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Kirkland’s, Inc. beats earnings expectations. Reported EPS is $-0.29, expectations were $-0.32.

Operator: Good morning, everyone, and thank you for participating in today’s conference call to discuss Kirkland’s financial results for the third quarter ended August 3, 2024. Joining us today are Kirkland’s Home CEO, Amy Sullivan; EVP and CFO, Mike Madden; and the company’s External Director of Investor Relations, Caitlin Churchill. Following their remarks, we’ll open the call for your questions. Before we go further, I would like to turn the call over to Ms. Churchill as she reads the company’s safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Caitlin, please go ahead.

Caitlin Churchill: Thank you and good morning. Except for historical information discussed during this conference call, the statements made by company management are forward-looking and made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995. 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. A webcast replay will also be available via the link provided in today’s press release as well as on the company’s website at kirklands.com. Now, I will turn the call over to Kirkland’s CEO, Amy Sullivan. Amy?

Amy Sullivan: Thank you, Caitlin, and good morning, everyone. The third quarter marked a significant turning point for Kirkland’s as we entered into a strategic partnership with Beyond that allowed us to retire expensive debt, strengthen our balance sheet and begin to position our company for growth. This partnership not only provides us with additional capital to continue progressing on our Kirkland’s Home initiatives, but enables new growth opportunities as we work together to revitalize the Bed Bath & Beyond brand. In addition to this important milestone, during the quarter, we anniversaried the strategic shift in our Kirkland’s Home brand that we began to implement in September of last year. Going forward, our results will be much more comparable to prior year periods as we continue the brand revitalization.

Before I share more on our strategic initiatives, let me review a few highlights from the quarter. I am very pleased with our team’s ability to deliver our fourth consecutive quarter of positive comparable store sales growth of 1.6%, driven by positive traffic and conversion despite a significant headwind from hurricanes Helene and Milton. In line with prior quarter trends, the strength in our store performance continued to be offset by declines in our e-commerce channel, resulting in a total comparable sales decline of 3% for the period. With respect to profitability, we delivered a year-over-year $3.7 million improvement in adjusted EBITDA, resulting in a return to positive adjusted EBITDA for the quarter. While we have continued to see our customer be choiceful in her spend, which has increased promotional activity across the industry, we were pleased to see a 6% increase in transactions and 10% increase in units sold, driven by continued positive momentum in seasonally relevant decor, such as holiday, floral, and gifts.

Our overall third-quarter performance is a great example of our team’s ability to deliver year-over-year improved financial performance while navigating the necessity to operate with a conservative approach to cash management, which impacted our marketing budgets and timing of product flow in the quarter. This accomplishment reinforces our optimism for the future, given the healthier financial position we expect to be in following the completion of the Beyond transaction, allowing us to begin to build the foundation for new growth. Now, let me turn to the ongoing progress we are making on our Kirkland’s Home strategic initiatives and how we see the Beyond partnership further supporting our efforts and growth potential. First, with respect to re-engaging our core customer.

We spent the first half of the year diligently focused on reactivating lapsed customers, enhancing their loyalty profiles, and keeping them engaged with the brand. These efforts are paying off as we have seen a 39% reactivation of lapsed customers over the last 12 months. We have continued to grow our loyalty file, and we have continued to drive high engagement with our over 3 million social media followers, particularly when we feature an in-store shopping experience. While our marketing budget is lean, given our strategically conservative approach to expenses, we continue to focus on impact and efficiency by driving traffic through seasonally relevant events that align to our new product launches and continue to drive conversion through targeted email and SMS campaigns.

Looking ahead, as our financial position improves and we begin to leverage beyond robust customer database, we believe we have a greater opportunity to more effectively engage with our customers and more efficiently acquire new customers. In addition, we believe in the opportunity to further expand customer loyalty and retention through unified loyalty and credit programs with Beyond. Let me now turn to our next initiative, refocusing our product assortment. As I mentioned, we are now a year into executing on this initiative, leaning into our always something new mindset by delivering more frequent newness in the key categories that our customers expect and love. We continue to see excellent results in holiday, floral, gift, fragrance, and textiles.

And while we are pleased with the results across our decor categories, we saw continued softness in furniture and wall decor driven by both macroeconomic pressures to high ticket goods and the strategic decision to ship goods in these categories later to minimize the impact from the spike in container costs and limited availability of containers over the summer. As we shared last quarter, we had seen a strong start to our Halloween and harvest assortment, and we were pleased to end the season exceeding our expectations in both revenue and margin. The reintroduction of gift continues to resonate with our customers, largely driven by apparel, accessories, and impulse product. Our carry-all tote and monogram jewelry boxes continue to be the top items in this category.

These category trends remain strong as we look at early holiday sales and see newness in Christmas and gifts continuing to drive demand. We also anticipate being in a more favorable inventory position in furniture and wall decor as we move into December. Our merchants have worked diligently to bring value price points back to the higher ticket categories and we believe those efforts will help improve conversion in these categories as we move forward. In addition to our own initiatives around our product assortment, we are also excited to leverage our partnership with Beyond to expand our distribution channels and more efficiently move slower turning product via Overstock.com. We believe in time, these efforts combined with continuing to drive newness and freshness across the assortment will further support improved inventory turns more in line with our historical performance.

This now leads me to our final strategic initiative, strengthening our omnichannel capabilities. With respect to e-commerce, while performance remains challenged, our teams are actively working to drive improvements. As we discussed last quarter, we had recently implemented a new pricing tool to help our merchants better analyze the competition, particularly in our dropship assortments. Within the quarter, we deployed two major pricing tests in art and furniture, and the findings have provided us clear direction for pricing and the technology needed to best showcase value for the customer that we plan to incorporate into our strategy for the upcoming e-commerce replatform. As we focus on developing our roadmap to our replatforming efforts next year, we are thrilled to leverage the e-commerce expertise of Beyond.

We are reviewing our current technology and our recent RFP process with our partners at Beyond with the goal of making a platform decision by the end of the year. With stronger e-commerce capabilities in place, we expect to better leverage our omnichannel model as we remain highly encouraged with the continued strength of our brick and mortar channel. It is a testament to our store teams that through our partnership with Beyond, we will be the exclusive brick and mortar licensee and lead the efforts to revitalize the iconic Bed Bath & Beyond brand. As we discussed at our announcement, we are planning to open our initial Bed Bath & Beyond neighborhood stores in 2025. We expect these stores to generate at least two times the revenue of a current average Kirkland’s Home store and will focus on a curated assortment of Bed Bath & Beyond’s iconic legacy brands as well as complimentary Kirkland’s Home seasonal and decor products.

We recently reorganized our team to support both brands and are actively building the Bed Bath & Beyond merchandising and store strategy. There is still a lot of work to be done as we prepare for our first opening next year, but both of our teams are excited for the growth opportunity we see ahead for this strategy as we position Kirkland’s as a multi-brand retailer. In summary, we are pleased with the progress we are making across our business. Our partnership with Beyond has further energized our teams and our efforts in positioning Kirkland’s to achieve its full potential. We remain excited about what we can achieve together as we look to end fiscal 2024 in a healthier financial position with significant opportunities for growth. And now, over to Mike.

Mike Madden: Thank you, Amy, and good morning, everybody. For the third quarter, net sales were $114.4 million versus $116.4 million in the prior year quarter. As a reminder, we had anticipated that the calendar shift associated with last year’s 53-week year would benefit total sales dollars in the third quarter as a smaller week at the beginning of the quarter was replaced by a larger week pulled into the end of the quarter. This shift benefited sales by approximately $3 million in the third quarter. In addition to this shift, the total sales comparison incorporated the 4% decline in average store count compared to the prior year quarter, and a comparable sales decrease of 3% for the quarter. The decrease in comparable sales, which is calculated on a like-for-like basis by shifting the prior year NRF calendar by one week, was driven by declines in the consolidated average ticket and e-commerce conversion, partially offset by an increase in consolidated traffic and store conversion.

We estimate that hurricanes Helene and Milton negatively impacted our comparable sales performance by approximately 100 basis points. For the quarter, comparable store sales increased 1.6%, inclusive of the disruption from the hurricanes which impacted about 20% of our store base in some fashion. With respect to our e-commerce business, sales declined 14.9% compared to the prior year period, offsetting the positive results in our store channel. E-commerce accounted for 24% of total sales in the quarter, down from 28% in the prior year quarter. Breaking down sales within the quarter, comps were down 3% in August, down 1.3% in September, and down 5.2% in October. October reflected a more difficult year-over-year comparison and included the impact of the hurricanes and the inventory flow adjustments that Amy discussed.

From a merchandise perspective, we saw increases versus the prior year in holiday, gift, textiles, floral, fragrance, and housewares, reflecting our shift in emphasis to faster turning, lower price point items. However, these increases were not enough to offset declines in the higher ticket categories of furniture, mirrors, wall decor, art, and lamps. Geographically speaking, sales performance lagged in Florida, Georgia, and North Carolina due to the impact of the storms, while we saw strong performance in Texas and other areas of the Southeast. Gross profit margin increased 180 basis points to 28.1% of sales, compared to 26.3% in the prior year quarter. The components of this year-over-year change were as follows. Central distribution costs decreased by 130 basis points to 4.8%, primarily due to a later inventory build-up versus the prior year.

The closure of our Winchester, Virginia e-commerce hub in the prior year quarter also contributed to the decline compared to the prior year. Outbound freight costs, including both store and e-commerce shipping expenses, decreased 120 basis points to 6.8% of sales compared to the prior year quarter. Improved management of outbound store routes along with lower rates per route were the primary drivers of the decrease. We also benefited from lower parcel delivery costs due to the reduction in e-commerce revenue and lower contract parcel rates. In addition to these cost improvements, depreciation included in cost of sales decreased by about 20 basis points to 1.3% of sales. Partially offsetting these factors was a decline in merchandise margin and an increase in store occupancy costs.

Compared to the prior year, merchandise margin decreased approximately 50 basis points to 53.5% and store occupancy cost increased 40 basis points to 12.5%. The decrease in merchandise margin was largely driven by increased promotional activity during the period, particularly in the latter part of the quarter. And the pressure that we expected to experience from freight was minimized in the quarter due to our strategic decision to ship certain goods later than we previously planned. The deleverage of store occupancy costs was largely due to the overall sales decline in the quarter. Total operating expenses decreased $2.8 million to $34.5 million, or 30.2% of sales, compared to $37.3 million, or 32% of sales in the prior year quarter. The decrease in dollars was primarily the result of reduced advertising costs, corporate salaries, and asset impairment expenses.

Adjusted EBITDA, which excludes certain expenses related to the Beyond transaction, stock compensation, and severance charges, was a positive $0.5 million versus negative $3.3 million in the prior quarter. Operating loss was $2.4 million compared to an operating loss of $6.7 million last year. Excluding the items are reviewed in adjusted EBITDA, adjusted operating loss was $1.9 million compared to $6 million last year. Interest expense in the quarter was $1.7 million compared to $1.2 million in the prior year quarter due to higher borrowing levels and higher interest rates. During the quarter, we incurred a charge of $3.3 million related to the repayment of our FILO term loan in conjunction with our transaction with Beyond. Net loss was $7.7 million compared to $6.4 million in the prior year quarter.

Excluding the non-core operating items incurred in both periods, adjusted net loss was $3.8 million compared to $5.9 million in the prior year quarter. With respect to our balance sheet, we ended the quarter with $111 million in inventory, a 5.7% increase from the $105.2 million at the end of the prior year quarter. The year-over-year increase was largely due to timing. Due to the calendar shift, we were one week deeper into the season as compared to last year, and we also strategically prioritized our inventory flow to better manage the container availability and freight costs previously discussed. We had total borrowings outstanding of $80.4 million at the end of the quarter, which was comprised of $65 million under our senior revolving line of credit and $15.4 million in debt to Beyond related to the term loan, convertible term loan, and the sale of a percentage of Kirkland’s future revenues to Beyond, net of debt issuance and original issue discount costs.

This compares to $52.7 million under our senior revolving line of credit and $8.7 million under our prior FILO term loan net of debt issue costs at the end of the previous quarter. The increase in borrowings reflects the net loss for the quarter, seasonal growth in working capital, and capital expenditures of $0.5 million. We are continuing our policy of not providing specific guidance given the difficulty in forecasting visibility. However, we do want to provide some color around our expectations in key areas. First, as a reminder, this year’s fiscal calendar includes 52 weeks compared to last year’s 53-week fiscal calendar. This extra week last year resulted in approximately $6.6 million in revenue that we will not benefit from this year.

In addition, the timing shift associated with the 53rd week will negatively impact Q4 as the larger week at the beginning of the quarter will be replaced by a smaller week at the end, resulting in a headwind of approximately $3 million for the quarter. We’ve seen a slower start to Q4, but we are encouraged by the sell-through we are seeing in key categories such as holiday and gifts, and we expect our in-stock levels in furniture to improve from earlier this fall. We also believe that the slower start is driven in part by the calendar shift in the compressed holiday selling season we have this year. Using history as a guide, we have been analyzing the sales build and consumer behavior we saw in 2019, which is the last time we had a similar retail calendar.

While consumer behavior has certainly changed since that pre-pandemic year, the overall analysis suggests that the compressed shopping calendar would benefit December versus November. Thus, we remain cautiously optimistic as we move forward through the quarter. We expect the promotional environment to continue to be a factor in Q4, and we also expect to see some added margin pressure from the spike in inbound freight rates we experienced in the summer as the affected goods sell through. However, the actions we took to control shipments will limit the amount of that pressure versus our original expectations. As for operating expenses, we continue to manage them very tightly and expect to continue to benefit from the cost reduction actions we took earlier this year.

While we believe we continue to have a line of sight to achieving positive adjusted EBITDA for the year, we acknowledge that the promotional environment has intensified as reflected in our results today and our expectations for the fourth quarter. With that said, we are continuing to control the aspects of the business that we can control and our priorities are unchanged. We are confident in our ability to drive strong year-over-year improvement in profitability and enter 2025 under stronger footing. We continue to believe in the long-term opportunities still ahead, especially as we layer in our strategic partnership with Beyond. We believe through our transaction with Beyond, we have the potential to accelerate the timeline to achieve our long-term targeted margins and growth guidance.

We look forward to sharing more details on our plans on our future calls. I will now turn the call back over to Amy for a few closing remarks before we open the call up for questions. Amy?

Amy Sullivan: Thank you, Mike. We are proud of the results we have continued to deliver throughout this year despite the challenges we have faced. This year is a transformative year for Kirkland’s. We entered the year as a single banner retailer in the midst of a turnaround and we are exiting the year as a dual brand retailer with significantly more growth opportunities along with an improved balance sheet and ongoing traction against our initiatives. As we look ahead to 2025, we are excited to unlock the potential of our partnership with Beyond as we revitalize the Bed Bath & Beyond brand, further strengthen the Kirkland’s Home Foundation, and begin to reinvest in areas like technology and marketing. Before I close, I want to thank our teams.

None of our accomplishments would be possible without our team members who show up focused on our customer every day. Their dedication to the art and science of retail is crucial in delivering the experience our customers love. We are excited by the opportunities for growth and are committed to delivering value to our shareholders. That is our focus now and will continue to be in 2025 and beyond. That concludes our prepared remarks. Operator, we’re now ready to take Q&A.

Operator: [Operator Instructions] The first question comes from Jeremy Hamblin with Craig-Hallum Capital Group. Please go ahead.

Jeremy Hamblin: Thanks for taking the questions, and congrats on the strategic partnership. I wanted to start by coming back to the commentary around trends and see if we can get a little more color in terms of what you’re seeing. You noted a little bit softer results here in November, but wanted to understand if you could help us with kind of magnitude and then also kind of the split that you’re expecting in terms of e-commerce performance, which, it’s lapping kind of similar compares in Q4 versus Q3 versus your retail store sales, which saw a pretty meaningful improvement last year and is clearly a tougher compare.

Amy Sullivan: Thanks, Jeremy. I’ll start and then I’ll let Mike give some additional color. So from an overall start to the season perspective, as you know, Q4 is our holiday season. And so when you take into account the calendar shift, we’re really managing to this nine-week spread between November and December. So there’s a lot of noise in the month of November in terms of how the calendar shift plays out. Mike alluded in his part of the script that if you use history as a comparison and look at 2019 and the rate of sales that we expect to have in at this point in the season, it still gives us optimism that November and December combined will be what we need it to be. So we’re really looking into — the next two weeks are really important for us. We have a huge customer appreciation event going on right now and as we wind into December, we believe those nine weeks combined will shake out.

Mike Madden: And, Jeremy, in terms of the compares, I think we continue to see more momentum in the store side of the business. I think that will continue into the fourth quarter notwithstanding the tougher comps you called out as it relates to stores. That’s just the trend we’ve been on. We’ve been seeing the traffic gains there, the conversion gains there, and that continues.

Jeremy Hamblin: Got it. And then shifting gears here to talking about the Beyond partnership. As we head into 2025, it sounds like, that really starts in earnest in Q1. And wanted to get a sense for how you think that’s going to evolve, particularly your e-commerce business and the potential there, there’s obviously some aspects to that agreement in which you’re paying fees and incentive fees for success there, but also wanted to understand how it might impact your marketing budget and how those costs may be shared across the two parties.

Amy Sullivan: Sure. So from an e-commerce perspective, we, as you know, throughout this past year have been really focused on evaluating our technology. We’ve gone through a pretty robust RFP process to start to identify the replatforming choices that we need to make. Given that our inherent strength here is brick and mortar and theirs is e-commerce, we’ve paused just to bring their expertise to the table with us as we make those final decisions on the re-platform. So when I think about how we leverage them as we cross into the new year, it would really be taking their guidance in terms of those next steps in our decision for building out our roadmap and leaning into them as we think about are there other partners or other players in the technology space that we should be evaluating as we look at our dated tech stack and negotiate alongside of them from an economy of scale perspective just to open up more options to make sure that when we do invest in technology we’ve made the best decision for the long haul.

So we’re actively working through that right now. We expect to make our [Technical Difficulty] platform decision by the end of this calendar year and then other components of technology that we think enhance the total business, we will continue to have those conversations as we move into the start of the new year. And then from a marketing perspective, I would say it’s sort of twofold. And so obviously our goal, both Kirkland’s and beyond, is to get a benefit of pooling our customer data and how can we not only learn customer shopping behavior by having the data pooled together, but how can we also share in a potential future unified loyalty program, unified credit card program. And so we are in the very early phases of that and obviously working through sharing that data, ensuring that we’re giving our customers the opportunity to opt into that and working with our legal teams on all the privacy laws.

But we definitely believe that there’s significant upside when you think about the opportunity for Kirkland to get new customers into the file at a much more efficient cost by sharing in the much larger pool of customers that Beyond has across its multitude of brands.

Mike Madden: And, Jeremy, one thing to add to that, just even with the fees related to the collaboration and the fees related to the incentive on the e-commerce side, when you look at it all together from where we were, cost of debt if you will, versus where we are, it’s neutral and it comes with these benefits. So we continue to be pleased that that’s the case going into 2025.

Jeremy Hamblin: Let me see if I can get a little bit more granular there. In terms of thinking about the costs, as you’re getting into a venture like this and kind of taking your respective customer bases and helping them to understand the changes that are happening here, would you expect greater investment to be made by Kirkland’s in kind of getting this kickstarted next year?

Mike Madden: We definitely would in terms of the store aspect of this. I mean, we’re going to operate these stores with our people, with our real estate efforts, our construction. So as we look at that five stores, the kind of plan for the pilot next year, that will be an investment from us, but we’re getting that additional capital as we close this with the shareholder meeting coming up here on December 23rd. That’s when the final $8 million comes through connected to the entire transaction. And that will provide us that — it’s not a huge amount to get into these five stores, but it does provide us the ability to do that and some flexibility to do some other things across the business.

Jeremy Hamblin: Great. And then just one other quick one here from me. In terms of what you’re seeing from a kind of promotional environment out there, I think that the category as a whole has probably been somewhat neutral year-over-year but wanted to get your insight in terms of what you’re seeing from your closest competitors and whether or not there are particular categories. You noted kind of the disparity in performance among categories, but whether or not you’re seeing some more aggressive promos in particular categories.

Amy Sullivan: Yeah, I would say overall we’ve been able to control sort of what we expected the promotional cadence to be. I would say it’s more about consistency of promo and ensuring that there’s sort of always a new fresh deal for our customer to keep traffic and conversion where we need it to be from an ongoing perspective. There have been parts of our business in the more seasonally relevant decor side of things and we specifically mentioned on this call Halloween and harvest where we were able to get better reg price selling at the beginning of the season and close out that season a little better than we had in prior years. If you think about the higher ticket categories, though, I would say it is just sort of a continuation of what we’ve seen in terms of the pressure on those high ticket goods.

The good news for us is we have been very consistently focused on bringing in value engineered product within the high ticket category. So, as we move into the future months, we think that will start to balance. But it’s really just about getting that consistency of a value message and a promotional message out there to focus on traffic.

Jeremy Hamblin: Got it. All right. Thanks for taking the questions and best wishes.

Mike Madden: Thank you.

Amy Sullivan: Thank you, Jeremy.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Amy Sullivan for any closing remarks.

Amy Sullivan: Thank you all for joining us today. As a reminder, we are having our upcoming shareholder vote on December 23rd, which assuming a positive outcome, will solidify the full investment from Beyond, resulting in $8 million of additional liquidity by year end. We look forward to speaking with you again on our next earnings call and we hope that everyone has a happy and healthy holiday season.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.