Q2 2021 Kirkland's Inc Earnings Call

[music].

Good morning, everyone and thank you for participating in today's conference call to discuss curriculums financial results for the second quarter ended July 31.2021.

Joining us today, our kirkland's, President and CEO, Steve Woody Woodward Executive Vice President and CFO, Nicole strain and the company's external director of Investor Relations Cody Slaw.

Following their remarks, we'll open the call for your questions.

Before we go further I would like to turn the call over to Mr. Spa as he reads the Companys Safe Harbor statement within the meaning of the private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward looking statements Cody. Please go ahead.

Thanks Betsy.

For historical information discussed during this conference call. The statements made by company management are forward looking and made pursuant to the safe Harbor provision of the private Securities Litigation Reform Act of 1995.

Forward looking statements involve known and unknown risks and uncertainties, which may cause kirkland's actual results in future periods to differ materially from forecasted results.

Risks and uncertainties are more fully described in kirkland's filings with the Securities and Exchange Commission.

Like to remind everyone. This call will be available for replay through September nine 2021.

Webcast replay will also be available via the link provided in today's press release as well as on the Companys website at <unk> Dot Com now I would like to turn the call over to the Kirkland's President and CEO what are your Woodward Woody over to you.

Thank you Cody and good morning, everyone.

As always I'd like to start our call today by thanking our entire organization for their unwavering commitment to continuously providing best in class service to our customers and driving our transformation story.

Progress we've made to date could not have been possible without our dedicated teams across the business.

Now, let's jump into the quarter, we faced headwinds that could have driven significant weakness across our business, but the steps we've taken to transition our company has driven resilience to dynamic markets like we faced in the second quarter.

Looking at our total comp we were down about 5% compared to the prior year period.

Two things drove this performance the second quarter of 2020 had unusually high comparable store sales due to the significant increase in demand for home furnishings and decor brought on by the pandemic last year. So we knew this quarter would be a tough comparison from the start.

Second we struggled to maintain inventory as we continue to be impacted by <unk> global supply chain constraints and shipping delays that are affecting our industry. At large. This included some key outdoor pieces that arrived about a month later than expected, which impacted our sales in may.

While our overall inventory position improved as the quarter progressed, we continue to experience volatility across specific products.

We would see availability for certain items returned to normal only to experience issues that resulted in shortages for other categories.

This just goes to show that the global supply chain issues continue to be unpredictable and will likely remain a challenge in the near term, but a great spot to this situation is the fact that we have seen high sell throughs of new updated merchandize as soon as we get it in stores.

Made significant strides over the past few years, improving our inventory control, primarily around improved planning and product flow by destination down to specific shipping points that shipping ports, which resulted in changes at how we write our orders specific to the back half of 2021, we've added weeks to our order flow process to allow for <unk>.

Why change lease.

Okay.

We also experienced volatility volatility in traffic patterns within our stores throughout the quarter for example in a month and the month of June we saw less traffic on weekends, but more traffic on the weekdays where July with more of our typical in store traffic with weekend is picking up.

And Additionally, we also experienced an in store sales increased during the latter portion of the quarter.

We believe this reflects the customers' appetite to get back outside to shop, particularly as vaccination rates have improved.

Our customers have generally been more comfortable resuming some state of pre pandemic shopping behavior.

No matter, what medium our customers choose to shop, we're ready to serve them and we continue to build out our omnichannel approach in the quarter we.

We also remain well on track with our direct sourcing as we stated on the last call.

<unk> to produce procure about 38% of our merchandize from direct sourcing for the year. However, we're not stopping there and with all the recent success in ramping up this percentage much faster than anticipated. We believe we will have 50% to 75% of our product from direct sourcing in the next three to five years.

With a goal to have at least 75% by the end of 2020.

We also spent a significant amount of time looking at our optimal store count for the quarter with all the successful changes we've made to our store profitability. We're revising our optimal store count to approximately $53.0 This will include additional store closures in the future limited opportunistic store openings store relocations and extensive.

Updates and enhancements to the existing store base.

Now, let's discuss our product category performance.

Despite a tough comp we experienced healthy improvements in AUR across multiple categories.

Resulting in total AUR increases of approximately 5% over the period same period last year.

Although this was less than our annual target of 10% to 15% due to inventory shortages in outdoor and furniture, we still experienced positive momentum.

Such as in our furniture category, whose AUR was up 26% to $197 six in.

In addition, we saw 44% year over year increase in mirrors, along with improvements in other categories like outdoor living.

Today wall decor frames and Lance we believe AUR will continue to improve in many of our categories as we increase our direct sourcing and continue selling larger ticket items like furniture.

With higher AUR, we can better offset the recent declines in traffic and lower store count to continue driving sales in our key product categories.

<unk> will be an important kpis.

Track.

We continue our transformation to unfold because it represents our customers' continued acceptance of our shift towards higher quality merchandise. So we look forward to continuing to report on our progress.

In past calls we've talked in length about our key strategic initiatives and financial goals.

For the next two to three years to transform kirkland's into a specialty retailer where customers are able to furnish their entire home on a budget I'm happy to say that Q2 was another data point that shows we are on the right track.

We're accelerating our product development to reinforce the quality and relevancy of our assortment.

I think we are viewed as a high performance, especially home furnishings store offering immense value through an omnichannel experience.

One of the major ways. We're accomplishing this is through significantly enhancing our furniture offerings and providing customers with quality and stylish products at an affordable price point.

We've continued to see increased demand for home furnishings, and Shoppertrak data shows the industry traffic for this product category was up approximately 61% during the second quarter.

To better highlight these products, we've been working on adding various upholstery items to our floor because at the end of the day.

How do your customers know the euro home furnishing store without having so first on the showroom floor. So we recently added new chairs and sofas to our floors. This includes our vegan leather sofa at $108.0 price point and matching chairs at $104.0 price point, we've seen great success with the early 25% sell through in the first few.

Weeks, and we plan on introducing our modular sectional in the coming weeks at a $200 price point.

We were able to accomplish this without having to do significant work reorganizing our Florida. It was really just a matter of cutting down on the number of units on the floor.

Rather than eliminating assortment to our customers are seeing the same product offerings. They have come to expect with the added benefit of now having chairs and sofas to touch NPL.

These products also have proven to help sell ancillary offerings like pillows or side tables, and a customer can see how these items tire room together, rather than just being highlighted in a standalone manner.

As we make enhancements to grow our furniture category.

We're focused on expanding our outdoor offerings. This includes moving away from outdoor weaker which is a commodity at this point and can be purchased at places like home depot Lowe's towards the higher quality and has designed <unk> offering.

We'll be we will look to shift towards selling more outdoor furniture, rather than having a heavy focus on outdoor accessories to further drive an increase in AUR.

This will allow us to leverage our e-commerce channel to sell those accessories and existing lines that customers still desire online, while pushing our higher quality new product offerings, both in store and online.

If we can bolster our offerings in both furniture and outdoor product categories. We believe this will enable us to drive profitable growth growth across all four quarters moving beyond our traditional seasonality and dependency on harvest and Christmas holidays to drive growth for the whole year.

Now turning to the other side of the growth Formula our customer base, we've done an excellent job maintaining our core customers by providing enhanced product offerings and re launching our loyalty program, but now we're really focusing on driving new customers and improving our customer acquisition strategy.

In fact, we've recently brought on Liza Foley, who I've had the pleasure of working with in the past to lead our marketing department and strengthen these efforts.

It brings a proven track record from notable retailers, including crate and barrel, where she used an analytical approach to drive both e-commerce and in store traffic and sales through revamped digital marketing efforts.

As we look to drive customer growth. The biggest thing for Kirkland's is to increase awareness of our brand.

Need to get in front of the right people those who are looking to furnish an entire home.

To show them, we change and how.

And now have an extensive merchandize assortment that can fulfill all their home furnishings needs without breaking the bank. We believe MISO will be instrumental in driving our efforts here.

With her in depth knowledge of high end specialty retailer customers and.

Look forward to sharing more details on these digital marketing strategies as they begin to rollout.

Once we've attacked new customers towards attracting new customers to our stores our E Commerce channel and we're going to be focused on what we can do to keep them as customers and further increase their visits.

Keeping them as a customer will really come down to further expanding of our assortment and consistently providing high quality stylish offerings that are up to date with the latest trends.

After we've landed them as a customer and proven we can meet their needs and our focus will shift to what we can do to increase the numbers of times they shop with US who will primarily do this through our revamped loyalty program with a with a reward program that provides a three 3% reward for all purchases and was recognized by Newsweek as the number one loyalty program.

The home decor sector earlier this year.

We plan to further enhance this program with added benefits, including VIP shopping hours advanced shopping on new collections and more targeted offerings towards specific customers.

We'll also be imperative that we continue to improve the overall customer experience such as adding delivery options that consumers have and expect from other specialty retailers to ensure that we're providing convenient options to drive customers back to us time and time again.

Overall, I'm incredibly pleased with where we sit today I believe we're just getting started and realizing the true potential of kirkland's.

A much leaner organization with a more efficient cost structure and a strong focus on delivering relevant product offerings that will.

Our both stylish and affordable.

As we begin to ramp up our customer acquisition efforts and better showcase the company Hercules is today I firmly believe we will achieve the financial goals, we've laid out I want to thank all of our stakeholders for their support in getting us this far and I could not be more excited for the future of this company.

With that I will not I will now turn the call over to Nicole strain are our Chief Financial Officer, who will provide additional commentary on our performance in the second quarter in detail on our outlook.

Nicole Thank you Wendy and good morning, everyone before we dive into the P&L I wanted to reiterate that the second quarter of 2020 at significant COVID-19 related tailwind despite it being a traditionally softer quarter for our business.

As such it created a challenging quarter to compare again with that being said we are still very proud of the progress we've made and firmly believe in the path. We are on to achieve our longer term financial targets.

Now, let's jump into it.

Net sales were $122.0 million compared to $131.0 million in the year ago quarter. The decline was primarily a result of the tougher comp along with 18 fewer stores.

Breaking down sales within the quarter, we had a comp decline of three 9% in may at <unk>.

Klein of eight 7% in June.

And a decline of two 1% in July.

<unk> in a total decline of five 2%, which included a decrease in E. Commerce of 12, 6% from the prior year.

Our sales were impacted by inventory shortages, most notably in the first half of the quarter and a decline in traffic across both our physical stores and E Commerce channel.

Sales declined for the quarter, but our two year stack comp was approximately 5% showing growth over pre pandemic levels.

Additionally, the prior year conflict tougher as the quarter progressed with a 20% two year stacked comp in July we are happy with how we ended the quarter.

On this topic I want to be clear that we are sacrificing some sales growth by limiting promotions and this is intentional as we invite new customers to our brand we don't want to train them to only buy when there's a sizable discount. So we are remaining disciplined in our level of promotions to set appropriate expectations with these newly acquired.

Customers and our existing customers, we believe the improved quality and design. We are offering is the real value add.

As we stated we saw several abnormalities within our traffic patterns for both in store and online.

For the remainder of 2021, we expect traffic comps to very significantly month to month, as we compare against Covid impacted trends and inventory challenges in the prior year.

Improving traffic and converting existing traffic to our more elevated assortment will continue to be a main priority throughout our brand transformation.

Commerce accounted for 28% of our sales in the quarter are fulfilled in store E. Commerce sales were 32% compared to 40% in the prior year.

Lower in store inventory has continued to limit the volume of these channels and does restrain our profitability.

During the quarter, we closed one store, resulting in account of 369 stores.

What do you mentioned, we have refined our expected store count to approximately 350 stores, which will include 20% to 30 closures of declining stores relocation of 40 to 50 stores and refreshes of much of the remaining store base. We expect these changes to take place over the next three to five years.

Gross profit increased 600 basis points to 34, 6% of sales compared to 28, 6% in the prior year quarter.

The increase was primarily driven by improved landed product margins as a result of the continued benefit from direct sourcing and our disciplined approach to evolving our discount strategy.

Store optimization benefits, including store closures and rent reductions.

And the reversal of the negative timing difference impacting distribution cost mentioned on prior calls were also drivers of the improvement.

It's worth noting that these margin gains include absorbing almost 500 basis points of year over year incremental inbound freight.

Landed product margin was 59, 8%, which shows growth from the second quarter of 2020 again, while absorbing the significant freight impact.

Store occupancy costs were 14% of sales and.

And we remain on track with the additional 100 to 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 <unk> comparable sales.

Even with the sales deleverage in the quarter, we are trending towards the high end of this range.

Great customer DC to our stores with two 3% of sales compared to two 2% of sales in the prior year period.

As a result of moving more freight within the quarter then in 2020.

DC costs were 4% of sales compared to five 4% in the prior year period and were slightly higher than our expectations.

Again, we move more freight within the quarter than the prior year period as our inventory levels improved.

This includes the benefit of the capitalization timing adjustment mentioned earlier.

Similar to our commentary on our last call, we continue to see productivity and infrastructure improvements.

Is that the incremental cost to pick and pack E Commerce orders along with strong performance from the two E. Comm hubs, we added last year.

E Commerce shipping at four 9% of sales increased year over year as the volume of ship to home sales grew which goes back to the lower than expected fulfilled in store E Commerce sales.

As inventory continues to improve offering incentives for pickup in store options will help these channels return to prior levels.

Operating expenses, excluding impairment increased $5.0 million from the prior year period to $44.0 million or 34, 4% of sales. This increase was primarily attributable to lower store labor in the prior year as Covid store closures extended into the second quarter and one time.

Corporate cost reductions in the prior year as a result of the pandemic.

Quarter also included a half year catch up of incentive compensation accruals.

On a comparable basis, we remain down just under $9 million from the 2019 level.

Adjusted EBITDA, excluding impairment and other minor non operating expenses for the quarter was $6.0 million or four 4% of sales.

For the quarter, our normalized tax rate was 24, 4% compared to a normalized rate of 23, 1% in the prior year period.

The actual rates for both periods were impacted by a valuation allowance.

Adjusted earnings per share, which excludes noncash impairment normalized tax rate and other minor non operating adjustment was a loss of a penny compared to a profit of <unk> in the prior year.

GAAP earnings, including these items with <unk> up significantly from a cost of 66 cents in the prior year.

We ended the quarter with $47.0 million in cash and no outstanding debt compared to $103.0 million at the end of $2053.0 million in the year ago period as.

I've mentioned on the prior call we expected a reduction in cash of $45 million as we rebuild inventory levels.

In the quarter included a more aggressive approach to our buyback program, we will continue to balance appropriate inventory levels with sales risks and adjust accordingly.

Inventory at the end of the quarter was $92 million, which was a build of $38.0 million from the end of fiscal 2020 and compared to $78.0 million in the prior year.

We repurchased 562000 shares within the quarter for $12 million at an average cost of $59.0

In the month of August we used another $11.0 million of our authorization at an average cost of $45.0 and <unk>.

Year to date, we've repurchased 945000 shares for 7% of our outstanding shares for.

For $27.0 million at an average cost of $20.99.

As announced in our earnings release. This morning, our board has approved another $20 million share repurchase authorization.

As we continue to execute on our transformation and get further past the dynamic environment brought on by COVID-19 last year. We wanted to provide a same store sales comp range that we expect to achieve in the second half of fiscal 2021 for.

For the second half, we expect mid single digit positive comp sales driven by a larger harvest five in last year and improved inventory position in key categories, specifically furniture and wall.

With the inventory benefit having a larger impact in the fourth quarter.

In addition, we anticipate year over year earnings growth, despite absorbing significant incremental freight costs.

As we look ahead, we firmly believe that kirkland's is well positioned to execute on our long term vision for the company we.

We've created an efficient organization with an appropriate cost structure and the necessary capabilities to be nimble in these uncertain times.

As we continue to build out our omnichannel platform and focus heavily on new customer acquisition, we will be supported by a strong financial foundation that has a setup to succeed.

Based on our progress to date, we are increasing our one to two year target to gross profit margins in the mid to high 30% range EBIT.

EBITDA margins in the low to mid double digit range and operating income margins in the high single digits.

We expect these targets to be driven by top line growth fueled by an increase in our average ticket new customer acquisition strategies.

Lowering our freight rates.

<unk> direct sourcing benefit overall efficiencies and supply chain operations and continued disciplined cost control.

We look forward to continuing to share updates along the way and achieving both our near term and longer term outlook.

And operator, we are now ready for Q&A.

Thank you.

We will now begin the question and answer session.

To ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the key.

Is it any time your question has been addressed and you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our rock.

And the first question comes from Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead.

Thanks, and congrats on the strong results.

I wanted to get a little more granular into your gross margin performance really.

Quite impressive to be up 200 basis points sequentially.

And just to understand some of the components of that in terms of thinking about.

How much of that sequential improvement use.

Initial markups are improving versus the the sourcing that you're doing in year over year change that you've seen in directly sourced goods.

Yeah, taking the pieces of the the 600 basis point improvement. The one thing that I would say is it's just a timing impact and we've talked about on a couple of calls is the 170 ish basis points.

Timing that we talked about our inventory levels negatively impacted distribution costs in the third quarter of last year, I believe and so getting back to normal inventory levels allowed that timing difference to flip, but the bigger piece 380 basis points roughly is in landed product margin and I think you're right.

Look at this holistically direct sourcing provides a benefit that we've talked about which is 500 basis points for everything that we move over but really I think has a halo benefit because of the quality and the style our improvement Cigna.

Significant improvements and it allows us to sell more of them at original price. So it really is also aiding us in pulling back discounts that for me it becomes a bit hard to break that apart because I do think outside of just the initial cost benefit. It has a much larger benefit on our ability to operate with lower discounts.

And then the other pieces store occupancy 140 basis points again, that's within the range, where we expect to continue to see opportunities for rent reductions and those.

Those are the big pieces, we mentioned become shipping going about 500 million about 50 basis points. The other way and really that's just mix within that channel.

A great lead into the follow up question, which is.

As you look at you've done an incredible job on renegotiating rents.

Right sizing the store base.

As we get into those conversations and retail in general has.

Saying that it's stronger levels.

How are those lease negotiation conversations happening I recall that.

Thank your average.

Lease negotiation renewal was at about a 20% discount versus.

Prior levels, what do you see it today.

So I think a lot of that will be kind of answered as we get through the rest of the year almost all of our lease renewals happen at the end of the fiscal year, we have about a third that come up for renewal at the end of this fiscal year the ones that I would say that we're working on now are the higher performing stores that we want to lock in early.

<unk> longer term and I'd say on almost all of those we are either locking in at flat rent not taking escalations or at a slight discount and those again would be the ones where the centers are fully occupied and we're in great great.

Centers. So I think we may be below the 20% at year end, when we're negotiating but I still think there's going to be quite a bit of favorability in the majority of the third that come up at the end of the year, we havent yet had an opportunity post COVID-19 to negotiate those so I do think theres going to be opportunity out given up.

Data is we get a little bit closer and further into those negotiations.

Great color.

Just one other.

Item that I wanted to follow up on in terms of your <unk>.

Your cash it's been a great asset.

Last year, you talked about where some of those targets might be at the end of the year.

What do you have kind of a target range that youre looking at obviously.

<unk> been able to buyback some shares at lower levels now.

Quarter to date.

Do you have a target range that you.

You're looking at just to utilize some of that debt balance sheet.

Yeah. So at this point I think we and probably down $10 million to $20 million from last year and really just depends on how our aggressive share buyback is for the rest of the year end and that will be dictated by where our stock prices I mean, if our stock price remains as significantly undervalued as we believe it is now then we will be.

Much more aggressive on our continued to be aggressive on our buyback.

Great one more quick one can you give any color on the kind of quarter to date trends.

Are you tracking versus that mid single digit.

Yeah, I think the easiest thing to say there is last year going into Q3, we saw in August and September really unprecedented demand for our harvest product, which meant the comps that we're comping against in August and September really tough and then we got to October and had basically no harvest.

Sorry to sell to the October comp much much softer so we're down about 5% to last year in August but similarly, when we look at that on a two year stack were up 5% from 2019, and so I think we continue to kind of carry that forward, but I think the <unk>.

Opportunity for us to comp up it's pretty heavily in October the other thing I would say is I feel like with all things considered we did a decent job of getting harvest into our stores, but we are you know a couple of weeks behind sales are pretty fills a pretty soft in the start of the harvest season. So that's.

Only recoverable, but that did have an impact on August as well. So you know it doesn't change anything we feel really strongly bought harvest up this year and you'll like it really helps us to be more smoothed out throughout Q3.

Alright, congrats and thanks for all the transparency and color best wishes.

Thank you.

The next question comes from Anthony Lipinski with Sidoti <unk> Company. Please go ahead.

Yes, good morning, guys. Thanks for taking the questions.

The results even with all the.

Cost headwinds that are out there.

So.

First I just wanted to get a little bit more specifics about the average ticket, which what are you you talked about a lot. So can you give us a sense as to on a consolidated basis, where you are with your average ticket.

So far.

For the quarter for year to date, However, you do it and how does that scar versus last year, and then with the <unk>.

The products that you are looking to get into more on the furniture store.

Where do you think that average ticket could go to.

Yeah I'll take the first part of that and then what are you definitely can add some color on the merchandize pieces. So we mentioned up 5% for the quarter really our expectations, which we also mentioned we are in the 10% to 15% and that's what we saw.

Last year as well over the prior year and we look at that is as we make these merchandise changes its more a mix of what we're selling and that there will be sequential years of a 10% to 15% increase even on the conservative side too.

Being up 5% helped us, but it was under where we expect it to be because we were light in furniture or the outdoor showed up late and those are things, where we've really taken some steps to improve the higher ticket offerings, but.

I'll just jump in with just a broader statement.

A year ago, we said that as we migrate more of our assortment to direct sourcing we would.

Take part of that increase in gross margin and we added to our financial benefits. The other half, though is you're starting to really pay off and that was where we decided during methodically to increase quality improve our packaging across all categories, but where it's really showing up now in some of our larger ticket category.

Like furniture, which we intend to grow substantially over the next three to five years. So a lot of the things that we're seeing today are the result of making good decisions over the past year and a half or two years.

Not only is our store looking more inviting more advertising or selling them a better quality, but we've also made a concerted decision to maintain opening price points and so this is a carefully thought out plan to make sure that we're not alienating customers.

I have looked at us for an opening price point, but really delighting customers that are looking for a better best assortment and.

Like we said earlier on the call that one of the Big Differentiators right now is to get upholstery onto our floor. So that we can look like we are a holistic.

A holistic home furnishings retailer and this has been so well received initially on the first.

So far that we've landed in the vegan leather and by the way he can leathers just kind of a fabric.

Not another from some.

[laughter] tomato or something.

So we've had some some really nice surprises on the customer acceptance of those products and I think as we grow our ability to get that to customers with a white glove delivery in the future and he really enhances that more most of the things. We're landing now are meant to be able to be picked up within the store are put into the customers su.

SUV. So anyway, we're really plateaued proud of where we are it's been very methodical and I think this AUR is going to be an important story. The other side of that is that remember that our.

<unk> ability to move towards this direct sourcing is is unrelated to all of our competition, who had done that years ago. We were we were a little late to the game and so those benefits come to us in the next.

This year in the next several years.

The other people won't be seen.

Got it.

So let's talk about color Nick.

Colin.

Then.

In terms of just looking at the back half of the year on the comparison to last year.

Your third quarter gross margin was unusually high for that particular quarter.

Just just as we look to update our models here and keeping in mind, what you said as far as the mid single digit comps for the back.

That path as well as earnings improvement.

Are you looking to see are you looking actually.

<unk>.

Both quarters or.

Just to be more weighted towards the fourth quarter. When you have easier same store comparison, maybe if you could just give us a little bit more color as to how we should.

Update our models.

Yeah, So just starting with top line.

I already mentioned in Q3, the opportunity really is in October but in the back half.

In a mid single digit comp increase a significant opportunity exists in Q4, so even looking at that I think the opportunity on the top line is higher in Q4 and a piece of that is in a really low store traffic in in late November and December path in the past year because of that.

Well you know the new wave in Covid cases, but probably the bigger things specific to US is we were down 30%, 40% in inventory in furniture and art and really.

It didn't have anything for the customer to buy in a lot of cases, so that's a pretty significant opportunity that I think we will see in the third quarter, but more so in the fourth quarter and then two.

<unk> margins, you mentioned, because we sold harvest through without having to go.

After the initial discount the actual margin rate for Q3, the landed margin going to be tough to comp in and so that I think we've talked about before but we'll make that up in other areas and in Q4.

A better comp, but also I would say on the Christmas product that we're bringing in paying a little bit more to get that on the water. We have been able to offset some of that with pricing that we took on the Christmas products. So I would look at it and say margin is a tougher comp and bottom line a tougher comp in Q3.

But quite a bit more opportunity in Q4, I think bottom line Q3, we could likely be similar to last year and in Q4 more opportunity.

Okay got it thanks, a lot that's definitely helps and then.

Quick questions, if I may so far.

Far as the store base target now moving to 350 versus 350 previously can.

Can you give us a timeline as to when you would expect to get to that 50 store count.

Yeah, I think I, you know and obviously every year. So we went from.

60 to 70 stores that were four wall negative EBITDA to now one so we made a lot of progress last year. We do have a group of stores that we know are not in markets that we want to be in long term. So but they are profitable because we have had significant rent reductions we've changed the labor model. The margins are much better so a little bit.

That is just you know, whereas the decision point, where theyre down to a level of profitability that that leads us to want to close. It. So you know it's not going to happen all in 'twenty 'twenty. Two am I you know I think we talked about before having a handful of closures maybe five to 10 of those this year and then.

I think the same thing as we move forward and it really will just depend on where those stores continue to perform from a sales perspective.

Got it Okay and then last question for me here so to give us.

On your loyalty.

Where you are in terms of membership.

What your expectations going forward.

Yeah, I think just overall.

Santa loyalty program is we're really happy that we got it re launched we have a new head of marketing now who's taking a look at the program in and how that fits in with customer acquisition and we've always talked about loyalty.

Loyalty to point out, which would be much more targeted at tiers and would offer different things.

We were happy with the loyalty program, we've made some projects some progress in sign ups, but I think the potential is really remaining as we dig further into that and and how we can make it more targeted and more specific one.

Got it alright, well, thank you very much and best of luck.

Thanks Ashwin. Thank you.

The next question comes from John Lawrence with Benchmark. Please go ahead.

Yes, thanks, good morning.

Good morning My name.

Yeah.

What are what you did and just to just a little bit your comments about the freight situation and on the other side. We've got this direct sourcing it and you mentioned the fact that it was some of the work that you did you've done the last couple of years.

Can you comment a little bit how you're able to and describe maybe the bad side of the freight.

And then the positive how you were able to get this direct sourcing on the floor.

Yeah. This is I can speak for every one most likely in the home furnishings industry and overall.

Apply chain industry has really been hard to navigate and its still somewhat unpredictable, but I think what we're doing is we're hitting our stride of how can we win at our particular part of what we can do and right now Unfortunately, it's paying more to get these containers on the water, we realized that not having the inventory with more damaging than paying more for the.

Inventory getting it here and that continues hopefully there'll be a day.

And next year, where it starts to moderate and.

Actually works in our favor, but we've made really good decisions. So what we've done is make sure that every single shipment is prioritize isn't an urgent shipment were willing to pay additional for that container is it something that's nice to have it goes back in on our core and.

And so we really prioritized our harvest shipments and that's why we're in such good stock shape on harvest and that will pay dividends not.

Not only right now, but as we get into that October period, where we ran out last year that will help us bridge the gap.

Christmas The next Christmas wave, which we've also prioritized those two categories are important for us because customers really recognize us for that and it brings traffic into our stores right now, we're pretty well set up for some of the core categories furniture mirrors.

Any place where we've got good inventory, we're having good sales, which is a really good indicator that our merchandise direction is paying off and I think that we're just learning how to navigate this and it's not everywhere around the world, but certain ports are very very complex and so we're watching those we're micromanaging what goes out of those ports.

And really making sure that we at least can communicate if you have three containers, which one should you put up a ship right now and which way can you hold another week. So part of it is just us really doing our homework and due diligence.

Great. Good morning, Thanks for that and just the process of on the direct side.

Most of this work has been done prior to all this disruption awesome.

Yes, and it is something that is a work in progress we have to build the team. We picked all the what we consider the very best agents Representatives overseas and now the fruits of that work over the past year and a half has started to come through and accelerate like we said well, we'll end up and you know the 38.

To 40% range of direct sourcing this year with the goal to continue to push that and the residual benefit I think.

And Nicole mentioned as we get more exclusive product that is well designed and now our stores are actually looking like a fully curated casual home furnishing store, which is our goal all the way along but when youre buying it from a from.

From a group that is you're buying off the shelf.

Harder to make sure that our look is exactly 100%.

Our look and if we can really stand behind the fact that we have exclusive product at great value.

Great. Thanks, and one last question for me.

Do you have a plan or the prototype of what the remodel would look like and then have you remodeled any of those at this point.

Yeah, we've done over the past few years, a series of tests and really for US you know a lot of our stores.

Darker walls and darker carpet and it's just how do we make this store is lighter and brighter says that the merchandise really really shows up to and saying we're going to refresh the majority of our store base. It's not a significant contribution per store. It really is focused on painting the walls changing the flooring.

Making sure the lighting is right and really we've seen it make a significant difference I mean the comments. We've had are it looks like theres different merchandise in the stores that we refresh versus the one that havent been so I think it's really going to be a key part of making the changes that we're making in merchandize be reflected to the.

Customer in the store.

Great. Thanks, Congrats and good luck.

Thanks, Sean.

This concludes our question and answer session I would like to turn the conference back over to Mr. Woodward for any closing remarks.

Thank you Betsy wed like to thank everyone for listening today's to today's call and we look forward to speaking with you. When we report our third quarter 2021 results. Thanks again for joining us.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.