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| Operator: | | Ladies and gentlemen, thank you for standing by. Welcome to Kirkland’s, Inc. First Quarter 2012 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, Friday, May 18, 2012. |
| | | I would now like to turn the conference over to Ms. Drew Anderson of corporate communications. |
| | | You may begin, ma’am. |
| Drew Anderson: | | Good morning and welcome to the Kirkland’s, Inc. conference call to review the company’s results for the first
quarter of fiscal 2012. |
| | | 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 of this conference call on a listen-only basis over the
Internet were released earlier this morning and a press release that has been covered by 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 involved known and unknown risks and uncertainties which may cause Kirkland’s actual
results these periods to differ materially from forecasted results. |
| | | Those risks and uncertainties are more fully described in Kirkland’s file including Securities and Exchange
Commission including the company’s annual report on Form 10-K filed on April 12, 2012. |
| | | With that said I will turn the call over to Mike for review of the financial results. Mike? |
| Mike Madden: | | Thanks, Drew, and good morning everyone. |
| | | I’ll begin with the review of the first quarter financial statement and then finish with financial guidance for
the second quarter and our updated performance goals for fiscal 2012. |
| | | For the first quarter, net sales were 97.8 million, a 3.6% increase versus the prior quarter. |
| | | Comparable store sales including e-commerce decreased 1.2%. |
| | | E-commerce sales were 3.3 million for the quarter, a 101% increase over the prior quarter. |
| | | Average sales per brick and mortar store increased approximately 1%. |
| | | For brick and mortar stores, the comp sales decline was driven by 5% decrease in transaction offset by 2%
increase in the average ticket. The decrease in transactions resulted from a decline in the conversion rate
partly offset by 1% increase in the traffic count. |
| | | The increase in the average ticket was the result of an increase in items sold per transaction combined with a
flat average retail selling price. |
| | | Sales performance by geographic area were — was relatively consistent across the chain similar to the fourth
quarter. Sales result in Texas and Louisiana lagged the company average while results in North Carolina were
above the company average. |
| | | Merchandise category showing comp increases were arch mirrors, floor — floral — I’m sorry, outdoor living and
furniture. These increases were offset primarily by declines in decorative accessories, wall décor, and lamps. |
| | | In real estate, we opened five stores and closed 17 stores during the quarter, bringing us to 297 stores at
quarter end. Eighty-five percent of the total stores at quarter end were in off-mall venues and 15% were located
in closed malls. |
| | | At the end of the quarter we had 2.1 million square feet under lease. That’s an 8% increase from the prior year.
Average store size was up 7% to 7000 square feet. |
| | | Gross profit margin for the first quarter decreased approximately 100 basis points to 39.3% of sales from 40.3%
in the prior quarter. |
| | | The components of gross profit margin were as follows: |
| | | First, merchandise margin increased 60 basis points as a percentage of sales. As we anticipated inbound freight
costs on inventory were lower than in the prior year, positively impacting the merchandise margin by
approximately 50 basis points. Excluding the freight impact, merchandise margins were up slightly versus the
prior year. |
| | | Second, store occupancy cost increased approximately 100 basis points as a percentage of sales, reflecting the
negative comparable store sales result combined with the reduction in the number of leases with negotiated ramp
reductions in comparison to the prior year. |
| | | Additionally, due to these renegotiations, the prior year occupancy ratio benefited from acceleration of tenant
allowance amortization in the stores that were affected. |
| | | Third, outbound freight cost increased 50 basis points, reflecting an increase in e-commerce sales which carried
higher shipping cost and an increase in diesel fuel prices. |
| | | And finally central distribution cost increased 10 basis points versus the prior quarter, reflecting a comparable
store sales decline combined with the increase in e-commerce sales. |
| | | Operating expenses for the quarter were 32.3 million or 33% of sales as compared to 29.7 million or 31.4% of
sales for the prior quarter. |
| | | One hundred and forty basis points of the increase was due to an increase in marketing expenses primarily related
to two seasonally focused direct mail, mini catalogs that were dropped during the quarter. |
| | | The remainder of the increase is primarily due to deleverage spinning from the comparable store sales decline. |
| | | Depreciation and amortization decreased 30 basis points as a percentage of sales, reflecting accelerations and
depreciation in the prior year for stores impacted by lease-free negotiations. |
| | | Operating income for the first quarter was 3.2 million or 3.2% of sales as compared to 5.2 million or 5.5% of
sales for the prior quarter. |
| | | Income tax expense was 1.2 million or 38.4% of pretax income versus expense of 2 million or 38.2% of pretax
income for the prior quarter. The slight increase in the right reflects the lower amount of pretax income versus
the prior year. |
| | | Net income for the quarter was approximately 2 million or 10 cents per diluted share as compared to net income of
3.2 million or 15 cents per diluted share in the prior quarter. And at the end of the quarter there were
18,170,236 shares outstanding. |
| | | Turning to the balance sheet and the cash flow statement, inventories at April 28, 2012, were 47.5 million or
$160,000 per store as compared to 44.6 million or $152,000 per store in the prior year. This represents a 6%
increase in total inventory and a 5% increase on a per store basis. |
| | | On a per square foot basis, inventories are down 4% year-over-year. We expect the end of second quarter with
inventories in the range of 46 to 48 million. |
| | | At the end of the first quarter, we had $73.2 million in cash on hand as compared to 90.3 million at the end of
the prior quarter and 83.1 million at year end. |
| | | During this trailing 12-month period, we repurchased 2.3 million shares of our common stock for a total of 26.6
million as part of our share repurchase authorization that was established in August of 2011. |
| | | No borrowings were outstanding under our evolving line of credit and capital expenditures were 4.1 million for
the quarter. Of the total capital expenditures, 1.9 million related towards construction and 1.9 million related
to information technology projects with the remainder relating to maintenance items. |
| | | The final item I’ll cover before turning the call over to Robert is to provide guidance for the second quarter
and our updated outflow on the full fiscal year. |
| | | For the second quarter ending July 28, 2012, we expect total sales to be in the range of 94 to 96 million,
reflecting a range of comparable store sales results between flat and a decrease of 3% compared to sales of 89.7
million and a comparable store sales decrease of 8% in the prior-year quarter. |
| | | We expect gross profit margin to be roughly equal to the prior year, reflecting a slight improvement in
merchandise margin offset by increases in outbound freight, occupancy and central distribution cost as a
percentage of sales. |
| | | Operating expenses for the second quarter should slightly below that of first quarter. |
| | | Based on these high-level assumptions, we expect to report a loss of 7 to 11 cents per share for the second
quarter. |
| | | We expect to open 10 to 12 stores during the quarter and close five stores. |
| | | For the full year fiscal 2012, we expect to open 40 to 45 new stores and close approximately 30 stores, many of
these representing relocation opportunities. |
| | | The overall store activity would equate the unit growth of 3% to 5% and square footage growth of 10%. |
| | | We expect total sales for fiscal 2012 to increase 7% to 9% over the prior year. This expectation for total sales
growth reflect the additional week in the retail calendar for fiscal 2012 which includes this free week. |
| | | This level of sales growth would imply comparable store sales of slightly negative to flat excluding the impact
of the additional week of sales. |
| | | Based on our current outlook, we would expect the operating margin for fiscal 2012 to be below last year in the
range of 90 to 140 basis points. |
| | | An increase in our expected levels of promotional activity during the second quarter and gradually rising
outbound freight cost will make merchandise margin gains more difficult to achieve than originally anticipated. |
| | | Continuing investments in technology infrastructure, personnel additions in key areas of the business and an
increase in marketing activities will also provide operating margin pressure in the short term. |
| | | With the tax rate assumption ranging between 38% and 38.5% for the year, we would expect earnings per share to be
in the range of 87 cents to 97 cents for fiscal 2012. |
| | | From a tax flow standpoint, we anticipate capital expenditures total in 29 to 32 million for landlord
construction allowances for new stores. Approximately 16 to 18 million of total capital expenditures will relate
to new store construction, 7 to 8 million will relate to information technology with the balance relating to
distribution center improvement and store merchandise fixture enhancement and other refurbishment to stores. |
| | | This level of capital spending — combined with our operating performance expectations — would yield positive
cash flow for the year before assumptions of share repurchase activity. |
| | | Thank you and I’ll now turn the call over to Robert. |
| Robert Alderson: | | Thanks, Mike. |
| | | The first quarter results this point are seen after the effort in prior months to address merchandising and
marketing opportunities that we felt would improve our first half business and continue the sales momentum we’ve
slowly built in the back half of 2011. |
| | | Certainly we were cautious in setting expectations for the quarter, but we felt a different approach to our
spring merchandising would provide a more easy first half merchandise mix and more quickly and strongly address
the change in seasons in the resulting customer preference for spring colors and outdoor related merchandise. |
| | | While gross sales only fell slightly below our expectations, comparable store sales lagged the prior-year quarter
despite a small lift from e-commerce sales. |
| | | As expected, we had a small and time limited merchandise margin advantage of about 50 basis points from inbound
freight differentials entering the quarter. |
| | | Finally, merchandise margin results were slightly up to the prior-year quarter. Traffic — a big emphasis of our
marketing effort — was slightly up on a comparable basis for the quarter. And our work throughout 2011 to
address improved average at retails, items per transaction and average transaction yielded almost $1 increase in
the average ticket. But our conversion rate fell about 6%, produced a slight drop in comparable sales. |
| | | We noted that the quarterly results were significantly affected by what seems to be a change in consumer somewhat
in the last five to six weeks of the quarter. We produced inline comparable sales in February and throughout half
the month of March. |
| | | Sales lag thereafter likely influenced by another rise in fuel prices toward $4 per gallon and wide speculation
that prices would go higher in (this run). |
| | | Promotional activity to drive traffic and sales in order to counter the customer (pull back) was accelerated and
limited our year-over-year merchandise margin gains. |
| | | Fuel prices have recently pulled back from recent highs, but consumer confidence has not rebounded. Sufficient
noise remains in the macroeconomic environment to suggest a cautious outlook for retail in the near term is
reasonable. |
| | | Garden category continue to lead our business with strong sales and merchandise margin performance to plan in
last year delivering almost 20% of our first quarter sales. The furniture, mirrors, floral and outdoor living all
produced respectable comparable sales results. |
| | | Alternative wall décor made great progress versus our plan to continue to lag in comparable sales due to the
reallocation of the inventory spend in this category. |
| | | Decorative accessories continue to be an area of concern as this important category represented almost 13% of our
total business for the quarter but lagged our sales plan in last year. |
| | | A new initiative for Kirkland’s outdoor living merchandise for (unintelligible) and patio with a light core entry
to the mix and has performed reasonably well. |
| | | However, in hindsight, with exceptionally mild winter and very early spring, we delivered to our stores a bit
later than would have been optimal for this merchandise. |
| | | Some of our categories are pushed up slightly in price point as well as on the style scale for the first half,
mostly furniture, decorative accessories, candles and lamps. Furniture benefited the most including some current
market trends such as industrial (in distress) within our traditional mix. |
| | | In lamps and decorative accessories, we introduced new colors, style scale, materials and price points with some
success, but we may have moved the selling price too much and too high respectively and are adjusting slightly to
be sure to enclose sufficient merchandise for our traditionally solid customer and to continue to deliver easily
identified (value) to the customers. |
| | | Mike gave our cautious opinion about business expectations for the second quarter pretty much in line with much
of the retail community. We expect continued slow economic growth and cautious consumer spending consistent with
April slowdown. |
| | | In saying those expectations, we were very aware of the environment. But our primary focus is and must be focused
on the delivery of consistent and reasonable growth in period-over-period sales and earnings comparison. |
| | | That effort is setting us the background of major undertakings in our business such as increase spending toward
continued steady store replacement and modest growth; to finish our four-year program debt rate, our most
critical information systems; upgrade our in-store and multi-unit supervisory talent for the better and more
consistent store experience to maintain growth and momentum in our e-commerce and significantly improve content
delivery across all forms of our marketing message to customers about our strong value proposition and constantly
renewed merchandise mix. |
| | | I don’t believe we’re really far off but the last several quarters suggest our primary focus must remain on
merchandise sale and sales improvement. |
| | | We’re an industry leader in the productivity of inventory that demonstrated ability and high priority on the
consistent control of inventory volumes. That won’t change. |
| | | But we’re well aware must improve to produce strong accretion of shareholder value is consistent sales
productivity. Over our 46-year history — including our almost 10-year public experience — we’ve maintained a
merchandising plan featuring item focused buying and constant flow of new products, high turn volume sales and
value pricing. The result has been a retailer that sometimes very hot and sometimes not. |
| | | We’ve also gathered a very loyal group of customers across more than 30 states that are fans in the merchandising
experience. |
| | | As we have resumed growth and exited in closed malls and moved off-mall and the strip centers in a larger
footprint since 2008, that method has produced a store model that features rapid maturity and constant -
consistently strong cash flows. |
| | | However, our comparable store sales experience has featured long runs about strong and weaker comp sales. |
| | | So our task is necessarily to continue to address the core problem without changing our merchandise DNA or
deserting our customer base or sacrificing our organic growth opportunity. |
| | | We don’t think our measured new store growth should or must stop while we address those issues. We’re unique in
our sector at less than 300 stores with an obvious growth potential in a period of great real estate opportunity. |
| | | A very large amount of our new store activity over the past three years and projected in plan for 2012 has been
for replacement stores remaining in the same markets as their mall store predecessors. |
| | | At 2014, we will be very close to finalizing a seven-year plan to move out of small expense, even close mall
locations. Replacing stores in existing long-term markets in proximity to the prior mall store is a safe bet to
deliver a productive store. It doesn’t guarantee comp sales increases for new store classes and clearly shows the
importance of merchandising success. |
| | | Our focus as we steadfastly move toward fall of 2012 or early spring 2013 to turn on our new generation Oracle
merchandising software system is to apply better information to decisions about what to buy, how it’s priced and
if how and when it’s replenished and how it’s allocated. |
| | | While more and better information is wonderful, we expect to enjoy a much enhanced decision making process with
our new merchandise hierarchies, systemic tracking, store-specific inventories and lighter markdown optimization. |
| | | We recognize that we need to add to our merchandising ability with experienced senior management additions and to
continue the modifications to our merchandising process to utilize a more data driven approach in all aspects of
our buying and merchandise planning and allocation. |
| | | Therefore, over the next several months and beyond, as necessary our management board will work together to
identify our needs and process change and (talent) and to fill those needs while maintaining our focus on
creativity and product development and delivering value to our customer. |
| | | We know that we can deliver new and unique merchandise at great prices and at the same time be more structured,
efficient and disciplined, propelling our merchandise organization toward more consistent productivity. We’ll
continue to apply that same effort to marketing. |
| | | Asking customers for their business effectively is a relatively new thing for us given nearly 41 years as
predominantly mall-based retailer. |
| | | For the first time we delivered two spring sales catalogs e-mailed to customers and to over 1 million potential
new customers. We’ve begun an aggressive campaign to add more e-mail recipients to our 2.5 million base, retained
that group and returned former recipient. |
| | | We continued to expand Facebook and other social media followers, and to evaluate the return on those
investments, we’re constantly evaluating the effectiveness of our increased marketing spending that recognized
the considerable lag between spend, recognition, creation of a widely-known brand and creation of new customers,
a necessary endeavor. |
| | | As for merchandising, we’ll continue to press on improvement in process and people to seek maximum penetration
and productivity. |
| | | We’ve already made great strides and learning to thrive in our new off-mall neighborhood, yet we have much more
important work to do. |
| | | We’ll remain very focused on optimizing short-term results, but we’ll also ensure that we make decisions for the
long term that deliver shareholder value that we know Kirkland’s is capable of providing. |
| | | We appreciate your interest and patience. I’m confident we the right course. I look forward to reporting our
progress. |
| | | Operator, we’ll take questions. |
| Operator: | | Thank you. |
| | | Ladies and gentlemen if you would like to register a question, please press the 1 followed by the 4 on your
telephone. You will hear a three-tone prompt to acknowledge your request. |
| | | If your question has been answered and you would like to withdraw your registration, please press the 1 followed
by the 3. |
| | | And if you are using a speakerphone, please lift your handset before entering your request. |
| | | Our first question from the line of Brad Thomas with KeyBanc Capital Markets. |
| | | You may begin. |
| Brad Thomas: | | Thanks. Good morning, Robert. Good morning, Mike. |
| Man: | | Good morning. |
| Brad Thomas: | | Wanted to just ask first of all about the marketing side of things. Robert, you mentioned that it can take time
for new marketing efforts to drive new customers. |
| | | But as you reflect on the investments that you made on this quarter, you know, how much do you think it helped
benefit comps? I mean, is it a case that you didn’t really see any benefit from it and that negative 1.2 comp was
kind of reflective of just advertising that you have been doing over the past year or do you think things have
been worse without that advertising? How are you guys looking at the current investment? |
| Robert Alderson: | | Carefully. We’re trying to understand what it added and what it didn’t add. We inserted coupons into the — both
of the books in order to get some idea about how the redemption for most coupons affected business. |
| | | I think it’s very difficult on our first two efforts to assess that. There’s a lot of anecdotal information that
we get from stores and wherein stores we seek people using the catalog to shop. And we’ve had, you know, a good
bit of nice comment about it. |
| | | But all in all, as I look back at the first quarter, I’m not sure I’m glad we did it because, you know, I’d like
to have that million dollars on the other side of the line. So it’s a little bit of a difficult decision right
now as to where we want to go with it. |
| ((Crosstalk)) | |
|
| Mike Madden: | | Just to add to that (road), on the coupon redemption, which we can measure pretty easily, I mean, that by itself
would suggest that the sales lift wasn’t much. |
| | | But as Robert said, there are anecdotal, you know, you know, there’s things out there that suggest that, you
know, it drove more than that, and we certainly think it did. But just looking at that measurable, you know,
coupon redemption it didn’t look like a big impact. |
| Brad Thomas: | | Okay. |
| | | And then just a follow-up on the store actions that you all have had over the last couple of years, I mean, it’s
been, by my (assessment), about 25% of stores that are, you know, a new location or a new store. Could you just
give us an update on how those newer stores are performing when you look at a metric sales per square foot or
four-wall profitability that kind of adjusts for the larger stuff at (unintelligible)? |
| Mike Madden: | | If you look at the new stores and really, I mean, when you look at the last two classes or last three classes
would be more representative of the new real estate we’re going after and the relocations we’ve done that you
referenced, those stores are (comping) right with the company average. If you look at the class of ‘09 and class
of ‘10 as they’re very comparable to what we’re seeing in the rest of the chain. |
| | | On a per square foot basis it’s a similar story. |
| | | You know, there are bigger stores that were generating more sales and they’re also in real estate where the
occupancy cost is more attractive and not as high as some of the older, you know, mall and early off-mall stores.
So they’re more profitable on a dollar basis, but we’ve yet to see it in the comps list and as well as the sales
per square foot, and some of that may have to do with the fact that they are relocations and you’re dealing with
the same customer base. |
| Brad Thomas: | | Okay. |
| | | And then just one housekeeping item. The — I believe last quarter the guidance excluding any benefit from share
of purchases. Is that the case again for this quarter? |
| Mike Madden: | | It is in kind of modest amount of that going forward. |
| Brad Thomas: | | Got you. Okay thanks guys. |
| Operator: | | Our next question from the line of David Magee, SunTrust Robinson Humphrey. |
| | | You may begin. |
| David Magee: | | Good morning guys. |
| Robert Alderson: | | Good morning, David. |
| David Magee: | | Just a couple of questions. |
| | | One is, when you slice and dice this as if the chain based on geography, are you seeing anything different as far
as, you know, where the stores are located versus, you know, the sales trend? |
| Mike Madden: | | Could you repeat that, David? |
| ((Crosstalk)) | |
|
| Mike Madden: | | ...a hard time hearing you. You’re a little low volume there. |
| David Magee: | | Yes, I’m sorry. I’ll say it louder. |
| | | When you look at this chain and look at the differences of the store performances, you know, throughout the
chain, are you seeing any different with regard to geography where the stores are located that would account for,
you know, any trend? |
| Mike Madden: | | Not really. In our prepared comments there, I think the overriding comment is the consistent sales trend across
geographies. We did call out Texas being a little bit — and the gulf area to be more precise, being a little bit
below that company average. |
| | | And then in the Carolinas, we’ve seen better results. I think some of that have to do with improvements we’ve
made in staffing and — in those stores in that area of the country and the comps they were up against. |
| | | That’s a — the general statement is pretty consistent. |
| David Magee: | | Are you seeing anything different now versus a few months ago with regard to promotions by other retailers? |
| Robert Alderson: | | You know, we try to keep up with what’s going on promotionally. I don’t think we see much difference honestly. |
| | | I think when we’re highly promotional, we can drive traffic and sales but that certainly not margin productive.
And, you know, for example, we had one of the — I guess we have the best Saturday before Easter — excuse me, for
Mother’s Day we’ve ever had but that was a highly promotional day. And it’s nice and we enjoyed it but, you know,
you’d like to drive that without a high-level promotional activity around it. So I think it’s somewhat the same. |
| David Magee: | | Do you sense that there’ll be any difference going into the fall based on what you see in the sector the last
month or so? |
| Robert Alderson: | | (Absent) or change in consumer (setting) I don’t know. |
| David Magee: | | Do you think a big promotion this fall then? |
| Robert Alderson: | | I do. |
| David Magee: | | Okay. Well thank you. |
| Robert Alderson: | | Thank you. |
| Operator: | | Our next question from the line of Anthony Lebiedzinski with Sidoti & Company. |
| | | You may begin. |
