Ladies and gentlemen, thank you for standing by. Welcome to the Kirkland's, Inc. Second Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, August 22, 2013. I would now like to turn the conference over to Mr. Tripp Sullivan with Corporate Communications. Please go ahead.

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 2013. 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 the notice of the accessibility in 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 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 18, 2013. With that said, I'll turn the call over to Mike for a review of the financial results. Mike?

Thank you, Tripp, and good morning to everyone. Our second quarter results reflected sales that were in line with our guidance, combined with strong year-over-year increase in our merchandise margin, which exceeded our expectations and led to the better-than-expected earnings performance. For the second quarter, net sales were $97.1 million, a 6.7% increase versus the prior-year quarter. Comparable store sales, including e-commerce sales, decreased 0.2%; and comparable brick-and-mortar sales were down 1.3%. e-commerce sales were $4.4 million for the quarter. That's a 27% increase over the prior-year quarter. And as a reminder, each quarter during fiscal '13 starts 1 week later than the same quarter of fiscal 2012 due to the retail calendar for fiscal 2012 having 53 weeks versus the typical 52 weeks. And as expected for the second quarter, this shift had a 100 basis point positive impact on comparable store sales. The 1% comp sales decline in our brick-and-mortar stores was driven by a 6% decline in transactions and a 5% increase in the average ticket. The decrease in transactions resulted from a 7% decrease in traffic counts, partially offset by a 1% improvement in conversion. The increase in the average ticket was entirely due to an increase in the average retail price per item. Items per transaction were flat to the prior-year quarter. These metrics all reflect the reduction in promotional activity, which likely held conversion down somewhat while providing a strong lift in the average ticket. From a geographic standpoint, sales results were mixed. Comp sales results in the Gulf Coast states were strongest. And Texas, with over 60 stores, performed slightly better than the company average. These results were offset by weakness in the upper Midwest and the Far West. Merchandise category showing strong comp performance were mirrors, lamps, wall decor, textiles and holiday,…

Good morning, everyone. We're pleased to report a good second quarter. And the good news is that our merchandising momentum continues. We met our projected sales despite continued headwinds in traffic. Improved conversion and average ticket helped overcome much of that traffic shortfall. Importantly, we exceeded our earnings expectations with improved and strong merchandise margin increases, as we had suggested would happen, with a combination of better information and merchandising practices, lower average inventory levels and a product mix that's resonating better with our customer base as evidenced not only by the margin results but a steady return, increased gross margin return investment and lower markdown rate versus the prior-year period. We're pleased with our inventory position in both amount and content, as we enter the important back half of the year. We'll closely monitor inventory levels and the number of and margin impact of promotional activities during the back half to maximize both the productivity of our inventory and create excitement in our stores. Assuming as we do that tepid growth in the economy is likely to continue for the foreseeable future, we believe our best opportunity is improving operating margins and earnings rather than extraordinary promotional actions during the holiday periods directed to traffic gains. We'll approach traffic improvement with a much more highly directed marketing effort based on the success of multi-marketed tests we have conducted over the last several months. In the second quarter, in our major categories, we had strong results in lamps, decorative wall decor, textiles, mirrors, candles, lighting and fragrance and housewares. As a whole, the wall decor category was virtually -- or division was virtually flat to last year, while the home decor division showed a low-single digit comp increase. We expect continued incremental improvement in sales and margin performance from our…

[Operator Instructions] And our first question is from the line of Brad Thomas with KeyBanc Capital Markets.

I wanted to just maybe talk about merchandise margins in terms of the big picture there. Robert, as you think about that over the last couple of years, it was, sort of, in the low 50s-percent range. Obviously, it seems to be trending up, and you're expecting it to be up year-over-year. Just as you think about the longer-term opportunity, if Oracle really works well, if your merchandising and advertising hit the mark, structurally, where would you like to see merchandise margins for the company?

Well, I think we would -- our aspirational goal would be mid-50s to 60%. That's aspirational. We have some work to do and a continued momentum to build, and I think that's the product of maturation of a merchandising team, better practices, better information, better coordination. And hopefully, we'll continue to see some tailwind from control and stabilization of inbound freight cost. But I think, long term, for the company, the news is generally good if you define long term in retail as 12 to 36 months.

Great. And, Mike, to follow up on the freight side of that. If I'm not mistaken, the container rate should be moving in your favor here for the back half. Can you just remind us what the expectations would be on the freight component of things for the back half of the year?

Yes, the -- so far, the year, as you know, has kind of played out with little more pressure in Q1. And then, we -- that reduced in Q2. We really only had about -- I think, it was 16 basis points of headwind in Q2. And all along, we thought that we would get most, if not all of that, back in the back half because we've been able to secure fixed rates through next spring, and those rates are -- compare very favorably to the rates that we paid last fall. So I think, if you want to quantify it in terms of how much lift we could get, it looks 50 basis points to 75 on the high side. And I'm really talking to the back half.

Right, 3Q and 4Q, if that's about the level that we could be getting?

Yes.

Okay. And then, just lastly, on the margins. Mike, this is obviously a big, big quarter for you with the gross margin up 374 basis points. As you think about some of these more disciplined promotional initiatives, do they have an opportunity to build momentum? I mean, is there the potential for upside if you continue to see the same success that you had this quarter? How should we think about the cadence of some of these initiatives you're putting into place?

Yes. We certainly can build momentum in the sense of continuing some of the things that we did in Q2 and the disciplines in how we're treating promotional activity. I mean, we'll continue that. In terms of its impact on the margin expectation, I think 1 thing I would call out is that, that 374 basis point lift in Q2 had a lot to do with last year's Q2. So I don't want you to take that and roll it forward at that level. What I would say, though, is we are optimistic about the trends that we're seeing in merchandise margin. We have the freight benefit mainly ahead of us for the back half. And so we do feel positive about that direction, but I don't want to say that it's going to be as dramatic as we saw in Q2.

Our next question is from the line of Neely Tamminga with Piper Jaffray.

This is Caleb Burke [ph] filling in for Neely Tamminga. Can you talk about specific digital strategies in the second half of this year you might employ during the peak seasonal selling periods? Are you engaging customers via direct e-mail marketing campaigns alone, or are you starting to incorporate more social media in your outreach yet, for example, Pinterest?

Some of that question is breaking up, so I hope we answer it fully. The initiatives we've had on the digital side have -- we've been into Pinterest quite a bit up to now. We're playing in pretty much all of the different venues. We use blogs. We use Twitter. We use Facebook. So we're heavy into that, and we'll continue to be. The marketing test, which is maybe more of a store-driven initiative that we talked about, is -- we completed a March to July test on that, and we were happy enough with the results of that test to extend it for the back half and expand it somewhat to a few more markets and apply the lessons we learned in the first part of the test to the media mix that we're employing in each market. So that's a big initiative. On the digital side, we're certainly going to continue all these things that you mentioned. We do a lot of search engine marketing on top of the social activities, and that's a big part of our plans for the back half.

Our next question is from the line of Joan Storms with Wedbush Securities.

I have a question. You guys went pretty quickly through the category performance. So I wanted to try and drill down on that a little bit and talk about -- and Robert had made some comments about customers were -- the merchandise was resonating better with customers or maybe go over areas where you're seeing the improvement and how that compares to -- and maybe if there's any, sort of, mixed changes because of that?

Well, I think we did -- we called out, sort of, where we -- in the major categories, where we felt we had nice performance. I think the good news is that we -- about 1.5 years' work has culminated with seeing some really outstanding performance in decorative wall decor and mirrors. So both of those have become very stable and productive categories again -- which, and they're part of our wall decor division. We have -- we are seeing improvement in a couple of categories that have been dragging the results for the past few quarters, and that's furniture and decorative accessories. And we're very hopeful that we'll have more good news to say about those as we go deeper into the quarter. But we had some very nice and stable results from several other of the categories, textiles and lighting and housewares and others. So I think the good news, Joan, is that there's a pretty broad and nice acceptance of the merchandise mix well across the 13 categories and that we have good momentum in them as we go into the back half when seasonal, beginning with Halloween and harvest begins to be important and then, of course, culminating with the Christmas and policies, and that we'll see sales begin to drive that in the back part of October into November, December. So I think the merchandise offering is solid. We're being very careful about the inventory levels. We're trying to be very careful about promotional activities to plan those to be very limited in scope, to be very time-sensitive about how long they should run, to be very careful about what we put into them and to make them as productive as we can and exciting and compelling to customers, so that we can get them to shop with us, either in the store or online. So control of promotions will be a big part of that and how we manage the mix, as we go into the second half of the year.

Okay. And then, on the marketing test that you plan on continuing. That was successful. And then, you have strategies that are -- as Mike has said, it was more store-driven initiative. How are you doing that, are you doing that with inserts in local newspapers or any -- TV or radio, how are you getting that word out there...

Yes. Joan, it's...

[indiscernible] which you already talked about?

Yes. It's a combination of cable TV advertising and newspaper inserts. The newspaper inserts, both in the form of a freestanding piece, as well as a shared piece, which probably you've noticed in -- when you look at your newspaper -- the difference. So we do a little bit of those 3 activities. I did say it was a store-driven initiative, but everything we do around here is about tying the 2 together. So I need to correct myself a little bit, but -- because there is, certainly, a connection to the online business as well, we are doing a lot of work around here to make sure that that's a seamless and tied-together experience. So those were the ways we were reaching customers through the tests that ran from March to July. What we've been able to learn, I think, really gets down to the individual markets and what vehicle works best in those individual markets, and we'll make changes to the markets based on those results in the back half, as well as add a few more markets to the activity. So we're reaching a few more stores. So we're taking it step by step, and we were happy with the results of the first part of the test. And we'll just keep learning and evaluating the financial benefit of doing this marketing.

Okay. Fair enough. And then, just on the geographic comments, it's been pretty similar in the last couple of quarters. Is there something to say there about the consumer or what you're doing from an operations or store standpoint between what you're seeing, sort of, in the Southeast Texas seems to be doing better than the, sort of, far West? Is that just a matter of the consumer brand awareness? Or what are you factoring into those performances?

It's really hard to say, and I don't have a really easy answer to that. I think it's -- the -- certainly, the 2 areas that we -- of weakness or areas where our brand is not as top of mind or as well-known. And I think after some of the housing shocks and recoveries, some of that settled out across the markets. I mean, we've continued to see better results in Florida, as an example of that. But it -- we're -- it's something we're continually looking at, and it's really hard to follow. I mean, last year, I think we were saying, in California, business was good. So...

Texas was down.

Yes. So some of it is comparisons. We'll continue to call it out because that is what we saw, but trying to evaluate it and understand it better is something we're trying to do everyday. But there's nothing really on the surface that would suggest why other than the brand awareness is a little bit lighter in the upper Midwest and far West right now as we build the store base.

[Operator Instructions] Our next question is from the line of Anthony Lebiedzinski with Sidoti & Company. Anthony C. Lebiedzinski - Sidoti & Company, LLC: I just wanted to get a little bit more details about the branding initiatives that you're doing. How many markets did that give us in the second quarter, and what is the plan for the fourth quarter?

We had 7 in the first 2 quarters. I guess, the test ran over a 2-quarter period. And as we look into the back half, it will be those 7 or plus 4. Anthony C. Lebiedzinski - Sidoti & Company, LLC: Got it. Okay. So...

So that's the level of expansion. Now in terms of store coverage, you're still not -- you're talking about maybe 1/5 the chain. Anthony C. Lebiedzinski - Sidoti & Company, LLC: Okay. And then, when you look at the dollar spending that you're doing, is it roughly a 50-50 mix between cable TV ads and newspaper inserts, or can you give us a little bit of quantification as to the media mix?

It varies by marketing. It's -- I mean, some of the production costs obviously are shared because we're running the same creative -- in the different markets, but it's a pretty even mix. I mean, we will adjust it somewhat based on what we learn. Some of the markets we were in, the television and the awareness factor is more important than the kind of direct response that a -- an insert with a coupon gives. So that's evolving. And the point -- the endpoint is we're going to spend the money where we feel it's most productive, and that gets down to the market level because every market is a little different. And we have a different footprint and a different penetration level that we have to address. Anthony C. Lebiedzinski - Sidoti & Company, LLC: Okay. Good. And then, also, as you pointed out that you are still seeing some continued challenges in customer traffic. So if that continues, would you then perhaps consider being more promotional, perhaps doing more discounts, or would you rather be more disciplined with your pricing? I just wanted to know how you're thinking about that, as you go into the second half.

Philosophically, we would prefer to be much more controlled and directed with our promotions, believing that if we do those -- if we plan and execute those well and with the proper product and we do the adequate job of advising the customer that we can generate as much as we could by being as reactive as I think we've gotten in some quarters, I think it makes it much easier to do that if you keep your inventory well in check and deal with your problems quickly as they're identified in the quarter and do those in a way where you can gain greater margin results and selling them as opposed to waiting to the end of the quarter clearances, where we sometimes have found ourselves. So I think our whole promotion inventory and offering strategy is very related -- interrelated and coordinated. So that's where we'd rather be. Obviously, if something happens that changes the equation in a major way, we would have to react.

Our next question is from the line of David Magee with SunTrust.

This is Lynda Guthmann in for David. First, a quick question. I apologize if you already said this, but could you provide the traffic count and the conversion rate in the quarter?

Yes. Traffic down 7% and conversion up 1%.

Okay. And the average ticket?

Up 5%.

Okay. Great. And then, our next question is we just wanted to see if you guys had noticed a difference -- a divergence in the stores regarding traffic or end sales with -- where the stores that are in the lower demographics, lower income?

I don't think so. Not markedly...

I don't think there's anything that's conclusive that would say to us that 1 particular customer is being affected more than another. Sometimes, it's -- as you -- if you look at the stores and the different ways that you cut the stores, which we do, it's difficult right now to say that any group is affected more profoundly than the other, if that's what your question was.

Our next question is from the line of Matt Dhane with Tieton Capital Management.

I was -- how concerned are you about the traffic? And are you seeing the markets, where you're doing the marketing tests, have positive traffic?

We're seeing improved results in the markets where we're engaged in the test, yes. And I think that's what's encouraging us to expand the test and to do some testing with end markets to validate results. So I think we still have some work to do. But I do believe that we -- as we said, we expect to address our traffic going forward with better marketing and more target-directed marketing as opposed to addressing it with promotional activity. So I think the news there is traffic should get better as a result of better merchandise and better merchandise execution, and we've done a lot of work in stores to prepare the stores to address customers in a more logical and compelling way. And I think the whole effort about traffic is very holistic. And that's around online contact, it's around new things that we'll do around mail and TV and it also will be about store experience and the merchandise mix. All of it has to work together. Typically, when we see margin and conversion going up, eventually, we see traffic follow. So we feel like, based on our historical experience, we'll see that again. And so, we are concerned and we're working on it, but that would be expected.

And then, the -- if I could shift to the CRM system, can you discuss a little bit and help me understand what exactly -- is this a rewards program you're rolling out, and how impactful do you expect this to be with time?

Well, it is -- it's the combination of true customer relationship management capabilities and a loyalty program. So the 2 kind of go hand-in-hand. We have, to date, never I think had the level of individualized customer data, and the ability going forward this will provide is to segment and speak to our customers differently based on their behavior and their engagement with our brand. So this is new for us, and we're excited about the opportunity that it's going to give us to market smarter and therefore, in the long run, spend our money in marketing wisely and better than we otherwise would have.

And since you're rolling out the module here in the second half or in that aspect of the system here in the second half, how long before it really gets fully rolling operational and starts having an impact on your business?

I think that, that particular piece can have an impact as early as next year. I mean, it -- you have to build up a certain level of history to really have it mature and be very efficient. But when you're coming from a spot with kind of none of that information and you're adding it as you roll it out and you're learning every week, I think there's things we can act upon quickly.

Since there are no other questions at the moment, I will now turn the call back to you, Mr. Alderson.

Thanks, everyone, for being on the call. We appreciate your time and interest, and we look forward to speaking to you at the end of this quarter. Thanks.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.