Q1 2025 Kirkland's Inc Earnings Call
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Good morning, everyone and thank you for participating in today's conference call to discuss Kirkland financial results for the first quarter ended may four 2024.
Joining us today are Kirkland, who CEO, Amy Sullivan, EVP, and CFO, Mike Madden and the company's external director of Investor Relations Caitlin Churchill.
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. Churchill. She will read the Companys Safe Harbor statement within the meaning of the private Securities Litigation Reform Act.
Of 1995 that provides important cautious cautions regarding forward looking statements Caitlin. Please go ahead.
Thank you.
Except 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 uncertainty, 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 filings with Securities and Exchange Commission.
A webcast replay of today's call will be available via the link provided in today's press release as well as on the company's website at Kirkland Stockholm.
Now I would like to turn the call over to Kirkland CEO, Amy Sullivan Amy.
Thank you Caitlin and good morning, everyone.
As we have previously communicated over the past year, we have been dedicated to improving our performance by returning to our value heritage and re engaging our core customer.
Kirkland is has a strong history with an incredibly loyal customer and we are well positioned in our industry with our value oriented differentiated and curated product assortment to once again drive.
During this time as we work through our repositioning that is currently underway. We are staying focused on executing our strategic initiatives.
Controlling the controllable and driving improvements across all areas of the business.
Our first quarter top line results reflect a continued challenging industry environment with total comparable sales down we get a half percent.
We continued to see early indicators that our strategic initiatives are gaining traction.
Our store channel delivered a 2.8% comparable sales increase driven by our marketing and merchandising strategy.
In fact overall unit sold was almost with almost 20% in Q1 compared to last year as growth in value of the core offset the lower demand of higher priced goods.
Yeah.
With respect to profitability adjusted EBITDA improved $1.3 million compared to last year, driven by gross margin expansion and disciplined expense management.
As we noted in our press release following the quarter end redeployed a number of cost savings initiatives to further align our cost structure with the current business environment.
Through these actions, we expect to deliver $6 million in expense savings inside this fiscal year.
We are focused on minimizing any potential impact to our strategic initiatives and most importantly, the customer experience.
While these decisions are never easy we believe they are the right actions to take as we remain focused on improving our profitability and liquidity.
We have also retained consensus and investment banking firm specializing in consumer facing companies to serve as a financial advisor to assist the board and the pursuit and evaluation of potential strategic opportunities to support our efforts and plans.
We know to drive success, we must deliver sales growth and this is where the entire organization is keenly focused let.
Let me refresh you on our strategic initiatives.
First we engaging our core customer.
Second refocusing our product assortment.
Third strengthening our omni channel capabilities, let me dive deeper into each one.
First re engaging our core customer.
As we have discussed previously we are intently focused on keeping a consistent brand boys, while leveraging efficient marketing tactics to drive results.
Since the start of Q4, we have seen a 36% reactivation of lapsed customers largely driven by our shift back to home decor, and guests, where we have meaningful category dominant compared to our pricing strategy.
We know our customer continues to feel pressure on her wallet.
Many of our competitors recently reported but.
But we have seen that when we provide a sense of urgency or a call to action type of promotion she responds.
For example, our April friends and family event drove positive traffic and conversion in both channels ultimately, resulting in positive comp sales compared to the same event last year.
We continue to see positive news from our Fms program, which drove 30% increases in both conversion and revenue this quarter by highlighting timed events with our best offers.
In addition, we continue to maximize our email file expanding our triggered email campaigns to notify the customer if recently searched items are low and thought well back in stock.
We reintroduced a birthday reward to our loyalty customers to help drive both traffic and frequency in our channel.
We expect to continue to benefit from these SMS and email campaign through the balance of the year as we continue to engage our 17 million poor and reactivated customers.
Yeah.
Turning next to our second strategic initiative to refocus our product assortment by bringing back our always something new mindset and delivering curated on trend and seasonally relevant home decor at a great price.
We made strides over the past several months and reducing penetration of our furniture category.
And as we continue to rebalance our assortment and introduce more frequent newness. We believe in time, we will return to historical inventory turns above three times.
Okay.
Our merchant teams are constantly in the market and analyzing social media to capitalize on.
And lean into the seasonal moment, our customers love.
We are particularly pleased with a 15% year over year sales increase from decorative accessories.
Which continues to win with the customer.
As has our holiday and floral assortment, which continue to be core strength for the brand.
Yes, which we tested and reintroduced in Q4 has been a bright spot and delivered an incremental $2 million in revenue driven by sentiment religious and mothers' day thing.
Within that we maximize the power of a key item in our beach Totes, which ended up being the number three item and the total company in Q1.
This is a great example of how our teams are reacting quickly and leaning into on trend moments all customer box.
[laughter] again as reported by our competitors, we continue to see challenges in high ticket items, such as furniture mirrors and rugs, while we plan to these businesses down appropriately for the quarter demand remained soft.
As we look ahead, we will continue to monitor the demand and price sensitivity of these categories, while driving more substantial growth in holiday floral the core and gap.
Yeah.
Finally, let me turn to our third initiative to strengthen our omnichannel capabilities.
As we have discussed we see ample opportunity to improve our e-commerce business.
We have recently retained additional leadership to help oversee our ecommerce strategy and she is actively identifying and addressing areas to improve results.
As a reminder, our e-commerce assortment has a greater penetration of high ticket categories and wild continued softness of these categories weighed on a O P E R.
He used to be positive conversion for the channel overall in the quarter.
We are maintaining a dominant share of voice in key categories, such as holiday art, CT and floral compared to our peers.
That said given the results in E. Commerce, we are planning the business conservatively for the remainder of the year and are taking actions to rationalize our skus to optimize value.
Yeah.
In addition, we are continuing to work on plans for 2020 five three platform, which will deliver a more seamless customer experience while improving efficiencies.
With respect to stores as I mentioned in my opening comments, we are pleased with the two 8% comparable sales growth we drove in this channel.
Our store teams are maximizing our new assortment and delivered double digit increases in conversion and transactions in the first quarter.
Do you believe in the new store growth opportunity in front of us.
And see it as a potential accelerant to our overall value creation.
There is clear opportunity to reenter into many of the markets, we previously exited and.
And we are actively engaging in discussions however, timing will depend on our capital priorities and investment needs.
As we look to the future we remain confident in our three strategic initiatives.
It's on driving sales growth, we believe these initiatives coupled with maintaining disciplined operational effectiveness.
And improve liquidity should give us a path to $600 million in revenue in the next five years.
Which in turn will enable us to return to adjusted EBITDA margin in the mid to high single digit range.
Before I turn the call over to Mike I want to thank all of our associates.
Dedication to our customers and commitment to our initiative is directly tied to our results.
It's an honor to be almost journey with each of you and I'm confident in our collective ability to return our brands for long term profitable growth for our shareholders Mike over to you.
Thank you Amy and good morning to everybody as Amy reviewed we saw a softer start to the year. However, we were pleased with the ongoing progress against our initiatives as reflected in the positive comparable sales growth we delivered in our store channel for the period.
Mike: And the year over year improvement, we delivered an adjusted EBITDA.
Turning to our results in more detail, but.
For the first quarter net sales were $91 8 million versus $96 9 million in the prior year quarter.
The average store count was down 4% compared to the prior year quarter and comparable sales decreased three 5% for the quarter.
The decrease in comparable sales was driven by a decline in the average ticket.
Offsetting partly by improvements in conversion and store traffic.
Breaking down sales within the quarter.
Comps were up two 4% in February.
Down 10, 1% in March and down to 0.9% in April.
As Amy discussed we drove positive comparable store sales of 2.8% in the quarter. However, the ecommerce sales decline of 19, 1% more than offset the positive store resolved.
E Commerce accounted for 24% of total sales in the quarter down from 27% in the prior year quarter.
From a merchandise perspective, we saw increases versus the prior year and decorative accessories floral gift and seasonal reflecting our shift in emphasis the faster turning lower price point items.
However, these increases were not enough to offset declines in the higher ticket categories of furniture and mirrors, along with rugs and outdoor.
Sales performance was consistent across geographic areas with no particular over or under performance relative to the whole.
Gross profit margin increased 280 basis points to 29, 5% of sales compared to 26, 7% in the prior year quarter.
Mike: The five components to this year over year change were as follows.
Mike: First merchandise margin increased 70 basis points to 57, 5%.
As 56, 8% in the prior year quarter.
Lower freight cost along with an increase in the penetration of store sales, which carry a higher margin led to the overall increase in merchandise margin.
Second outbound freight cost, including both store and ecommerce shipping expenses.
Decreased 180 basis points to five 9% as a percentage of sales compared to the prior year quarter.
A reduction in the number of outbound routes combined with lower rates per route.
Were the primary drivers to the decrease.
We also benefited from low lower parcel delivery costs due to reduction in e-commerce revenue and lower contract parcel rates.
Third central distribution costs decreased by 50 basis points to five 1% of sales compared to the prior year quarter.
Increased efficiency and lower inventory levels led to lower labor and operational costs within our distribution centers.
Fourth depreciation included in cost of sales decreased by about 30 basis points to one 8%.
And lastly, partially offsetting these cost improvements was an increase in store occupancy costs of 50 basis points to 15, 2%.
This increase was due to deleverage from the overall sales decline.
Total operating expenses decreased one 6 million to $34 6 million or 37, 7% of sales compared to $36 2 million or 37, 4% of sales in the prior year quarter.
The decrease in dollars was primarily the result of disciplined expense management and lower corporate overhead compared to the prior year.
Adjusted EBITDA.
Excluding impairment stock compensation and other minor expenses was negative $4 5 million versus negative $5 8 million in the prior year quarter.
This was primarily the result of the gross margin improvement along with continued tight expense control.
Operating loss was $7 5 billion compared to an operating loss of $10 3 million last year.
Mike: Operating loss as a percentage of sales improved 250 basis points driven by the expansion in gross profit margin.
Net other expense, which is largely comprised of interest expense offset by other income was $1 million for the quarter compared to <unk> 4 million in the prior year quarter.
Included in these amounts are net interest expense was $1 1 million for the quarter compared to 0.5 million in the prior year quarter due to higher borrowing levels and higher interest rates.
Okay.
Our income tax rate for the quarter was an expense of three 7% of pre tax loss.
Pair to an expense of 12, 7% of pre tax loss in the prior year period.
From a balance sheet perspective.
Our inventory levels continue to be under control and in line with our plan.
We ended the quarter with $75 8 million in inventory.
Two 3% increase from $74 1 million at the end of the previous quarter and a nine 1% decrease from $83 3 million at the end of the prior year quarter.
We had total borrowings outstanding of $48 9 million at the end of the quarter, which was comprised of $38 9 million under our senior revolving line of credit.
And $10 million under our filer term loan.
This compares to $34 million under our senior revolving line of credit at the end of the previous quarter.
The increase in borrowings reflects the negative operating performance for the first quarter seasonal growth in working capital and capital expenditures of 0.8 million.
As a reminder, given the seasonality of our business inventories are at lows during the first quarter and begin to build during the second quarter on the way to peak in late Q3 early Q4.
We expect our borrowing capacity to expand as we increase our inventory position ahead of our peak holiday season, and we expect to use the cash generated during the third and fourth quarters to reduce the borrowings under our senior credit facility.
Okay.
We are continuing our policy of not providing specific guidance given the difficulty in forecasting visibility. However.
However, we do want to provide some color around our expectations in key areas.
For the balance of the year, we expect improvement in sales as we build towards the holiday season.
Driven by our assortment shift to faster turning categories, and our aggressive focus on promotional effectiveness and inventory clearance to ensure freshness throughout the year.
Mike: Overall comps for the month of May or a slight improvement to the down 0.9% we saw in April.
Primarily driven by an improvement in e-commerce performance, given an easier year over year comparison in that channel.
As it relates to gross margin.
We have seen promotional but we have seen the promotional level intensify in may compared to Q1, and we expect that to continue into June as we clear the way for our fall offerings to take hold in July and extend into the back half of the year.
In addition, this spring we began to see tightening conditions around ocean shipping, particularly impacting our imports from China and Southeast Asia.
The resulting reduction in capacity is driving ocean rates higher as we approach peak shipping season.
While it is still early to determine the level of impact we expect rates to trend higher for the balance of the year.
Mike: And we are selectively using the spot market to support our merchandise flow for the critical seasonal timeframes.
That said, we expect some offset to the increased promotional activity and inbound freight costs from ongoing improvements in many of our supply chain costs.
Particularly with better management of our labor and our distribution centers and outbound transportation costs.
We expect to deliver gross profit margin expansion in Q2, albeit below the level of expansion we saw in Q1.
As for operating expenses, we are managing them very tightly and reducing costs across the business as Amy discussed following quarter end, we implemented cost savings initiatives that will result in savings of approximately $6 million for the rest of fiscal.
Mike: 2024, and approximately $7 million in ongoing annual pre tax savings.
These cost savings initiatives include a reduction in corporate overhead as well as store payroll marketing and third party expenses.
While difficult decisions. We believe these actions are necessary as part of improving our profitability and liquidity trajectory, while minimizing disruption to our focus on our strategic initiatives and the overall customer experience.
While we have seen a softer start to fiscal 'twenty for topline performance. We believe with these actions in place we are still positioned to achieve positive adjusted EBITDA in 2024 after two years of losses.
With respect to priorities for capital allocation this year.
Our number one priority for the business right now is returning to positive cash flow.
As we make progress toward that end.
We continue to focus on reducing borrowings and reestablishing our level of liquidity that allows us to operate the business with more flexibility.
The expanded credit facility, we closed in January.
And the cost savings actions, we recently implemented were crucial steps to enable our ability to execute our strategy.
In addition, we have engaged consensus to predict to pursue and evaluate potential strategic opportunities in support of our plans.
As we stabilize our financial position.
We are also focused on reinvesting in the business with E Commerce technology enhancements and targeted store openings and relocations.
Looking further ahead as Amy outlined we believe our strategic initiatives combined with the continuation of our operational discipline and improvements in liquidity.
Should enable us to achieve our long term goal of $600 million in revenue by the end of fiscal 2028.
Our sales goal assumes comp growth to return us to average that.
Historical store volume levels of one 4 million through merchandising and marketing initiatives.
Enhancements to our e-commerce technology to unlock the full potential of that channel.
And targeted new store growth.
On the cost side, we have already taken steps to improve supply chain efficiencies and remove fixed costs from our distribution facilities.
We expect these factors along with tight management of our operating expenses provides a path to get back to a mid to high single digit adjusted EBITDA margin over that five year timeframe.
That includes that concludes our prepared remarks, and operator, we're now ready to take Q&A.
We will now begin the question and answer session.
Speaker Change: 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.
Speaker Change: To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question today is from Jeremy Hamblin of Craig Hallum Capital Group. Please go ahead.
Great. Thanks for taking the questions.
I wanted to just start by seeing if I could clarify the commentary around trends.
So if so may.
Can we assume that may is kind of flat or maybe slightly negative, albeit a little bit better than than April.
Yeah, that's a fair that's a fair assumption Jeremy yes.
And then I just wanted to make sure that we understood you know typical seasonality of the business. So I think as I look back historically Q.
Q2 from an absolute dollar.
Dollar sales basis is down from Q1.
Wanted to understand if that.
Just kind of the pattern that you expect to play out again this year.
And then just to see if I could clarify the.
The commentary around gross margin.
So it sounds like it's a bit more aggressive on the promotions I'm, both for Kirk business as well as industry or are you kind of expecting like a low twenty's type gross margin in Q2.
Yeah, I think Thats Oh, you're in the ballpark there Jeremy I think.
On the sales question that you asked yes, I mean that is the seasonal pattern of the business has long been Q2 has been the lowest volume quarter that we have and that's going to be the case. This year as it has been so.
I think what's changed versus historically speaking is.
Q3 is starting to capture some of what used to hit Q4 is the holiday season is kind of expanded itself out but.
Speaker Change: Certainly Q2 remains kind of a lower quarter in terms of sales volume.
Speaker Change: And yes, the promotional activity has been a little bit heavier to start the quarter, but.
Our inventory levels are in line and we've got plans to manage through that but we do think it will be a little bit more promotional.
Here in the near term and and then we're keeping our eye on the impact of these freight developments that are affecting everyone coming over from the far east.
Got it and then let's just touch on the online portion of your business. So.
You know that that obviously has struggled now for for some time and I wanted to jump.
Understand.
Product assortment that you're offering online versus your stores.
I think what you indicated as you know in terms of how it skews it is a bit more planted on your online portion of business towards.
A little bit higher ticket type item is that something that you could potentially revamp I mean, you have a number of peers.
Home decor space that.
The kind of plant a little bit more towards you know the the core accessories in the online portion of their business is.
Is that is that an adjustment that you are looking at making on a go forward basis.
Hi, Jeremy I'll take that one.
So historically sort of.
Old Kirkland strategy, New Cartland strategy those high ticket categories to your point have always been a larger percent of the total part of the sort of compound factor of that has been the growth of the drop ship business over recent years and that is the area, where we've got opportunity to go through.
Speaker Change: And reevaluate how many skus, we carry what the value proposition as if those skus because if you look at our own assortment. The majority of our assortment is exclusive to Kirkland and a very curated with drop ship. We have less exclusivity you said, there's more comparisons out there too.
There are competitors, who are more pure play who operate on lower margins than we do so we are absolutely in the process of really doing an overall SKU rationalization of the entire e-commerce assortment to ensure that.
It better matches, our go forward merchandising strategy for both channels now that being said I think there's white space opportunity that will always exist online. So I expect there to be a little bit higher a little more friends and white space categories for the online channel, but we are active actively deploying a new.
Tool as well that's going to help the merchant team really go through and almost scrub of our web site in comparison to our main competitors and ensure that our pricing is in line with where it should be.
As we think about the things that are working in stores like the gift category for example that I mentioned as.
As we move forward to a new platform I think we've got opportunities to figure out bundling and other ways to make shipping more profitable because on our current platform with the limitations. We have I don't want to move too far down the path of these lower ticket items, and then impact the profitability of shipping those items. So it took a little step one.
The cleanup of current assortment on current platform and step to unlock capabilities to better bundle and create basket.
As we move to a new platform hopefully next year.
Understood. Thanks for taking the questions and best wishes.
Thank you Jeremy.
Speaker Change: The next question is from John Lawrence of Benchmark. Please go ahead.
Speaker Change: Hi, Good morning can you hear me.
Yes, yes.
Yeah, Congrats on the positive comp, let's say in several stores.
Over the last few weeks.
<unk> certainly seen that.
Traffic is built a little bit.
And that sort of stuff.
Can you talk about the store base in the fleet.
Where you were really strong and what was it the average of that 8%.
It was a lot of variability of that across the country.
How many stores were.
Other than positive versus.
Still struggling a little bit.
I think across the base. It was largely consistent if you look across the chain. We certainly have some categories of business as we think about how we are allocating product and the reintroduction, particularly after the gift category for example.
They're all product types within that assortment that we are thinking of regionally allocating and we're seeing some strength in different categories three regions as we revamp sort of how we can localize our product assortment.
But largely if you just look at topline resolved it was pretty consistent across the board a handful of pretty minor weather impacts and part of our base, but largely come at that time.
Great. Thank you.
Mike would you talk about the ecommerce in the platform.
What what ideally.
<unk> systems et cetera down the road.
What are you reasonably see as the opportunity for savings for shipping.
Order across the country, which what's the metric we should look at to be able.
What are the possibilities for increased profitability out of that channel.
As far as E. Commerce goes I think what Amy just you know in a response to Jeremy covered some of this.
You know as we enhance our technology capabilities online and maybe you know.
Border, Matt get these orders optimized in a way where the.
The shipping is not as much of a negative impact on margin I think we'll have more opportunity to do that.
The assortment itself I think is the bigger driver, though it's it's getting that right balancing this.
Growth that we've seen in our drop ship program that I think in the you know as we look back at we probably wouldn't have moved as quickly there and I think our profitability would would it would be a bit better than it is today had we kind of.
Metered that growth with what we owned over the last few years. So that's that's that's step number one and as we get to optimize optimization through technology.
Speaker Change: I think we certainly believe the business can be a profitable business for us and.
Speaker Change: <unk> maintained that.
25, 30% of the business over the long haul and we have a.
150 ish million dollar ecommerce business that makes money in and we believe in that so we just need to invest a bit in <unk>.
Fine tune the assortment I think those are the priorities.
Yeah, Thanks and.
Next question and you spoke to it and I want to make sure I understood that.
Process of relocating some stores in some proven markets and replacing some of those stores, where does that stand and I know you spoke to it but just remind me what that was.
Well, it's early on and we're early in a turnaround and we're building liquidity.
Liquidity and capital that is going to need to do that more aggressively but while we're sitting here today. We are active in terms of looking at prioritize locations and those are going to be historic core kirkland's markets, primarily in the Sunbelt Southeast Texas.
Prioritizing those lower cost markets, where we have a lot of cash.
Speaker Change: Customer strength over over a long period of time.
And we'll be ready to act when we feel like we have the.
Wherewithal to do it aggressively.
We've been encouraged by some of these markets that as we've started to.
See some fruits of the shifts that we've made with the merchandise and the customer.
Some of these stores that hits would have been historically strong are catching fire faster than maybe some of the the those that are outside those historic.
Location. So that's that's encouraging to us and we want to find more of those.
But we've got certainly where we are today, we gotta be measured about how we do it.
And do it responsibly.
Great. Thanks, I appreciate that good.
Good luck.
Thank you John.
This concludes our question and answer session and the conference. Thank you for attending today's presentation. You may now disconnect.
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