases or some sort of dividend are all on the table.
And I think I missed the third 1.
That was the third I'm sorry, the second 1 did I.
Yeah, you roll them together all of our.
I appreciate you I appreciate you taking all the questions I will hop back into the queue and congrats on strong execution.
Thank you.
The next question will come from Anthony <unk> with Sidoti <unk> Company. Please go ahead.
Yes, good morning, and thank you for taking the price and so I appreciate the color about the the second quarter of kind.
And I'm looking forward to the back half of the year on the same store comparisons get a little bit easier.
Especially in the fourth quarter so with.
With that in mind close of the fact that.
You are working hard to improve your inventory levels would it be reasonable to assume that you will have positive comps in the back half of the year.
It is and I think to that point, we expect it to sequentially increase quarter to quarter from Q2 of the Q4 the comp.
Anthony 1 of the end of last year, we experienced during the third and fourth quarter with significant inventory shortages.
We are recovering at this point, but the other section of that is trying to get the merchandize all adds together and create a very beautiful impact on the floor in terms of really showing the vision of the merchants in terms of.
The the trends and that should start regulating or historic normalizing here in the second quarter, we fully expect it to be in great shape for the third and fourth quarter.
But this quarter and next quarter of very important for our merchandize transformation in the.
This is where we accelerated some of the quality aspects design aspects of look so we're really looking forward to this the back half of this year.
Got it okay. Thanks for that so and what are you you mentioned that as far as direct sourcing of Europe, the 38% of does of the first quarter.
How should we think about the for the balance of the year as far as where you think you'll wind up closer for direct sourcing on the.
Impact on margins.
Yeah. It is of a very positive story that 38%, though represents the orders that we've written for the back half of the year. So that's a pretty good number to hang on to it could be as high of 40% and we're growing that.
In a way that we are taking advantages of.
The design of opportunities or better pricing a couple of aspects that I mentioned on the last call was the unforeseen benefit they were getting of that are some of our domestic vendors of really sharpen their price points. So.
We said all along that we would let the direct sourcing to get up to about 50% of our purchases and then evaluate whether we want to go even higher right now I would say that the the agents in our countries that were buying directly from are really hitting their stride and for example in this particular quarter.
We're gonna be landing Mark first of.
Poultry from China, which is really an exciting you will make our stores look more like a real home furnishings retailer.
And the scale a little bit smart of the price points are super sharp in the in the products the <unk>.
So.
The direct sourcing is really a smart way for us to balance out our risk.
As of last year, we were very dependent on China, and this year, we're balancing towards Vietnam, India and other countries.
So youll see our penetration in China going down and.
And the penetration in some of the other countries going up which should give us better opportunities for that would be sort of dependent on 1 part of 1 supply.
The supply chain.
And on the finance side of the impact getting 238% to 40% for another 75 to 100 basis points of margin improvement and I think specifically in Q3 were comping some pretty tough.
The margin rate just from early sell through of seasonal so I think that will help us to balance that out.
Got it okay. Thanks, So I guess the.
The last question for me as far as of the store openings and closings. So of you actually open the poll of stores.
The quarter, you mentioned 1 of them.
The form of tier 1 location. So how should we think about the as far as store openings for the balance of the year of and also of store closings as well. Thank you.
Yes for the balance of the year, we had the 1 store of that with it's not actually in the opening but its been closed for over a year now because of a tornado in Arkansas to that 1 will reopen back up I think we'll have a handful of less than 5 closures between the.
Now in the the end of the year and again have another large portion of our leases coming up for renewal at the end of our fiscal year. So if we have increased closings there'll be at the end of the fiscal year, So I'd say 5 or less within the year and the the others will be at the end of the year and really again, just like last year.
Turns on how much progress, we're able to making of negotiation.
Got it okay. Thank you very much best of luck. Thank you.
Thank you.
The next question is from John Lawrence with Benchmark. Please go ahead.
Good morning.
Good morning, good morning.
Yeah. What are you could you speak a little bit you mentioned, a I guess first thing would be competitive environment for <unk>.
People might be looking at price to drive traffic.
Could you just speak to that first and then we'll go from there.
Yeah, all licensing in competitive environment is working in our favor right now because remember that we lost our largest competitor of pier 1 last year and while that doesn't immediately fold into our sales you start seeing that because you know home furnishings is 1 of those and less frequent purchases and so we're starting to see some some benefits from that.
I think that overall the part that we're the most proud of right now is that while we're doing this direct sourcing it is helping us with our product margins with the <unk>.
The benefit to that is the look and quality of our of our products and better packaging and I think our customers are starting to really give us credit for maintaining value price point, while <unk>.
Actually giving the customer consumer a lot more quality and a lot more value in terms of design.
Great and could you follow that with a loyalty card all of that what Oh.
Update there.
Yes, we've been very pleased with our loyalty program in fact.
Since the launch we're seeing the loyalty consumer spend of around $10 more of 27% more per transaction when compared to the non loyalty customers and so far.
1 of the loyalty customers are spending the brand new ones are spending of about $20 of 53% more than the non loyalty customer. So like we said in previous calls our loyalty program is the multi phased approach. So we've got a lot more what I would call bells, and whistles coming to enhance that program and make us really the.
The retailer of choice to our most loyal customers and they represent a huge portion of our sales and our profitability.
Yeah, Thanks for that and the last question for me you mentioned some of the new vendors some of the new brands you've had on e-commerce.
But what can you say about negotiating with those vendors as far as.
With all of the store closings within the industry.
Or.
Some of these vendors wanting to deal with you more because of the the doors that you have and what are you seeing from the vendors at this point.
Yeah, I think there's probably 2 reasons 1 they are looking for distribution just because of some challenges in their distribution model and the lack of new stores opening and so we're getting some of that.
But the other side is the elevation of our store and our store look in our web site is now able to.
So you look at it kitchenaid are of Cuisinart, and our Assortments for parallel with what Theyre offering. So it really is kind of a 2 pronged approach they have been very.
We have a lot more people knocking on our door, saying can we be part of your curated.
The style and we've been pretty pleased with the results so far.
Of course, some of those vendors of also experienced some of their own inventory shortages of supply chain issues, but really and truly we're pleased with the results that we're getting we're pleased that the opportunity for the.
The customer is where they can buy some of those great brands from their trusted store Kirkland's and then at the end of the day, we may evaluate whether there is a key item or 2 the we'd want to bring in.
The enhanced fourth quarter gift, giving.
All items are all ideas around the table and these vendors have been really great to work with.
Great.
Grant's on the success of look forward to hearing more thanks.
Thank you John.
And the next question is a follow up question from Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead.
Thanks for taking the follow up up sort of come back to the direct sourcing here you are clearly tracking ahead.
Head of prior expectation in terms of penetration of that business.
Generating strong margins the.
You know really impactful results on what Youre doing on the E Commerce side of your business. So I wanted to just to get a sense of thinking about the long term I think.
Spoken to direct sourcing getting to that 50% threshold.
And then maybe pausing and revisiting after that.
And then just thinking about.
Where direct sourcing can go and the.
In terms of both margin, but also in quality of goods should we be thinking about direct sourcing as potentially being a bigger portion of your total business.
And then along with that kind of same question along the lines of e-commerce It sounds like.
The drop ship has been tremendously successful thus far you're now at 30% penetration of E Commerce overall.
Is that something where you may end up tracking towards what many of your peers do where E. Commerce is going to be greater than 50 per cent of your business long term.
Well, let's go both really good questions Jeremy Thank you for asking.
Part with the direct sourcing.
Our goal was to start it off a couple of years ago, we hit the 20% and then our goal this year the hit 30% of you'll probably get about 38% to 40%.
What we needed to do was make sure that our agents and supply chain. It gets a little bit more accustomed to this business model. So we get some some things to do on our side and some things to let them get up and running but the result that we're seeing is spectacular merchandise at a great value and so I think that when we say they will pause.
At 50% I don't really see a reason why we would if everything is moving along as as we projected remember the most of our competition has significantly more than 50% of their disc.
Distribution of 50% of their purchases coming from a direct source environment.
So I would say that we will pause, but for like 2 seconds in the let's say, let's keep increasing it because we like what we're getting.
And then the other side of that.
On the E com, becoming a larger portion yeah.
We said that we'd like to get healthy with being in the 50.50 range, 50% store contribution sales of 50% of e-commerce in the future, but that doesn't mean, what that really says is that we're listening to the consumer of we're letting them kind of lead the way. This ship direct from vendor has been so successful for US every day.
Of all of the debt.
Shire did it so that it's not literally just a bunch of home furnishings, but their home furnishings. It looked like the fit through the lens of our kirkland's stands for from a.
Kind of the casual home furnishings.
Lifestyle look.
So I think the vast opportunities there like the vendors from the.
The cuisinart and particularly we have many more vendors approaching it from the house and they want to be part of our direct ship and yes, we have a few issues there with the systems that we're working in the back the back of the house volume.
Is that more fluid and easier to manage the.
The called the journey.
No I think you know before we had said 50 per we thought we'd end up in that 2 to 3 times from 2 to 3 year timeframe likely 50% store sales of 50% of Congress, but we're not driving to that number for the sake of getting to that number. It really is just we're pushing e-commerce as the growth in <unk>.
<unk> of our company into Woody's point, the customer will dictate where we end up with that.
The 45 or 60% and we're just trying to make sure that we are set up to be able to you.
Services sales in a way that our customers expect wherever wherever they happen.
Thanks for taking the follow up best wishes.
Thank you thank you Jeremy.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over the Woody Woodward for any closing remarks.
Thank you operator as always we're available for follow up questions over the next several days and weeks and we look forward to seeing you online in our stores. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yes.