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| Operator: | | Press 8 to pause the recording. Press 9 to fast forward 30
seconds. Press 0 to adjust the volume. |
| | | Ladies and gentlemen, thank you for standing by. Welcome to
Kirkland’s, Inc. Fourth Quarter 2011 conference call. |
| | | During the presentation, all participants will be in a
listen-only mode. Afterwards, we will conduct a
question-and-answer session. At that time if you have a
question, please press the 1 followed by the 4 on your
telephone. If at any time during the conference you need to
reach an operator, please press star 0. As a reminder, this
conference is being recorded, Thursday, March 8, 2012. |
| | | I would now like to turn the conference over to Mr. Tripp
Sullivan of Corporate Communications. Please go ahead, sir. |
| Tripp Sullivan: | | Good morning and welcome to this Kirkland’s Incorporated
conference call to review the company’s results for the
fourth quarter of fiscal 2011. |
| | | On the call this morning are Robert Alderson, President and
Chief Executive Officer, and Mike Madden, Senior Vice
President and Chief Financial Officer. |
| | | The results, as well as Notice of the Accessibility in this
conference on listen-only basis over the Internet were
release earlier this morning in a press release 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 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, including the company’s Annual Report
on Form 10-K filed on April 14, 2011. |
| | | With that said, I will turn the call over to Mike for a
review of the financial results. |
| Michael Madden: | | Thanks, Tripp, and good morning everybody. I’ll begin with a
review of the fourth quarter financial statements, and then
finish with financial guidance for the first quarter and
performance goals for fiscal 2012. |
| | | For the fourth quarter total sales, including gift card
breakage revenue, were $149.1 million, a 6.8% increase,
versus the prior year quarter. As previously announced,
comparable store sales increased 1.4%. E-commerce sales
entered the base of comparable stores sales in December of
2011 and contributed 80 basis points to the total increase
during the quarter. Average sales per store increased 4%
over the prior year quarter. The store comp sales increase
was driven by a 4% increase in the amount of the average
ticket. Increases in both the average retail selling price
and the number of items in each transaction led to the
overall increase in the average ticket. The transaction
count declined by approximately 3%, traffic count increased
2%, but a decline in the conversion rate more than offset
the traffic increase. |
| | | From a geographic standpoint, sales trends continued much
like the third quarter. We are — we experienced stronger
results in California, Arizona, Florida, the Upper Midwest,
and North Carolina. Results were below average in Texas and
Louisiana. |
| | | E-commerce sales were $3 million for the quarter. In our
first full-year operating the business, sales were $8.4
million. We experienced sales acceleration each quarter
since going live in November of 2010. Traffic to the site is
on the rise with unique visits increasing 70% over the prior
year during the months of January and February. The
merchandise category showing comp increases were art,
floral, seasonal, gifts, mirrors, and textiles. These
increases were offset primarily by declines in decorative
accessories, alternative wall décor, and frames. |
| | | In real estate we opened 11 stores and closed 3 stores
during the quarter, bringing us to 309 stores at
quarter-end. Eighty-four percent of the stores at
quarter-end were in off-mall venues, and 16% were located in
enclosed malls. At the end of the quarter we had 2.1 million
square feet under lease, a 10% increase from the prior year.
Average store size was up 7% to right at 6900 feet. |
| | | Gift card breakage revenue was $800,000 as compared to
$250,000 in the prior year quarter, reflecting an increase
in the estimate for the expected breakage rate. |
| | | Gross profit margin for the fourth quarter increased
approximately 70 basis points to 43.0% of sales from 42.3%
in the prior year. The components of reported gross profit
margin were as follows. First, merchandise margin increased
approximately 40 basis points as a percentage of sales. As
expected, lower inbound freight costs positively affected
the margin during the quarter, accounting for an increase of
110 basis points. An increase in promotional activity and a
higher markdown rate offset a portion of the gains realized
from the lower freight costs. |
| | | Secondly, we recorded a gain of approximately $1.2 million
during the quarter related to a change in the estimate of
our accrual for customer loyalty points. This adjustment
accounted for a benefit to cost of sales of approximately 90
basis points versus the prior year quarter. During the
quarter we terminated our agreement with our private label
credit card and loyalty program provider. As a result of
that termination, the loyalty accrual associated with that
program was reversed. We’ve replaced the credit card and
related loyalty program with a new provided. The rollout is
underway and should be completed before the end of the first
quarter of 2012. |
| | | Thirdly, store occupancy costs increased 15 basis points a
percentage of sales. The increase, as a percentage of sales,
reflects the slight increase in comparable store sales and a
reduction in the number of renegotiated leases compared with
the prior year. Fourth, outbound freight costs increased 40
basis due to higher diesel fuel cost, as well as shipping
and packaging costs associated with an increase in the
E-commerce business. And finally, central distribution costs
were essentially flat as a percentage of sales. |
| | | Operating expenses for the quarter were $36.6 million or
24.5% of sales, as compared to $33.4 million or 23.9% of
sales in the prior year quarter. Increases in store payroll,
as a percentage of sales, drove approximately 1/2 of the
overall increase. Staffing levels were increased during the
fourth quarter to support an increase planned promotional
activity and a larger seasonal merchandise offering. The
remainder of the increase was due to several factors,
including an increase in corporate salaries, as a percentage
of sales, increases in accruals related to employee
benefits, and higher marketing and professional and legal
expenses. These increases, as a percent of sales were offset
party by favorable experience in worker’s compensation and
general liability claim trends. |
| | | Depreciation and amortization was flat on a dollar basis,
but down slightly as a percentage of sales, reflecting the
improvement in total sales trends. Operating income for the
fourth quarter was $24.1 million or 16.1% of sales as
compared to $22.2 million or 15.9% of sales in the prior
year quarter. |
| | | Income tax expense was $8.9 million or 37.1% of pre-tax
income, versus expense of $7.9 million or 35.2% of pre-tax
income recorded in the prior year quarter. Income tax
expense for the fourth quarter of the prior year included a
net benefit of approximately $800,000 related to an
adjustment to the prior year income tax provision, partly
offset by a revaluation of the state tax rate on deferred
tax assets based on tax planning strategies implemented
during 2010. |
| | | Net income for the quarter was $15.2 million of 78 cents per
diluted share, as compared to net income of $14.4 million or
70 cents per diluted share in the prior year quarter. |
| | | Turning to the balance sheet and the cash flow statement,
inventories at January 28, 2012 were on plan at $47.3
million, or $153,000 per store, as compared to $44.5 million
or $148,000 per store in the prior year. This represents a
6% increase in total inventory and a 3% increase on a per
store basis. On a per square foot basis, inventories are
down about 3% year-over-year. We expect to end the first
quarter of 2012 with inventory levels in the range of $45 to
$47 million. |
| | | At the end of fiscal 2011 we had $83.1 million in cash on
hand, as compared to $91.2 million at the end of fiscal
2010. During the year we repurchased 2.1 million shares of
our common stock for a total of $24.6 million under our
repurchase authorization, which was established in August of
2011. No borrowings were outstanding under our revolving
line of credit at the end of either this fiscal year or the
prior. |
| | | For the full-year cash flows from operations were $41.8
million, as compared to $36.7 million in the prior year.
This increase in cash flow from operations primarily relates
to the timing of Federal and State income tax payments. |
| | | Capital expenditures for the year were $26.7 million. Of the
total capital expenditures, $15.2 million related to new
store construction, $8.7 million related to information
technology maintenance and projects, and the balance related
to maintenance capital expenditures for stores, the
distribution center, and the corporate offices. |
| | | The final item I’ll cover before turning it over to Robert
is to provide some guidance on our outlook for the first
quarter of 2012 and some high level performance goals for
the full-year fiscal 2012. |
| | | For the first quarter ending April 28, 2012, we expect total
sales to be in the range of $98 to $100 million reflecting
comparable store sales of flat to slightly positive,
compared with net sales of $94.4 million and comparable
store sales decrease of 8.4% in the quarter. We expect some
continued benefit from inbound freight costs during the
first quarter, likely to be in the range of 30 to 50 basis
points. Excluding the freight impact, merchandise margins
have been relatively strong for the first quarter-to-date. |
| | | Operating expenses are expected to increase as percentage of
sales, primarily reflecting a planned increase in marketing
activity. Earnings per share are expected to be in the range
of 11 to 14 cents per diluted share, compared to 15 cents
per share in the prior year quarter. |
| | | We expect to open approximately 5 stores and close 15 stores
during the quarter. For the full-year of fiscal 2012, as it
relates to store count and store growth, we expect to open
35 to 45 stores and close approximately 25 stores, implying
unit growth of between 3% and 6% and square footage growth
of 9% to 13%. The store openings will be weighted toward the
second half of the year, and the closings will be weighted
toward the first half of the year. |
| | | Our top line expectations are for total sales in fiscal 2012
to be above fiscal 2011 in the range of 10% to 12%. This
expectation for total sales growth reflects the additional
week in the retail calendar for fiscal 2012, which includes
53 weeks. This level of sales growth would imply comparable
store sales of flat to slightly positive for the full-year,
excluding the impact of the additional week of sales. |
| | | Based on our current outlook, we would expect operating
margin for fiscal ’12 to approximately equal that of fiscal
’11. We expect inbound freight costs to be lower than the
prior year during the first half of fiscal 2012, and edge
upwards as the year progresses. We are encouraged by our
merchandise margin results thus far and optimistic about the
prospects for our merchandise offering in 2012, and its
ability to further improve our merchandise margins. |
| | | Increases in fuel costs, a planned increase in marketing
activity, and investments in additional personnel in key
areas of the business to support our growth and technology
investments will serve to offset some of the merchandise
margin gains. |
| | | With a tax rate assumption ranging between 38% and 38-1/2%
for the year, at this time we would expect earnings per
share to be in the range of $1.10 to $1.15 for fiscal 2012. |
| | | From a cash flow standpoint, we anticipate again generating
positive cash flow in 2012 and fully funding our new store
growth, technology, and other capital improvements through
internally generated cash flows. We do not anticipate usage
on our line of credit. |
| | | Capital expenditures are currently anticipated to range
between $29 million and $32 million in 2012 before landlord
construction allowances for new stores. We currently
estimate that approximately $16 to $18 million of the total
capital expenditures will related to new store construction,
$7 to $8 million will relate to information technology, with
the balance of our capital expenditures relating to
distribution center improvements and store merchandise
fixture enhancements and other refurbishments. |
| | | We will update outlook each quarter during 2012. |
| | | Thank you and I’ll now turn the call over to Robert. |
| Robert Alderson: | | Thanks, Mike. Q4 2011 showed financial and merchandise
performance improvement over the prior year quarter, and
continuation of generally improved trends in our business
that began in the third quarter. |
| | | Although better than originally projected, the Q4 comparable
sales increase was moderate and helped by the entry of our
startup E-commerce business into the comp base in December. |
| | | Art, as it easily does, led the way with substantial comp
and product margin increase. A strong seasonal offering in
both Harvest and Christmas in the fourth quarter, again,
drove positive sales and product margin gains as our
strategy to buy up to the prior year quarter proved
successful, despite the expected promotional season. We see
year round opportunity in seasonal product, which we have
historically limited largely to the back half of the year.
Gift and impulse also contributed significantly and should
have full-year impact. |
| | | Traffic gains in the quarter, as well as an average ticket
increase highlighted the transaction metrics. Conversion
percentage was the only metric that was down for the
quarter. Transactional metrics for the quarter and the back
half are stronger in non-mall stores than mall stores, a
trend that we expect to continue in 2012. |
| | | As we begin 2012 we’re encouraged about the composition of
our merchandise mix and — in relation to that of a year ago,
and we’re also encouraged by the early trends we’re seeing.
Framed Art remains a solid and consistent performer entering
2012 with good momentum, and driving our average unit retail
of strong sales in large art pieces. We presented (these
styles) in materials and table and floor lamps as we seek to
update and upgrade this category. |
| | | Based on proven success, our proprietary wax programs will
be emphasized in candles. We expect our furniture business
to continue to provide strong sales and support average
ticket gains, and provide both every day and promotional
opportunity. Mirrors gained sales and margin momentum in the
fourth quarter, as our inventory levels achieved balance and
size and type. We should continue it in the first half.
Further strength in the quarter is expected in Floral and
Garden textiles, and our expanding gift business. |
| | | Seasonal will be important to the quarter as our expanded
Easter offering is — has performed very well today. Our
Alternative Wall Décor business is back on plan and should
perform better as the year progresses; albeit at lower sales
levels than 2010 and ’11 as we adjust skews and inventory
levels to demand. |
| | | Our first quarter performance opportunity is on the product
margin line. As Mike mentioned, we do expect some
incremental tailwind from freight charges during the first
half, but that should moderate as the first half progresses
and freight rates evidenced announced increases in March and
June. It is uncertain if and how much of announced container
increases will actually hold in the face of continued tepid
worldwide demand. |
| | | Based on historical experience, both inbound and outbound
freight rates, as well as retail sales will be affected if
oil prices continue to rise and remain at historic high
levels due to political unrest or the anticipation thereof. |
| | | We should continue to get a slight sales boost from results
of our E-commerce business as it continues to experience and
project rapid growth. We will make adjustments to our
distribution center this year to facilitate this growth;
however, we don’t expect E-com to be a significant
percentage of our overall sales for several years, despite
building at strong year-over-year rates. |
| | | These store growths should continue in the first half as we
aim towards a slightly larger class of stores in 2012,
suggested by our consistent success in new store performance
since resuming building new stores in 2009. Space
availability remains a store growth constraint, but we also
remain optimistic that we will get more than our share of
suitable spaces and remain a force in the process of
retenanting large spaces for multiple tenants. Closings
project to continue at fairly high levels for 2012 and ’13
as we near the end of our move out from recently closed
malls to strip centers. We will likely rethink our ultimate
position in certain existing markets where a suitable
opportunity to move off-mall has not or is not likely to be
presented in the near or mid-term. |
| | | This year we will also refocus our relocation efforts to
work on relocating older deals in unanchored lifestyle
centers. We’ll also continue to develop our presence in the
California market where we’ve seen very nice acceptance. |
| | | There’s really no magic formula. The marketplace is very
fragmented and every deal is hard and time consuming. The
only formula for success is to make every deal stand on its
own, practice prudence in the deal negotiation in the
build-out, and react quickly to make the deal and build the
stores. |
| | | Mike mentioned that we would spend slightly more advertising
in 2012. We have developed and distributed our first form of
a catalog in our history, 24 pages, designed to show our new
merchandise and showcase the style and pricing. It’s a
learning process in every way, but we see a great
opportunity to build sales following with customers and
brand awareness as we sent them to a million customers, and
distributed 500,000 in our stores. |
| | | We continue to build on our Internet advertising presence
with the additional Twitter during Q4 and Pinterest in the
first quarter. |
| | | We appreciate your continued interest and we’re ready to
take questions, operator. |
| Operator: | | Thank you, sir. Ladies and gentlemen if you’d like to
register for a question, please press the 1 followed by the
4 on your telephone. You will hear a three-toned prompt to
acknowledge your request. If your question has already been
answered and you would like to withdraw registration, please
press the 1 followed by the 3. If you’re using a
speakerphone, please lift your handset before entering your
request. Once again to register for a question, please press
the 1 followed by the 4 on your telephone. |
| | | And our first question comes from the line of Brad Thomas
with Keybanc Capital Markets. Please go ahead. |
