| | | |
| Operator: | | Ladies and gentlemen, thank you for standing by. Welcome to
the Kirkland’s, Inc. Second Quarter 2012 conference call. |
| | | During the presentation, all participants will be in a
listen-only mode. Afterwards, we will conduct the
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 anytime during the conference you need to
reach an operator, please press star 0. As a reminder, this
conference is being recorded, Friday, August 17, 2012. |
| | | I will now like to turn the conference over to Tripp
Sullivan. Please go ahead, sir. |
| Tripp Sullivan: | | Thank you. Good morning and welcome to this Kirkland’s, Inc.
conference call to review the company’s results for the
second 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 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 risks,
and uncertainties which may cause Kirkland’s actual results
and 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 12, 2012. |
| | | With that said, I’ll turn the call over to Mike for review
of the financials. Mike? |
| Michael Madden: | | Thanks, Tripp, and good morning. I’ll begin with the review
of the second quarter financial statements and then finish
with financial guidance for the third quarter and our
updated performance goals for fiscal 2012. |
| | | For the second quarter, net sales were $91 million, a 1.5%
increase versus the prior year quarter. Comparable store
sales, including e-commerce, decreased 3.6%. E-commerce
sales were $3.5 million for the quarter, a 111% increase
over the prior year. |
| | | Comparable brick-and-mortar sales were down 5.8% with
average sales for brick-and-mortar store down 2%. For
brick-and-mortar stores, the comp sales decline was driven
by an 8% decrease in transactions, partially offset by 2%
increase in the average ticket. |
| | | The decrease in transactions resulted from a 6% decline in
the conversion rate, combined with a 2% decrease in traffic
count. The increase in the average ticket was the result of
an increase in items per transaction, offset partially by
slight decline in the average retail selling price. |
| | | Sales performance by geographic area was relatively
consistent across the chain with slightly better results in
the Upper Midwest and Northeast, and weaker results in our
Southwestern border stores. Merchandise categories
contributing most to the comp decline were decorative
accessories, wall decor, textiles, and frames. |
| | | In real estate, we opened 10 stores and closed five stores
during the quarter, bringing us to 302 stores at quarter’s
end. Eighty-six percent of the total stores at quarter end
were off-mall, and 14% were located in malls. At the end of
the quarter, we had 2.1 million square feet under lease, a
9% increase from the prior year. Average store size is up 6%
to just over 7,000 square feet. |
| | | Gross profit margin for the second quarter decreased
approximately 140 basis points to 33% of sales from 34.4% in
the prior year. The components of gross profit margin were
as follows, first, merchandise margin decreased 70 basis
points as a percentage of sale, higher-than-expected
promotional activity undertaken during the quarter in
response to soft sales trends combined with additional
markdown pressure led to a lower-than-expected margin for
the quarter. Inbound freight costs were flat to the prior
year and had a little impact on the year-over-year
comparison. |
| | | Second, store occupancy costs increased approximately 20
basis points as a percentage of sales reflecting the
negative comparable store sales results. Third, outbound
freight costs increased 30 basis points, reflecting an
increase and e-commerce sales which carry higher shipping
cost. Excluding e-commerce, outbound freight costs were flat
to the prior year. And fourth, central distribution cost
increased 20 basis points versus the prior-year quarter
reflecting the comparable store sales decline combined with
the increased in e-commerce sales. |
| | | Operating expenses for the quarter were $30.7 million, 33.8%
of sales as compared to $28.8 million, or 32.1% of sales for
the prior year quarter. Sixty basis points of this increase
was due to a prior year bonus accrual reversal in the amount
of $500,000. The remainder of the increase as a percentage
of sales relates primarily to the decline in comparable
store sales, combined with the increases in healthcare,
marketing, and information technology expenses. |
| | | Depreciation and amortization increased 50 basis points as a
percentage of sales, reflecting an increase capital
expenditures combined with the slight increase in total
sales. Operating loss for the second quarter was $4 million
or 4.3% of sales as compared to an operating loss of $0.6
million or 7.7% of sales for the prior year quarter. |
| | | We reported an income tax benefit of $2 million or 49.7% of
pretax loss versus a benefit of $0.1 million, or 19.7% of
pretax loss for the prior year quarter. During this year’s
quarter, a portion of the tax benefit amounting to
approximately $400,000 related to federal and state
employment tax credits received that were related to prior
year’s in excess of our expectations. |
| | | Net loss for the quarter was approximately $2 million or 11
cents per share, as compared to net loss of $0.5 million, or
2 cents per share in the prior year quarter. At the end of
the quarter, there were 17,061,615 shares outstanding. |
| | | Turning to the balance sheet and the cash flow statement, at
the end of the second quarter, we had $49.6 million in cash
on hand compared to $75.1 million at the end of the prior
year quarter, and $83.1 million at the end of 2011. During
the trailing 12-month period, we repurchased 3.4 million
shares of our common stock for a total of 40 million,
completing the repurchase authorization that was established
in August of 2011. |
| | | Despite the softness in our sales trends in planned heavy
capital expenditure budget this year, we still expect to
generate positive cash flow during 2012 excluding the impact
of previous share repurchase activity. Inventories at the
end of the quarter were $49.8 million compared to $47.7
million in the prior year. Including e-commerce, this
represents a 4% increase in total inventory above our
expectations due in part to the shift to the sale shortfall.
However, e-commerce inventories have grown in support of
continued strong business expected for the back half. |
| | | At the store level, we planned inventories conservatively
throughout the year. And on a per-store basis, we actually
ended the second quarter down 2% versus the prior year. On a
per-square-foot basis, we were down 7% year-over-year. |
| | | Consequently, we are comfortable with our level of inventory
entering the back half. And we expect to end the third
quarter with inventories in the range of $62 million to $64
million, which represents our seasonal peak time frame. |
| | | We continue to operate the business without any long-term
debt and no borrowings were outstanding in our revolving
line of credit at the end of the quarter. Capital
expenditures were $10.7 million for the quarter and included
the following: $4.7 million for new store construction; $2.5
million for information technology projects including our
Oracle Merchandising System that is slated for go-live this
fall; $2.4 million for store improvements including the
introduction of new more flexible fixtures that allow for
better clarity of presentation as well as the reset and
refreshing of many of our older, smaller locations; $600,000
was for improvements in our distribution center to support
better workflow and additional space for e-commerce
fulfillments; and lastly, the remaining $500,000 spent
during the quarter related to various routine maintenance
capital expenditures. |
| | | The final item I’ll cover before turning the call over to
Robert is provide our guidance for the third quarter and our
updated outlook for the fiscal year. For the third quarter
ending October 27, 2012, we expect total sales to be in the
range of $97 million to $99 million, reflecting a range of
comparable store sales results of down 3% to 5% compared
with sales of $89.7 million and a comparable store sales
decrease of 3.6% in the prior year quarter. |
| | | We expect gross profit margin to be down in the range of 150
to 200 basis points versus the prior year quarter,
reflecting a decrease in the merchandise margin and due to
higher inbound freight cost as well as unexpected
promotional sales environment combined with smaller
increases and outbound freight occupancy and central
distribution cost as a percentage of sales. |
| | | Operating expenses for the third quarter should be above
that of the second quarter by 6% to 8%, reflecting the
seasonality of the business and an increase in new store
activity. Based on these high level assumptions, we would
expect to report a loss of 3 cents to 7 cents per share for
the third quarter. We expect to open 14 to 16 stores during
the quarter and close four stores. |
| | | For the full year fiscal year, we expect to open 40 to 44
new stores and close approximately 30 stores. This overall
store activity would equate to unit growth of approximately
4% and square footage growth of approximately 9%. |
| | | We expect totals sales for fiscal 2012 to increase 4.4% to
6% over the prior year. 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 in the low
single digit negative to territory excluding the impact of
the additional week. |
| | | Based on our current outlook, we would expect the operating
margin for fiscal 2012 to be below last year in the range of
200 to 250 basis points. Rising inbound freight costs will
make merchandise margin gains more difficult to achieve in
the back half than originally anticipated. And we are
assuming a continuation of the promotional environment we
saw on the first half of the year. |
| | | Continuing investments in our technology infrastructure and
business processes as well as personnel additions and key
areas of the business will also provide operating margin
pressure inside fiscal 2012. With a tax rate assumption
ranging between 38% and 38.5% for the year, we would expect
earnings per share to be in the range of 72 cents to 82
cents for fiscal 2012. |
| | | From a cash flow standpoint, we anticipate capital
expenditures totaling $29 million to $32 million before
landlord (and) construction allowances for new stores.
Approximately $16 million to $18 million of the total CAPEX
will relate to new store construction — $7 million to $8
million will relate to information technology and the
balance relating to distribution center improvements and
store merchandise fixture enhancements and other
refurbishments. |
| | | Thanks. And I’ll now turn the call over to Robert. |
| Robert Alderson: | | Thanks. Second quarter was not what we hoped for, same areas
of concern from the first quarter continued to affect
business results. Gross sales were up slightly versus the
prior year quarter, but comparable sales decreased 3.6%
against the slight decline in traffic. Traffic was down 1%
in off-mall stores, but down 3% in mall-based stores.
Conversion negatively affected transactions and drove the
consequence. |
| | | Despite a stronger initial markup, merchandise margin for
the quarter declined 70 basis points as a result of heavier
than expected promotional activity prompted by the
conversion decline and our efforts to control inventory both
as to amount and composition as we prepare to enter the
second half of the year. Our store inventories are down 7%
on a square-foot basis and 2% per store versus the prior
year, as Mike said. |
| | | We’re up slightly in total, (the) store growth, but
importantly an increase in e-commerce inventories versus the
prior year to support our early stage business, which is
running ahead of plan. As to category, (in) large (class)
performance, our table lamps, candles, large mirrors,
pillows, garden, statuary — gift and statuary had strong
sales increases during the second quarter. Furniture was
essentially flat. We continue to struggle in decorative
accessories, ornamental wall art, frames, and textiles
strongly influenced to comp sales decline for the quarter. |
| | | As we reallocate our inventory spin for the back half of the
year, we will continue to see movement in down numbers in
dec frames and ornamental wall décor, but our actions should
result in a healthier business in each in Q4 and beyond.
Considering first quarter results and conversion in the
prevailing economic climate, we planned a number of
promotional events with hot prices on event-specific
merchandise for the second quarter to drive traffic in
sales. |
| | | Some of the events were seasonally related like Mother’s
Day, Fourth of July, Father’s Day, and Memorial Day. Others
like our semi-annual big sale and numerous one-day and
weekend sales gave us an opportunity to highlight sale
opportunities in a smaller group items. |
| | | With the Saturday before Mother’s Day in our history, in the
event, we generally performed well. We believe we can
improve results going forward with the last seasonal related
merchandise. Same lesson would apply in Memorial Day and
Fourth of July as the patriotic picnic and outdoor seasonal
merchandise was highly promoted and competitive throughout
the marketplace. Father’s Day is a somewhat new target event
for us and was marginally successful since it’s a very
limited holiday shopping period, and the merchandise is a
tough fit for our store. |
| | | We also plan some new introductions and refocus some others.
Early in the quarter, we presented a new to Kirkland’s
outdoor patio group including outdoor and food related
furniture with mixed results in stores and better sales
consistency online where we see continued opportunity to
expand that business. Concurrently, to support the outdoor
group and our summer seasonal theme, we introduced Summer
Fun and a collected group of outdoor and entertaining and
gift merchandise with similar results, some very good and
some not so good. |
| | | Back to school runs through September. While we’re still
learning, I haven’t seen quite the results we (won) at a
relatively new to Kirkland’s business. As with housewares
and wedding, we’re optimistic that we can complement our
core business, bridge some seasonal periods, increased
visits, and provide our customer with a meaningful
assortment that has interest and provides support to our
year-round businesses. |
| | | Our semi-annual big sale event is always focused on well
priced items with a great value in our prime categories and
continues to deliver outstanding results. Kirkland’s has
always been item-focused featuring new products at great
prices. For spring, we aggregated dedicated fixtures, some
fun (unintelligible) (gift bowl), well priced in often
seasonally related merchandise. And a prime selling area in
our stores is an organized impulse area aimed at building
sales and ticket. |
| | | Early results have been favorable. We’re still learning what
works best and we’ll keep testing items, price points and
seasonality throughout the balance of the year. During the
first half, we executed multiple efforts to be seasonally
appropriate and to deliver event specific merchandise at
compelling prices. |
| | | For the go, we build the traffic in sales yet we did not
meet or exceeded prior comparison period. It’s hard to
discuss results from especially conversion without
referencing the protracted somewhat dismal say of consumer
sentiment which actually seem (gorge) today than what we
experienced in Q1. |
| | | We (sell) a lot of fun and a lot of value, but we don’t sell
necessities. Our moderate income customers (unintelligible),
continued high employment weak job growth, and a poor
housing market. Our consumer faces the added specter of
yearend political gridlock which may not be totally
understood, but she knows it’s not good news. Our customers’
reaction since April has been to stay in the current job,
spend less, pay down debt when possible and save more. |
| | | As we’ve previously said, we can’t blame the environment.
Many retailers have done well. We all swim in the same
notion, so we must look for better performance from the
customer’s we have. |
| | | As we take a high level look at the quarter results, we
probably overacted the questionable environment and planned
and tried to execute too many promotional activities (made)
too much event and seasonally related merchandise and
thereby pressured our merchandise margins unnecessarily,
which is correctable. Additionally, going forward, I think
we can and we’ll also plan our second quarter inventory
levels much more precisely and lowered to help our
assortment in sales results. |
| | | Our Oracle Retain Enterprise System is less than 45 days
from the cutover absent any last-minute problems. We don’t
expect instant rewards, but we’re preparing well ahead of
time to utilize its richer information deliverables. |
| | | Just as we have augmented our corporate team for the oracle
implementation, we’ve been adjusting our merchandise
planning and buying processes to take the earliest advantage
of the system and in order to use information more
effectively now with existing systems even before Oracle
goes live. |
| | | With this work over the past several months, we expect to
affect our Q3 and Q4 buys significantly with a much more
data driven process. Natural results should be more emphasis
on our core items, fewer SKUs, eventually lower running
inventories and a more consistent margin (rates) business. |
| | | We can accomplish this and still meet our customers’
expectations on new and unique merchandising great prices
while also providing a better stock position on best selling
items. If we match our merchandising talent with better
information and better process, we’re confident that we will
the merchandise consistency we see. |
| | | We’ve noted in the past calls that we clearly recognize the
need to deliver to a more effective and compelling marketing
message through all mediums in order to build traffic in
customer accounts and maintain the sales and (patron) needs
of our existing (oil) customer base. |
| | | To that end, we’ve been engaged with the national marketing
firm in a major branding project, provide the context for
delivering our value message. Also, we’ve engaged and now
working with a new national PR advertising team to improve
our new store opening effectiveness in an effort to increase
and maintain exposure and awareness of our new stores in
both existing and new markets. |
| | | As an essential element of that effort, we are realigning
our in-store visual presentation scheme to maximize the
impact of our investment in (working) merchandising and
marketing. Also, we will complete within the third quarter a
store fixture rollout that effects three quarters of our
store base with retrofits and upgrades of additional or new
fixtures along with a position realignment designed to take
advantage of ten to 12 additional selling spaces created
thereby. |
| | | We hope to reassert our historic focus on transparency in
value pricing impact merchandising and visual acuity. We
continue to progress in our early stage e-commerce effort,
we’re about to complete an expansion of this phase allocated
to e-commerce fulfillment in our distribution center. |
| | | Our SKU count has grown to over 2,800 or about double one
year ago. We expect to at least double our year one business
within this fiscal year. We’re preparing to test business
enhancements, so like quite a delivery and third-party
fulfillment (unintelligible) while continuing to emphasize
and grow in store pickup. |
| | | Our original plan was for web exclusive merchandise to grow
to and maintain at about 20% to 25% of the SKU set. But we
have so far been able to maintain our 40%, a pleasant
surprise. |
| | | We’re continuing to test web-based promotions to find our
best and most effective opportunities and the timing
thereof. As we suggested would be the case for the first few
years, a strong majority of our online sales come from
geographic areas where we have stores, which presents
another branding opportunity. |
| | | Our real estate plans for this year remain unchanged. In the
third quarter, we expect to open about 15 stores and close
four, so. And for the full fiscal year, it still appears
that we’ll open at least 40 or so these stores and close
about 30 for about ten net new stores. We do expect the net
gain in new store openings to begin to stretch significantly
after 2013. |
| | | It’s too soon to opine much about the current (class), but
early results were good. Deals remain reasonable priced, and
space availability is adequate but not abundant for better
spaces in the most desirable strip centers. |
| | | We continue to be cautious in our outlook (unintelligible).
I’ll ensure the timing we have done and are doing a lot of
foundational work and investment that will pay off
especially the fine-tuning of our merchandise mix and
reasserting our great price style and quality equals value
message. |
| | | As we move off-mall, I don’t think our compelling price
story stands out so much. We can’t fix the world economic
conditions but we can fix that and also (buy bearer). So
that’s where we’re concentrating. |
| | | With that said, while we’re rightfully cautious and
conservative, we’re also need to discourage
(unintelligible). We expect to return Kirkland’s previous
levels of sales profitability and operating efficiency.
We’ve completed our stock buyback well ahead of schedule and
still maintain — expect to maintain a strong balance sheet
and cash position with no debt. |
| | | Thank you for your time and your interest in Kirkland’s.
And, operator, we’re prepared to take questions. |
| Operator: | | Thank you. 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-tone prompt to acknowledge
a request. If your question has been answered and you would
like to withdraw your registration, please press the 1
followed by the 3. If you are using a speakerphone, please
lift your handset before entering your request. One moment,
please, for our first question. |
| | | And our first question comes from the line of Brad Thomas
from Keybanc Capital. Your line is open. Please go ahead. |
| Brad Thomas: | | Hey, good morning, Robert; good morning, Mike. |
| Robert Alderson: | | Hey. |
| Michael Madden: | | Hey, Brad. |
| Brad Thomas: | | Let’s see here, I wanted to just follow up a little bit, you
know, at a high level in terms of, you know, what you’re
seeing out there. You know, it doesn’t feel like comps
change a great deal from last quarter but, you know, did
continue to moderate down a little bit more. |
| | | You know, a lot of references (obvious) to the difficult
consumer landscape. But, you know, how much do you think the
consumer versus perhaps the merchandise on your part not
having the mark versus, you know, the competitive landscape
changing? |
| Robert Alderson: | | You know, I don’t think — as I’ve said, I don’t think you
can discount the moment that we’re in and have been for
awhile with our customer. I think depending on what you sell
and dealing with a moderate income customers we do, you may
find a result different than ours. But we don’t — as I’ve
said we don’t sell anything that’s needed for life. |
| | | So I think the customer makes decisions based on how much
they have and what their expectations and fears are, and
what they feel like they can spend. And I think family and
all the things related to family come first. |
| | | So I think we are affected. We obviously — with the work
that we’re doing and the systems that we’re putting in,
specifically the work on process, we are aware that we can
and must by better and more precisely, and continue to make
gains and merchandise productivity, specifically sales and
margin. |
| | | And — so that is a part of it and we recognize it, and
that’s really the only thing we can affect. And we can also
market ourselves better. I think the change, as I said,
off-mall, I don’t (our) message that we have the best prices
generally, spends out nearly as much in a group of large
boxes that whether they’re really low price or not get some
credit for that based on the size of your box, what they
carry and what they’re able to price some of the things
within their mix. So I think it’s a combination of all of it
we’re at. |
Brad Thomas:
Michael Madden: | | Okay. And then, you know, obviously, your guidance gives us
an outlook for store openings and, you know, you mentioned,
share repurchase. But, you know, in light of, you know, a
couple of quarters, the things have gotten a little bit
softer. Is there — you know, has there been — have there
been discussions about perhaps, you know, either slowing
down the openings or, you know, reigning in the share
repurchase just until we start to get some more
stabilization, you know, at the store level?
Well, Brad, on the store opening plan for this year, we’re
pretty much settled. We have leases for the most part that
are final, and a lot of activity to come in Q3 and early Q4
with those openings. |
| | | We still are in a position to effect, you know, next year,
and we’re constantly monitoring trends in the business. And
I think we’ve historically been a pre-conservative
management team, and we’ll continue to be so. So we will
look at that. But as far as this year goes, we’re settled,
we’ll open to 40 to 44 and close the 30, and keep monitoring
the business. |
| | | On the buyback side, we did complete the 40 million
authorization during the second quarter, and we will — you
know, we will continually, as we always do, evaluate our
cash position in light of all these investments we just went
through the call and also have discussions that are
board-level about what to — how to consider that. But we’re
always watching the business, and that’s first and foremost
in our minds as we make decisions about use of capital. |
| Robert Alderson: | | You know, Brad, also I would say, next year, we only have, I
think, five leases we’re committed to at this moment. So,
you know, we like to get well ahead of a prior year, but I
think we — you know, we constantly look at it as Mike said.
And we’ll be — I can tell you that we’ll be very careful
about that. |
| Brad Thomas: | | Okay. And then just a housekeeping item, Mike, you mentioned
the container rates being higher as we model the back half
of the year. What sort of, you know, drag should we model in
for gross margin associated with where container rates are
tracking now? |
| Michael Madden: | | You know, obviously, it’s a constantly moving target. But
right now, I would say, 50 to 100 basis points. A little bit
more in the fourth quarter than the third because the recent
increases won’t really impact margins on that inventory
until it sells through in Q4. |
| Brad Thomas: | | Right. And I think we’ve seen some moderation rates
recently, so hopefully that (continues). |
| Robert Alderson: | | Yes. As I said, it’s a moving target where you can (rest
your shared work), taking every effort to locate the best
rates and move our (goods across it) at the best price we
can. |
| Brad Thomas: | | All right. Well, thanks so much and best of luck. |
| Robert Alderson: | | Thank you. |
| Operator: | | Thank you. And our next question comes from the line of Joan
Storms from Wedbush Capital. Your line is open. Please go
ahead. |
| Joan Storms: | | Hi, guys. Good morning. |
