Good morning and welcome to Kirkland's Second Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] I would now like to turn the conference over to Tripp Sullivan 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 2020. On the call this morning are Woody Woodward, Chief Executive Officer; and Nicole Strain, 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 announced earlier this morning in a press release that's 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 the 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 10, 2020 and Quarterly Report on Form 10-Q filed on June 4, 2020. I'll now turn it over to Woody.

Thanks, Tripp. Once again, I would like to begin my remarks by thanking all of our Kirkland's team members. The operating performance we will discuss this morning is a direct result of their commitment to taking care of our customers and each other in our stores, distribution center, and home office. Historically, the second quarter is a tough one for Kirkland's due to category mix and seasonality. That's why this quarter was such a significant achievement. We reported a 10.2% comparable sales increase with a 77% increase in our e-com business. Calculating that comp increase solely based on the stores that were open for the entire period, comparable sales overall would have increased 16%. We had a flat comp in May and accelerating positive comp in the remainder of the quarter, and August was up low double-digits. For the first time since 2010, we were profitable on an adjusted basis in the second quarter. We also significantly narrowed our year-over-year GAAP net loss, increased our cash position, and eliminated our outstanding debt ahead of schedule. None of this was a coincidence. We earned it with a lot of heavy lifting over the past year, focused on improving merchandise assortments, increasing brand awareness, driving our omni-channel strategy, improving our infrastructure, and significantly reducing our operating costs. Last quarter, I noted that our confidence was growing on the direction of the business for the balance of the year. This improving confidence was based on the steps we took to right-size the company and make it more nimble than it's ever been. It was also based on the fact that a number of our store-based competitors are in bankruptcy or liquidation, which is allowing us to gain market share. The return of the accelerating trends we were experiencing pre-COVID in the stores and…

Thank you, Woody. As Woody mentioned, the second quarter has historically been our toughest for both top line sales and profitability. With the seasonality of our merchandise and limited outdoor selection, it has historically been a reset quarter for us between spring and harvest sets with roughly 20% of our annual sales and the lower sales deleveraging our models. Making a profit on an adjusted basis in the second quarter, coming out of an extremely disruptive first quarter, is a significant achievement for our team. Our segment is experiencing a tailwind from increased demand in home decor and home furnishings, but we believe our merchandise quality and style improvement will continue to benefit us beyond the current segment trends. I'll go through our quarter financials and our financial goals in more detail, but we used the disruption in the first quarter to accelerate planned infrastructure changes, which we expect to significantly benefit our profitability as we move forward. These improvements create a profitable model, which we expect to further leverage with continued growth in top line sales to reach our long-term financial targets. For the quarter, we had a comparable sales increase of 10.2%, which included an increase in e-commerce sales of 77.1% or a demand e-com comp increase of 86%. If we adjust for the stores we didn't open until later in the quarter, our comp sales increase was just over 16%. We had a flat comp in May, driven by partial store openings and strong e-commerce sales growth of 95% followed by double-digit comps in both June and July, July being the strongest month of the quarter for both stores and e-commerce. We continue to see a double-digit comp sales increase in August, but have a tougher comp later in the quarter, due to increased promotions in the…

Thanks, Nicole. I’m proud of how our team came together and handled the initial store closing crisis and took the opportunity to accelerate the execution of our goals. We are collectively enjoying the momentum within our sector, as well as the success of our own initiatives. I want to thank our team and our customers as they support Kirkland's. They're acknowledging how much of a cooler and more relevant brand we are becoming. Operator, now we're ready to take questions.

Thank you. [Operator Instructions] The first question will come from John Lawrence with Baraboo. Please go ahead.

Great, thank you. Congratulations, guys.

Thanks, John.

Yeah, could you – Woody, could you speak to a little bit about – let's just start with merchandising first, I mean -- when you came to Kirkland's and the vision you had to those pillars of the merchandising assortment, the furniture, the desktop – I mean the tabletop, can you sort of walk through that? Just give us a sense, sort of since year-end or maybe even a little further back of where that process is now and obviously just remind us of the process that you've been through and a little bit of a success factors that within this report that are yielding that.

Great. Thanks, John. Of course, this is my favorite topic to talk about, because I believe that as a retailer, we are what we sell. And one of the facts that I discovered early on when I came to Kirkland's just under two years ago was that we were really good at servicing a customer at the end of their decorating journey. They will come to us for a wreath ora candle or some accent, and we were very appreciative of that, but to become a real home furnishings retailer, we had to dig deep into our souls and say, what are the categories that we're missing that could help us improve on that future, and so we added some new categories and we've extremely beefed up our furniture assortment. We added tabletop knowing that there was a competitor out there that was very vulnerable and that has been wildly successful. Bedding, a little bit less successful, but we're still in the game and rugs, which is coming on pretty strong at this particular point. So, all of our new categories seem to be working, but with a couple of them being runway successes with both the tabletop and the furniture. But I always want to point out that this is definitely – it's kind of a cliché word to use the word journey, but we are on a journey of our merchandise and we are only part way there. We have so much more improvement, but the part that excites me is that the customers are already getting the parts of the improvement that we're already putting out there. They are seeing our improved quality. They are seeing our improved design. They're seeing our more mature way of handling promotions and not being so frenetic. And so, I'm really excited about the next two years to three years as we really push on additional new categories that I may not able to talk about today, but also the direct-to-consumer from a vendor and all the opportunities that we have. So, like I said, if I had to evaluate, we're probably 25% to 30% in on this journey with a lot of room for improvement for the future.

Great, thanks. And just go along with that, is there any way to measure, Woody – I mean, it's probably an unfair question because of the mix, but is there any way to look at what percentage of sales today would you say is the new merchandising plan versus the traditional Kirkland's customer product mix?

Probably hard. I mean we could take the entire tabletop business and say that that's all new. So, that's an easy one, because it's 100%, we didn't really carry that before, but hard to say because we're getting both a channel shift mix right now. We got a little -- some tailwinds from that. We've had some competitors go out that were very dominant in some of these areas. And then I think that just bringing in all these new customers into our e-commerce site and then looking at us and saying this is a cool store. This has got – you got a relevant assortment at a great value. I am going to check it out online first, and then I'm going to pop into one of the stores. Our stores look better than ever. And we've taken an initiative to really stabilize how much movement we have on the floors because what I find is that our customers come to us for consistent and stable assortments. They want to know where to go to find their candle update, they want to know where to go to find their seasonal products. And so, we really cleaned up the store and it's a much better shopping experience for our consumers.

I think I'd just add to that, there is so much noise in Q1 and Q2[ph] and breaking apart of the pieces is definitely difficult, but I do think the merchandise we've been – Woody's team has been able to touch definitely creates an overall halo effect on the rest of the stores and the rest of the merchandise, but we'll continue to monitor that as we have more stable quarters.

Yeah. And just last question and I'll jump back in, but when you look at the store base, Nicole, when you look at those 10% to 20% more reductions, I assume with this tailwind, there's a handful of stores 5% to 10% that you're waiting to see if this tailwind helps them enough to stay. Is it that clear cut or is it – what are the measuring – I mean the leases obviously are important, but what other factors go into of that store's reduction model?

Yeah, I think it's a multi-phased approach. The first is profitability and I think it's top line tailwind. It's also the new labor model and it's a margin rate that we're running with. So, I think that combined with what sort of rent terms we think we can renegotiate will play into what that number is and obviously we gave a range because it is to some degree dependent on how those stores perform from here on out.

Thanks a lot. Congrats again.

Thank you, John.

Thank you.

[Operator Instructions] The next question comes from John Lewis with Osmium Partners. Please go ahead.

Good morning, guys. Very, very strong results. So, nice work there. I guess my first question is, you guys – I think if I heard you right, Nicole, you generated around 40 million in cash for the quarter. Is that right?

Correct. Correct. 37.8 million.

37.8 million, okay. And then for the year-end cash – net cash, did you say $50 million to $60 million?

Correct.

Okay. And that's like $4 [indiscernible] the market cap. And I guess with that, have you guys thought about repurchasing stock at all? Is that come up on the potential hit-list?

Yeah, I think where we are now is, obviously, came out of Q1 and this has been a great quarter for us. There are some unknowns in the back half on what happens with COVID from here. So, I think the way we're looking at it is, our models have generated significant amount of cash, especially with earnings that – the earnings that were trending towards now, but holding off for a period of time, but definitely open to evaluating what are the things that make the most sense and have the best return for our cash. So, I would say open to all pieces, but definitely have a window of time where we want to make sure that we are conservative enough to weather whatever should happen over the next six months.

Got it. That makes sense. And then I guess my last question is, your call has been very helpful, you answered most of my questions. So, thanks for all the details. I guess my last question is, over the next two years to three years with your current plus 10% comps on same-store sales, I think you said 25% to 35% growth in e-commerce and I guess then the offset would be you close may be 40 stores to 50 stores. So should I expect a growing top line in addition to your margin targets?

I think ultimately in the two-year to three-year time frame, yes, I think we're in this period now where the store closure is accelerating faster than the e-commerce is growing, but that will level out within that time frame. So, we are taking advantage this year because we have some opportunities to be much more aggressive with landlords, but I do think that over the time frame, there will be top line growth overall.

Got it. Okay. Thank you very much, very helpful and great work.

Thank you.

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Woody Woodward for any closing remarks.

Well, thank you for both John’s on asking questions. I guess you have to have a first name of John to be able to ask a question and we certainly appreciate that, and we appreciate all the supporters that we got out in the world and we look forward to future good quarters. Thank you.

Thank you.

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