KIRK
#Thank you, <UNK>, and good morning to everybody.
The first quarter was in line with our expectations and we're pleased with the progress we made on the strategic priorities that will enable us to drive our full-year performance.
As you'll recall, our full-year guidance, which we have maintained today, assumes a year-over-year decline in earnings in the first half as we invest in the supply chain and continue our shift to a more front-loaded store opening schedule.
We expect second-half earnings to be above last year's levels as we leverage our store growth and benefit from progress on various productivity initiatives.
We are on track with that forecast, which includes bringing inventory levels back into alignment by the end of the second quarter and opening our new stores much earlier in the year.
At the same time, we are moving forward on a set of price, merchandise, and marketing initiatives to drive our long-term strategic plans.
I'm optimistic about the progress we're making and believe we are well positioned as we approach the crucial fall and holiday selling seasons.
One of the biggest improvements we are focusing on involves our supply chain.
Our e-commerce channel has grown at an accelerated pace and now accounts for 7.5% of our total revenues.
Until now, order fulfillment for that channel has been operating out of the same distribution center as our brick and mortar stores.
The combination of this growth with an 11% gain in store square footage in 2015 and a planned 6% to 8% increase for 2016, coupled with the more complex flows of seasonal goods, has added to the demands on our distribution network.
All of these factors strained our supply chain in 2015 and we absorbed considerable dislocation around our peak seasonal build last fall.
To address these issues we've made a number of important adjustments already, including the new e-commerce fulfillment center and a more efficient process for new store openings.
Additionally, we are working to further increase our supply chain capacity by introducing a West Coast bypass operation later in the year, something that is commonplace for companies our size.
The result of these initiatives will alleviate a tremendous amount of pressure relative to the last few years as we approach our critical seasonal build.
Our supply chain work has important long-term implications for the business.
It supports each of the pillars we've identified to transform Kirkland's into a high-performing nationally recognized home decor brand of choice.
These include improving in-store productivity, enhancing our omni-channel platform, optimizing our real estate and development and reinforcing a culture of continuous improvement.
It will also provide some short-term comparative benefits as we cycle against elevated freight costs, higher labor costs and a series of operational distractions that came into play in the back half of 2015.
We're already unlocking better efficiency across the organization and that should enable us to take a more proactive posture to support our fall and holiday merchandise offerings.
We're pleased with both the transition and the trajectory of the direct-to-consumer channel.
E-commerce revenue grew 28% in the quarter.
While we had some startup cost inefficiencies during Q1 which put pressure on both e-commerce sales and labor costs and fulfillment, we are quickly gaining momentum.
The new fulfillment operation is already achieving better output metrics for the direct channel and we expect further improvements as we move through the year.
We continue to see a path to increase the direct channel penetration to 10% over the next few years.
We're taking a holistic approach to market development that takes into account existing and new stores as well as e-commerce growth.
We believe we're in a favorable position vis-a-vis pure direct players, given our unique merchandise assortment, value pricing and store footprint.
Our ship-to-store model accounts for about two-thirds of our direct revenues at present.
Our customers use our stores to visualize ideas and we're achieving strong attachment rates on e-commerce promotions geared to in-store pickup.
Looking forward, we're working on ways to improve the experience by accelerating delivery times and offering more options for the customer.
We recognize the competitive nature of the business and we've begun to test free shipping, provided the customer hits certain thresholds.
Importantly, we're also laying the groundwork to fulfill some e-commerce orders from store inventory to streamline our distribution process.
And finally, we've expanded our supplier direct fulfillment program with new vendors in Q1 and plan to add more over the rest of the year.
We're optimistic about its expansion and the positive impact it can have on the channel and its profitability.
Higher ticket categories like furniture, art, and wall decor are popular online, and allow us to carry multiple styles that are not available in stores.
To further enhance direct sales in the furniture category, during the first quarter we introduced a special order program in our stores which leverages our e-commerce fulfillment and ship-to-store model.
We'll have more to talk about as we develop and refine our e-commerce model and we look forward to updating you in coming quarters.
We've made considerable progress to bring our overall inventory levels back into alignment with sales during the first quarter.
Planned promotional activities, combined with tight management of our receipt plans to the sales rate have allowed us to improve our position.
We're in the final stages of this process and on track to enter the third quarter on plan with year-over-year inventory levels in line with, to slightly below, the expected sales gain for the back half which should provide us with improved margin visibility.
As noted in the release, we opened 14 new stores during the quarter.
We've been able to open stores earlier in the year which frees up operational resources for peak season activity.
This has been possible because our pipeline is full, allowing us to be more selective in the deals we choose to pursue and the timing of our construction activity.
The heavier new store openings scheduled during the quarter led to expense pressures in occupancy and store payroll due to pre-opening activities but we'll obviously benefit from this class of openings as we enter the holiday period.
Optimizing our real estate is one of our top strategic priorities.
Our loyalty program and our e-commerce channel are providing a wealth of data on our shopper.
We've added that to a much more analytical site selection process to refine how we look at growth in new and existing markets.
We're pleased with the new store openings thus far in Q1 and we're adding analytics to better assess competitive dynamics by market to optimize our market spacing and minimize cannibalization.
We're also looking at ways to create a more consistent store, one that's easier to plan, allocate, visually present, and operate.
That will involve new standards for site selection and additional innovation and merchandising.
The special order program I mentioned earlier reflects this.
The program allows customers to order various styles of seating and benches that aren't offered every day currently in our stores.
It's too early to gauge success, but it's just one example of how we're thinking about adding special buys in new categories and additional selection within existing businesses.
As expected, traffic remained a challenge during the quarter, particularly in Texas.
While our ability to affect macroeconomic headwinds is sometimes limited, we are able to control where we invest our marketing dollars to drive traffic.
Therefore, we're reallocating marketing spend to more productive areas beyond our FSI programs and we're optimistic they can drive stronger results.
While some specific macro issues are affecting traffic, we're pleased with our merchandise assortments.
We continue to enhance the interaction between merchandising, visual presentation, marketing in stores, and this strong linkage again supported an uptick in conversion during the quarter.
Categories, including mirrors, clocks, furniture, and fragrance were stronger in the quarter and our Easter seasonal business performed very well.
So we're encouraged by that as we approach the second half with healthier inventory positions.
With that, I'll turn it over to Adam to cover the financials.
Adam.
Thank you, Mike.
Net sales for the first quarter increased 9.8% with comparable store sales increasing 0.5%.
This was in line with our projections and reflects the growth in our store base, continued strength in e-commerce and positive response to our seasonal assortment.
E-commerce revenue continued to increase at a healthy rate, generating $9.8 million for the quarter which represented a 28% increase over the prior-year quarter and accounted for approximately 7.5% of total sales during Q1.
Comp sales trends in our brick and mortar stores were relatively consistent as we moved through the quarter.
Geographically, comparable store sales results were similar to what we experienced in the fourth quarter of 2015, with Texas and Louisiana weighing down on our comparable to our sales results.
Combined, these two states affected total comp by almost 1.5 points.
Encouragingly, two of our largest states by store count, Florida and California, continued to show positive results.
We opened 14 new stores during the quarter and closed 8, ending with 382 stores representing 40 more units than the end of Q1 last year.
First-quarter gross profit margin decreased approximately 215 basis points to 38.1%.
This decline was driven by three factors.
First, merchandise margin declined 60 basis points to 55.8%, primarily due to planned promotional mark-downs to manage inventory levels.
While the promotional environment was competitive, we are pleased with the reduction in inventory and will now be able to achieve our target of being back on inventory plan during Q2.
Inbound freight charges were a smaller component of the merchandise margin decline in Q1 and showed improvement versus the back half of FY15 as we executed on our supply chain initiatives.
Moving on to the other components of gross profit margin, store occupancy costs increased 98 basis points as a percentage of net sales during the first quarter, which were in line with our expectations due to the increased level of store opening activity during the quarter.
8 of the 14 new store openings occurred in late April and did not have time to contribute the level of sales needed to offset pre-opening rent, payroll and advertising costs.
Outbound freight costs, which include e-commerce shipping, were down slightly as percentage of sales.
Similar to Q1 last year, we saw approximately two-thirds of our e-commerce revenue fulfilled via ship-to-store.
Finally, central distribution costs increased 61 basis points.
As Mike mentioned, we executed the transition to our new e-commerce fulfillment facility in Jackson, Tennessee during March.
Startup costs and inefficiencies, especially labor costs, put additional pressure on the quarter.
Looking forward through to the end of the year, we expect that our lower inventory levels, combined with improvements in our supply chain structure, will help improve the flow of goods both in stores and to customers' homes.
Operating expenses for the first quarter were 32.3% of sales, which is slightly down to last year.
Store-related expenses deleveraged during the quarter, reflecting higher healthcare costs as well as marketing expense.
We recognize the benefit in the prior year related to our health care plan which drove a negative comparison to the current year.
Marketing costs were higher as a percentage of sales, partly due to the increased new store opening activity, as we opened 14 stores in Q1 this year versus only 1 store last year.
Store payroll deleveraged during the quarter.
This was within our expectations, also reflecting the higher store pre-opening activity.
Corporate-related expenses leveraged during the quarter, driven by a favorable comparison to our retired CEO's post-employment benefit charge from last year but also by lower professional legal fees, which reflects the hiring of our General Counsel and continued tight management of these expenses.
E-commerce-related operating expenses were relatively flat to the prior-year quarter as a percentage of total revenue.
Depreciation and amortization increased approximately 18 basis points as a percentage of sales.
The tax expense for the quarter was approximately $594,000 or 39.3% of pre-tax income, resulting in net income for the quarter of $0.06 per diluted share.
Moving to the balance sheet and cash flow statement.
At the end of the quarter, we had $38.2 million in cash on hand.
Inventories at the end of Q1 were $69.1 million, an increase of 19% over Q1 last year.
This was in line with our expectations and we anticipate inventory levels to be back on plan by the end of Q2.
As Mike mentioned, part of our supply chain initiative includes incorporating a West Coast bypass operation later in the year.
This bypass will allow us to gain ownership and control of our product earlier in the pipeline to better manage our business, especially during our peak holiday season, without increasing our working capital requirements.
The bypass will improve service to our West Coast stores, take pressure off of our Tennessee distribution center and provide us with more control over our seasonal product flow.
At quarter end, we had no long-term debt and no borrowings were outstanding under our revolving line of credit.
During Q1 2016, cash provided by operations was $2.7 million, reflecting our operating performance and changes in working capital.
Capital expenditures were on plan at $8.7 million with approximately 79% of CapEx relating to new stores and existing store improvements, followed by 11% relating to supply chain improvements.
And IT system improvements accounted for the balance.
As mentioned in our press release earlier today, we are reiterating all of the components of our 2016 guidance that was provided on the March 11, 2016 earnings release.
Thanks, and I will now turn the call back over to Mike.
Thank you, Adam.
As many of you know, Kirkland's is celebrating its 50th year in operation.
Back in 1966, Carl and Robert Kirkland founded our Company with the belief that great style can come at a great price always.
The concept has evolved and thrived through tremendous economic and social change but that vision continues to guide our strategy.
The organization is stronger than ever and I'm confident Kirkland's best years are ahead of us as we build on our founding principles.
We have a lot to look forward to in the back half and we look forward to updating you on our progress.
Operator, we are now available to take a few questions.
<UNK>, how are you.
Hey, <UNK>.
Inventory position: we are very pleased with the progress we made and continue to make on getting back at the position we intend to be going into the back half.
Year-over-year comparisons are still a little tricky, given last year's port slowdown and subsequent flow that started to really occur about this time last year.
So you're still showing about ---+ I think we show about an 18%, 19% increase over the prior year right now.
But as we go into the back half, as I said in my comments, I would see the inventory level being, on a year-over-year basis, up less than the expected sales increase we have in the back half.
Which, if you look at store count and look at your comp assumptions, would be in the 10% to 12% range.
So inventories to be up year over year, a little bit less than that going into the back half, which is considerable progress from where we've been.
We're very happy about that.
From a seasonal standpoint and looking at core, core has continued to be a significant part of our business.
It's 35%-ish of the overall business, so we do everything we can to protect that part of the business.
Seasonal categories have been successful for us for the last few years and we are planning a slight increase there going into the back half.
We saw good results in the spring seasonal aspects of our assortment, and we're excited about what's ahead, looking at fall and then deeper into the holiday period.
Sure.
I think we're still dealing with some promotional activity in Q2.
Q2 happens to be a little bit more lighter quarter in terms of volume and a little more promotional historically, so you'll continue to see some of that in Q2.
But as we go into the back half is where we would see improvement start to come in on the merchandise side.
We also have some inbound freight reductions that we think will help margin going into the back half, as well as all the things we mentioned in our comments ---+ Adam mentioned in his comments ---+ about the supply chain changes we're making and the improvements we expect there.
Well, without going into specifics, <UNK>, you're right about the comparisons.
I think we're up against a 6.7% or so in the second quarter, and that was a little bit more heavy in May and June than July.
So as we think about second quarter and as we planned the year originally, we expected earnings to be down in the second quarter.
And we expected the comp increase to be a little bit less, given the comparison we were up against.
So that's directionally how I would look at it.
Yes, I think around flattish is about the way to think about it.
All right, <UNK>, thanks a lot.
Sure, <UNK>, this is Adam.
We certainly did see a heavier weighted impact for the two states we called out in the prepared remarks.
That being said, we did see some positive traffic trends in some of the other states.
We're not negative across the board, although these states that we called out, unfortunately, are disproportionately higher in terms of sales and earnings contribution; therefore, they have more of a negative impact.
But as we move into the back half of the year, when we started to see the traffic declines, especially in Texas, Louisiana, we're hopeful that some of these traffic comparisons will ease up a bit.
Yes, I'll start with that.
And what I would say ---+ there's really three buckets we're thinking about with supply chain as far as 2016.
One is the fulfillment center move that completed in March.
As I said earlier, after the move and the startup phase, we're starting to see better metrics coming out of that as we expected.
And we expect that to continue as the year progresses.
Secondly, is the West Coast bypass operation.
That will help us in multiple ways.
But first being ---+ in no particular order ---+ first would be the ability for those West Coast stores, which would, when you add up all the geographic areas that would be affected, maybe about 40 stores that will see better service.
When you're not having to bring it all the way to the interior and ship it all the way back out, those stores will be receiving their merchandise at the right time and with the rest of the chain.
We've struggled with that in the past and that will help us on that aspect.
Secondly, it will alleviate pressure on our Tennessee facilities because we won't be bringing all of the flow into those facilities.
And thirdly, and importantly, it provides a governor on our flow.
You've got a facility ---+ and we're a highly seasonal business.
We can time that flow better with that facility in place and allow our DC to manage the goods in an orderly fashion as we flow seasonal product out to the stores.
Presentation is very important to us, and we want the stores showing the product in the order that we've envisioned when we buy.
And this will give us much more capability in terms of being able to control that and better service our stores.
So it's a long-term play.
You can think way long term that, as we grow and continue to get bigger, we will need more infrastructure in our supply chain, maybe a second DC.
But this is something that we'll need anyway, that will help that flow management that is crucial for us, especially as you get into peak.
So the West Coast is the second one.
And thirdly, and I won't dwell on it too much, but to say that we are investing in a systems upgrade on our e-commerce fulfillment that will ---+ the move was one thing; it addressed capacity, it addressed some automation that we added.
But when we get further benefits once we upgrade our warehouse management system that we use to run that aspect of the operation, and we see some efficiencies coming out of that as well.
The timing of all these things is the current year.
It's going to come in phases, but we intend to have it all in place before the peak part of our selling season, which, with e-commerce, is a little bit deeper into the year ---+ you're talking about third quarter here.
So hopefully that provides a little color.
Thanks, <UNK>.
Yes, it's more future-driven there, <UNK>.
To say that we have no cannibalization is an overstatement, so I'm not going to say that.
We are doing infills; it does have an impact.
We're doing a better job of measuring it, especially when we get up front, when we're evaluating a deal.
With all those analytics I mentioned that we've really added to the process, we have better way to track cannibalization, and we are beginning to be able to avail ourselves of those capabilities.
There are some spot markets where I think we've built it out and we are seeing some cannibalization, but it's healthy cannibalization.
I think it's more a statement on going forward as to what is the ultimate store count in each market and how do we address that with the growth in e-commerce.
Well, <UNK>, this is Adam.
As you know, the final regs came out last week and we are still evaluating their impact.
The latest regulations seem to be a little less onerous than we had earlier anticipated.
We'll have more to say on that as we move through this next quarter.
North of $60 million, <UNK>.
That's a topic that we would be in discussion with our Board on, <UNK>.
Obviously, it's always something that we address at that level, and when we have something to talk about, we'll share it.
Hey, <UNK>.
That's a tough one to do.
Our promotional activity was a little higher than last year, as we mentioned.
Conversion was positive.
I think that does play into that, but not enough.
The numbers we're seeing would not suggest that, that's the whole reason conversion is up.
We've made a lot of improvements in terms of how we message and how our teams are connecting in terms of visually in the stores and pulling that off, and we think that's a big driver to conversion.
The promotions certainly have an effect, but I think it's a combination of things and it's hard to really quantify the components out that way.
Well, one thing that we've talked about and we've mentioned here is evaluating our current marketing programs, a big part of which is email, which right now the metrics on email suggest that, that is still a good return and driving traffic to our stores.
We see it when we run our events and the immediate impact that, that can generate.
The other second large component of our marketing spend right now is our FSI program, which we're a little less happy with what we're seeing out of that.
So we are looking, as we look into the back half, we're looking to adjust some of the spend from that into other areas ---+ one I'll name would be digital ---+ that we're considering as a more effective way to drive traffic.
So we will be adjusting the back half spend a bit to position those dollars in areas that are driving traffic at a cost that's acceptable from a budget standpoint.
Thank you.
Thank you, everyone, for your attention on the call today and the questions.
We appreciate them.
We look forward to updating you as the year progresses.
Talk to you next quarter.
