Positioning

Kirkland : Home First Quarter 2022 Earnings Call Transcript – Marketscreener.com

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Event Name: Kirkland’s Home First Quarter 2022 Earnings Call
Event Date: Tuesday, May 31, 2022, 9:00 a.m. Eastern Time
Officers and Speakers
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
Jeremy Hamblin; Craig Hallum Capital Group
Anthony Lebiedzinski; Sidoti & Company
John Lawrence; Benchmark
Barry Haimes; Sage Asset Management
John Lewis; Osmium Partners
Presentation
Operator: Good morning, everyone, and thank you for participating in today’s conference call to discuss Kirkland’s financial results for the first quarter ended April 30, 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: [Indiscernible] for historical information discussed during this call, the statements made by company [indiscernible] forward-looking and made [indiscernible]. Forward-looking statements involve [indiscernible] which may cause Kirkland’s actual results in future periods to differ materially from forecasted results. Those risks and uncertainties [indiscernible] described in Kirkland’s filings with the Securities and Exchange Commission.
I remind everyone that this call will be available for replay through June 7, 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 to Kirkland’s President and CEO, Woody Woodward. Woody, over to you.
Steve Woodward: Thank you, Cody, and good morning, everyone. It has certainly been a challenging start to the year. Like many of our peers, our first quarter results were significantly impacted by lower customer demand and higher costs associated with various supply chain constraints. Anyone who’s been paying attention to the consumer commentary over the last few weeks knows that the broader retail landscape is being notably affected by several concerning macroeconomic trends, including rising interest rates, elevated levels of inflation, the ongoing
geopolitical conflict between Russia and Ukraine, and increased supply chain costs stemming from higher freight costs and transportation rates.
Kirkland’s is not immune to these issues; in some ways, we’re feeling it more than our peers in the home furnishings space. It appears our value-focused customer is more negatively impacted by these macroeconomic issues compared to the wealthier customer bases that shop at premium store brands and have more discretionary cash to spend. We believe our consumer has shifted some of their discretionary spend to experiences, such as going out to eat or taking a vacation, given that the pandemic’s restrictions are being largely lifted. Simply put, our customers are not prioritizing their discretionary spending on home furnishings and décor right now.
When you combine waning customer demand with wage inflation and a hypercompetitive hiring environment, and heightened freight and transportation costs, you have the perfect storm that makes it exceptionally difficult to generate meaningful sales momentum. Executing upon a meaningful transformation strategy within this environment is even harder. However, we will remain — still remain steadfast in our commitment to becoming a premier home furnishings retailer offering value, quality and design throughout an omnichannel experience. As we discussed a few months ago, we’d slowed down our pace of change as we weather the storm and wait for a more opportune time to put our foot back on the gas pedal to accelerate sales growth and expand our customer base.
All this being said, we’re still making progress on initiatives that are within our control. We launched our advertising tests in April across two key markets, Nashville and Atlanta, to drive brand awareness and generate new customer interest. While we only have just begun to roll out these marketing programs amid a challenging environment, the initial feedback has been positive. We will continue to gather data from these tests to glean insights on whether these initiatives could work on a broader scale across our national store footprint once customer sentiment begins to rebound.
We also recently test-launched our in-home delivery service to better serve our customers looking to buy bulky items such as furniture and outdoor items, with a full national rollout scheduled in the next month. As we’ve discussed on previous calls, this was an imperative next step in becoming — in improving our omnichannel capabilities. We continue to expect this to be a welcome enhancement within our overall customer experience and will continue to look for ways we can better serve our customers going forward.
We are also in the final stages of cleansing our customer data to start actioning our consumer data platform. As we have said on previous calls, this will give us much needed insights on customer behavior, as well as the ability to segment our customer base and target different groups with different offers and messaging. This capability will be especially critical as we navigate through the dynamic consumer backdrop we’re experiencing.
Given the volatile macroeconomic environment and our performance to start the year, we will balance and pace our — we will balance the pace of our transformation in 2022 with prudent expense management, which Nicole will cover in more detail. Historically, we’ve relied on strong sales from holiday season in the back half of the year to generate cash flow we use to
bolster our balance sheet, especially since we burn cash in the first half of the year. While we are positioning our furniture and outdoor categories to allow for more balanced sales throughout the year, we aren’t there yet, and with the challenging consumer backdrop, maintaining an adequate cash balance and appropriately using our credit facility is our top priority. Nicole will go into more details regarding our near-term capital allocation priorities, but we plan on operating as efficiently as possible.
We believe the strong inventory position that we built was necessary to ensure that we had our shelves stocked when our holiday season arrived, and that we weren’t leaving any sales on the table due to simply not having the product in time. We are cautiously optimistic that our upcoming holiday season in the back half of the year will help augment our financial results for the year. However, we’re also planning on being more promotional than we had originally intended to be in 2022. We believe this will allow us to fuel sales momentum with our core customer base and work through our inventory stockpile to generate cash flow.
We discussed at length in our last call about our customer acquisition challenges and how we’re having to slow down from our efforts to allow the market to fully understand our enhanced merchandise assortment without losing our dedicated and loyal customer base. While the challenging consumer backdrop is impacting our results, I think it is relevant to note that Kirkland’s has historically performed well during recessions or periods of stagnant growth. As customers get over the initial shock and begin value-hunting for ways to upgrade their home furnishings and décor without breaking the bank, we do believe there is an opportunity to capture attention from the new customer and begin to increase market share.
With our new assortments that feature elevated design concepts and higher-quality materials at a value price, we believe Kirkland’s Home is the perfect place for consumers to stylishly furnish their home on a budget. For this reason, our unwavering commitment to executing our transformation will continue during these challenging times. Our strategic goals remain the same and we’re doing everything we can to maintain our course and hit our objectives.
Our shareholders are always top of mind when we’re evaluating our strategic direction and ensuring that we’re making the best decisions to generate as much long-term value as possible. We plan on conserving our cash and being prudent stewards of capital as we weather the difficult environment, and we anticipate coming out of this even stronger than before.
As always, I’d like to recognize our dedicated employees and stakeholders that continue to believe and support our efforts in executing our transformation strategy. It certainly has been — not been an easy road over the last few quarters, but their perseverance continues to inspire me every day. I firmly believe that we have only just begun to scratch the surface of Kirkland’s true potential within the home furnishings space, and I look forward to what the future holds for us as we continue making progress on our transformation initiatives.
With that said, I’ll now turn over the call to our CFO and COO, Nicole Strain, who will provide detailed commentary on our performance in the first quarter and our outlook. I’ll be back during the Q&A to answer any questions you may have. Nicole, the floor is yours.
Nicole Strain: Thank you, Woody, and good morning, everyone. Before getting to the details and numbers, I wanted to summarize what we saw in the first quarter and how it impacted our business.
Comps continued to decline within the quarter, driven mainly by lower customer traffic. Our landed product margin came in better than expected, down 90 basis points to 2021, due to less discounting and taking retail price increases. We’ve talked in the past about how much of our costs are fixed in the first half of the year, which is in line with our goal to shift our assortment mix to products with stronger selling in the first two quarters, and fortunately, the first quarter shows deleverage of our operating model at this sales level.
Moving into May, we have begun experimenting with our promotional levers to stimulate customer demand and churn through excess inventory. To date, we are seeing sales improvement from what we saw in March and April, but still down double digits. We do expect to continue to be more promotional in the near term, which will impact our margins.
Given that the second quarter has historically been our toughest quarter, we expect Q2 earnings to decline from Q1.
Lastly, our plan to finally be in stock from an inventory perspective and bring in product for Q1 and Q2 sales early had a negative impact on our working capital. That was compounded by the slow sales in the first quarter, which resulted in a $35-million draw on our revolving line of credit. I’ll get more into our cash flow and how that impacts our capital allocation plan a bit later.
Jumping into our results for the quarter, net sales were $103.3 million, compared to $123.6 million in the year-ago quarter, which included a comparable store decline at 15.8%. The decline was exacerbated by macroeconomic conditions impacting the home furnishings industry and driving down traffic and conversion in both our in-store and e-commerce channels. Breaking down sales within the quarter, we had a total comp decline of 5% in February, a comp decline of 19% in March and a 22% decrease in April. E-commerce accounted for approximately 28% of our sales in the quarter.
Gross profit was 27.4% of sales, compared to 32.6% in the prior year quarter. The decline was mainly due to de-leverage of fixed infrastructure costs.
Landed product margin was 56.6%, compared to 57.4% in the prior year period, with lower discounting offsetting some of the expected incremental freight year-over-year. Store occupancy costs increased to 15.9% of sales, compared to 13.6% in the prior year quarter, due to the lower sales base. DC costs increased to 5.1% of sales, compared to 4.6% in the prior year period, from wage inflation and reduced productivity from higher inventory levels and implementation of a new warehouse management system. Outbound freight costs from our distribution centers to our stores increased to 2.4% of sales from 2% in the prior year due primarily to rate and fuel inflation. E-commerce shipping costs remained relatively flat at 4.4% of sales, compared to 4.5% in the prior year quarter. Lastly, other costs of goods sold increased 120 basis points, mainly due to increased damages with the higher inventory.
Operating expenses excluding depreciation and impairment were $37.7 million, or 36.5% of sales, compared to $36.3 million, or 29.4% of sales, in Q1 2021. Wage increases specifically impacting store labor, along with increasing employee benefit costs, were the primary drivers for the increase in operating expenses.
Adjusted EBITDA, excluding impairment and other minor non-operating expenses, was negative $5.8 million, compared to $7.7 million in the same period last year.
Our normalized tax rate in the first quarter was 25.5%, compared to 24.7% in the prior year period.
Adjusted loss per share, which excludes noncash impairment, normalized tax rate and other minor non-operating adjustments, was $0.62, compared to an adjusted earnings per share of $0.12 in the prior year. GAAP loss per share including these items was $0.63, compared to earnings of $0.11 in the prior year.
We ended the quarter with $5.4 million in cash and utilized $35 million in borrowings on our revolving credit facility. As mentioned before, we shipped and paid for the bulk of the inventory we expected to sell for the first half of the year during Q1, which resulted in us tapping our revolving credit facility. With slower sales in our harvest and Christmas inventory arriving in the second quarter, we expect to be further drawn on the credit facility through the third quarter. We expect to reduce the borrowings significantly as we sell through this holiday inventory in the fourth quarter and right-size our overall inventory position.
We have taken a series of actions to reduce our reliance on the credit facility, which includes reducing expected inventory receipts by approximately $50 million in the back half of the second quarter through the remainder of the year, implementing operating cost reductions in the remainder of the fiscal year of $12 million to $15 million, and increasing our level of promotion to churn through existing inventory at a faster pace.
Inventory at the end of the quarter was $130.9 million, which was an increase of $54.6 million from the same time last year and up $16.9 million compared to the end of the fiscal year. We expect our inventory levels to peak in August and decline to under $100 million by the end of the fiscal year.
We continued our share buyback in the first quarter with approximately 480,000 shares repurchased for $6.3 million at an average cost of $13.03 per share. At the end of the first quarter, we had a cumulative authorization available of $26.3 million. We continue to believe in share repurchases as a valuable component of our capital allocation strategy; however, given market conditions and our current forecasted reliance on our credit facility for the upcoming quarters, we are focusing first on making sure we maintain the liquidity needed to support the business. Additionally, our credit facility places certain restrictions on share purchases while in a borrowing position. We will revisit this program as cash flow allows.
Our transformation efforts remain, and I believe we’ve built a strong operational foundation that will carry us through this challenging environment. Although we are operating with macro
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Kirkland’s Inc. published this content on 01 June 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 01 June 2022 15:01:08 UTC.

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