Q1 2023 Kirkland's Inc. Earnings Call

Thank you for participating in today's conference call to discuss Kirkland's financial results for the first quarter ended April 29 2023.

All participants will be in listen only mode did you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.

Joining us today are kirkland's home interim CEO , and Joyce President and C O O Amy Sullivan.

E V P and CFO , Mike Madden 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 statements.

Also just as a reminder, the call is being recorded Cody. Please go ahead.

Thanks, Andrew.

Except 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 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.

I'd like to remind everyone that this call will be available for replay through June 15th 2023.

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 dotcom.

Now I'd like to turn the call over to Kirkland's home in term CEO and Joyce and over to you.

Thank you Cody and good morning, everyone.

It's great to be joining you in my new role as interim CEO I've spent the last two years as a board member and have been in this role a little over two months and while there's a great deal of work to be done being involved at this level has reinforced my view that our best days are ahead.

Before we get into the quarter's results I want to comment on my initial impression and talk about what's next.

As discussed on our last call we disappointed some of our loyal customers in recent years by placing too much emphasis on promoting higher ticket items.

Overall voice shading, and we struggle to keep our customer okay.

We missed our seasonally relevant in times of the year that have historically brought strong customer response.

Quick ones appeal has always been an ever changing seasonally relevant product assortment that provides fashionable curated look which our customers rely on to update their home decor affordably.

Our highly nimble team diligently monitoring the dominant home the core trends and quickly develop our merchandize assortment accordingly.

This scale allows us to provide our customers with fresh products that are relevant stylish and within their budget. We are renewing this proven model. While also expanding upon some of the recent successes that we've seen in the business.

One of these successes has been the transformation of our sourcing model.

Allowing us to upgrade our design enhanced product quality and improve margins.

We've also learned a great deal about the furniture category and what works and what doesn't work for our customers. These lessons will allow us to appropriately with buying our product assortment, even more ensuring its truly.

Within our model and meet our customers' expectations.

At our core we are a valued specialty home decor retailer and this means that we use promotions and deals as strategic driver to engage and excite our customers and.

In recent years, we've been reactions with our promotional strategy.

Now, we are creating a strategic and intentional promotional calendar centered around seasonally relevant items at lower price points that we believe will drive more traffic.

To maximize the promotions and sales events, we are ensuring that our messaging creates a call to action and showcases our renewed assortment. However, we're also leaving enough flexibility in our plan to be reactionary if the opportunity arises.

We are an omni channel retailer, which allows our customers to choose the engagements that fits their preference our real estate portfolio is very competitive with more than 340 stores across 35 states are.

Our recent assessment tells us that the vast majority of our stores are in healthy retail center with strong anchor tenants and located in areas, where our core customers with.

Well, we are confident in the strength of our current physical store footprint, we know the customer that shops, both channels spend twice as much as the single channel customer.

Looking at our sales mix by channel E. Commerce represents 27% of our business today and this makes our online platform our largest store. So we are focused on driving conversion, ensuring inventory availability and driving profitability.

As an omnichannel platform, we need both of our channels firing on all cylinders and we're spending a significant amount of time working towards that.

By the end of 2022 we made significant progress strengthening our balance sheet by reducing inventory to 84 million and paying down 45 million of our debt.

We sure this up in the first quarter to an extension of our credit facility, which provides for additional borrowing capacity during the upcoming peak season and extends the maturity date to March 2028.

Out of everything we've discussed.

Firmly believed that our greatest asset is our people, which includes our field leaders, our associates and the distribution and corporate teams that support them.

Their passion dedication and commitment to the customer it's truly impressive.

So we have a solid foundation to capitalize on it so what's next well recently, we realigned our organizational structure, placing an emphasis on our high performance culture and ensuring we have the right people in the right position.

I am fortunate to have Amy Sullivan, and Mike Madden as our key partners during this transition.

Amy was recently promoted to president and C. L O and she has varied and increasing merchandising and operational responsibilities. During her 10 years of Kirkland.

And before that she spent a decade in the fashion apparel industry, where she served in several merchandising leadership roles and prior to that in brand management role at Department stores. She is a talented and motivated leader and Mike rejoined Kirkland's last year after spending four years as the CFO of a commercial real estate investment funds.

Prior to that Mike spent 17 years at Kirkland, serving in various senior level capacities. He has a deep understanding of our business and our customers, both Amy and might have broad industry and company specific experience, which will be crucial as we execute our plan.

We are also instilling a culture that views things first through the lens of the customer and the associate we've launched two initiatives our voice of the customer and our voice of the associate programs geared to enhancing the overall brand experience.

My experience is that these programs if theyre supported by a robust use of data driven decision, making can quickly galvanize and organization and drive change we are still in the early stages, but I am encouraged by the organization's eagerness to embrace these changes.

Our attention now turn to recapturing sales and product margin to better leverage our fixed cost base.

This effort starts with and it depends on our merchandise assortment and our value proposition.

We have adjusted our assortment for the back half of 2023 to balance decorating entertaining and gifting with an emphasis on value decor under $20.

Supporting these changes with a strong promotional plan and effective marketing should allow us to win back customers and generate topline momentum.

As we adjust our brand voice to recapture that style and value proposition, we expect to strike a balance between the broad category of messages and personalized customer offers leveraging the investment in our customer data platform.

Supply chain costs have decreased substantially thanks to lower inbound freight rates and we expect our internal cost to be lower due to reduced inventory levels and increased efficiency.

You'll see some of these benefits already positively impacting our merchandize margin with a 160 basis point year over year expansion in Q1.

These factors helped the overall margin equation, providing a path to improve on the prior year, while giving us room to ensure our promotional strategies are effective and profitable.

Continued tight expense management should provide better flow through of any incremental sales that we generate.

But looking forward to the coming months, we will be refining our long term vision and strategic plan. So that we can capitalize on our brand potential we want to cement our strong brand identity centered around the value oriented and stylish homes decor with seasonal relevancy as well as compelling entertaining.

And gift options.

As we continue to make progress towards our refined long term vision the muscle that we built along the way should allow us to shape, our future and uncover additional opportunities for growth and profitability.

As we balance our short term goal of returning to profitability with refining and executing our long term vision. There remains much work to be done and we are in the early stages of our journey.

I do want to emphasize that during this transitional phase we remain steadfast in our constant commitment to our customers and to our path to profitability.

On that note I.

I'd like to express my Sincerest gratitude to our dedicated employees, our partners and stakeholders for their unwavering support and commitment to the Kirkland's home brands I am confident that our collective efforts will pave the way for long term success and create value for our shareholders.

With that now I'd like to turn the call over to Mike who will provide detailed commentary on our performance in the first quarter and our financial outlook, Mike over to you.

Thank you Anne and good morning to everyone for the first quarter net sales were $96 9 million compared to $103 3 million in the prior year quarter, which includes a 4% decline in the average store count and a comparable store sales decline of four 4%.

The comparable store sales result was largely driven by traffic declines in both stores and online partially offset by an increase in our customer conversion rate and an increase in our average transaction value.

We saw a small channel shift during the quarter at stores performed slightly better than e-commerce on a year over year basis.

E Commerce was 27% of total sales in the quarter compared to 28% in the prior year quarter.

Breaking down sales within the quarter comps were down 9% in February .

Followed by a decrease of 8% in March and an increase of 6% in April .

During April April we ran a friends and family promotional event that did not occur in the prior year.

The event was successful and driving to a positive comp for the month, but also helpful in providing insight into how we message promotional events for the rest of the year.

Store sales results were relatively consistent across geographic regions with better performance in the southeast and Florida.

And weaker results in the upper Midwest and northeast.

From a product perspective, we showed stronger results in the seasonal floral and outdoor categories.

These increases were offset by decreases in furniture and wall decor.

As Ann mentioned earlier and as we move into the back half of the year, we have increased our investment in categories that better highlight our value proposition and seasonal relevance.

We've also invested in depth in key items within these categories. As we felt that was a missed opportunity last year.

Further we plan to introduce more products that promote gifting and entertaining during the during the timeframe between Thanksgiving and Christmas another area of missed opportunity last year.

Gross profit margin declined 70 basis points to 26, 7% of sales compared to 27, 4% in the prior year quarter.

The five components of this year over year change are as follows.

First.

Merchandise margin increased 160 basis points to 56, 8%.

Versus 55, 2% in the prior year quarter.

Lower freight rates combined with lower product costs drove the increase in margin.

As we've previously discussed inbound freight rates spiked during early 2022 and have steadily declined since then.

Spot rates in our key ports of origin in China, Vietnam, and India have either reached or are near post pandemic lows.

We expect our merchandize margin to benefit from the decline in inbound freight costs throughout 2023.

Second central distribution costs increased 100 basis points to five 6% of sales from four six in the prior year quarter.

Deleverage from the decline in sales combined with high levels of cost capitalization in the prior year led to the increase.

We saw sequential improvement from Q4 and the year over year comparison during the quarter.

Excluding the capitalization effect cost incurred in our distribution center operations were down during the quarter.

Our operational efficiency is improving because of a decline in inventory levels and better product flow and we expect this to continue for the balance of the year.

Third.

Store occupancy costs increased 100 basis points to 14, 7% of sales from 13, 7% in the prior year quarter, largely due to deleverage from a lower sales base.

Fourth outbound freight costs, including both store and E Commerce shipping expenses.

Increased to 90 basis points to seven 7% of sales from.

From six 8% in the prior year quarter.

Sales deleverage was the primary reason for the increase.

And lastly, depreciation included in cost of sales decreased 60 basis points to two 1% of sales from two 7% in the prior year quarter.

Yeah.

Total operating expenses were $36 2 million or 37, 4% of sales compared to $39 4 million or <unk> 38, 1% of sales in the prior year quarter Thats, a decrease of 70 basis points.

The decrease was primarily the result of lower marketing expenses, which was 3% of sales for the quarter.

Versus four 5% of sales for the for the prior year quarter.

This was offset somewhat by deleveraged from the sales decline severance charges of approximately 0.5 million related to our Ceos retirement, our prior Ceos retirement.

And impairment charges of zero point $2 million recorded during the quarter.

Adjusted EBITDA, excluding impairment stock compensation and other minor expenses was negative $5 8 million for the for the current quarter and the prior year quarter.

Our operating loss improved to $10 3 million versus $11 one in the prior year quarter.

Our income tax rate for the quarter was an expense of 12, 7%.

Impaired to a benefit of 29, 7% in the prior year quarter. As you may have noticed we dropped the adjusted net income reconciliation as we are no longer including this metric within our reporting.

Given the seasonality of our business our tax rate will fluctuate greatly as the year progresses, depending on actual results and forecast for this reason operating income and adjusted EBITDA or the profitability metrics that we use internally to gauge profitability as we were as we progressed through the year.

From a balance sheet perspective, our inventory levels are under control and flowing according to plan.

We ended the quarter with $83 $3 million of inventory versus $130 9 million in the prior year quarter.

We had borrowings outstanding on our under our revolving line of credit of 33 million, which was in line with our expectations.

As we announced in April we completed a five year extension to our revolving credit facility that provides additional borrowing capacity during our peak season.

Moving to our outlook for 'twenty three we are not providing specific guidance for the year given the lack of visibility around the macroeconomic environment and its impact on customer traffic and conversion trends. However, we do want to provide some color around our expectations for certain key areas of the business.

In the early part of the second quarter, we continued to see challenging trends in traffic counts both in stores and online.

Second quarter comp sales trends remain negative.

However, we expected Q2 to be a transition quarter factoring in lead times and execution, the merchandize assortment and promotional changes that Anne mentioned earlier, they won't be meaningfully represented until Q3.

Merchandise margins are providing an offset running higher than the prior year and the 150 to 200 basis point range, thus far in the quarter.

We expect that to grow as the quarter progresses.

In the latter part of the second quarter last year, we initiated a period of deep clearance in order to reduce excess inventory that we won't have to repeat this year.

The merchandise margin is also benefiting from lower inbound freight cost as container rates returned to pre tax pre pandemic levels and a decrease in product cost through vendor negotiations.

Supply chain costs inside our distribution centers are reflecting lower inventory levels and increase labor efficiency.

We have made moves to simplify our supply chain infrastructure by recently closing, our Los Vegas ecommerce distribution hub and eliminating our reliance on off site storage.

We expect to see a bigger effect from these changes as we progressed into the peak season.

And we continue to be vigilant about operating expense control, reducing operating expenses by over $3 million in the first quarter.

These reductions are in place and will positively impact year over year comparisons for the balance of the year.

Looking at our balance sheet, we expect inventory levels to follow a historical cycle and peak at the end of Q3 in the range of $110 million to $120 million we.

We will fund this inventory investment with trade payables and borrowings under our credit facility.

As of today, we have 37 million outstanding on the facility with $24 million in excess availability $12 4 million of which is available for borrowing.

As our inventories increased our line capacity does as well and we will use additional borrowing to fund our peak season inventory flow.

Currently we expect peak borrowings to be in the range of $60 million, which matches last year's level.

As Ann mentioned in her remarks, our priority for the balance of 2023 is to generate renewed sales momentum through changes to our merchandise assortment and promotional activities that highlight our value proposition.

Financially speaking this would mean a return to positive adjusted EBITDA generation, while creating sales momentum that can carry forward into 2024.

Our intermediate goal is to return to historical average adjusted EBITDA margins in the mid to high single digit range.

We've made significant improvements in our operations over the last several years, including our direct importing growth and improvements in our omnichannel capabilities and supply chain infrastructure.

We've also tightened up our store base and improved leasing terms and many of our locations.

Recent work, we've done to analyze our store portfolio supports the fact that we remain in competitive vibrant real estate locations.

We've done an effective job in reducing our operating expenses and continue to manage each line item prudently.

Getting back to historical adjusted EBITDA generation depends on our ability to rekindle demand with our customer base and macro factors surrounding the home furnishing sector getting back to normal after a period of sales pull forward during the pandemic.

We believe that with some shifts in emphasis in our merchandise assortment, we can attract additional demand from our core customer segment.

While maintaining interest from those we've attracted over the last few years.

We are prioritizing more depth and seasonal buys key items across our home decor categories and an emphasis on more accessible price points in an environment, where home consumers are stretched.

All the while we will continue to feature the improvements in style and quality that we've gained over the last few years.

Finally as to capital allocation, our priority is to reduce borrowings and reestablish a level of liquidity that allows us to operate the business with more flexibility.

Once that has been achieved we will focus on growth and ROI opportunities to push the business forward.

Share repurchases and dividends have been valuable components of our capital allocation strategy, historically, and we expect to use them again in the future once our near term goals have been achieved.

That concludes our prepared remarks, and Andrew we're now ready to take some Q&A.

We will now begin the question and answer session.

If you ask any question you May Press Star then one on your telephone keypad.

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'd like to withdraw. Your question. Please press Star then two.

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

The first question comes from Jeremy Hamblin, with Craig Hallum Capital Group.

Please go ahead.

Thank you and and it's nice to have you on the team are full time.

I wanted to just start by.

Getting a little bit of an understanding of you noted traffic trends remain challenged.

And that your your may comps quarter to date comps were negative wanted to give a get a sense of magnitude and and then as a comparison versus April where you.

You saw a pretty pretty solidly positive comps.

Your expectation in terms of you know compares for the remainder of the year.

And whether or not you feel good about getting back to kind of a positive comp by the end of Q2.

We're waiting until the back half of the year.

Okay, Jeremy I'll start with that.

Mike.

So yeah, I mean April was a strong month for us given the event we ran.

We also had a little bit easier comparison that month and as we walked into may.

We are negative traffic trends continue to be kind of tough both both in store and.

And online, but we expected that really in the second quarter given.

What we had to do last year to really start clearing inventory. So we viewed Q2 is a transition and we think as we get into the back half more of what we talked about in the call in terms of the assortment in terms of the promotional planning.

And the impact of those events.

It will take place more in Q3 and into Q4.

The depth and the seasonal buys the allocation of inventory investment into some of these other categories that really can drive more basket.

We're going to be really important and we think we'll be better positioned. So Q2 is definitely a transition quarter. We've got a lot to play out we've got some events coming up in June and July that will have a big effect on how we finished that quarter, but really our focus has been on the back half.

And that's where we see the opportunity both on the sales side and the margin side.

Although I will say in Q2 of margin is a big opportunity in Q2, just because of what we were doing last year to clear the inventory and we hit such a low I think our gross profit margin in Q2 last year was 18% or so.

Yeah.

I was encouraged by.

What we what we believed was the customer's voting on some of the <unk> changes in some of the product assortment changes that were.

And in April .

Also I think that we have a did a better job of conversion in April and as we build the conversion muscle through the back half of the year with what Mike just described in terms of our positioning.

I'm encouraged by us being able to control what we can and.

Getting better at certain things as the year goes on.

That's helpful. Yeah. It sounds like a good test case there in April .

But Mike you you did get a or kind of alluded to the point that I wanted to hone in on a little bit more.

Which was your gross margin obviously it was really tough last year as you were clearing goods clearly inventory levels are pretty tight in much better shape.

Sequentially typically Q2 is down from Q1, and you know just wanted to get a sense maybe near term on you know where you expect.

Gross margin to play out I know.

I know that you provided some color on merch margin.

But my assumption is that you would see pretty significant improvement.

On overall gross margin in Q2, but maybe sequentially down from Q1, any additional context or color you can share there.

Yeah, I think youre pretty much on it I think our second quarter margin just given.

Seasonality in the business second quarter is a little bit lower in terms of total sales dollars than Q1. So there is a deleveraging effect there and it's also kind of a.

Then more of a discount heavy quarter historically.

So that is true sequentially down from Q1 as is the right way to think about it but on a year over year basis, I think we have more opportunity to grow the margin both the merchandise margin and the gross margin in the second quarter and then for the rest of the year I think.

What we'd like to see is our ability to get back toward that 30% number.

For the year and the.

The sales and the margin mix will determine where that ultimately shakes out, but that's how we're positioning ourselves going into the back half year.

Got it that's helpful and then as you've had a chance to.

To assess the store portfolio.

Any changes in terms of it sounds like you're pretty happy with the centers that you're operating in also sounds like you've had some opportunity maybe to renegotiate some of your lease deals but wanted to get a sense for you know is there any thought on relocation.

<unk>.

No additional closures it looks like maybe you've closed a couple of locations quarter to date, but any any color you can share on your store portfolio.

Sure.

We're definitely in what I would call maintenance mode in the store portfolio, we want to we want to hold our store count Theres a lot of changes here, we talked about today that.

We think we will have an enormous benefit on our store performance and we don't.

Where we see a store that's in a good retail center thats around a lot of our customers, we want to make a good deal and ste.

And that's that's how we're looking at this we are relocating a couple of stores. This year I think it's too and it'll be later in the year.

As we as we accomplish those but that would be better positioning successful markets that we're in.

And we will do some.

Housecleaning I would call. It in terms of stores that are not as profitable or not profitable and that will really come toward the end of the year and I think it will look a lot like last year, we could close 10 to 15 stores, but they will largely be underperforming stores that we've concluded it.

That's the right move for Us to go ahead and exit.

So that that will come at the end of the year when most of our leases.

Our lease actions actually.

Have to be dealt with a lot of our leases really.

Coincide with the end of our fiscal year end, we will be working on that.

Diligently for the rest of the year.

Got it. Thanks last one for me is you noted the advertising expense was down your overall SG&A was down year over year.

By a few million dollars.

I wanted to get a sense in terms of the plan that you're going to execute here how should we be thinking about that on a go forward basis, particularly in the back half of the year.

Are you still planning you know advertising expense down should that normalize and you know how how does that impact your SG&A overall on a year over year basis here as we get into the second half.

Yeah, I'll I'll provide some high level and then I think we can talk also about how we're thinking about the spend itself and the effectiveness of it but we did plan it down in the first quarter that difference is a little bit more striking than what youll see for the rest of the year just because we were up against some dollars we spent on a.

On a a brand branding test that ran in two markets and we spent quite a bit of money on that that was a a a a rollout that we were testing and we were up against that spend so there's a chunk of that comparison I called out today that was related to <unk>.

To that as we look forward.

We're looking at roughly $13 million of marketing spend this year that compares to a little over 18 last year.

And we're constantly working on ways to make that spend more effective and maybe I'll, let Amy I missed that.

Hi, Jeremy it's Amy so as we think about the back half of the year, particularly as it pertains to advertising budget, we very intentionally preserved dollars for Q3 and Q4, when we will be in a better position in terms of our category mix in our overall value proposition that we want to speak to the customer.

Right now in Q2, we're testing a few different tactics things stem from our past some sort of future thinking ideas and marketing as we think about how the demand to drive demand.

Direct mail is one that we've got out in a test right now that I feel pretty good about and Thats something thats worked for us in the past. So I feel good that we have the dollars that we need for the back half of the year as we think about that as the time for our sales peak to come into play. So I think we're well positioned there.

Great. Thanks for the color and good luck this year. Thank you.

Jeremy.

The next question comes from John Lawrence with benchmark.

Please go ahead.

Yeah.

John .

Would you would you talk a little bit about just starting off.

Maybe about.

The culture and some of the changes in just a deeper dive into this.

You know I know you.

Explained it but this merchandise is this merchandise changes in.

You know known the company for a long time, but just to just a sense of.

What the customer's going to see going to see in the store. This year at holiday may be than what they saw last year.

And just a little deeper dive into those segments a little bit please.

Sure. John This is Andy I'll start and then I'll hand, it over to Amy.

No.

What I was hoping to make sure I got across is that the essence of what.

What.

Kirklin successful and it is in its success.

Its inception is still true today, maybe even more so given the macro economic conditions, and that's really about the ever changing seasonally relevant assortment the customers relied on to be able to update their home decor affordably.

No two awards I mean, I think there are more relevant today than they even were in the inception.

We had some missteps and the good news is we learned a lot in those missteps right. So we wanted to take those learnings and move them forward specifically into furniture.

As it relates to the specifics around the back half of the assortment I want Amy to talk about that but I do feel very encouraged by the fact that the team has been able to pivot to the back half and even if you look at 40% of the products being under $20 and speaking that value message. We believe those messages will drive.

Traffic.

In both channels and we also believe that we will surprise and delight her with our customer when they come into the store and see that they can buy gifting and decorating accessories et cetera at a price they can afford.

To enjoy their holidays.

And so.

The pivot of that and the movement that the team and the speed by which they've been able to move is pretty impressive and I think that we're well positioned for the back half Amy do you want to give a little bit more share color on that John I know, you're you've followed us for a long time. So you are really familiar with sort of our historic indexes in the back half.

Specifically in the holiday period, and so I think it will feel very familiar to you in terms of category mix and really focused on sort of those three key timeframes of the holiday season, if you think about decorating entertaining and gifting and and we have a long history and that that has proven to be very successful for us in the past.

Over the past few years I think the penetration that we've had in the furniture category has overshadowed some of that we haven't walked away from that but we need to get back to those historic levels of what the holiday business means to us in the back half of the year.

So as we move into this year, specifically, you'll feel the broader assortment and holiday better depth and holiday items, and then a heavier focus as Anne and Mike both mentioned and the items under $20, representing 40% of our assortment, which is also comparable to some of our best Q4 as in the past.

Furniture as Ann mentioned, we've learned a ton about it's not going away for us, but I think the breadth of the assortment and got too wide and so we are laser focused on staying in stock and the proven items within furniture that work because we do believe that the foundation. If you think about our store format, our customer comes to us for inspiration.

How she puts the looks together and decorates her room. So it's important to us, but we want to flip back to ensuring that we're heavily focused on how she decorates and celebrate sort of every moment throughout the year, specifically focused on Q4 right now.

Great. Thanks, Thanks for that and then secondly.

You've learned a lot over the last few years about this direct sourcing has the furniture direct sourcing spilled over some other where are the learnings that you picked up from that and how does that go forward.

Sure I'll take that one it's Amy again, so our overall direct sourcing penetration as you've heard US mentioned before is close to half of our business and it's really pretty evenly spread across most of our categories and so it definitely started heavily and more of our everyday home furnishings. If you think about <unk>.

Textiles and furniture.

But even this year's holiday assortment has a pretty heavy penetration and direct importing and so I would say our biggest learning and takeaway from that over the past few years has been <unk>.

Obviously, some improved IMU and margin out of the gate.

At our control of quality better control of design and more unique products to kirkland's and so we will continue to leverage that I want it to be a really natural process for the team to ensure that we're buying the best product at the best costs from the correct vendor whether that the direct import or an indirect import.

So we're really taking the opportunity now to make sure we're managing it holistically.

But its definitely given us across all of our categories are pretty solid footing to ensure that we have unique high quality items at a great cost.

Great. Thanks for that last one for me Mike.

When you look at the positive comp in April obviously was the promotion that.

That hit gross margin to drive that.

Ex that out with a four comp in April if you just split that much out did you see some of those costs.

Our leverage a little bit with a four comp or is it.

Not the right way to look at that.

Yeah.

We certainly gave some margin in that event, but it was productive I mean, we drove margin dollars and with a six comp in April .

We are able to leverage a lot of you know most if not all.

<unk> of the expense line items that.

Have been deleveraging quite a bit with the negative comp. So you can see it you can see that in play when you have month like that.

The flow through is.

Very strong so if we can create some momentum here in the back half that model is there for us I mean, if we can have a positive comp in that in that range.

That's going to be that's going to be a good year for us just given how much we've taken the fixed cost structure down we're still able to operate we still got all that we need to the flow through can be can be strong.

Great. Thanks, and Amy Thanks, a lot for your help and good luck.

Thank you. Thank you.

At this time. This concludes our question and answer session I would like turn the call back over to Ann for closing remarks.

Thank you Andrew we'd like to thank everyone for listening on today's call and we look forward to speaking with you. When we report our second quarter 2023 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.

Okay.

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Okay.

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