Good morning and welcome to Kirkland's First Quarter 2021 Earnings Conference Call. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator instructions]. I would now like to turn the conference over to Tripp Sullivan with SCR Partners. Please go ahead.

Tripp Sullivan - President

Thank you. Good morning and welcome to Kirkland's conference call to review results for the first quarter of fiscal 2021. On the call this morning are Woody Woodward, Chief Executive Officer; and Nicole Strain, Chief Financial Officer. The results, as well as notice of the accessibility of this conference call on a listen-only basis over the Internet were announced earlier this morning in a press release that has been covered by the financial media.

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 provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risk 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'll now turn it over to Woody.

Steven C. Woodward - President and Chief Executive Officer

Good morning. Before we begin, I want to recognize the skill, commitment, creativity and innovation of the entire Kirkland's team. They responded well to every challenge we faced, and they delivered on the opportunities to serve our customers, drive profitability and evolve the Kirkland's brand.

For the quarter, we generated a comp increase of 75.3%, which reflected a 95.1% increase in store comps and a 42% increase in e-commerce. GAAP earnings for the quarter were $0.11 and adjusted earnings were $0.12; our most profitable first quarter in over five years. As will become evident in our prepared remarks, this performance could have been even stronger absent the weather impacts and inventory constraints. But we are pleased with the profitability we're generating.

While we started off the quarter with a multi-week period of winter storms in our markets, we made a nice recovery in our comp trends in March and April. We were very deliberate in choosing profitability over promotions this quarter and maintaining our focus on key items. As the economy began to reopen with vaccinations and state restrictions dropping in most of our largest markets, we began to see a little more competition for the wallet share that we expect to be short term in nature.

We're seeing signs that the big lift[Phonetic] to home furnishings that was happening pre-pandemic and throughout the past year are sustainable due to the appeal of work from our - from home and hybrid approaches to work.

Other factors such as strong housing market and the decreased store-based competition further support the sustainability. The momentum created by our evolution into a value oriented specialty retailer continued this quarter. Our profitability is accelerating even with very deliberate pace of transformation. We provided a strong foundation for a robust outlook over the next two years - two to three years.

So I want to spend some time this morning on what's driving our confidence in the business and our outlook. Let's start with direct sourcing. Our goal for 2021 was to achieve 30% direct sourcing, and we already are well ahead of that target with 38% of our product coming primarily from agents in Vietnam, China and India. Diversifying our product by moving to South [Phonetic] and Southeast Asia has helped us improve design and quality of our merchandise, but the tighter shipping capacity has affected overall inventory availability and inbound freight costs.

We're managing through these challenges. While improving, we expect them to continue at least in the first half of this year. All of our merchandise categories delivered strong comps, but overall, we missed our expectations due to inventory shortages that negatively impacted our overall mix in ticket. Recall that we have been elevating our style and quality, allowing us to keep our opening price points and gradually increasing our overall pricing thresholds in key categories such as furniture.

We've also streamlined the aesthetic of our brand with an eye towards improved design, efficiency and function. As expected, we continue to see very positive sell-through in each category as consumers are responding to our cohesive style point of view and elevated quality. The best performing categories in the quarter were holiday, textiles and fragrance. Holiday's success was driven by Valentine's and Easter, both of which we were in great inventory position and exceeded expectations.

Textiles was an all-round success with wins in pillows throws and tabletop textiles. Fragrances had a strong quarter, largely driven by the continued success of our jar candle program. We saw the biggest impact from availability of inventory throughout the quarter in wall decor, outdoor, housewares and furniture categories. Wall decor, outdoor and furniture specifically drive a higher ticket and the lack of inventory impacted the sales performance. We expect to be in better inventory position in these higher ticket categories earlier in the second quarter.

All of our strategic goals - one of our strategic goals is to continue the transformation of Kirkland's brand into a specialty retailer where customers are able to furnish their entire home on a budget. We will continue to do the heavy lifting with our merchandise to slowly grow our better invest offerings while keeping us on the path to - for the upgrades and styling quality that are resonating with our customers.

The addition of brands such as Cuisinart, KitchenAid and Viking to our website this quarter was a great example of this gradual improvement along with very positive customer response, and a specific benefit to our e-commerce business. We have a number of exciting things happening within our categories later this year that should provide momentum heading into the back half. The digital transformation of our business is in progress and we'll continue to focus on our investments - our investments on improvements that drive the e-commerce operations.

E-commerce was 30% of our sales in the quarter, up from 24% in the fourth quarter and e-commerce profitability continues to be up year over year. We have prioritized our capital expenditures to fuel this digital transformation, and I'm pleased to note that these past investments such as our e-commerce hubs and our ship direct from vendor channels are paying real dividends.

I'm going to ask Nicole to address the specifics, but it's been clear for us for some time and more directly evident in the quarter, such as the one we're in, that we're generating profitability where historically we couldn't. There are building that - that we are building a sustainable and a formidable business model, the model is born of an intentional plan, a sustainable and efficient cost structure, improving execution and a distinct point of view on style and design.

I will admit that we have been helped by chartering this course at the right time. However, without the vision of all the hard work during the past few years, we wouldn't have been unable to fully benefit from the positive secular trends that continue to drive the home furnishing sector. There is more growth ahead for Kirkland's and our shareholders. And we look forward to reporting on our progress throughout the balance of the year.

Nicole, why don't you provide some color on the details in our outlook?

Nicole A. Strain - Executive Vice President and Chief Financial Officer

Thank you. As Woody mentioned, the evolution of our merchandise and the changes in our infrastructure and cost structure generated a profitable first quarter, which included some significant headwinds from supply chain delays and abnormally tough weather impacting our store footprint in February.

Historically, our full-year profitability has been heavily weighted to contributions in the second half of the year. While we have seen and expect to continue to see real improvements in profitability in the third and fourth quarters, we believe there is more room for earnings improvement in the first half of the year as we continue to execute this transformation.

Before I get into the details of the quarter, I wanted to make the overarching comment that the year-over-year comparisons for comp sales, percentage of sales and other metrics are heavily skewed by the necessary actions we took last year during the pandemic with store closures, the channel shift to eCommerce, and the macro trends that existed then and now. Breaking down sales within the quarter, we had a comp decline of 3% in February, with a strong start and finish for the month, but extreme weather in the Southeast impacting the two weeks in the middle.

Our stores closed last year in the middle of March and most remained closed for the remainder of the quarter, resulting in a comp increase of 134% in March and 196% in April. The total comp increase of 75.3% included an increase in e-commerce of 42% on a 32% increase in the prior year. Excluding the impact of the COVID driven store closures from the prior year, we had a total comp increase of just under 16%. The sales impact of the weather in February and inventory shortages within the quarter was approximately $12 million.

As expected, we started to see some year-over-year softness in the back half of May due to the spike in demand in the second quarter last year and further elevated by some macro shifts in share of wallet towards entertainment and travel as the economy fully reopened, which we do expect to be a short-term headwind.

Our store traffic outperformed the retail segment of shopper track and was in line to slightly down compared to the home furnishing sub segment, but with store closures impacting businesses differently in the prior year, it's tough to compare traffic year-over-year in the first quarter. Improving store traffic and converting existing traffic to our more elevated assortment will continue to be a main priority throughout our brand transformation. We did continue to see the sales benefit of the changes we have made to improve the quality and design of our merchandise with a high single-digit ticket increase in stores. So limited inventory in the furniture, outdoor and wall categories prevented us from reaching our expected sales levels.

Average ticket has increased in the later part of May as inventory improved and we expect to continue to see growth as we returned to planned inventory levels in those key categories in June. Our e-commerce comp increase continued to be driven by our third-party dropship channel with revenue up over 70% which is significant considering the tougher comparison from the prior year when store closures forced the channel shift towards e-commerce. This channel made up almost half of our e-commerce sales within the quarter.

Our fulfilled in-store e-commerce sales for the quarter were just over 30% compared to 35% in the prior year. Lower in-store inventory has continued to limit the volume of these channels and thus restrain our profitability. We remain committed to the importance of our stores delivering those for 40% to 50% of our e-commerce sales and there is profitability upside as we return to those levels.

During the quarter, we closed five stores, opened two new stores and relocated one store, resulting in a count of 370 stores. Of the closings, three were rollovers from year-end lease negotiations and closed in early February. One of the new store openings and the relocated store were opportunistic, shorter-term leases we negotiated in locations that were previously Pier 1 stores.

Gross profit was 32.6% of sales compared to 13.3% in the prior year quarter. The prior year included significant deleverage with the store closures and the current year includes approximately 400 basis points of incremental inbound freight costs. We expect to have a similar level of freight impact in the second quarter and continued impact throughout the balance of the year, with the degree of the impact in the back half unknown. We do not expect the Q3 and Q4 impact to be higher than the first half of the year, but is yet to see the softening in rates that we expected.

With the long-term use of freight rates and the continued push to elevate sales in the first half of the year, we expect upside in gross profit rates in the first and second quarters in the coming years. Landed product margin was 57.4%, which shows growth from the first quarter of 2020 while absorbing the significant freight impact.

The gains continue to be driven by direct sourcing benefits, simplifying our promotional message, and also reducing the depth of offers and the inherent stacking of entire store couponing. Delays in inbound freight that were consistently in China in the fourth quarter spread to India as that country struggled with the pandemic impacting production and shipping levels. While we made progress on inventory, much of that progress was in the later part of the quarter and the mix of receipt was not as we had planned.

We missed the early part of the sales window for our outdoor collection, which included some testing related to larger scale items, upgraded collections and outdoor dining table, which will be a key learning for improving sales in the first half of the year. Also, lower inventory and higher ticket furniture SKUs impacted the average ticket for the quarter.

We do not expect a significant margin impact from the late arrival of these items, but also don't expect to fully recover the lost sales. With the unknown surrounding supply chain we are pulling forward purchase order timing, specifically in the time-sensitive seasonal categories, which will have a short to mid-term timing impact on cash flow. Store occupancy cost were 13.6% of sales. We remain on track with the additional 100 basis point to 150 basis point improvement in occupancy costs in 2021 relative to the same quarter in 2020 excluding the much larger benefit in the first quarter due to the uncomparable sales.

Freight costs from our DC to our stores was 2% of sales and was impacted by sales deleverage and an unfavorable capitalization adjustment from lower store inventory, which will reverse as inventory increases. DC costs were 4.6% of sales and remained relatively flat to our expectations with the sales deleverage offset by reduced expenses from less inventory moves than expected. For two quarters now I've noted that the reversal of the 150 basis point unfavorability in the third quarter of fiscal 2020 would reverse with improved inventory levels. We should see that reversal in the second quarter of this year.

We continue to see productivity and infrastructure improvements offset the incremental cost to pick and pass e-commerce orders, and are pleased with the performance of the two e-com hubs we added last year. E-commerce shipping at 4.5% of sales increased year-over-year as the volume of shipped to home sales increased, while we are seeing some rate improvement over the prior year, as the average price point improves and we fully utilize the hub. Again, as we improve the mix of in-store fulfilled e-commerce sales and are able to ship a larger percentage of ship to home sales, our exclusive [Phonetic] distribution option, which was also impacted by lower inventory levels, there is leverage to be gained here.

Operating expenses excluding impairment at 30.7% of sales or $37.9 million was an increase over the prior year $3.2 million due to reactionary measures taken while the stores were closed last year and some fully variable costs. EBITDA, excluding impairment and other minor non-operating expenses for the quarter was $7.7 million or 6.2% of sales, a year-over-year improvement of $24.8 million. For the quarter, our tax rate was 16.1% compared to 73.1% in the prior year period. Both periods were impacted by a valuation allowance.

The normalized rate of 24.7% was used in the non-GAAP adjusted calculations for the current year and 23.8% for the prior year. Earnings per share excluding non-cash impairment, normalized tax rate, and other minor non-operating adjustments was $0.12 compared to a loss of $1.27 in the prior year. The GAAP earnings including these items was $0.11 compared to a loss of $0.53 in the prior year. We ended the quarter with $72.3 million in cash and no outstanding debt, which is a reduction of $28.1 million from the Q4 levels and an increase of $42.1 million year-over-year, or an increase of $82.1 million including the outstanding borrowing in the prior year.

As mentioned on the prior call, we expected a reduction in cash of $30 million to $35 million as we rebuild inventory levels. With pulling out purchase order timing to offset supply chain constraints for the balance of the year, we could see this timing impact be closer to $45 million. So we will balance appropriate inventory levels with sales risks from missing set dates, specifically on the more time sensitive seasonal bias. Combined with availability on our revolving credit facility, which is based on our inventory position, we had total liquidity of $121 million. Inventory at the end of the quarter was $76.3 million, which was a build of $14.2 million from the end of fiscal 2020 and compared to $99.1 million in the prior year or 23% lower.

The prior year levels were elevated due to the store closures and continued receipts within the first quarter, and we currently have 9% fewer stores. We ended the quarter approximately $5 million down to our inventory plan, so with a surge in receipts to end [Phonetic] the quarter, our store inventory had a larger gap to plan, with a significant amount of the inventory in transit within our domestic distribution network.

We repurchased 47,000 shares within the quarter for $1.4 million at an average cost of $29. In the month of May, we repurchased another 46,000 shares for $1.3 million. We have seen tailwinds in consumer demand since early May of last year, which has allowed us to accelerate some of the more transformational aspects of our merchandise and pricing strategy.

We have also seen significant headwinds with supply chain delays and incremental costs. Although our strategy has remained focused and unaltered, we have adapted our pace of change as the macro circumstances have allowed. We have a growing level of confidence that customers approve of where we are moving the Kirkland's brand and that a space exists within the market for higher quality, curated merchandise at a meaningful value relative to other specialty retailers.

Our business model is set to allow us to pivot as needed and still deliver profitable results to our shareholders. We are now ready for your questions.

Question & Answers

Questions and Answers:

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Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And the first question will come from Jeremy Hamblin with Craig-Hallum Capital Group. Please go ahead.

Jeremy Hamblin - Craig-Hallum Capital Group - Analyst

Thanks and good morning. I wanted to start with just getting a sense around trends and thinking about it sounds like there has been some kind of positive and negative takes in May, as we look towards your expectations on Q2 and recognizing that this quarter probably has the most noise, is there a kind of a range of expectations that you are looking at based on the information you have now and understanding where some of the inventory constraints have been. Anything that you can call out in terms of your expectations on Q2 sales.

Nicole A. Strain - Executive Vice President and Chief Financial Officer

Yeah. I think a couple of - just to reiterate, the positives definitely are we're getting back into a better inventory position in those key categories, which really has the most impact overall on our average ticket increase that we expected year-over-year. And then on the downside, a piece of what we're seeing in the softness we expected just as we're comping in Q2, pent-up demand and a lot of focus on home decor as things open back up last year.

But also, we had expected at some point in time that there would be a temporary reallocation of spend towards travel and entertainment as people felt more comfortable getting out. So I definitely think that we're starting to see some of that, but again expect that the Q2 comps to be tougher based on what last year looked like.

I think based on what we saw in May, which May was impacted similar to the first quarter with limited inventory until we got into the last week, I think it will be tough to comp, positive comp last year in Q2, so I don't know if that help to give you any context and some of that we expected when we planned out the year, we had a 77% increase in e-commerce that we knew it would be tough to comp year-over-year.

So I think I would say from here, expecting to be slightly down from a comp perspective to where we - to where we were last year.

Jeremy Hamblin - Craig-Hallum Capital Group - Analyst

Okay. That's consistent with our expectation. And in terms of - I actually want to break it down into that e-commerce channel where you have endless aisle, you're driving towards that and ship from vendor options that may be are not as impacted with inventory constraint. But I wanted to just get a sense for performance with e-commerce, a, throughout Q1, and whether or not that showed a little more consistency where weather impacts probably lower on e-commerce, and then as we are sitting here in Q2, is that a category or channel, again you had huge performance up 77% last year. Is that something where you're expecting e-com to be kind of flat or down here in Q2? Any color that you could share around that E-commerce business?

Nicole A. Strain - Executive Vice President and Chief Financial Officer

Yeah. I think I'll start with the numbers piece and then Woody may have something to add about the third-party dropship channel, because we are definitely - continue to be pleasantly surprised by that channel. From an e-commerce comp perspective, I do think that we can comp positive. I just think it will be - it will be a single-digit to low double-digit comp increase, and a lot of that driven by that third-party dropship channel. And to your point, we did not see the same impacts from inventory levels in that channel. It was about 50% of our e-com sales for the quarter, and it also drives a significantly higher ticket. It was more than double our owned inventory e-commerce ticket in Q1. And that continues to add elevated brands and I think there is a lot of continued potential on that channel.

Steven C. Woodward - President and Chief Executive Officer

Yeah. Nicole mentioned about the - this particular ship direct from vendor channel. They did experience some of the similar problems with inventory that we experienced in our own inventory. However, because we can toggle between what we're showing up on the website, we can kind of make those adjustments that are invisible to the consumer. But we are really pleased, we built a team now that is really going after the endless aisle, curated endless aisle and our whole assortment seems to be kind of coming to a much improved way that the store assortments look very similar to what we're doing from the ship direct from vendor. So we're very optimistic that that's going to continue for the next several years, being a big opportunity for us.

Jeremy Hamblin - Craig-Hallum Capital Group - Analyst

Got it. Thanks. And then, gross margins, I wanted to just see if we could hone in a little bit more. A lot of noise around gross margins, wanted to make sure that I understood the call-outs that you had. So freight impact I think you called out was 400 basis points drag in Q1, and that you expect it to be a similar level in Q2 that you're going to have some positive impact from the inventory normalizing versus I think what you've been calling out since Q3 of last year. And I think you called out that, that would be roughly 100 basis points to 150 basis points. Just in terms of any of the other items and kind of - I think typically Q2 has a lower gross margin than Q1. I think some of that is the seasonality of the products that you sell. But any additional color you can point us to here in Q2 on gross margins?

Nicole A. Strain - Executive Vice President and Chief Financial Officer

Yeah, I think, based on timing of inventory and all of those things that you mentioned, I'd probably look at Q2 gross profit this year more similar to Q1 of this year than maybe it is in most years.

Jeremy Hamblin - Craig-Hallum Capital Group - Analyst

Okay, great. And then, also wanted to just ask about capital allocation. And you had a little bit of noise on the balance sheet, because I think you had inventory drag on your cash flows, which was expected based on where they - the levels ended at the end of 2020. But you also had a little bit of drag around your AP and accrued expenses, do you expect that to normalize? Is that just kind of timing of when the quarters end, and so forth? But should some of that be recaptured on the balance sheet? That's part one of the question.

And part two is, your buyback program hasn't really got going, yet. And I don't know if that's just being opportunistic, if there is levels you're looking at. And part three of the question is, are there other considerations when you have such a significant cash balance, if you looked at things like a special dividend as a potential option.

Nicole A. Strain - Executive Vice President and Chief Financial Officer

Yeah. Starting at the first one, so when we ended the year with a $100 million in cash, we have said, there's about a $30 million impact as we rebuild inventory, and part of that was actual an increase in inventory and the other piece was that we received more of the inventory towards the end of the quarter so that we hadn't paid for it the same that we would have in a normal cycle.

So, you know, I think what we're going to see this year from a timing impact is potentially a working - a negative working capital adjustment just because we are trying to pull forward inventory to make sure we're not in the same place with sales misses because we didn't get inventory in. So, I think by the end of the year that normalizes back out, but I think within the year, we are going to be trying to pull up orders within a two to four week timeframe.

So already in the Q2, Q3 timeframe, we're paying for some of the harvest and Christmas merchandise before we sell it, and so that will just be elevated. So I think there'll continue to be a little bit of noise, but the number I called out is from year-end that reduction to fund that may get to $45 million, but I think then we'll recover back from that.

And then on the share repurchase piece, I noted in Q1, we repurchased $1.4 million of shares and we actually had a new, more aggressive plan that we put in place near the end, actually in the middle of the quarter, so I called out May being the same as the quarter, which again is $1.3 million, but in one month more aggressive than we've been to date.

And to your point, we are considering all options and we'll continue to do so. And if we don't need the cash, then we are looking at what are the right things to do with that, and definitely returning it to shareholders in either share repurchases or some sort of dividend are all on the table. And I think I missed the third one. That was the third one, or the second one? Did I… [Speech Overlap]

Jeremy Hamblin - Craig-Hallum Capital Group - Analyst

Yeah. Your rolled it in together. I'll appreciate it - Yeah, I appreciate you taking all the questions. I'll hop back into the queue, and congrats on the strong execution.

Nicole A. Strain - Executive Vice President and Chief Financial Officer

Thank you.

Operator

The next question will come from Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

Anthony Lebiedzinski - Sidoti & Company, LLC - Analyst

Yes, good morning and thank you for taking my questions. So, yeah, I appreciate the color about the second quarter, and I'm looking forward to the back half of the year, the same store comparisons get a little bit easier especially in the fourth quarter. So with that in mind, plus the fact that you are working hard to improve your inventory levels, would it be reasonable to assume that you will have positive comps in the back half of the year?

Nicole A. Strain - Executive Vice President and Chief Financial Officer

It is. And I think to that point, we expect it to sequentially increase quarter-to-quarter from Q2 to Q4, the comp.

Steven C. Woodward - President and Chief Executive Officer

You know, Anthony, one of the things last year we experienced during the third and fourth quarter was significant inventory shortages. And we are recovering at this point. But the other section of that is trying to get the merchandise out of - all ends together and create a very beautiful impact on the floor, in terms of really showing the vision of the merchants in terms of the trends and that should start regulating or start normalizing here in the second quarter were fully expected to be in great shape for the third and fourth quarter. But this quarter and next quarter are very important for our merchandise transformation in that, this is where we accelerated some of the quality aspects, design aspects, look, so we're really looking forward to this - the back half of this year.

Anthony Lebiedzinski - Sidoti & Company, LLC - Analyst

Got it. Okay, thanks for that. So, and Woody, you mentioned that as far as direct sourcing, you're at 38% as of the first quarter, how should we think about it for the balance of the year as far as where you think you'll wind up for direct sourcing and kind of the impact on margins that, that will have?

Steven C. Woodward - President and Chief Executive Officer

Yeah. It's a very positive story. That 38% though represents the orders that we've written for the back half of the year. So that's a pretty good number to hang on to, it could be as high as 40%. And we're growing that in a way that we are taking advantages of any design opportunities or better pricing, a couple of aspects that I mentioned on last call was that the unforeseen benefit that we're getting is that our - some of our domestic vendors have really sharpened their price points.

So we said all along that we would let this direct sourcing get up to about 50% of our purchases and then evaluate whether we want to go even higher. Right now, I would say that the agents in our countries that we're buying directly from are really hitting their stride, and for example, in this particular quarter, we're really landing our first upholstery from China, which is really an exciting, will make our stores look more like a real home furnishings retailer and the scale, while a little bit smarter, the price points are super sharp and the products look great.

So the direct sourcing is really a smart way for us to balance out our risk. As of - the last year, we were very dependent on China and this year we're balancing towards Vietnam, India and other countries. And so you'll see our penetration in China going down and the penetration in some of the other countries going up, which should give us better opportunities to not be so dependent on one port or one supply chain.

Nicole A. Strain - Executive Vice President and Chief Financial Officer

And on the financial impact, getting to 38% to 40%, another 75 basis points to 100 basis points of margin improvement, and I think specifically in Q3, we're comping some pretty tough margin rates just around early sell-through of seasonal. So I think that will help us to balance that out.

Anthony Lebiedzinski - Sidoti & Company, LLC - Analyst

Got it. Okay, thanks. And I guess the last question from me, as far as the store openings and closings, so you actually opened a couple of stores in the quarter. You mentioned one of them I think was a former Pier 1 location. So how should we think about as far as store openings for the balance of the year and also store closings as well? Thank you.

Nicole A. Strain - Executive Vice President and Chief Financial Officer

Yeah. For the balance of the year, we have one store that was - it's not actually an opening, but it's been closed for over a year now, because of a tornado in Arkansas. So that one will reopen back out. I think we'll have a handful, less than five closures between now and the end of the year, and again have another large portion of our leases coming up for renewal at the end of our fiscal year.

So if we have increased closings, they'll be at the end of the fiscal year. So I'd say five or less within the year and the others will be at the end of the year. And really again just like last year depends on how much progress we're able to make in negotiations.

Anthony Lebiedzinski - Sidoti & Company, LLC - Analyst

Got it. Okay, thank you very much. Best of luck.

Steven C. Woodward - President and Chief Executive Officer

Thank you. Thanks Anthony.

Nicole A. Strain - Executive Vice President and Chief Financial Officer

Thank you.

Operator

The next question is from John Lawrence with Benchmark. Please go ahead.

John Lawrence - The Benchmark Company - Analyst

Hi, good morning.

Nicole A. Strain - Executive Vice President and Chief Financial Officer

Good morning.

John Lawrence - The Benchmark Company - Analyst

Yeah. Woody, could you speak a little bit, you mentioned I guess, first thing would be competitive environment, some people might be looking at price to drive traffic, could you speak to that first and then we'll go from there?

Steven C. Woodward - President and Chief Executive Officer

Yeah. I think the competitive environment is working in our favor right now, because remember that we lost our largest competitor Pier 1 last year, and while that doesn't immediately fold into our sales, you start seeing that. Because, you know, home furnishings is one of those less frequent purchases. And so we're starting to see some benefits from that. I think that overall, the part that we are the most proud of right now is that while we're doing this direct sourcing, it is helping us with our product margins. The real benefit to that is the look and quality of our products and better packaging. And I think our customers are starting to really give us credit for maintaining value price point while actually giving the consumer a lot more quality and a lot more value in terms of design.

John Lawrence - The Benchmark Company - Analyst

Great. And could you follow that with loyalty card? All of that? What - an update there?

Steven C. Woodward - President and Chief Executive Officer

Yeah. We've been really pleased with our loyalty program. In fact, since the launch, we're seeing a loyalty consumer spend around $10 more or 27% more per transaction when compared to the non-loyalty customers. And so far, new loyalty customers are spending - the brand new ones are spending about $20 or 53% more than the non-loyalty customers.

So, like we said in previous calls, our loyalty program is a multi-phased approach. So we've got a lot more what I would call bells and vessels coming to enhance that program and make us really the retailer of choice to our most loyal customers. And they represent a huge portion of our sales and our profitability.

John Lawrence - The Benchmark Company - Analyst

Yeah, thanks for that. And a last question from me, you mentioned some of the new vendors, some of the new brands you've had on e-commerce what can you say about negotiating with those vendors as far as with all the store closings within the industry? Are some of these vendors wanting to deal with you more because of the doors that you have? And what are you seeing from those vendors at this point?

Steven C. Woodward - President and Chief Executive Officer

Yeah. I think there's probably two reasons, one, they're looking for distribution just because of some challenges in their distribution model and the lack of new stores opening. And so we're getting some of that. But the other side is the elevation of our store, and our store look in our website is now able to, so you look at KitchenAid or Cuisinart and our assortments look parallel with what they're offering. So it really is kind of a two-pronged approach. They have been very - we have a lot more people knocking on our door saying can we be part of your curated endless aisle? And we've been pretty pleased with the results so far.

Of course, some of those vendors have also experienced some of their own inventory shortages and supply chain issues. But really and truly we're pleased with the results that we're getting, we're pleased that the opportunity for the customer is where they can buy some of those great brands from their trusted store, Kirkland's.

And then, at the end of the day we may evaluate whether there is an - a key item or two that we want to bring in to enhance fourth quarter gift giving. So all items are - all ideas are on the table and these vendors have been really great to work with.

John Lawrence - The Benchmark Company - Analyst

Great. Congrats on the success. Look forward to hearing more. Thanks.

Steven C. Woodward - President and Chief Executive Officer

Thank you, John.

Nicole A. Strain - Executive Vice President and Chief Financial Officer

Thank you.

Operator

And the next question is a follow-up question from Jeremy Hamblin with Craig-Hallum Capital Group. Please go ahead.

Jeremy Hamblin - Craig-Hallum Capital Group - Analyst

Thanks for taking the follow-up. So, want to come back to direct sourcing here. You're clearly tracking ahead of prior expectation in terms of penetration of that business, generating strong margins, seeing really impactful results on what you're doing on the e-commerce side of your business. So I wanted just to get a sense of thinking about the long term, I think you had spoken to direct sourcing getting to that 50% threshold. And then maybe pausing and revisiting after that. And then just thinking about where direct sourcing can go and the contributions in terms of both margin, but also in quality of goods, should we be thinking about direct sourcing as potentially being a bigger portion of your total business?

And then, along with that, kind of same question along the lines of e-commerce. It sounds like dropship has been tremendously successful thus far. You're now at 30% penetration on e-commerce overall. Is that something where you may end up tracking towards what many of your peers do where e-commerce is going to be greater than 50% of your business long term?

Steven C. Woodward - President and Chief Executive Officer

Well, let's - those are both really good questions, Jeremy. Thank you for asking it. Let's start with the direct sourcing. You know, our goal was - you know, to start it off a couple of years ago we hit the 20% and then our goal this year was to hit 30%, we'll probably hit about 38% to 40%. What we needed to do was make sure that our agents and supply chain gets a little bit more accustomed to this business model, so we get some - some things to do on our side and some things to let them get up and running.

But the result that we're seeing is spectacular merchandise a great value. And so I think that while we say that we'll pause at 50%, I don't really see a reason why we would if everything is moving along as as we projected. Remember that most of our competition has significantly more than 50% of their distribution or 50% of their purchase is coming from a direct source environment. So I would say that we will pause but for like two seconds and then we'll say, let's keep increasing it, because we like what we're getting. And then the other side of that, on the e-com becoming a larger portion, yeah, we said that we'd like to get healthy with being in the 50-50 range, 50% store contribution sales and 50% e-commerce in the future, but that definitely - what that really says is that we're listening to the consumer, we're letting them kind of lead the way. This ship direct from vendor has been so successful for us and they love that we have curated it, so that it's not literally just a bunch of home furnishing, but they're home furnishings that look like they fit to the lens of what Kirkland's stands for from a kind of a casual home furnishings lifestyle look.

So I think there's vast opportunities there. Like the vendors from the like Cuisinart and KitchenAid, we have many more vendors approaching us now saying they want to be part of our direct ship. And you know, yes, we have a few issues there with the systems and that we're working in the back - back of the house on to making that more fluid and easier to manage.

Nicole, did you have anything to add?

Nicole A. Strain - Executive Vice President and Chief Financial Officer

No, I think before we had said 50%, we thought we'd end up in that two to three times - two to three year timeframe likely 50% store sales and 50% e-commerce. But we're not driving to that number for the sake of getting to that number. It really is just - we are pushing e-commerce as the growth engine of our Company. And to Woody's point, the customer will dictate where we end up, if that's 45% or 60%, and we're just going to make sure that we are set up to be able to service those sales in a way that our customers expect wherever they happen.

Jeremy Hamblin - Craig-Hallum Capital Group - Analyst

Thanks for taking the follow-up. Best wishes.

Nicole A. Strain - Executive Vice President and Chief Financial Officer

Thank you.

Steven C. Woodward - President and Chief Executive Officer

Thank you, Jeremy.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Woody Woodward for any closing remarks.

Steven C. Woodward - President and Chief Executive Officer

Thank you, Operator. As always, we're available for follow-up questions over the next several days and weeks and we look forward to seeing you online and our stores. Thank you.

Operator

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KIRKLAND'S INC

Q1 2021

Earnings Transcript

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