Q1 2022 Kirkland's Inc Earnings Call
Good morning.
Everyone and thank you for participating in today's conference call to discuss Kirkland's financial results for the first quarter ended April 30th 2022 joy.
Joining us today, our kirkland's, President and CEO , Steve Woody Woodward.
C O O N C F O Nicole strain and the company's external director of Investor Relations Cody Cree.
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. Cree as he reads the company's safe Harbor statement within the meaning of the private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward looking.
Looking statements Cody. Please go ahead.
Thanks, Dave.
For historical information discussed during this conference call 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 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 Exchange Commission.
Mind, everyone that this call will be available for replay through June seven 2020 to the webcast replay will also be available via the link provided in today's press release as well as on the company's website at Kirkland's Dot com.
I'd like to turn the call over to <expletive> <unk>, President and CEO Hugh Woodward.
What have you.
Thank you Cody and good morning, everyone.
It has certainly been a challenging start to the year like many of our peers. Our first quarter results were significantly impacted by lower customer demand and higher costs associated with various supply chain constraints.
Anyone who has been paying attention to the consumer commentary over the last few weeks notice at the broader retail landscape is being notably affected by several concerning macroeconomic trends, including rising interest rates elevated levels of inflation, the ongoing geopolitical conflicts between Russia, and Ukraine and increase.
Hi chain costs stemming from higher freight costs and transportation rates.
Carter this is not immune to these issues in some ways, we're feeling a more than our peers in the home furnishing space. It appears our value focused customer is more negatively impacted by these macroeconomic issues compared to the wealthier customer basis that shop, a premium store brands and have more discretionary cash to spend.
We believe our consumer has shifted some of their discretionary spend to experiences such as going out to eat or taking indication given the pandemic restrictions being largely lifted.
Simply put our customers are not prioritizing their discretionary spending on home furnishings and decor right now.
When you combine waning customer demand with wage inflation, and a hyper competitive hiring environment and heightened freight and transportation costs you had the perfect storm it makes it exceptionally difficult to generating meaning wholesales in the better.
Upon executing executing upon a meaningful transformation strategy within this environment is even harder. However, we will remain still remain steadfast in our commitment to becoming a premier home furnishings retailer offering value quality and design throughout an omnichannel experience.
As we discussed a few months ago, we slowed down our pace of change as we weather the storm and wait for a more opportune time to put our foot back on the gas pedal to accelerating sales growth and expand our customer base.
All that being all this being said, we're still making progress on initiatives that are within our control we.
We launched our advertising tests in April across two key markets, Nashville, and Atlanta to drive brand awareness and generate new customer interest.
Well you only have just begun to roll out these marketing programs amidst a challenging environment. The initial feedback has been positive. We will continue to gather data from these tests to glean insights on whether these initiatives could work on a broader scale across our national store footprint, what customer sentiment begins to rebound.
We also recently chest launched our in home delivery service to better serve our customers looking to buy bulky items, such as furniture and outdoor items with a full national rollout scheduled in the next month.
As we've discussed on previous calls this was an imperative next step in becoming an improving our omni channel capabilities. We continue to expect this to be a welcomed enhancement within our overall customer experience and we'll continue to look for ways, we can better serve our customers going forward.
We are also in the final stages of cleansing, our customer data to start Actioning, our consumer data platform. As you said on previous calls this will give us some much needed insights on customer behavior as well as the ability to segment, our customer base and target different groups within.
With different offers and messaging.
This capability will be especially critical as we navigate through the dynamic consumer backdrop, we're experiencing.
Given the volatile macroeconomic environment and our performance to start the year, we were balanced and pace are we.
We will balance the pace of our transformation in 2022 with prudent expense management, which Nicole will cover in more detail.
Historically, we have relied on strong sales from holiday season in the back half of the year to generate cash flow, we used to bolster our balance sheet, especially since we burn cash in the first half of the year.
While we are positioning our furniture and outdoor categories to a LIFO to allow for more balanced sales throughout the year, we aren't there yet and with the challenging consumer backdrop, maintaining an alpha and adequate cash balanced and appropriately using our credit facility is our top priority.
Nicole will go into more details regarding our near term capital allocation priorities, but we plan on operating as efficiently as possible.
We believe the strong inventory position that we built was necessary to ensure that we have our shelves stocked when our holiday season arrived and then we werent, leaving any sales on the table due to simply not having the product in time.
We are cautiously optimistic that our upcoming holiday season in the back half of the year will help augment our financial results for the year. However, we're also planning on being more promotional than we had originally intended to be in 2022.
We believe this will allow us to fuel sales momentum with our core customer base and worked through our inventory stockpile to generate cash flow.
We've discussed it late.
Last call about our customer acquisition challenges and how we're having to slow down from our efforts to allow the market to fully understand our enhanced merchandise assortment without losing our dedicated and loyal customer base.
While the challenging consumer backdrop is impacting our result, I think it is relevant to note that Hercules has historically performed well during recessionary period or for periods of stagnant.
Right.
Customers get over the initial shock.
Begin value hunting for ways to upgrade their home furnishings and decor without breaking the bank. We do believe there's an opportunity to capture attention from a new customer and begin to increase market share.
With our new Assortments that feature elevated design concepts and higher quality materials at a value price. We believe cartons home is the perfect place for consumers to stylishly furnish their homes on a budget.
For this reason our unwavering commitment to executing our transformation will continue during these challenging times, our strategic goals remain the same and we're doing everything we can to maintain our course and hit our objections.
Our shareholders are always top of mind, when we're evaluating our strategic direction and ensuring that we are making the best decisions to generate as much long term value as possible with.
We plan on conserving our cash and being prudent stewards of capital as we weather the difficult environment, and we anticipate coming out of this EBIT stronger than before.
As always I'd like to recognize our dedicated employees and stakeholders. They continue to believe and support our efforts in executing our transformation strategy.
It certainly has been not been an easy road over the last few quarters, but their perseverance continues to inspire me every day.
We believe that we have only just begun to scratch the surface of cartoons true potential within the home furnishing space and I look forward to what the future holds for US as we continue making progress on our transformation initiatives.
With that said I'll now turn over the call to our CFO and COO Nick.
Cole strained who will provide detailed commentary on our performance in the first quarter and our outlook.
I'll be back during the Q&A to answer any questions. You may have called the floor is yours. Thank.
Thank you Wendy and good morning, everyone before getting to the detail of the numbers I wanted to summarize what we saw in the first quarter and how it impacted our business comps continue to decline within the quarter, driven mainly by lower customer traffic or landed product margin came in better than expected down 90 basis points to 2021.
Due to less discounting and taking retail price increases.
We've talked in the past about how much of our costs are fixed in the first half of the year.
Which is in line with our goal to shift our assortment next to products with stronger selling in the first two quarters.
Unfortunately, the first quarter shows deleverage of our operating model at the sales level.
Moving into May we have begun experimenting with our promotional lever to stimulate customer demand and turn through excess inventory today.
To date, we are seeing sales improvement from what we saw in March and April , but still down double digits.
We do expect to continue to be more promotional in the near term, which will impact our margin.
Given that the second quarter has historically been our toughest quarter, we expect Q2 earnings to decline from Q1.
Lastly, our plan to finally be in stock from an inventory perspective and bring in product for Q1, and Q2 sales early had a negative impact on our working capital.
Was compounded by the slow sales in the first quarter, which resulted in a $35 million draw on our revolving line of credit.
I'll get more into our cash flow and how that impacts our capital allocation plan a bit later.
Jumping into our results for the quarter net sales were $103 3 million compared to $123 6 million in the year ago quarter, which included a comparable store decline of 15, 8%.
The decline was exacerbated by macroeconomic conditions impacting the home furnishings industry and driving down traffic and conversion in both our in store and E Commerce channel.
Breaking down sales within the quarter, we had a total comp decline of 5% in February a comp decline of 19% in March and a 22% decrease in April .
E Commerce accounted for approximately 28% of our sales in the quarter.
Gross profit was 27, 4% of sales compared to 32, 6% in the prior year quarter.
The decline was mainly due to deleverage of fixed infrastructure cost.
Blended product margin was 56, 6% compared to 57, 4% in the prior year period with lower discounting offsetting some of the expected incremental freight year over year.
Store occupancy costs increased to 15, 9% of sales compared to 13, 6% in the prior year quarter due to the lower sales base.
<unk> cost increased to five 1% of sales compared to four 6% in the prior year period from wage inflation and reduced productivity from higher inventory levels and implementation of a new warehouse management system.
Outbound freight costs from our distribution centers to our stores increased to two 4% of sales from 2% in the prior year due primarily to rate and fuel inflation.
Commerce shipping costs remained relatively flat at four 4% of sales compared to four 5% in the prior year quarter.
Lastly, other cost of goods sold increased 120 basis points, mainly due to increased damages with the higher inventory.
Operating expenses, excluding depreciation and impairment were $37 7 million or 36, 5% of sales compared to $36 3 million or 29, 4% of sales in Q1 2021.
Wage increases specifically impacting store labor, along with increasing employee benefit costs were the primary drivers for the increase in operating expenses.
Adjusted EBITDA, excluding impairment and other minor non operating expenses was negative $5 8 million compared to $7 7 million in the same period last year.
Our normalized tax rate in the first quarter was 25, 5% compared to 24, 7% in the prior year period.
Adjusted loss per share, which excludes noncash impairment normalized tax rate and other minor non operating adjustment was <unk> 62 compared to an adjusted earnings per share of 12 in the prior year gap.
GAAP loss per share, including these items was 63 cents compared to earnings of <unk> 11 in the prior year.
We ended the quarter with $5 4 million in cash and utilized $35 million in borrowings on our revolving credit facility.
As mentioned before we shipped and paid for the bulk of the inventory we expected to sell for the first half of the year during Q1, which resulted in us having a revolving credit facility with.
With slower sales in our harvest and Christmas inventory, arriving in the second quarter, we expect to be further drawn on the credit facility through the third quarter we.
We expect to reduce the borrowings significantly as we sell through this holiday inventory in the fourth quarter and right size, our overall inventory position.
We have taken a series of actions to reduce our reliance on the credit facility, which includes reducing expected inventory receipts by approximately $50 million in the back half of the second quarter through the remainder of the year.
Implementing operating cost reductions in the remainder of the fiscal year at $12 million to $15 million and increasing our level of promotion to turn through existing inventory at a faster pace.
Inventory at the end of the quarter was $130 9 million.
Which was an increase of $54 6 million from the same time last year and up $16 9 million compared to the end of the fiscal year.
We expect our inventory levels to peak in August and declined to under $100 million by the end of the fiscal year.
We continued our share buyback program in the first quarter with approximately 480000 shares repurchased for $6 3 million at an average cost of $13 <unk> per share.
At the end of the first quarter, we had accumulative authorization available at $26 3 million.
We continue to believe in share repurchases as a valuable component of our capital allocation strategy. However, given market conditions and our current forecasted reliance on our credit facility for the upcoming quarters. We are focusing first on making sure we maintain the liquidity needed to support the business.
Additionally, our credit facility places certain restrictions on share repurchases, while in a borrowing position we will revisit this program as cash flow allows.
Our transformation efforts remain and I believe we've built a strong operational foundation that will carry us through this challenging environment. Although we are operating with macro headwinds we remain confident that we're on the right track and executing according to our strategic transformation.
Continue to focus on the areas, we can control and unlocking the potential of kirkland's as a specialty home furnishings retailer.
Thank you all for joining us today and operator, we're now ready for Q&A.
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 keys if at 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 roster.
Our first question comes from Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead with your question.
Thank you and good morning.
So I wanted to start by asking about the inventory management and so forth in terms of.
Getting that inventory level down below $100 million.
The first part.
Art is understanding the composition of the elevated I think by my math with inventory was up about 70% year over year.
Obviously seen sales trends down high teens in total.
In terms of thinking about the component parts of that inventory.
How much of that was just the freight impact and you know whether it's fuel surcharges other costs.
Posed to the actual piece of stem cells.
That are kind of stacking up I wanted to just see if we could get an understanding of the component parts and how much of this is actually just inflationary pressures that are hitting new guidance.
I think a couple of pieces there. So when we compare to last year, we were really low from an inventory perspective than we had been operating well under where we want it to be so.
We're definitely seeing freight the AA.
A big piece of the growth and we also have the $8 million of seasonal that we are carrying over to this holiday season. So I would say that the right number for us is somewhere in between where we were a year ago, and where we ended the quarter or so.
Does that help.
That is helpful.
And then in terms of what Youre seeing in the industry because I think your observation is right that consumers shifting where they're spending dollars maybe perhaps.
More on experiences, but certainly we've seen the home furnishings category soften as a whole wanted to get an understanding.
You noted that you know, perhaps you have a less affluent.
Customer more value oriented wanted to get an understanding of how you're seeing the industry pivot here as you know I think even at the high end, they've seen kind of a rolling over and in sales trends and whether or not youre getting a whole category, that's starting to be a little bit more promotional.
And whether or not you see that as potentially impacting your ability to clear through goods here over the next couple of quarters.
Well Jeremy Thanks for the question this way.
Multiple things embedded in that well first of all let's talk about the industry as a whole I think.
People are.
When times are tough and you're filling up your gas tank at $120 $100 and then you go to the grocery store and its expensive. They are just being more cautious on those discretionary items like what we sell we don't sell one thing that a customer has to have we sell things that are wants and dreams.
In the history of the company when times have gotten tough when we've gone into a recessionary time period. We were we benefited from some of that as being a value player. So we're anticipating that.
As people kind of change and refocus back on their homes, which.
If you look at housing and all of the components that make that up I don't think that we have a disaster on our hands. We just have a shift of focus.
But we are seeing our brethren both at the high end medium and low end being more promotional right now and thats because the inventory situation caught a lot of us off guard. We were so low by ending last year that we wanted to be in stock. This year for our customers and it came right at the time of the inflation started and the war started so.
I think everyone is a little bit bloated on inventory and they don't want to be so we will have to be.
More promotional I think in the coming months to liquidate through and get ourselves right at the right level of inventory, which I think Nicole said is around $100 million are a little bit less as.
As we go into the next year.
All that being said the component of our inventory is fairly good I mean, we were not bloated.
In one particular category, we seem to be it is just the lack of traffic. That's caused this decrease in <unk>.
Expectation and sales and so we don't have a lump problem, we have kind of a like an overall issue where we're just lowering the inventory is.
Good inventory is just.
It didn't sell as fast and then one other component of that inventory that I think I should mention is that when you have traffic declines like we've had in the past quarter due to the macroeconomic environment. Both the things that we've changed dramatically and the things that we haven't changed dramatically are both experiencing the same kind of downtick so in areas like our <unk>.
Handle assortment, where we didn't change that much their opinion and the decline in areas, where we changed dramatically with our increase in furniture and the quality and all the design aspects declined about the same amount. So we do know that it's an overall Matt.
Macro hit on our sales numbers versus it being in one particular market. The one area that we will be a little bit more promotional during the next very short period of time is making sure that we liquidate our outdoor category so that.
So that we don't carry that seasonal inventory into the third and fourth quarter.
Great that's helpful color.
And I'm, taking that a step further you noted I think the cutting of roughly $50 million or so of <unk>.
Inventory receipts in the back half of the year wanted to get a sense of you know.
Just kind of the component.
Departments or categories, where you might be.
That presumably youre not in holiday or seasonal.
But wanted to get a nurse stand between you know furniture wall decor.
Art textiles lamps.
Where's kind of the bulk of those reductions being made.
We are definitely true.
And making every effort to protect our fall harvest in our holiday Assortments, because that's what people come to US every year and they really know is for that and we have a big opportunity from last year, where we just were out of stock on those items. So those are protected and those are actually on the water right. Now so we expect to be fully in stock when we launch plus we have the $8 million carryover from last year.
For holiday, so we might come out of the gates, a little a little faster on some of those assortments. The rest of the reductions of $50 million come from 212 points. One its peer cancellations most of our vendors want us to be in a good inventory position so they've been very accepting of.
Certain items being canceled and the second one is just shifting product out to a later date and I would say that most of those $50 million our core products that just didn't hit their sales plans for the first quarter.
Order in a right now missing some of their sales plan for the second quarter and we're just lowering overall that inventory exposure to make sure that we come in at the right amount for the end of the year. So it was kind of across the board.
I would say because we had grown faster than furniture, it might be a little bit heavier there, but generally it's across all categories and just trying to get that inventory in the right position.
Yeah.
Got it.
Last one and then I'll hop out of the queue.
In terms of thinking about store closures right I think you closed one store in the quarter.
You know I think obviously profitability metrics have changed.
Here and.
As part of the plan here and kind of right sizing where the businesses do you do we need to think about closing more stores or you know I know, but Nicole team they've done a lot of hard work on getting the leases kind of shored up here over the last couple of years, but just wanted to understand that component.
You know decision, making on a go forward basis.
Not a significant change at this point, Jeremy I think that it will close that we've got a couple of additional closures that we'll have this year and then we'll have the normal lease renewals that happened at the end of the year, where we will evaluate what sort of rent reductions we can get on those stores that we're keeping open just until it doesn't make money there.
<unk> that we've talked about in getting down closer to $3 50, but not really changing anything significant otherwise at this point, but we'll continue to watch it.
Great. Thanks for all the color best wishes guys.
Jeremy.
Again, if you have a question. Please press Star then one our next question comes from Anthony <unk> with Sidoti and company. Please go ahead with your question.
Hey, good morning, everyone.
Thanks for taking the questions.
So first in terms of the quarter to date commentary.
It looks like you're still down double digits, so far in may.
<unk> talked about a little bit also some pulling some promotional levers.
Could you, perhaps expand on that as far as whats youre doing there.
And also just wanted to kind of tie that in with the marketing tests that are still in their initial stages in Atlanta, and Nashville, whether you've seen any incremental improvement from those two markets or is it just too early to say.
I'll start with the marketing test and it's really.
Thanks for the question Anthony the marketing tests are really too early to read we we feel that there is some optimism there, but it's still in the early weeks of that and so we're going to we need to make sure that we give that some time one market the national market is responding or slightly better than the Atlanta market, but it's still too early to tell so those are ongoing.
And it's exciting to be driving down the road and hearing one of our commercial on the radio we're seeing on television so.
We will continue those and then on the other question I'm going to let Nicole answer that because it's.
Yeah, I think it's just generally what we're realizing from a promotional perspective is it takes more right now to get the customer in the store and say we've increased the level of our March promotions and we've also increased the level of our coupons and at this point you know it looks like we'll need to continue that in the New York.
Future, but we've seen some success. We just came off of Memorial day, which obviously was very promotional for everyone and are seeing when we're willing to go to a deeper level of discount we are seeing the customer demand changed a little bit.
Mhm, Okay. Thanks for that and then.
Can you give us an update on your direct sourcing initiatives.
Yes, we're making very good progress.
We're making good progress on the things we can control, but then when we come back in some of the cancellations have to come through that direct sourcing.
But our goal still remains this year in the 45% to 50% of our assortment being direct sourced and we will hit those goals even despite some of the cancellations and other things we are finding that our Asia sourcing is coming along just fine. Although we are mitigating our exposure to not be.
So it dependent on any one country and then we are looking at and opening up some sourcing out of Mexico, which seems to be promising for the future, but yes generally we are and we're in good shape on that initiative is still producing very good results plus giving us the exclusive merchandise that can't be found anywhere else.
Gotcha, and then in terms of your sourcing.
Most of that comes from China have you guys been impacted materially as far as just just the.
Lockdowns there.
Your inventory seems to be Saudi and Iraq.
Pretty good shape, you know based on your comments was just wondering if you could just comment on the situation.
Specifically in China.
We havent really we havent the ports that we are shipping a lot of our holiday out of arent the ones that have been impacted.
So to this point now.
Got it Okay and then last question for me. So I was thinking that you know Nicole you you mentioned that the you have some cost cutting moves.
It's about $12 million to $15 million of that could could you, perhaps expand on that or give us some more details as to what youre looking to do there.
Sure the biggest categories for us that we can find dollars than our store labor advertising and it spend so really trying to balance continuing to do the things that we need to move the business forward, but take out costs or regulate costs too.
Match, the sales levels that we're seeing so.
Pretty much spread as a percent equally through Q2 through Q4, obviously much easier to take dollars out of Q3 and Q4, because we are more variable and less fixed at that point, but.
Got it alright, well, thank you and best of luck. Thanks.
Thanks, Anthony Thank you.
Our next question comes from John Lawrence with Benchmark. Please go ahead with your question.
Yes.
Yeah, Hi, guys good morning.
Just a couple just a couple of questions. Nicole can you talk a little bit about this ongoing freight expense and.
What we see and I don't know what was.
It was accelerated in the fourth quarter and what have you seen so far this year and work continue to big impediments.
That higher cost.
Sure, we just rolled into our new contract rates and those were about what we were paying last year. If you take out the the additional that we had to pay to get Christmas here, we are seeing right now spot rates be under our contract rates and some for it. So I do think as people pull back demand.
And you know overall, there's there's more supply than people wanting to ship goods for the rest of the year that we may see some benefit in inbound freight costs at least so but for right now we're paying similar to or paying on average 10000 container, which is similar to what we were paying last year with outside of Christmas.
Okay.
Yes.
And our last question there.
Delving into that a little bit or above the second quarter and.
I understood you just I'd be a little worse than the first quarter is that what you guided to.
It is from a topline perspective.
We're casting something similar to where we are in may with being down low double digits and then I think the biggest impact is what we're expecting from a margin perspective and that is just being from more promotional to move through some of the excess inventory outside of that it is our lowest sales volume quarter. So the P&L really deal.
Leverage is pretty quickly, especially gross profit. So again, just it's always been our toughest quarter and I think we'll see the same thing this year.
Yes.
Yeah, and just I'm, sorry, one more is that what.
When you look to the second half of the year and especially the fourth quarter.
Yeah.
That advertising that you've tested.
You make a decision say August September of how much supply into that study.
And in the holiday timeframe.
I think so we will continue to watch it and make decisions as it makes sense I think for us trying to get new customers, we really realized last year in the back half better to do that in the first half we really are strong.
A lot of people come to us for holiday, So really trying to make sure. We have the holiday inventory set on our set dates and I think if we we message that to our existing customers that there will be demand for the holiday product. It is the time period that a lot of people come to us, but we'll continue to watch the advertising.
<unk> moved forward our slowdown is as makes sense based on our results.
Alright, thank you.
Thank you Dan.
Yeah.
Again, if you have a question. Please press Star then one our next question comes from Barry Haimes with <unk>.
Sage asset management. Please go ahead with your question.
Thanks, So much for taking my question at a couple of questions just trying to understand the inventory situation a little bit better so.
So the roughly 100 million that that would be the right sized inventory.
Is that.
Assuming that the lower level of sales that you experienced in the first quarter continues or does that assume some rebound.
And second is it.
In terms of the and granted last year was too low, but if we just look at the difference.
How much of it.
The inventory increase is just price versus units and then.
How much of that you know.
Inventory you know the difference between let's say 100 and.
And where you are now.
Are in sort of spring seasonal goods, you know like the outdoors.
You know that you really want to sort of move before you get to the holiday versus inventory that's everyday kinds of things that you would normally can't really around thanks. So much.
Sure. So let me know if I missed any of those but starting with the first one we aren't factoring in a significant rebound.
Looking at risk fee cuts it made sense to assume at least relative to 2019, which will look a bit different.
Versus last year that we would make some improvement just by being more promotional but not in an overall.
Jimmy the macro economic environment or anything significant so there could be.
Some upside there from a sales perspective.
I'm going back to the second one which I believe was freight so freight right now is running about 35% of our cost of goods sold so that has been a significant piece. We also have seen materials, increasing price increases from vendors pretty tough for us to quantify.
By that because we don't reorder a lot of skus that were not ordering like items. Unlike items, so there's somewhat difficult to quantify that piece.
What was that it wasn't unit unit.
So the unit one is also a bit interesting is we've moved our or mix of what we sell more towards furniture. The units are actually not increasing at the same pace as the RASK for basically getting higher cost units and bigger and bulkier units. So the whole composition of our inventories change we're looking.
At the back half of this year, a little bit differently and trying to make sure that we have some of them are the lower ticket items that people and if the economy is slowing that are easier for people to come in and make the decision to purchase.
Did I Miss in seasonal seasonal component of the overage.
Yeah, right now I would say, we don't have significant risk, we obviously as Woody mentioned, we'll need to news throughout door in the next month and a half and there's a portion of outdoor it's not significant that will carryover in our D. C. It again, just because it doesn't make sense to ship it out to the stores and discount it significantly, but I think that will impact our.
In Q2, I don't expect us to have.
A significant amount of inventory at the end that we're trying to burn through at really high discount rate.
Great. Thanks, so much and I just missed when you said freight as a percent of cost of goods sold could you just repeat that number.
Yes, it's about 35%, 35%. Thanks, so much I appreciate the help good luck. Thank you Barry.
Our next.
<unk> comes from John Lewis with Osmium Partners. Please go ahead with your question.
Okay.
Good morning, guys how are you.
John .
Yeah, just a couple quick ones I guess just to start out on accounts payable you're at $47 million last year. You were at you closed the year at $62 million.
Where do you see your accounts payable I saw there was a huge dragging cash flow this quarter, what does that look like.
In a normal time here at AAP is about 60% of our inventory and not hold in those cases, what's different right now as we brought the inventory in early so we're paying for it before we sell it and that's flip flopped that ratio to roughly.
Roughly 38% I think in that does equate to about $30 million. So we knew that that would be a working capital hit but by the end of the year, we should be back to a P being close to 60% of that 100 million inventory number.
So if I'm doing this right your inventory will go from now 132, let's say $100 million. So you should squeeze $30 million in cash out of inventories and if you take 60% of 100 million. Your payables should be at 60. So you should really be closer just on those two components to putting $45 million.
Cash on your balance sheet is that roughly right.
From where we are right now yes.
Right Okay.
Okay.
Yes that was one of my main questions.
And then I guess can you get into you talked a little bit about cost reductions.
I think you said, 12% to $17 million can you can you unpack that a little bit.
Well for 15 million and you're right. We went through really everything and we've taken $45 million of cost out a couple of years ago. So we are relatively lean, but really trying to right size for the sales levels that we're seeing.
I'd say, a third of that is coming out of store labor and and that in some cases, we had added open hours back to stores going back at the stores that are low sales volume and taking that last hour of the day back off.
Marketing also is probably about a third of that and that is looking at where we're spending marketing that we may not be getting the benefit in and holding that.
To a time when when we are getting the demand from it and the rest comes from.
Here and there like every available place that we could come up with dollars that.
Werent necessary.
Projects that we had planned but weren't essential and werent sales driving is the biggest part of that other third.
Got it I guess, the other thing I was going to ask us.
Given your historic ratio between inventory and.
Access your credit facility.
Given that your inventories are where they are if you thought about expanding that line.
We do have an and one thing to keep in mind at the 130 inventory number it's a GAAP number which is a bit different than what we get credit for with the bank that number compared to the 130 gap was about 83 million. So there's obviously valuations that are applied against that and you know there are.
Our warehouse cap and other things that are in our our GAAP number we do have the accordion feature which is $25 million on top of the 75 million that if.
If we needed we could go to the bank and request that but beyond that haven't really gotten any further we don't think that will need it.
But I do think it's an option for us if we did.
Got it yeah, I mean, I look at it as you've got $10 in inventory per share you'll even by your numbers sure you'll put a net cash balance on the balance sheet.
And I guess the way I was looking at it is even if your EBITDA is $20 million to $25 million. If you were to cut your shares and have you'd have over $3 a share and EBITDA.
$5 stock.
It seems like kind of a no brainer and if you go back to.
If you ever get back to $47 50 million Youre looking at $8 a share if you had a $6 million share count so I.
I think the the opportunity to repurchase equity at these prices given you know enormous.
You got fairly high inventory churns.
There's for structural seasonal reasons, Theres always a Thanksgiving theres always a Christmas.
So it just seems to me that you know.
With buying your equity or your market. If you look at your market cap to inventory, it's 50 cents on the dollar.
So yeah, it's it's.
I guess, we also look.
Today, even if the current market.
<unk> are trading at almost three times inventory and we're at <unk> five.
Five times market cap inventory. So we think the stock is.
Absolutely undervalued and get the tough macro headwinds but.
We will catch up and I appreciate all your efforts.
Yeah. Thanks, John I think John you know my thoughts on that as we'd love to be buying back our stock at $6 a share and would love to have had back what we've already done and be buying at this level and we do believe that we are continued to be undervalued I think the balance is our credit agreement does have some restrictions on how.
Much availability, we have to have them in order to make share repurchases at any point in time that we're borrowing. So we're just balancing a lot of things in the near term and making sure that we.
Maintain the right liquidity to support the business, but I agree and we agree with with all the things that you said.
Okay.
Okay.
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.
Yes. Thank you operator, Dave we'd like to thank everyone for listening to today's call and we look forward to speaking to you when they report of our second quarter 2022 results come out and again, thanks for joining us.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.