Good day and welcome to Kirkland’s Second Quarter Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Jeff Black with SCR Partners. Please go ahead.

Thank you. Good morning and welcome to Kirkland’s conference call to review results for the second quarter of fiscal 2017. On the call this morning are Mike Madden, President and Chief Executive Officer; and Nicole Strain, Interim 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 distributed to the financial media. Except for historical information discussed during this 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 SEC, including the Company’s annual report on Form 10-K filed on March 31, 2017. With that I’ll turn it over to Mike.

Okay. Thank you, Jeff, and thanks to everybody for joining us this morning. I am pleased with the progress we made during the second quarter, which was highlighted by positive comparable sales and continued advancement on our strategic initiatives. As we outlined in the release, earnings performance was in line with our expectations and we made significant progress in key areas of the business as we head into our peak selling season. Sales growth of 7% was driven by higher store count and a 1.2% gain in comparable store sales. More effective marketing helped to cut into our traffic decline and we also drove improvements in conversion and average ticket. New stores met our expectations and we are optimistic about the upcoming opening that will complete our 2017 store class. And kirklands.com sustained its impressive momentum. Gross margin was impacted by planned initiatives to reposition certain key categories and increase in vendor direct shipping within our ecommerce channel as well as a promotional retail environment. We also experienced margin pressure from outdoor furniture where we increased the buy from last year. But aside from these specific callouts, we were pleased with margin performance and the remainder of the assortment. We saw particularly strong performance in everyday furniture, ornamental wall décor and lamps. Overall, I am pleased with the way the team executed as the competitive landscape continues to be challenging. Operating expenses remained well controlled and we’re entering the third quarter with a better inventory position and we are armed with some important learnings to inform our plans for 2018. Our balance sheet is in great shape with $48.7 million in cash and no debt. This morning, we announced that the Board has authorized the stock repurchase plan for the purchase of up to $10 million of common stock. With…

Thank you, Mike. Net sales for the second quarter increased 7%; consolidated comparable store sales increased 1.2%, which included a 40% increase in ecommerce revenue. Geographically, sales are relatively consistent across our regions with Texas remaining soft. We had a positive conversion rate for the fourth consecutive quarter and the higher average ticket, which both helped to offset the negative traffic. We opened eight new stores during the quarter and closed three ending the quarter with 406 stores, representing 15 more units or approximately 4% more than the end of Q2 2016. Ecommerce generated $14.7 million in revenue during the quarter, accounting for approximately 11% of total revenue. This increase was driven by a combination of strong increases in website traffic, conversion and average order value. We also saw a healthy increase in revenue derived from our third-party drop shift initiative, which accounted for a higher portion of ecommerce revenue during Q2 2017 compared to a year ago. Sales via this channel result in a lower initial merchandise margin but the lower carrying and labor costs provide a bottom-line benefit. Moving on to gross profit. Gross profit margin for Q2 decreased 20 basis points to 34.2%. Looking at the components. Merchandise margins decreased 45 basis points to 53.4%. Merchandise margin was negatively impacted by strategically planned promotions to sell-through inventory in several categories, as Mike mentioned, a general increase in promotional offers and a growing mix of third-party drop ship sales partially offset by favorable shrink results. Store occupancy costs decreased 95 basis points as a percentage of total sales during Q2, primarily due to onetime adjustment to capitalized one month of extra charges for our leases. Outbound freight costs which include ecommerce shipping increased 85 basis points as a percentage of net sales, which was driven by an increase…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Jeff Van Sinderen with B. Riley. Please go ahead.

Good morning and let me say congratulations on getting back to positive comps.

Thanks, Jeff.

Just a couple of questions on SKU count rationalization. I know you spoke to that, but just wondering if it’s working well in the test, and I think you said you’re rolling out more -- or you’re increasing the size of the pilot. Just wondering what I guess you need to see in order to roll that out further?

Well, yes, the test that we performed was very successful; it achieved essentially what we expected to achieve. We’re taking that to a district this fall before the holiday season. And to your point, we don’t really need to see a whole lot more. And what’s happening as a result is, we are already adjusting future on order and buys to get to that level of SKU count. So, as a reminder, in that test store, we reduced the SKU count by over 10%. And to get in there and do that while business is rolling, you got to pay special attention to the store and actually physically go and move things. As we move forward, we are already implementing some of these learnings into our process, and we won’t have to do that for the full chain. So, as you go into 2018, we should be at our SKU targets that we set out in the test.

Okay, good. And then, just in regard to eliminating some of the coupon stacking that I know you have been working on. I guess maybe any color you can give us on how the customer has been responding to that. Do you think that it’s not really impacting their buying decisions? And then, may be any sense you can give us on, I guess how you are able to pass through some of the price increases, do you think that they are just not really being noticed by the customer on some of the furniture items as such that you mentioned?

Yes. I will start with pricing. It really is a SKU-by-SKU determination. We bring a lot of new products and a lot -- for the most part, unique products. So, we have some ability to move price, and we have tried to, across the assortment -- I am calling out furniture here as an example because it’s a good category to touch on in terms of raising price, we have unique piece. We are the only ones that have it. And we can -- we are challenging our buyers to try to push price a little bit on those unique items that we feel like we can carry through with. And we are doing that across the assortment. So, the pricing is real -- and we think that’s a big part of what we are seeing in our ADT being up, which is -- in our AUR. Those pricing decisions are weighing into that. As far as the promotional changes and the customer reaction, so far so good on that. The big move we made during the second quarter was to eliminate coupon stacking on our clearance category. And so far, we are seeing very few comments or reaction from customer to that change, as I believe they are really -- they expect it; it’s pretty common place practice out there across the retail space. And we are also seeing a nice improvement in our margin on that clearance category. So, that’s been a big win, and we expect that to help us in the back half. There is more to come on promotional staffing. We are making some changes at the point of sale that take a lot of this decision making out of the employee’s hands and make it systemic. It really flows down the line a little bit and that puts decisions into the hands of the employee at a time where we really want them to be serving the customer. So, those changes we are excited about putting through in the third quarter.

Okay. Good to hear. And if I could squeeze in one more. Just wondering how we should think about comps, sort of the comp progression in the second half, we would be thinking that your comps could be positive in the second half or positive in Q4 or…?

Yes. I mean, I think our guidance implies flattish to slightly positive comps in the back half, and that’s what we would factor in.

Our next question comes from Brad Thomas with KeyBanc Capital Markets. Please go ahead.

Yes, thanks. Good morning and let me add my congratulations as well on the solid comp results. I was wondering if you could give us a little bit more color on how trends progressed through the quarter and how August has started out for you.

Early in the quarter, in Q2, the progression was improvement as the quarter progressed. I think June and July were pretty much similar but May was a little weaker. And what was your second question, Brad?

If there was any color on how the third quarter had started out, thus far, just in the context of how the cadence of the business has been progressing, was how I asked.

Yes. I would say, I mean, it’s early, Brad. I would say along with what we’ve said in our guidance and one callout I would have on early read in the third quarter is we’re really pleased to see what we’re seeing out of our fall assortment. That set came on early in the month, and that will be more important as the quarter progress and especially as we get into the fourth quarter with the Christmas assortment. But, it’s always good to see that seasonal come out o f the gate strong. We’re still dealing with a lot of the headwinds that many are with traffic but we’re cutting into it, and we expect more of that as the back half unfolds.

And then, Mike, as you think towards the all important holiday season, could you just remind us as we think about your guidance, what’s contemplated from a promotional standpoint for this holiday season?

Yes. I mean, I think, we’re projecting as we’ve seen pretty much through the first half, it’s a very promotional environment, most retailers are dealing with some level of traffic decline. So, as we look ahead, there are some headwinds, but what we think will enable us to show some slight margin improvement in the back half is the work we’re doing on pricing and promotion and the changes we’ve made in key areas of assortment. We’re going to have a lot of new product flowing in from now, really through the rest of the year in different spots in the assortment. And we’ve done a lot of work leading up to this. So, we’ve cleared a lot of the things that we want to clear, and we’ve got a lot of freshness coming in. So, those things should serve to blunt and block a little bit of this external pressure that we know will be there. So, we try to factor in all those things into our guidance in our forecast.

Our next question comes from David Magee with SunTrust. Please go ahead.

Hi, guys. Nice job on the comps.

Thanks, David.

Couple of things. One is, and I think you just answered this, but just the environment itself, I know it’s challenging out there. Is it just sort of flat lining from what you saw in the first quarter, do you sense any sort of things get a little easier on that front or no?

I would say similar. I don’t think -- it’s been a promotional environment, it will continue to be a promotional environment. We’re prepared for that. We’ve made some underlying changes that are long-term benefits for us that will start to kick in, and we’re driving a little bit more traffic with our marketing. So, all those things come together and you manage your margin as best you can, and we feel like we can do that in the back half, even with a pretty promotional external environment. I don’t sense it getting worse or better at this point, but we’re well ahead of the holiday period right now.

Thank you, Mike. And then, you mentioned new store productivity was on track with expectations. How does that metric compare from a ROI standpoint with historical trends?

I’d say, it’s a little lower, and primarily the reason being we’re going into some markets, still strong by the way, versus history, maybe a tad lower because of cost to enter some of these markets. I mean, we’re going into some bigger markets in other parts of the country, like the Northeast, like the Upper Midwest, like California. And typically the upfront investment is a little bit higher, given the construction costs in those markets. So, that’s really the only callout. It’s a still a very attractive return. We’re getting ecommerce business when we drop into these new markets. And we’re very bullish on entering some of these whitespace opportunities that we have in front of us that many retailers don’t have. So, we’re still very focused on entering the right real estate.

And on the real estate topic, when you think about -- and you sort of alluded to it earlier, mature markets and how many stores you might need. Have you done work on your older legacy markets and have thought about what you might have to do over time just sort of right sizing the market? If you’ve done that, is that a big number stores that might have to be downsized over time in your mind or is it just more of a sort of tweaking?

We’ve looked at that, David. I think if you look at the results in our stores by vintage here, actually the longer we’re in the market, they are still showing really strong comps on a relative basis. I think what we need to do and we’re planning to do is spend a little bit more money on some of these older stores to make sure that they are up to current brand standards in those markets. I don’t believe, to your question that we have a lot of markets where we’re overstored. So, when I call out whitespace opportunities, I am really talking about where we’re not going to cannibalize any other stores, and we still have plenty of opportunities there. But most of our markets are not overstored. If you look at as compared to the competition, which we do every time we look at the real estate deal, those competitors typically have quite a few more stores in each market than we do.

Thank you, Mike. And then, I guess just lastly for me. I know this holiday season you plan to be maybe a little heavier on giftables than in the past. Is that something that will begin to show on your website soon or when you plan to sort of flowing those into the stores?

That will be a little bit closer to the holiday season, David. I am glad you raised it because we’re really excited about that part of the assortment for the holiday period. I think what you’ll see is very attractive gifts, and it will be something that you’ll clearly view as new to Kirkland’s. And I think we think our customers will really engage with what we’ve got in store for them, on the gift front and holiday season. In addition to that, we are doing a little bit more in the way of entertaining pre-holiday. So, we’ve really got these three components, entertaining, decorating and gifting. And you will see us be very intentional about that during the holiday period, supported by marketing, supported by presentation, and all of that in addition to just the core buy that both for fall and seasonal will be up a little bit this year. And it was very purposeful as to how we bought that up. We focused on proven winners and some key items within those categories that we feel like we can drive volume with.

Our next question comes from Anthony Lebiedzinski with Sidoti and Company. Please go ahead.

Yes. Good morning, everybody. Thanks for taking the questions. So, first, I just wanted to follow up about your store growth plans. Mike, in the past, you’ve talked about eventually having about 500 stores; you are little over 400 now. Is that still the case? I mean, obviously, it’s evolving retail landscape. So, I just wanted to get your updated thoughts on that.

Yes. I think, generally speaking, Anthony, that hasn’t changed. We believe we are 500 plus store retailer. I think we are leaning a little bit more into ecommerce than maybe you’d have heard this two years ago. I mean, the success we are seeing with that business, the growth rates, the improving profitability picture, we see that as a big opportunity for Kirkland’s and that will continue to drive some growth for the business. So, all-in-all, in terms of store count, given the whitespace opportunity that we do have, that’s still a target for us.

Okay. And as far as the improved profitability picture. So, last year, you put in the new ecommerce supply chain center in Jackson. As far as capacity of that, are you still in good shape with that? I just wanted to get a sense of if ecommerce continues to grow at this kind of rate, when would be -- at what point would you need to open another supply chain center like that?

Yes. We are working through that, Anthony. I don’t have specific on that. For now, that Jackson facility can handle the volume. One of the reasons, as Nicole pointed out in part of her prepared remarks, we have seen an increase in our third-party direct business online which naturally kind of pulled away from the activity in our DCs, which is helping and extends the life of the space we have devoted to it. And it’s also as byproduct helping us with the profit in the channel right now, as it goes in with a lower margin but it comes out with fewer costs and fewer labor pressures and things like that. So, we are pleased with that growth. And we are looking ahead to being able to leverage the stores more on buy online pick up in store options for the customer and that will additionally help the profitability picture.

And is there any data you can share with us as far as buy online pick up in store, how much of that of your business is that?

It’s a little bit less than 60% or at least for Q2 it was.

Got it, okay. And Mike…

And that is…

Okay. I am sorry, go ahead and finish your thoughts.

Well, I was just going to say that to remind everyone that that is a Ship to Store model right now. And as we look ahead, we would migrate a significant chunk of that 60% over to a true buy online and pick up in store model where we leverage the inventory on hand or in route to those different retail locations.

Got it, okay. And Mike, earlier you mentioned that you’re looking to target the millennials more. I mean, have you done already some of that or maybe you can share some thoughts as to what you’re thinking as to how do you get to that group of customers to be more engaged with Kirkland’s?

Well, I would just say, at this point, we’re keenly focused on. We’re doing a lot of work behind the scenes in our marketing. In addition to the improvements we’re making in marketing on the day to day stuff, we’re building a plan to address this customer segment in a bigger way. We already have some pretty good activity going on with that age demographic, but we need to do more, and that branding that I pointed to will be specifically geared towards that in addition to just refreshing the overall look and feel of Kirkland’s. More to come on that but just wanted to signal that as a focal point for our marketing effort over the next couple of years, as we grow the brand.

Okay. Thank you and good luck.

Thanks, Anthony.

This concludes our question-and-answer session for today. I’d like to turn the conference back over to Mike Madden for any closing remarks.

None, just to say thank you for joining us and we look forward to reporting to you on our progress in the upcoming third and fourth quarters. Thank you.

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