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

Thank you. Good morning. And welcome to Kirkland’s conference call to review results for the fourth 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 the 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 call, 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 both known and unknown risks and uncertainties, which may cause 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 annual report on Form 10-K filed on March 31, 2017. With that, I will turn it over to Mike Madden.

Thank you, Jeff. And thanks to everyone for joining us this morning. Fourth quarter results were in line with the update we provided in February. And our performance during the quarter highlighted some important areas of focus that we believe can improve our overall earnings production going forward. While our earnings results in 2017 were not what we had hoped, we made significant progress on investments to improve our execution and refocus our merchandise assortments, and we are seeing an impact. Average ticket is up. We’ve maintained positive convergence and we're achieving higher margins on our clearance products. And these are solid wins for our team as we continue to focus on driving these metrics and expect further benefits in 2018 as these programs mature. We got off to a very strong start in November with healthy sales of holiday décor bolstered by engaging in effective promotions and an improvement in year-over-year traffic trends. But we experienced softer traffic trends in December and that resulted in higher than anticipated promotional activity. We were able to offset some of this pressure with higher average ticket, which is positive throughout the quarter. We also experienced additional margin pressure from increases in e-commerce, shipping costs and additional store deliveries to respond to consumers’ preference to shop online during the crux of the holiday season and closer to their time of need. Revenue gains in 2017 were significantly aided by continued momentum in our e-commerce channel. Sales at Kirklands.com increased 37%, representing an acceleration in our growth rate and that was the driver in achieving positive comparable store sales for the year. We are optimistic about the trends we're seeing in the channel and we have initiatives underway to further improve the customer experience and achieve higher profitability. Our holiday seasonal assortment performed very…

Thank you, Mike. Net sales for the fourth quarter increased approximately 11% compared to the same period in the prior year or 6% on a 52-week basis. Consolidated comparable store sales increased 2%, which included 32% increase in e-commerce revenue. For the quarter, store results by regional were mix with half of our states showing positive comp sales for the quarter, the strongest of which were California and Colorado. Texas and Lusitania were among the softest. A higher average ticket offset negative store traffic during the quarter. We opened five new stores during the quarter and closed two, ending the year with 418 stores, which is a net gain of 14 stores or 3.5%. E-commerce generated $22.6 million in revenue during the quarter, accounting for approximately 10% of total revenue. This increase was driven by a combination of strong increases in Web site traffic and average order value. We also saw healthy increase in revenue derived from our third party drop ship initiatives, which continues to account for a higher portion of e-commerce revenue during the fourth quarter compared to a year ago. And again, sales via this delivery mode result in a lower initial merchandise margin that have limited overhead costs. Before I speak to operating results, let me take a minute to clarify change in presentation made during the fourth quarter, the one that affects both periods. To be more consistent with prevailing retail presentation and more closely align with U.S. GAAP, we are now including depreciation related to our supply chain and store facilities as a component of cost of sales versus depreciation expense as a standalone item. To quantify this reclassification with $5.4 million and $5 million for Q4 2017 and Q4 2016 respectively, the change in presentation had no impact on our operating income or…

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

Mike, I know you touched on somethings in the prepared comments. But can you delve a little bit more into your learnings from Q4 I guess more on what you feel you did right? How are specifically you can build on those elements in 2018? What we should see there? And then I guess any other color you could add on what you feel like you could have done better and then how you’re course correcting in those areas for this year?

Fourth quarter was an interesting quarter. We got off to a phenomenal start. I mean we were very happy with what we saw in November. And that in large part came from the success of our holiday assortment of which we brought up a planned 10% comp this year and we actually hit the plan and that represents about $60 million of business. So that was huge for us. I think where we're focused as we look to this year and how we're planning out that season is that specifically that timeframe between Black Friday and Christmas and then post-holiday as to where we can make the most improvement. And as we look at what did work within that timeframe, our move into gifting and some of the gift presentations that we had in the store worked really work. I think if we had to do it all over again, we would have brought a little deeper and devote a little bit more space to that and that's a learning. Our marketing is well. This year we've got a bit of pivot toward more of an acquisition model. And we believe that can help drive some traffic during that timeframe once we move through the year with our new digital program. And then the launch of BOPIS, I think can have a big effect as well. We will be in a better position to fulfill orders quickly for our customer as opposed to some of the delays we've experienced in the past during that timeframe. And it also gives us an opportunity to think about the assortment online during that timeframe I mentioned as to how we take best advantage of that and get orders to customers at a faster pace. And we're much better positioned to do that going into the year. So there is a number of other things but those are the key call ups that I would put out there. That and managing the margin a little bit better, I think we got a little aggressive in response to the dip in traffic, some of the dips that we saw. And I know once we get to the fourth quarter, we'll have another year under our belt in terms of managing that promotional those activities. And we've obviously put a lot of attention and effort into that in 2017 as well.

And then when will BOPIS be fully up and running?

In the back half.

And then as you think about enhancing merchandize content, I know you touched on that a little bit. But just wondering how you're thinking about differentiation and customer experience this year both in the stores and from an omni-channel perspective. Any of that color you can add there?

Well, I would just, what I would say there is on the merchandize side, we're adding some licensed product this year. I think you'll see that rolling in starting in Q2. So watch out for that. I think that's an add something that we haven't done a whole a lot of in the past. Our online capabilities will be making improvements to our mobile offering as I mentioned in the prepared remarks. And I think importantly and I called this out, we've organized our team around an effort to really innovate. And that includes a dedicated team as well as some testing that we're planning to do in our existing format that will lift up some of the merchandize presentations that we feel really good about. We feel good about the products. It's about how we show it, how we sale it and how the stores pull that off and the site pulls that off, so more to come on that, Jeff. But it is a key initiative for the company in 2018 and we're all excited about it.

And our next question comes from Brad Thomas of KeyBanc Capital Markets. Please go ahead.

Couple questions about the guidance, if I could. Can you help us think about what you all are planning from a margin perspective? How are you thinking about gross margin and operating margin in the context of the $0.50 to $0.60 earnings range, please?

On the margin side, I mentioned it in the script a bit. I mean, we feel like there is opportunity on the merchandise margin aspect of that. So we believe we can create some gain there. We’ll give some of that back though with higher transportation cost. I mean I think that's something that most retailers, if not all retailers, are feeling this year and we try to account for that in our guidance. So that leads to more of a flattish gross profit margin. And then when you add in a little leverage from the SG&A that we expect, you'll have a slight -- the modest increase in the operating margin as contemplated in the guidance here.

And then it looks like with the restatement we should probably be moving -- looks like it's about $5 million a quarter from depreciation into COGS for 1Q to 3Q?

Yes. And we're going to release an 8-K later today that will go back and retroactively restate the quarters with this re-class. So you have the exact numbers, so yes.

And then just, Mike, in terms of this backdrop where retailers that are big taxpayers are getting a nice break here. We're hearing a lot of retailers reinvest some of that. I guess just what were your discussions as a management team and among the board about reinvesting, and is there any element of reinvestments contemplated in 2018 here for you all?

I mean, one technical point here in terms of the cash impact of the tax law for us, given our seasonality and the timing of our tax payments, we'll make our tax payment in April for last year at the higher rate. And then we really won't feel the bulk of the cash flow impact of this until 2019, but obviously we’ll get the rate benefit in 2018. But same question applies and that's how do we plan on using this additional capital. And first and foremost, we're investing in the business. I’ve talked a lot about some e-commerce investments that we prioritize. I think accelerating that became possible given some of the cash flow benefit that we're going to see out of this tax law. We’ve been able to allocate both OpEx and CapEx to some of these -- we call them next-gen initiatives tests. Concept proof that we’ll do as we go through the team and identify what can be the sources of differentiation for us going forward. So it allows us to move faster on that as well. And then we also have a share repurchase program out there and that gives us more flexibility to move that along as well. So that’s the sequence that we think about this through and we’re in a healthy cash position as it is and this just gives us a little bit more flexibility.

And could you remind me what that share repurchase authorization is as we stand here today? And what share count or what level of repurchase is baked into the earnings guidance you’ve given here this morning?

So the initial authorization was for $10 million. As of today, there’s roughly $7 million of that remaining. What’s baked into the guidance is an opportunistic approach to use the remaining authorization throughout the rest of the year. So obviously, it depends on stock price in the way that we’ve built the model, but there is some baked in.

And then maybe if I could just squeeze one more in. Just I don’t think there was explicit commentary on 1Q necessarily but any update for us on how recent trends has been. Any color you could share with us on how your consumer is performing given tax reform, but also to some degree tax refunds, it look like -- maybe about week late from last year?

We track that as well and they are about a week behind where they were last year. In terms of the trends in the business, I would just characterize them as pretty right in line with the guidance that we gave for the full year. And so little bit late in fourth quarter but we’re positive so far this year.

And our next question comes from Anthony Lebiedzinski from Sidoti and Company.

So Mike, you said in the press release and I think in your prepared remarks that you made important investments in 2017, good execution, focused much on assortment. So which of these investments do you think will have the most impact on your results in fiscal ’18?

Well, I think -- well, all of the them, we think well because the timing of that throughout ‘17 was building obviously. So some of the work that we implemented on pricing and promotional activity, systemically dropped in as the year progressed. For example, the clearance margin affect started really in Q2. So we expect those margin initiatives to have a full year’s effect this year as we continue to get smarter on those. The SKU rationalization -- our SKU count is down and we’ll start the year in that position and it will be coupled with the discipline behind it. So our planning team and our merchant team is working together to maintain that level of SKU control. And so we’ll have a year's benefit of that. And we’re doing a much better job of tying the SKU positioning to the space in the store and that’s a big initiative as well as for space planning, which in our business you have to be flexible but it’s very helpful to the way we plan the business. And so all those things we think will continue to benefit us in 2018.

And also what are you longer term thoughts on the store base? Obviously, you gave guidance for fiscal '18. But with e-commerce accelerating, are you evaluating the store base ultimately as where you think that will be?

Yes, I mean we do that. We're very focused on that. We are reducing the pace of openings in 2018. And you called out probably the top reason and that's just that unabated growth that we're seeing in ecommerce, which is a positive. And so we're focused on that. We'd like to see the brick and mortar traffic trends start to come back in our favor a little bit. As I've outlined in the past, we don't have to have that positive and brick and mortar to generate comp, because we’ve had these initiatives that I described and what we've seen out of the average ticket and our ability to continue to drive conversion and keep a positive track there are able to offset that brick and mortar traffic decline. And while I am now, I’ll highlight that if you really look at the touch points that we have with customers when you combine what's happening online with what's happening in the stores, we're year-over-year higher, because the activity that we're seeing on our site. So if you rolled it all up and I understand one visit is not the same as others, they're not equal in terms of its convertible or how it converts the sales. But the touch points are up, because of our presence online. But as it relates to store growth, we'd like to see a little bit more stability on the traffic side before we expand in a bigger way. We don't want to put undue pressure on our supply chain that's been a focus of ours. And as we're progressing here, I think it's wide for us to not put that pressure on it if we don’t need to. And so those are the big reasons. And we continue to refine and improve our ability to open new stores and that's still intact. But these other factors I think lead us to want to slowdown the pace a little bit.

And also when you look at your CapEx budget that you have for fiscal '18. Can you give us a sense to how much of that going towards e-commerce? How much towards the supply chain? How much stores maybe just put in the different buckets that would be very helpful. Thank you.

Last year, I think Nicole called out that 72% was new store capital. This year it's closer to 50%. And keep in mind again that the amount of capital we spend on a new store is offset in a pretty large way by the landlord's contribution as part of the lease. So that is a growth CapEx figure. But clearly, if you look and step back and look at how we're allocating that capital, it's more on the e-commerce omni-channel side than it has been. And our group to supply chain with that because they're hand-in-hand.

And our next question is a follow-up from Jeff Van Sinderen from B. Riley FBR. Please go ahead.

Mike, you mentioned that your comps are running positive so far in Q1, which is great to hear. Is that being driven by e-comm, just wondering about that? And then, any more insight you can give us for modeling purposes on how you're thinking about the quarterly progression this year in terms of gross margin, SG&A, any other elements that maybe you can help us with there?

The first part, yes, it's being driven by e-commerce in a similar way as it was in Q4. So we were seeing a similar lift in e-commerce so far and a similar brick and mortar comp if you want to look at it that way as well. So it’s continuing to be supported and driven in large part by e-commerce. And then as far as the quarterly progression, I think Nicole highlighted on the bottom line that we expect to see some improvement year-over-year in Q1, Q3, and Q4, there are some comparison issues in Q2 that we're going to make that a little bit more difficult in comparison to LY. As far as the margin in part goes, I don't know that there is some really big differences across the quarters. In your earlier question, you asked about Q4 and performance. We obviously think there's a margin opportunity in Q4 in 2018 that may be a little bit more of an opportunity than the other quarters. We've also made some expense reductions that will affect Q1 through Q3, because they were more or less fixed cost that we pulled out. And so that should help spread it a little bit better than it has in the past. Hopefully, that's helpful for you.

And then if we could turn for a moment to direct sourcing, because that's one of the things that we saw as a pretty substantial opportunity for you. Maybe you could update us on how that’s progressing, maybe how we should expect that to impact gross margin this year? Anything you can give us there on order of magnitude timing would be helpful.

So given the lead times in the business and that’s ramping up to that, it won't really impact the margin until Q4 this year. And on a -- not a huge scale given the way we're moving into this, which again is focused on our replenishment portion of the assortment, which has more steady characteristics to it. And that in total makes up about 30% of the assortment. I don't think we'll get the entire 30% to the direct import model, but we are just going SKU by SKU and looking for the biggest opportunities and going after those first. And so as you go into 2019 is when you'll see more of an impact from that transition. Although, this year will be the first time you see a benefit and that should come in Q4.

And then just had one question on the P&L as a follow up. I think there was -- in the prerelease you mentioned of a $0.04 headwind from tax reform and severance for Q4. But I'm not sure I heard you call that out on today’s release or in the call. Is that $0.04 actually proved to be the right number of one-time costs when the final accounting was done or was there a shift there?

No, it stayed at $0.04 and it’s pretty much equally between the two of those items.

And this concludes our question-and-answer session. I would now like to turn the conference back over to Mike Madden for any closing remarks.

Thank you everyone for attending the call today and your questions. And we look forward to reporting to you in a couple of months. Thank you.

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