Good morning and welcome to the Kirkland’s First Quarter 2016 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jeff Black of Investor Relations. Please go ahead.

Thank you. Good morning and welcome to Kirkland’s conference call to review results for the first quarter of fiscal 2016. On the call this morning, we have Mike Madden, President and Chief Executive Officer and Adam Holland, Vice President and Chief Financial Officer. The results as well as the notice of accessibility of this conference call on a listen-only basis over the Internet were announced 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 the company management are forward-looking 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 SEC, including the company’s annual report on Form 10-K filed on April 8, 2016. With that, I will turn it over to Mike.

Thank you, Jeff and good morning to everybody. The first quarter was in line with our expectations and we are pleased with the progress we made on the strategic priorities that will enable us to drive our full year performance. As you will recall, our full year guidance, which we have maintained today assumes a year-over-year decline in earnings in the first half as we invest in the supply chain and continue our shift to a more front loaded store opening schedule. We expect second half earnings to be above last year’s levels as we leverage our store growth and benefit from progress on various productivity initiatives. We are on track with that forecast, which includes bringing inventory levels back into alignment by the end of the second quarter and opening our new stores much earlier in the year. At the same time, we are moving forward on a set of price, merchandise and marketing initiatives to drive our long-term strategic plan. I am optimistic about the progress we are making and believe we are well-positioned as we approach the crucial fall and holiday selling seasons. One of the biggest improvements we are focusing on involves our supply chain. Our e-commerce channel has grown at an accelerated pace and now accounts for 7.5% of our total revenues. Until now, order fulfillment for that channel has been operating out of the same distribution center as our brick-and-mortar stores. The combination of this growth was an 11% gain in source square footage in 2015 and a planned 6% to 8% increase for ‘16, coupled with the more complex flows of seasonal goods, has added to the demands on our distribution network. All of these factors strained our supply chain in 2015 and we absorbed considerable dislocation around our peak seasonal build last…

Thank you, Mike. Net sales for the first quarter increased 9.8% with comparable store sales increasing 0.5%. This was in line with our projections and reflects the growth in our store base, continued strength in e-commerce and positive response to our seasonal assortment. E-commerce revenue continue to increase at a healthy rate, generating $9.8 million for the quarter, which represented a 28% increase over the prior year quarter and accounted for approximately 7.5% of total sales during Q1. Comp sales trends in our brick-and-mortar stores were relatively consistent as we move through the quarter. Geographically, comparable store sales results were similar to what we experienced in the fourth quarter of 2015, with Texas and Louisiana weighing down on our comparable sale stores results. Combined, these two states affected total comp by almost 1.5 points. Encouragingly, two of our largest states of our store count Florida and California, continue to show positive results. We opened 14 new stores during the quarter and closed eight, ending with 382 stores, representing 40 more units than the end of Q1 last year. First quarter gross profit margin decreased approximately 215 basis points to 38.1%. This decline was driven by three factors: First, merchandise margin declined 60 basis points to 55.8%, primarily due to planned promotional markdowns to manage inventory levels. While the promotional environment was competitive, we are pleased with the reduction in inventory and we will now be able to achieve our target of being back on inventory plan during Q2. Inbound freight charges were smaller component of the merchandise margin decline in Q1 and showed improvement versus the back half of fiscal 2015 as we executed on our supply chain initiatives. Moving onto the other components of gross profit margin, store occupancy cost increased 98 basis points as a percentage of net…

Thank you, Adam. As many of you know, Kirkland is celebrating its 50th year in operation. Back in 1966, Carl and Robert Kirkland founded the company with a belief that great style can come at a great price always. The concept has evolved and thrived through a tremendous economic and social change, but that vision continues to guide our strategy. The organization is stronger than ever and I am confident that Kirkland’s best years are ahead of us as we build on our founding principles. We have a lot to look forward to in the back half and we look forward to updating you on our progress. Operator, we are now available to take a few questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Brad Thomas of KeyBanc Capital Markets. Please go ahead.

Yes. Hi, good morning Mike, Adam and Jeff. How are you?

Brad, how are you?

Good. Thanks. A couple of questions if I could, first one is just sort of off asking about inventory, it sounds like things are moving in the right direction here, but anymore color around how you ended the quarter and how things are tracking from a seasonal perspective versus more of a core perspective would be greatly appreciated?

Brad, inventory position, we are very pleased with the progress we made and continue to make on getting back at the position we intend to be going into the back half. Year-over-year comparisons are still a little tricky given last year’s port slowdown and subsequent flow that started to really occur about this time last year. So you are still showing about – I think we show about an 18%, 19% over the prior year right now. But as we go into the back half, as I said in my comments, I would see the inventory level be on a year-over-year basis, up less than the expected sales increase we have in the back half, which if you look at store count and look at your comp assumptions would be in the 10% to 12% range. So, inventories to be up year-over-year, a little bit less than that going into the back half, which is considerable progress on where we have been. So, we are very happy about that. From a seasonal standpoint and looking at core, core has continued to be a significant of our business, 35%ish of the overall business. So, we do everything we can to protect that part of the business. Seasonal categories have been successful for us for the last few years and we are planning a slight increase there going into the back half. We saw good results in the spring seasonal aspects of our assortment, and we are excited about what’s ahead looking at fall and then deeper into the holiday period.

Great. And then as we connect the dots from inventory to merchandise margin, can you help us think about how trends play out in merchandise margin over the next couple of quarters?

Sure. I mean, I think we are still dealing with some promotional activity in Q2. Q2 happens to be a little bit more lighter quarter in terms of volume and a little more promotional historically. So, you will continue to see some of that in Q2. But as we go into the back half is where we would see improvement start to come in on the merchandise side. We also have some inbound freight reductions that we think will help margin going into the back half as well as all the things we mentioned in our comments, Adam mentioned in his comments about supply chain changes we are making and the improvements we expect there.

Great. And then the last if I could, I know you are not giving specific second quarter guidance. But just as we think about the tougher comparison that you are up against, maybe any thoughts that you might have in terms of how we should maybe model comps earnings for the second quarter would certainly be welcomed?

Well, without going into specifics, Brad, that you are right about the comparisons. I think we are up against a 6.7 or so in the second quarter and that was little bit more heavy in May and June than July. So, as we think about second quarter and as we plan the year originally, we expected earnings to be down in the second quarter. And we expected the comp increase to be a little bit less given the comparison we are up against. So that’s directionally how I will look at it.

Got it. Are you thinking that comps would still stay positive in the second quarter?

I think around flattish is about the way to think about it.

Perfect. Well, certainly setup for some nice momentum as we move to the year and so thanks for all the color and best of luck.

Right, Brad. Thanks a lot.

Our next question comes from Jeff Van Sinderen of B. Riley. Please go ahead.

Good morning. And just kind of follow-up on traffic in Q1, obviously, there has been a lot of discussion about it in the industry. So, just wondering how you think about that in terms of what you saw outside of the oil patch in your brick-and-mortar stores? And I guess, how you look at that in the context of what the broader traffic is in the kind of centers you are in?

Sure, Jeff, this is Adam. We certainly did see a heavier weighted impact for the two states we called out in the prepared remarks. That being said, we did see some positive traffic trends in some of the other states. So, we are not negative across the board although these states that we called out unfortunately are disproportionately higher in terms of sales and earnings contribution. Therefore, they have more of a negative impact. But as we move into the back half of the year, when we started to see the traffic declines, especially in Texas, Louisiana, we are hopeful that some of these traffic comparisons will ease up a bit.

Okay, good. And then anymore color you can give us on where you stand at this point with supply chain? Obviously, you have got a lot of work behind you with the new center up and running. Just wondering maybe when and how we see the benefit start to manifest from that? And I think you talked about second half and then any update on other supply chain initiatives that are still in the works, maybe more color on the West Coast bypass and what we should expect there?

Yes, I will start with that. And what I would say there is really buckets we are thinking about with supply chain as far as 2016 go. One is the fulfillment center move that completed in March. And as I said earlier, after the move and the start-up phase, we are starting to see better metrics coming out of that as we expected and we expect that to continue as the year progresses. Secondly is the West Coast bypass operation and that will help us in multiple ways, but first being in no particular order, first would be the ability for those West Coast stores which would when you add up all the geographic areas that would be affected maybe about 40 stores that will see better service when you are not having to bring it all the way to the interior and ship it all the way back out. Those stores will be receiving their merchandise at the right time and with the rest of the chain. So, we have struggled with that in the past and that will help us on that aspect. Secondly, it will alleviate pressure on our Tennessee facilities, because we won’t be bringing all of the flow into those facilities. And thirdly and importantly, it provides kind of a governor on our flow. So you got a facility that – and we are a highly seasonal business. We can time that flow better with that facility in place and allow our DC to manage the goods in an orderly fashion as we flow seasonal product out to the stores. Presentation is very important to us. And we want the stores showing the product in the order that we have kind of envisioned when we buy it. And this will give us much more capability…

That’s extremely helpful. I appreciate that. I will let someone else jump in. Thanks a lot.

Thanks Jeff.

Our next question comes from Anthony Lebiedzinski of Sidoti & Company. Please go ahead.

Good morning guys. Thank you for taking the questions. So Mike, in your remarks, you did mention about the fact that you are looking to minimize cannibalization, just wondering if that was any notable impact in the quarter or is this more your thinking about the future as far as cannibalization is concerned?

Yes. It’s more future driven there, Anthony. To say that we have no cannibalization is an overstatement. So I am not going to say that. I mean we are doing in-fills. It does have an impact. We are doing a better job of measuring it, especially when we get upfront when we are evaluating a deal. With all those analytics, I mentioned that we really added to the process, we have a better way to track cannibalization. And we are beginning to be able to avail ourselves of those capabilities. But there are some spot markets where I think we have built it out and we are seeing some cannibalization, but its healthy cannibalization. I think it’s more a statement on going forward as to what is the ultimate store count in each market and how do we address that with the growth in e-commerce.

Got it, okay. So thanks for that clarification. And also, any impact from the new overtime rules that you can mention?

Well, Anthony, this is Adam. As you know the final rags came out last week. And we are still evaluating their impact. The latest regulations seem to be a little onerous than we had earlier anticipated. But we will have more to say on that as we move through this next quarter.

Got it, okay. And also if you end the year roughly at the midpoint of your EPS guidance, where do you think your cash position will be at the end of the fiscal year?

North of $60 million, Anthony.

Okay. And lastly any thoughts about a share repurchase program?

That’s a topic that we would be in discussion with our Board on, Anthony. Obviously, it’s always something that we address at that level. And when we have something to talk about, we will share it.

Thank you very much.

Thank you.

[Operator Instructions] Our next question comes from David Magee of SunTrust. Please go ahead.

Yes. Hi, good morning guys. This is actually Mitch in for David.

Hi Mitch.

Hi, curious about in-store conversion rates above and beyond the incremental promotions, could you quantify what conversions would be when you are backing out that impact?

That’s a tough one to do. Our promotional activity was a little higher than last year. As we mentioned, conversion was positive. I think that does play into that, but not enough – the numbers we are seeing would not suggest that that’s the whole reason conversion is up. We have made a lot of improvements in terms of how we message and how our teams are connecting in terms of visually in the stores and pulling that off. And we think that’s a big driver to conversion. But promotions certainly have an effect. But I think it’s a combination of things. And it’s hard to really quantify the components out that way.

Okay. And then you mentioned that traffic is still challenging. And I apologize if I missed this earlier, but what could be done differently on that front to help stimulate that, is there any initiatives that can share from a marketing standpoint that are planned for the back half of the year?

Well, one thing that we have talked about and we have mentioned here is evaluating our current marketing programs, a big part of which is e-mail, which right now, the metric on e-mail suggest that, that is still a good return in driving traffic to our stores. We see it when we run our advance and the immediate impact that that can generate. The other – maybe the second large component of our marketing spend right now is our FSI program, which we are a little less happy with what we are seeing out of that. So we are looking – as we look into the back half, we are looking to adjust some of the spend from that into other areas. One large well name would be digital that we are considering as a more effective way to drive traffic. So we will be adjusting the back half spend a bit to position those dollars in areas that are driving traffic at a cost that’s acceptable from a budget standpoint.

Okay, that’s helpful. Thanks for the color guys.

Thank you.

There being no other questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mike Madden for any closing remarks.

Thank you, everyone for your attention on the call today and the questions. We appreciate them. We look forward to updating you as the year progresses. Talk to you next quarter.

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