Kirkland : Fourth-Quarter and Full-Year Earnings Call Transcript

Kirkland's Inc. [KIRK]

Fourth-Quarter and Full-Year Earnings Call

Thursday, March 17, 2022 9:00 AM EDT

Company Participants:

Cody Cree; External Director, Investor Relations

Steve Woodward; President and Chief Executive Officer

Nicole Strain; Executive Vice President, Chief Operating Officer and Chief Financial Officer

Analysts:

Anthony Lebiedzinski; Sidoti & Company

John Lawrence; The Benchmark Company

Matthew Schwarz; MAZE Investments

Presentation:

Operator: Good morning, everyone, and thank you for participating in today's conference call to discuss Kirkland's financial results for the fourth-quarter and full-year ended January 29, 2022.

Joining us today are Kirkland's President and CEO Steve "Woody" Woodward; COO and CFO, Nicole Strain; and the Company's External Director of Investor Relations, Cody Cree. Following their remarks, we'll open the call for your questions.

Before we go further, I would like to turn the call over to Mr. Cree as he reads the Company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Cody, please go ahead.

Cody Cree: Thanks, Betsy. 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 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.

I'd like to remind everyone that this call will be available for replay through March 24, 2022. The webcast replay will also be available via the link provided in today's press release, as well as on the Company's website at kirklands.com.

Now I would like to turn the call over the Kirkland's President and CEO, Woody Woodward. Woody, over to you.

Woody Woodward: Thank you, Cody, and good morning, everyone.

As always, I'd like to first recognize our dedicated employees and stakeholders that continue to believe and support our efforts in executing our long-term transformation strategy. This past year has been challenging, to say the least, given all the macro environment unknowns that come with a pandemic, social unrest across the country, high inflation and now the current war in Ukraine. I'm incredibly proud of everyone stepping up to the plate and exceeding my expectations in controlling the things that we can control and executing our strategic goals at the pace that would have been challenging even in normal times. I cannot thank all of you enough for your dedication and commitment.

In the past year we've taken a series of meaningful steps to transform Kirkland's into a true home furnishings specialty retailer, with high quality, high style products at affordable price points. Our advances made in diversifying our product mix, improving our direct sourcing capabilities and reinforcing our infrastructure have put us in a strong position for a healthy future.

As we look back at the progress we have made, we realize we may have driven our merchandise transformation efforts faster than our ability to migrate customer base and make the necessary changes to our customer experience and infrastructure. While we have no intention of going backwards from here or wavering on our overall strategy, we do intend to alter the pace of change within our merchandise mix and style elevation. We believe this will allow our customer acquisition efforts time to catch up. The persistent macro environment constraints seem to be having a tangible effect on our consumer and we believe the impact is exaggerated since we are evolving our target customer, product sets, sourcing and customer experience in an already difficult environment.

I'd also like to remind everyone why we're making this transition and why we believe and why we continue to believe in it so strongly. When I initially joined Kirkland's, our brands suffered from low customer awareness. We lost our way from a brand point of view and, as a result, our customer base, sales and margins were on the decline. At the same time, customers were shifting to online shopping and brick-and-mortar traffic was declining. We were also continuing to compete from a product perspective with the much larger big box stores and growing online commodity retailers, resulting in ever-increasing promotional discounts which offered a growing number of unprofitable stores. We had merchandise that was not exclusive and quality that we weren't always proud of.

We had to find a place in the market where we could be successful long term. Based on our store footprint and an obvious white space in the market, we believed we could transition our business into a curated specialty retailer where customers can furnish their entire home on a budget. We believe we can create looks comparable to the higher-end home furnishings retailers, but at a discernible value of 20 to 40% less. We believe we can be the high-quality,high-style value option for the consumer that wants that more expensive look but can't afford the higher-end offerings in the market. From a profitability perspective, the increased ticket that comes with the broader selection of merchandise will allow us to grow brick-and-mortar sales even with less traffic. Additionally, we believe we can continue to sell the exclusive higher-quality merchandise with less discounts.

Over the past two years we've made a lot of changes in our infrastructure, including removing $45 million in operating expenses, while improving our profitability significantly. Through these changes we have solidified our foundation to build from and one that can support a meaningful transformation. We are creating a brand that has a very clear point of view and a focus on serving an underserved customer. And we've seen meaningful progress in these efforts. We've been successful in the larger-ticket offerings of furniture and mirrors. We've seen success in upgrading textiles, decorative accessories and fragrances. A large portion of our customer base is moving with us and loves the new product.

Have we lost customers along the way? Yes. Have we had a portion of our customer base that only purchased products at a deep discount? Yes, we did have those customers. We didn't make money from those customers, but we did generate sales. Additionally, we closed over 15% of our store base. Those stores didn't make money, but they did generate sales. So in the end we made the right long-term decisions, focused on making a profit and returning money to our shareholders.

So why is it going slower than expected? Last year we shifted our focus to ramping up customer acquisition effort, which aimed to target customers that spend, oh, somewhere in the $1,500 range with their retailers of choice each year, instead of $150. However, we started these efforts in the middle of the holiday season, impacted by supply chain challenges, and we weren't happy with the results. And then, to start the fiscal year, we saw macroeconomic issues dampen the discretionary consumer spending.

As a result, we're taking an alternate approach. Instead of aiming to transform all of our markets at once during these uncertain times, in April we're beginning an exciting and significant brand awareness market test in two of our key markets. This test will include mass media marketing of our Kirkland's Home rebranding. We believe if we can put the new Kirkland's Home in front of targeted customers, while not abandoning our legacy customers, our company will begin to recognize the true potential it has to offer without taking a meaningful hit to our sales in the near term.

Do we have other things to solve? Of course. For our existing customers we have to prove that our quality has consistently improved. We have improvements to make in our store footprint, to our online experience and to our supply chain infrastructure. We have a roadmap for each of these and believe we can execute without significantly impacting the profitability or capital needs. As mentioned above, we are adjusting the merchandise pace to allow us to accelerate improvements in each of these areas. Meanwhile, we will continue to focus on day-to-day execution and managing through the current macroeconomic challenges. Finally, we will continue to be opportunistic in buying back our own shares as a means of maximizing shareholder return.

As we look at our performance during the fourth quarter, we were challenged by late-arriving merchandise product in November and December, which impacted sales during our critical holiday selling season and led to increased clearance sales in January. As a result, we are holding approximately $8 million of Christmas-related inventory that we plan to sell in holiday 2022.

While I certainly would have liked to see different results, we were able to report financials that are in line with the revised expectation we announced in December 2021.

Diving into some sales highlights for the quarter, we were encouraged by our furniture sales, which had a 28% year-over-year increase in AUR, as well as a large increase in mirrors and lighting. Our furniture offerings become a larger percentage of our product mix and we generate more customer interest and we anticipate the higher AUR this category offers to further benefit our overall mix.

Within our e-commerce channel, AUR also increased across all categories, as we benefited from a more favorable category mix, selling a larger percentage of offerings within our better and best product options than the prior year. As we continue to evolve our merchandise strategy, these early successes in driving higher AUR give us confidence we will start seeing meaningful improvements as we generate more traffic and ultimately conversion in the furniture category in the e-commerce channel.

I'll let Nicole provide a more in-depth review of the nuances within our financial results for the fourth quarter in a moment, but I'd like to focus on what we are excited about for 2022 and where we currently sit within our overall transformation strategies. We started this fiscal year with a model of reclaiming our rhythm. There were plenty of surprises within the macroeconomic environment last year, but I don't want that to overshadow the progress that we've made and how hard our entire organization has been working to set Kirkland's up for success in 2022 and beyond.

At the center of our transformation strategy is a goal to evolve into a high-performance specialty home furnishings retailer. With that we anticipate furniture being our largest growth category this year and have stocked our shelves to ensure that we have the necessary amount of inventory to sell in the first half of the year. As supply chain constraints have continued throughout the industry, we made it a priority to be in a strong inventory position so we don't get caught flatfooted by running out of products to sell. Now that we are confident in our inventory position, we have started to roll out our new furniture offerings this month. In fact, we held our first major furniture event over the past two weeks and we were pleased with the initial customer feedback that we've received. This is a great indicator of the potential of this category and how it can be transformative to Kirkland's.

To truly succeed we have to get our furniture offering right with the consumer and so far we've had nothing but positive feedback. In addition, we need to ensure that customers are aware of these new furniture offerings and thinking of Kirkland's when looking to furnish and style a living space. To accomplish this, we are taking several steps to drive consumer acquisitions and awareness.

As I mentioned earlier, in April we will launch advertising tests in two key markets, Nashville and Atlanta, to drive brand awareness and generate meaningful improvements in traffic and conversion. As we start to see more and more success within these regional advertising campaigns, we will begin to roll out similar strategies on a broader scale to further drive consumers to our in-store and e-commerce channels.

One of the main marketing initiatives that we've spoken to in the past is our rebranding effort to Kirkland's Home, which we believe is better aligned with where we aim to be and how we want customers to view us. We've already begun launching these efforts and will have transitioned most touchpoints by the end of the first half, updating signage and branding in stores and online.

In addition to our advertising and marketing efforts, we are also going to focus on investing and bolstering the omnichannel experience throughout the year. In today's competitive environment, it's imperative that consumers have a positive experience across all channels. One of the most important near-term initiatives that we are on track to accomplish in May is introducing in-home deliveries, which is our version of white-glove delivery service. Currently, if a customer orders a piece of furniture in store, they need to personally move the item from the store back to their home. And in many cases, our larger furniture options aren't available to customers who don't live near our store. Within home delivery we can finally have the capability to deliver these larger items directly to the customer, which is a must-have service for a value-focused furniture retailer to be an attractive choice for consumers.

As we roll out these new furniture offerings and make investments to further improve the customer experience, we will also be launching an internal customer data platform that will help us better track and understand customers' behavior. This will be key in our decision-making process as we test and evaluate the best strategies to drive in-store and online traffic and generate meaningful sell-throughs with our customers. Additionally, it allows us the ability to message existing customers differently than newly acquired customers.

As we start to gauge the success of our first major push into furniture, we're focused on 2 KPIs, average ticket and percentage of revenues this category generates. Part of our rationale in evolving and expanding our merchandising to furniture was to gain meaningful increases in the average ticket size per customer, with larger pieces of furniture commanding higher prices than our historical home decor offering. The goal of this category is to scale so that we aren't so reliant on the holiday season to make or break our year. For contrast, the furniture category has been in the low-tomid-teens as a percentage of total revenue over the past two years. We expect to expand that figure to greater than 25% of our mix over the next several years.

Overall, we're going to be deeply focused on executing what we can control within our key strategic initiatives. And we look forward to unlocking the true potential of Kirkland's. Thank you, again, for all the support along the way.

With that, I'll turn the call over to our CFO and COO, Nicole strain, who will provide additional commentary on our performance in the fourth quarter and further detail on our outlook. Nicole?

Nicole Strain: Thank you, Woody, and good morning, everyone.

Before we get into our results for the fourth quarter, I wanted to add to Woody's comments on our transformation progress. In 2019 we started this journey with an adjusted EPS loss of $1.39, declining comp sales, gross profit of just under 27% and growing operating expenses at almost 32% of sales, excluding depreciation and impairment. In the past 2 years we have closed 71