Q3 2024 Kirkland's Inc Earnings Call
Speaker Change: Good morning, everyone, and thank you for participating in today's conference call to discuss Kirkland's financial results for the third quarter ended August 3, 2024.
Joining us today are Kirkland's Home CEO, Amy Sullivan.
Speaker Change: EVP and CFO Mike Madden, and the company's External Director of Investor Relations, Caitlin Churchill.
Speaker Change: Following their remarks, we'll open the call for your questions. Before we go further, I would like to turn the call over to Ms. Churchill as she 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. Caitlin, please go ahead.
Caitlin Churchill: Thank you and good morning. 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.
Caitlin Churchill: Forward-looking statements involve known and unknown risks and uncertainties, which may cause Kirkland's actual results in future periods to differ materially from forecasted results. Those risks and uncertainties are more fully described in Kirkland's filings with the Securities and Exchange Commission.
Speaker Change: A 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.com. Now I will turn the call over to Kirkland CEO, Amy Sullivan. Amy?
Thank you, Caitlin, and good morning, everyone.
Amy Sullivan: The third quarter marked a significant turning point for Kirkland's as we entered into a strategic partnership with Beyond that allowed us to retire expensive debt, strengthen our balance sheet, and begin to position our company for growth.
Amy Sullivan: This partnership not only provides us with additional capital to continue progressing on our Kirkland's Home initiatives, but enables new growth opportunities as we work together to revitalize the Bed Bath & Beyond brand.
Amy Sullivan: In addition to this important milestone, during the quarter, we anniversaried the strategic shift in our Kirkland's Home brand that we began to implement in September of last year.
Amy Sullivan: Going forward, our results will be much more comparable to prior year periods as we continue the brand revitalization.
Amy Sullivan: Before I share more on our strategic initiatives, let me review a few highlights from the quarter.
Amy Sullivan: I am very pleased with our team's ability to deliver our fourth consecutive quarter of positive comparable store sales growth of 1.6%, driven by positive traffic and conversion, despite a significant headwind from Hurricanes Helene and Milton.
Amy Sullivan: In line with prior quarter trends, the strength in our store performance continued to be offset by declines in our e-commerce channel, resulting in a total comparable sales decline of 3% for the period.
Amy Sullivan: With respect to profitability, we delivered a year-over-year $3.7 million improvement in adjusted EBITDA, resulting in a return to positive adjusted EBITDA for the quarter.
Amy Sullivan: While we have continued to see our customer be choiceful in her spend, which has increased promotional activity across the industry, we were pleased to see a 6% increase in transactions and 10% increase in units sold driven by continued positive momentum in seasonally relevant decor such as holiday, floral, and gifts.
Amy Sullivan: We spent the first half of the year diligently focused on reactivating lapsed customers enhancing their loyalty profiles and keeping them engaged with the brand.
Amy Sullivan: These efforts are paying off as we have seen a 39% reactivation of lapsed customers over the last 12 months. We have continued to grow our loyalty file and we have continued to drive high engagement with our over 3 million social media followers, particularly when we feature in it.
Amy Sullivan: In store shopping experience.
Amy Sullivan: While our marketing budget ethylene given our strategically conservative approach to expenses.
Amy Sullivan: We continue to focus on impact and efficiency by driving traffic through seasonally relevant events that align to our new product launches and continued to drive conversion through targeted email and SMS campaigns.
Amy Sullivan: Looking ahead as our financial position improved and we begin to leverage beyond robust customer database.
Amy Sullivan: We believe we have a greater opportunity to more effectively engage with our customers and more efficiently acquire new customers.
Amy Sullivan: In addition, we believe in the opportunity to further expand customer loyalty and retention three unified loyalty and credit programs with beyond.
Amy Sullivan: Let me now turn to our next initiative refocusing our product assortment.
As I mentioned, we are now a year into executing on this initiative leaning into our always something new mindset by delivering more frequent newness in the key categories that our customers expect and love.
Amy Sullivan: We continue to see excellent results and holiday floral gift fragrance and textiles.
Amy Sullivan: And while we're pleased with the results across our core categories. We saw continued softness in furniture and wall decor, driven by both macroeconomic pressures to high ticket goods and the strategic decision to ship goods in these categories later to minimize the impact from the spike in container.
Amy Sullivan: And limited availability of containers over the summer.
Amy Sullivan: As we shared last quarter, we have seen a strong start to our Halloween and harvest assortment and we were pleased to end the season exceeding our expectations in both revenue and margin.
Amy Sullivan: The reintroduction of gift continues to resonate with our customers largely driven by apparel accessories and impulse product.
Our carryall tote and monogram jewelry boxes continue to be the top items in this category.
Amy Sullivan: These category trends remained strong as we look at early holiday sales and see newness and Christmas M gift continuing to drive demand.
Amy Sullivan: We also anticipate being in a more favorable inventory position in furniture and wall decor as we move into December.
Amy Sullivan: Our merchants have worked diligently to bring value price points back to the higher ticket categories and we believe those efforts will help improve conversion and these categories as we move forward.
Amy Sullivan: In addition to our own initiatives around our product assortment. We are also excited to leverage our partnership with beyond to expand our distribution channels and more efficiently move slower turning product via overstock Dot com.
We believe in time these efforts combined with continuing to drive newness and freshness across the assortment will further support improved inventory turns more in line with our historical performance.
Amy Sullivan: This now leads me to our final strategic initiative strengthening our omnichannel capabilities.
Amy Sullivan: With respect to ecommerce while performance remains challenged our teams are actively working to drive them for six months.
Amy Sullivan: As we discussed last quarter, we had recently implemented a new pricing tool to help our merchants better analyze the competition, particularly in our drop ship Assortments.
Within the quarter, we deployed two major pricing tests, and art and furniture and the findings have provided us a clear direction for pricing and the technology needed to best showcase value for the customer that we plan to incorporate into our strategy for the upcoming E Commerce re platform.
Amy Sullivan: As we focus on developing our road map to our re platforming effort next year, we are thrilled to leverage the e-commerce expertise of beyond.
We are reviewing our current technology and our recent RFP process with our partners that beyond with the goal of making a platform decision by the end of the year.
Amy Sullivan: With stronger e-commerce capabilities in place, we expect to better leverage our omni channel model as we remain highly encouraged with the continued strength of our brick and mortar channel.
Amy Sullivan: It is a testament to our store teams that through our partnership with beyond we will be the exclusive brick and mortar licensee and lead the efforts to revitalize the iconic bed Bath <unk> beyond the brand.
As we discussed at our announcement, we are planning to open our initial bed Bath and beyond neighborhood stores in 2025.
Amy Sullivan: We expect these stores to generate at least two times the revenue of our current average Kirk one's home store.
Amy Sullivan: And we will focused on a curated assortment of bed Bath <unk> beyond iconic legacy brands as well as complementary Kirk one's home seasonal and decor products.
Amy Sullivan: We recently reorganized our team to support both brands and are actively building the bed Bath <unk> beyond merchandising in store strategy.
Amy Sullivan: There is still a lot of work to be done as we prepare for our first opening next year, but both of our teams are excited for the growth opportunity. We see ahead for this strategy as we position <unk> as a multi brand retailer.
Amy Sullivan: In summary, we are pleased with the progress we are making across our business. Our partnership with beyond has further energized our team and our efforts in positioning <unk> to achieve its full potential.
Amy Sullivan: We remain excited about what we can achieve together as we look to end fiscal 2024, and a healthier financial position with significant opportunities for growth.
Mike Madden: And now over to Mike.
Mike Madden: Thank you Amy and good morning, everybody.
Mike Madden: For the third quarter net sales were $114 4 million versus $116 4 million in the prior year quarter.
Mike Madden: As a reminder, we had anticipated that the calendar shift associated with last year's 53 week year would benefit total sales dollars in the third quarter as a smaller week at the beginning of the quarter was replaced by a larger week pulled into the end of the quarter.
Mike Madden: This shift benefited sales by approximately $3 million in the third quarter.
Mike Madden: In addition to this shift the total sales comparison incorporated the 4% decline in average store count compared to the prior year quarter.
Mike Madden: And a comparable sales decrease of 3% for the quarter.
Mike Madden: The decrease in comparable sales, which is calculated on a like for like basis by shifting the prior year in RF calendar by one week was driven by declines in the consolidated average ticket and E Commerce conversion.
Mike Madden: Partially offset by an increase in consolidated traffic and store conversion.
Mike Madden: We estimate the hurricanes Helane in Milton negatively impacted our comparable sales performance by approximately 100 basis points.
Mike Madden: For the quarter comparable store sales increased one 6% inclusive of the disruption from the hurricanes, which impacted about 20% of our store base in some fashion.
Mike Madden: With respect to our E Commerce business sales declined 14, 9% compared to the prior year period offsetting the positive results in our store channel.
Mike Madden: E Commerce accounted for 24% of total sales in the quarter down from 28% in the prior year quarter.
Mike Madden: Breaking down sales within the quarter comps were down 3% in August down one 3% in September and down five 2% in October.
Mike Madden: October reflected a more difficult year over year comparison and included the impact of the hurricanes and the inventory flow adjustments that Amy discussed.
Mike Madden: From a merchandise perspective, we saw increases versus the prior year and holiday gift textiles, floral fragrance and housewares, reflecting our shift in emphasis the faster turning lower price point items.
Mike Madden: However, these increases were not enough to offset declines in the higher ticket categories of furniture mirrors wall decor art and lamps.
Geographically speaking sales performance lagged in Florida, Georgia, and North Carolina due to the impact of the storms, while we saw strong performance in Texas and other areas of the South East.
Mike Madden: Gross profit margin increased 180 basis points to 28, 1% of sales compared to 26, 3% in the prior year quarter.
Mike Madden: Yeah.
Mike Madden: The components of this year over year change were as follows.
Mike Madden: Central distribution costs decreased by 130 basis points to four 8% primarily due to a later inventory buildup versus the prior year.
Mike Madden: The closure of our Winchester, Virginia E Commerce hub in the prior year quarter also contributed to the decline compared to the prior year.
Mike Madden: Yeah.
Mike Madden: Outbound freight costs, including both store and ecommerce shipping expenses decreased 120 basis points to six 8% of sales compared to the prior year quarter.
Mike Madden: Improved management of outbound store route along with lower rates per out.
Mike Madden: Were the primary drivers of the decrease.
We also benefited from lower parcel delivery costs due to the reduction in e-commerce revenue and lower contract parcel rates.
Mike Madden: In addition to these cost improvements.
Depreciation included in cost of sales decreased by about 20 basis points to one 3% of sales.
Mike Madden: Partially offsetting these factors was a decline in merchandise margin and an increase in store occupancy costs.
Compared to the prior year merchandise margin decreased approximately 50 basis points to 53, 5% and.
Mike Madden: And store occupancy costs increased 40 basis points to 12, 5%.
The decrease in merchandise margin was largely driven by increased promotional activity during the periods, particularly in the latter part of the quarter.
Mike Madden: And the pressure that we expected to experience from freight was minimized in the quarter due to our strategic decision to shift certain goods later than we previously planned.
Mike Madden: The deleverage of store occupancy costs was largely due to the overall sales decline in the quarter.
Mike Madden: Total operating expenses decreased $2 8 million to $34 5 million or 32% of sales compared to $37 3 million or 32% of sales in the prior year quarter.
Mike Madden: Yeah.
Mike Madden: The decrease in dollars was primarily the result of reduced advertising costs corporate salaries and asset impairment expenses.
Mike Madden: Adjusted EBITDA, which excludes certain expenses related to the beyond transaction stock compensation and severance charges was a positive 0.5 million versus negative $3 3 million in the prior year quarter.
Mike Madden: Operating loss was $2 4 million compared to an operating loss of $6 7 million last year.
Mike Madden: Excluding the items I reviewed and adjusted EBITDA adjusted operating loss was $1 9 million compared to $6 million last year.
Mike Madden: Interest expense in the quarter was $1 7 million compared to $1 2 million in the prior year quarter.
Due to higher borrowing levels and higher interest rates.
Mike Madden: During the quarter, we incurred a charge of $3 3 million related to the repayment of our FILO term loan in conjunction with our transaction with beyond.
Net loss was $7 7 million compared to $6 4 million in the prior year quarter.
Mike Madden: Excluding the non core operating items incurred in both periods adjusted net loss was $3 8 million compared to $5 9 million in the prior year quarter.
Mike Madden: With respect to our balance sheet, we ended the quarter with $111 million in inventory, a five 7% increase from the $105 2 million at the end of the prior year quarter.
Mike Madden: The year over year increase was largely due to timing.
Mike Madden: Due to the calendar shift we were one week deeper into the season as compared to last year, and we also strategically prioritized our inventory flow to better manage the container availability and freight costs previously discussed.
We had total borrowings outstanding of $80 4 million at the end of the quarter, which was comprised of 65 million under our senior revolving line of credit and $15 4 million in debt to beyond related to the term loan convertible term loan and the sale of our percentage of kirkland's feet.
Mike Madden: Your revenues to beyond net of debt issuance and original issue discount costs.
Mike Madden: This compares to $52 7 million under our senior revolving line of credit and $8 7 million under our prior phyllo term loan net of debt issue costs at the end of the previous quarter.
Mike Madden: The increase in borrowings reflects the net loss for the quarter seasonal growth in working capital and capital expenditures of zero point $5 million.
Mike Madden: We are continuing our policy of not providing specific guidance given the difficulty in forecasting visibility. However.
Mike Madden: However, we do want to provide some color around our expectations in key areas.
Mike Madden: First as a reminder, this year's fiscal calendar includes 52 weeks compared to last year's 53 week fiscal calendar.
This extra week last year resulted in approximately $6 $6 million in revenue that we will not benefit from this year.
Mike Madden: In addition, the timing shift associated with the 50 <unk> week will negatively impact Q4, as a larger weak at the beginning of the quarter will be replaced by a smaller week at the end, resulting in a headwind of approximately $3 million for the quarter.
Mike Madden: We've seen a slower start to Q4, but we are encouraged by the sell through we are seeing in key categories, such as holiday and gifts and we expect our in stock levels and furniture to improved from earlier this fall.
Mike Madden: We also believe that the slower start is driven in part by the calendar shift and the compressed holiday selling season, we have this year.
Using history as a guide we haven't been analyzing the sales build in consumer behavior. We saw in 2019, which is the last time, we had a similar retail calendar.
Mike Madden: While consumer behavior has certainly changed since that pre pandemic year. The overall analysis suggests that the compressed shopping calendar would benefit December versus November.
Mike Madden: Thus we main.
Mike Madden: Thus, we remain cautiously optimistic as we move forward through the quarter.
Mike Madden: We expect the promotional environment to continue to be a factor in Q4.
Mike Madden: And we also expect to see some added margin pressure from the spike in inbound freight rates, we experienced in the summer as the effected goods sell through.
Mike Madden: However, the actions we took to control shipments will limit the amount of that pressure versus our original expectations.
Mike Madden: As for operating expenses, we continue to manage them very tightly and expect to continue to benefit from the cost reduction actions. We took earlier this year.
While we believe we continue to have a line of sight to achieving positive adjusted EBITDA for the year.
We acknowledge that the promotional environment has intensified as reflected in our results today and our expectations for the fourth quarter.
Mike Madden: With that said, we are continuing to control the aspects of the business that we can control and our priorities are unchanged.
Mike Madden: We are confident in our ability to drive strong year over year improvement in profitability and enter 2025 under stronger footing.
Mike Madden: We continue to believe in the long term opportunity still ahead, especially as we layer in our strategic partnership with beyond.
Mike Madden: We believe through our transaction with beyond we have the potential to accelerate the timeline to achieve our long term targeted margins and growth guidance.
Mike Madden: We look forward to sharing more details on our plans on our future calls.
Speaker Change: I will now turn the call back over to Amy for a few closing remarks before we open the call up for questions Amy.
Amy Sullivan: Thank you Mike.
We are proud of the results we have continued to deliver throughout this year. Despite the challenges we have faced.
Speaker Change: This year is a transformative year for Kirkland's, we entered the year as a single banner retailer in the midst of a turnaround and we are exiting the year as a dual brand retailer with significantly more growth opportunities along with an improved balance sheet and ongoing traction against our initiatives.
Speaker Change: As we look ahead to 2025, we are excited to unlock the potential of our partnership with beyond as we revitalize the bed Bath <unk> beyond brand.
Speaker Change: Further strengthened the Kirkland's home foundation and begin to reinvest in areas like technology and marketing.
Speaker Change: Before I close I want to thank our team none of our accomplishments would be possible without our team members, who show up focused on our customer every day.
Their dedication to the art and science of retail is crucial in delivering the experience our customers love.
Speaker Change: We are excited by the opportunities for growth and are committed to delivering value to our shareholders.
Speaker Change: That is our focus now and will continue to be in 2025 and beyond that.
Speaker Change: That concludes our prepared remarks.
Speaker Change: Operator, we're now ready to take Q&A.
Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Speaker Change: If you are using a speaker phone 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.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: The first question comes from Jeremy Hamblin with Craig Hallum Capital Group. Please go ahead.
Speaker Change: Thanks for taking the questions and congrats on the strategic partnership.
I wanted to start by coming back to the commentary around trends.
Speaker Change: And you know.
Speaker Change: See if we can get a little a little more color in terms of what you're seeing you noted a little bit softer results here in November.
Speaker Change: But wanted to understand you know.
Speaker Change: If you could help us with kind of magnitude and then also kind.
Speaker Change: Kind of the split that you're expecting in terms of E Commerce performance.
Speaker Change: Which you know it's lapping kind of similar compares in Q4 versus Q3.
Speaker Change: Versus your retail store sales, which saw a pretty meaningful improvement last year, and it's clearly a tougher compare.
Speaker Change: Thanks, Jeremy I'll start and then I'll, let Mike give some additional color. So from an overall start to the season perspective, as you know Q4 as our holiday season, and so when you take into account the calendar shifts we're really managing to this nine week spread between November and December but there's a.
A lot of noise in the month of November in terms of how the calendar shift.
Speaker Change: It plays out Mike alluded in his part of the script that if you use history as a comparison and look at 2019 and and the rate of sales that we expect to have at this point in the season.
Speaker Change: It gives us optimism that November.
And December combined will be what we need it to be so we're really looking into the next two weeks are really important for us we have a huge customer appreciation of that going on right now.
Speaker Change: And as we wind until December we believe those nine weeks combined well will shake out and Jeremy in terms of the compares I think we continue to see more momentum in the store side of the business.
Speaker Change: I think that will continue into the fourth quarter notwithstanding the tougher comps you you called out as it relates to stores.
Speaker Change: That's just a trend we've been on we've been seeing the traffic gains there the conversion gains there and that continues.
Got it.
Speaker Change: And then shifting gears here to talking about the beyond partnership.
Speaker Change: As we head into 2025, it sounds like you know that really.
Speaker Change: Starts in earnest in Q1 and wanted to get a sense for how you think that's going to evolve, particularly your ecommerce business.
Speaker Change: And the potential there there's obviously some some aspects to that agreement in which you're you know you're paying fees and incentive fees for success. There, but also wanted to understand how it might impact you.
Speaker Change: Your marketing budget and how those costs may be shared across the two parties.
Speaker Change: Sure.
Speaker Change: So from an E Commerce perspective, we as you know throughout this past year have been really focused on evaluating our technology, we've gone through a pretty robust RFP process to start to identify the re platforming choices that we need to make.
Speaker Change: Given that our inherent strengths here its brick and mortar and there is E. Commerce, we've paused just to bring their expertise to the table with us as we make those final decisions on the re platform. So when I think about how we leverage them as we cross into the new year at.
Speaker Change: It would really be taking their guidance in terms of the next steps in our decision for building out our roadmap.
Speaker Change: And leaning into them as we think about are there other partners or other players in the technology space that we should be evaluating as we look at our data and tech stack and negotiate alongside of them from an economies of scale perspective, just to open up more options to make sure that when we do invest in technology. We've made the best decision for them.
Speaker Change: A long haul.
Speaker Change: We're actively working through that right now we expect to make our platform decision by the end of this calendar year.
Speaker Change: And then other components of technology that we think enhance the total business. We will continue to have those conversations as we move into the start of the new year.
Speaker Change: And then from a marketing perspective, I would say, it's sort of two fold and so obviously our goal I'm, both kirkland's and beyond is to get a benefit of pooling our customer data and how can we not only learn customer shopping behavior by having the data pooled together about how can we also share and our potential.
Speaker Change: All future unified loyalty programs unified credit card program and so we are in the very early phases of bad and obviously working through sharing that data and ensuring that we're giving our customers the opportunity to opt in to that and working with our legal teams on all the privacy laws, but we definitely believe that there is significant upside when you think about.
Speaker Change: The opportunity for Kirkland's to get new customers into the file at a much more efficient cost him by sharing and the much larger pool of customers that that beyond has across a multitude of brands and Jeremy one thing to add to that I'm just.
Even with the fees related to the collaboration and the fees related to the incentive on the ecommerce side. When you look at it altogether from where we were cost of debt. If you will versus where we are.
Speaker Change: It's neutral and it comes with these benefits we continue to be pleased that that's the case going into 2025.
Speaker Change: Let me, let me see if I can get a little bit more granular there on in terms of thinking about the costs that you're getting into a venture like this and kind of.
Speaker Change: Taking your respective customer bases and helping them to understand.
Speaker Change: The changes that are happening here would you expect a greater investment to be made by by Kirkland's, you know and kind of getting this kick started next year.
Speaker Change: We definitely would in terms of the.
Speaker Change: Store aspect of this I mean, we're going to operate these doors.
Speaker Change: With our people with our real estate effort start construction.
Speaker Change: So as we look at that five store is the kind of plan for the pilot next year.
That will be an investment from from us, but we're getting that additional capital as we close this with the shareholder meeting coming up here on December 23rd that's when the final $8 million comes through.
Speaker Change: <unk> to the entire transaction and.
Speaker Change: That will provide us that you know it's not a hope it's not a huge amount to get into these five stores, but it does provide us the ability to do that in some flexibility to do some other things across the business.
Speaker Change: Great.
And then just one other quick one here for me in terms of what you're seeing from a you know kind of promotional environment out there.
Speaker Change: The category as a whole has probably been somewhat neutral.
Speaker Change: Year over year, but wanted to get your insight in terms of.
Speaker Change: What you're seeing from your closest competitors in whether or not there are particular categories. You. You noted kind of the disparity in performance among categories, but whether or not you're seeing some more aggressive promos in particular cat or categories.
Speaker Change: Yeah, I would say overall.
Speaker Change: We've been able to.
Speaker Change: Control sort of what we expected the promotional cadence to be I would say, it's more about consistency of promo and ensuring that there's sort of always a new fresh deal for our customer to keep traffic and.
Speaker Change: Conversion, where we need it to be from an ongoing perspective, there have been parts of our business and a more seasonally relevant the core side of things and we specifically mentioned on this call Halloween and harvest, where we weren't able to get better Reg price selling at the beginning of the season and closeout that season, a little better than.
Then we had in prior years.
Speaker Change: If you think about the higher ticket categories, though I would say it is just sort of a continuation of what we've seen in terms of the pressure on those high ticket good.
Speaker Change: The good news for US is we have been very consistently focused on bringing in value engineered product within the high ticket categories. So as we move into the future months, we think that will start to balance, but it's really just about getting that consistency of our value message and our promotional message out there.
Focus on traffic.
Speaker Change: Got it alright, thanks for taking the questions and best wishes.
Speaker Change: Thanks, Jeremy.
Speaker Change: This concludes our question and answer session I would like to turn the conference back over to Amy Sullivan for any closing remarks.
Amy Sullivan: Thank you all for joining us today as a reminder, we are having our upcoming shareholder vote on December 23rd, which assuming a positive outcome will solidify the full investment from beyond resulting in $8 million of additional liquidity by year end. We look forward to speaking with you again on our next earnings call and we hope that everyone has.
Amy Sullivan: A happy and healthy holiday season.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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