Good morning, everyone. And thank you for participating in today's conference call to discuss Kirkland's Financial Results for the Second Quarter ended July 31, 2021. Joining us today are Kirkland's President and CEO, Steve "Woody" Woodward; Executive Vice President and CFO, Nicole Strain; and the company's External Director of Investor Relations, Cody Slach. Following their remarks, we'll open the call for your questions. Before we go further, I would like to turn the call over to Mr. Slach as he reads the company's safe harbor statement within the meaning of the Private Securities Litigation Reform Act of 1995 that provides important cautions regarding forward-looking statements. Cody, please go ahead.

Thanks, Betsy. 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 provision 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. I'd like to remind everyone this call will be available for replay through September 9, 2021. A webcast replay will also be available via the link provided in today's press release, as well as on the company's website at kirklands.com. Now I would like to turn the call over to Kirkland's President and CEO, Woody Woodward. Woody, over to you.

Thank you, Cody. And good morning, everyone. As always, I'd like to start our call today by thanking our entire organization for their unwavering commitment to continuously providing best in class service to our customers and driving our transformation story. The progress we have made to date could not have been possible without our dedicated teams across the business. Now let's jump into the quarter. We faced headwinds that could have driven significant weakness across our business. But the steps we've taken to transition our company has driven resilience through dynamic markets like we faced in the second quarter. Looking at our total comp, we were down about 5% compared to the prior year period. Two things drove this performance. The second quarter of 2020 had unusually high comparable store sales due to the significant increase in demand for home furnishings and decor brought on by the pandemic last year. So we knew the quarter would be a tough comparison from the start. Second, we struggled to maintain inventory as we continue to be impacted by global supply chain constraints and shipping delays that are affecting our industry at large. This included some key outdoor [ph] pieces that arrived about a month later than expected, which impacted our sales in May. While our overall inventory position improved as the quarter progressed, we continue to experience volatility across specific products. We would see availability for certain items returned to normal only to experience issues that resulted in shortages for other categories. This just goes to show that the global supply chain issues continue to be unpredictable and will likely remain a challenge in the near term. But a bright spot to this situation is the fact that we have seen high sell-throughs of new, updated merchandise as soon as we get…

Thank you, Woody. And good morning, everyone. Before we dive into the P&L, I wanted to reiterate that the second quarter of 2020 had significant COVID-related tailwinds despite it being a traditionally softer quarter for our business. As such, it created a challenging quarter to compare against. With that being said, we are still very proud of the progress we've made and firmly believe in the path we are on to achieve our longer term financial targets. Now let's jump into it. Net sales were $114.8 million compared to $124.7 million in the year ago quarter. The decline was primarily a result of the tougher comp, along with 18 fewer stores. Breaking down sales within the quarter, we had a comp decline of 3.9% in May, a decline of 8.7% in June and a decline of 2.1% in July, resulting in a total decline of 5.2%, which included a decrease in e-commerce of 12.6% from the prior year. Our sales were impacted by inventory shortages, most notably in the first half of the quarter, and a decline in traffic across both our physical stores and e-commerce channel. Sales declined for the quarter, but our 2 year stack comp was approximately 5%, showing growth over pre-pandemic levels. Additionally, the prior year comp was tougher as the quarter progressed. With the 20% 2 year stacked comp in July, we are happy with how we ended the quarter. On this topic, I want to be clear that we are sacrificing some sales growth by limiting promotions, and this is intentional. As we invite new customers to our brand, we don't want to train them to only buy when there's a sizable discount. So we are remaining disciplined in our level of promotions to set appropriate expectations with these newly acquired customers and our…

Thank you. [Operator Instructions] And the first question comes from Jeremy Hamblin with Craig-Hallum Capital Group. Please go ahead.

Thanks. And congrats on the strong results. I wanted to get a little more granular into your gross margin performance, really quite impressive to be up 200 basis points sequentially. And just to understand some of the components of that, you know, in terms of thinking about how much of that sequential improvement is initial mark-ups improving versus the sourcing that you're doing and the year-over-year change that you've seen in directly sourced goods?

Yes. Taking the pieces of the 600 basis point improvement, the one thing that I would say you know, is just the timing impact and we've talked about on a couple of calls is the 170-ish basis points of timing that we talked about our inventory levels negatively impacted distribution cost in the third quarter of last year, I believe. And so getting back to normal inventory levels allowed that timing difference to flip. But the bigger piece, 380 basis points roughly, is in landed product margin. And I think - I look at this holistically, direct sourcing provides a benefit that we talked about, which is 500 basis points for everything that we move over. But really, I think, has a halo benefit because the quality and the style, our improvements - significant improvements and it allows us to sell more of them at original price. So it really is also aiding us in pulling back discounts. So for me, it becomes a bit hard to break that apart because I do think outside of just the initial cost benefit, it has a much larger benefit on our ability to operate with lower discounts. And then the other piece is store occupancy, 140 basis points. Again, that's within the range where we expect to continue to see opportunities for rent reductions. And those are the big pieces we mentioned, e-com shipping going about 500 - going about 50 basis points the other way and really that's just mix within that channel.

Great lead into the follow-up question, which is as you look at - you've done an incredible job on re-negotiating rents, rightsizing the store base. As we get into those conversations and retail in general has sustained at stronger levels, how are those lease negotiation conversations happening? I recall that - I think your average lease negotiation renewal was at about a 20% discount versus prior levels. What are you seeing today?

So I think a lot of that will be kind of answered as we get through the rest of the year. Almost all of our lease renewals happen at the end of the fiscal year. We have about a third that come up for renewal at the end of this fiscal year. The ones that I would say that we're working on now are the higher performing stores that we want to lock in early longer term. And I'd say on almost all of those, we are either locking in at flat rent, not taking escalations, or at a slight discount. And those, again, would be the ones where the centers are fully occupied and we're in great center. So I think we may be below the 20% at year end when we're negotiating, but I still think there's going to be quite a bit of favorability. And the majority of the third that come up at the end of the year, we haven't yet had an opportunity post-COVID to negotiate those. So I do think there's going to be opportunity. We'll give an update as we get a little bit closer and further into those negotiations.

Great color. As - just one other item that I wanted to follow up on, in terms of your cash, it's been a great asset. Last year, you talked about where some of those targets might be at the end of the year. What do you have kind of a target range that you're looking at? Obviously, you've been able to buy back some shares at lower levels now quarter-to-date. Do you have a target range that you're looking at just to utilize some of that balance sheet?

Yeah. So at this point, I think we end probably down $10 million to $20 million from last year and really just depends on how aggressive or share buyback is for the rest of the year. And that will be dictated by where our stock price is. I mean if our stock price remains as significantly undervalued as we believe it is now, then we will be much more aggressive on - or continue to be aggressive on our buyback.

Great. One more quick one. Can you give any color on kind of quarter-to-date trends, where you're tracking versus that mid single digit?

Yeah. I think the easiest thing to say there is last year, going into Q3, we saw in August and September really unprecedented demand for our harvest product, which meant the comps that we're comping against in August and September, really tough. And then we got to October and had basically no harvest inventory to sell. So the October comp, much, much softer. So we are down about 5% to last year in August. But similarly, when we look at that on a 2 year stack, we're up 5% from 2019. And so I think we continue to kind of carry that forward. But I think the opportunity for us to comp up is pretty heavily in October. The other thing I would say is, I feel like with all things considered, we did a decent job of getting harvest into our stores. But we are a couple of weeks behind. Sales are pretty - still pretty soft in the start of the harvest season. So definitely recoverable, but that did have an impact on August as well. So it doesn't change anything. We feel really strong. We bought harvest up this year and feel like it really helps us to be more smoothed out throughout Q3.

All right. Congrats, thanks for all the transparency and color. Best wishes.

Thank you.

The next question comes from Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

Yes. Good morning. Thanks for taking the questions. Certainly best of results even with all the cost headwinds that are out there. So first, I just wanted to get a little bit more specifics about the average ticket, which you talked about a lot. So can you give us a sense as to, on a consolidated basis, where you are with your average ticket so far this - for the quarter or year-to-date, however you do it, and how does that compare versus last year? And then with the products that you're looking to get into more on the furniture side, where do you think that average ticket could go to?

Yeah. I'll take the first part of that, and then Woody definitely can add some color on the merchandise pieces. So we mentioned up 5% for the quarter, really our expectations, which we also mentioned here in the 10% to 15%, and that's what we saw last year, as well over the prior year. And we look at that as we make these merchandise changes, it's more a mix of what we're selling and that there will be sequential years of a 10% to 15% increase, even on the conservative side. So being up 5% helped us, but it was under where we expected to be because we were light in furniture, the outdoor showed up late and those are things where we've really taken some steps to improve the higher ticket offerings.

You know, I'll just jump in with just a broader statement. A year ago, we said that as we migrate more of our assortment to direct sourcing, we would take part of that increase in gross margin and we'd add it to our financial benefits. The other half, though, is starting to really pay off. And that was where we decided very methodically to increase quality, improve our packaging across all categories. But where it's really showing up is now in some of our larger ticket categories like furniture, which we intend to grow substantially over the next 3 to 5 years. So a lot of the things that we're seeing today are the result of making good decisions over the past year and half or 2 years. And not only is our store looking more inviting, more advertising, selling a better quality, but we've also made the concerted decision to maintain opening price points. And so this is a carefully thought-out plan to make sure that we're not alienating customers that have looked at us for an opening price point, but really delighting customers that are looking for a better, best assortment. And like we said on the call, that one of the big differentiators right now is to get upholstery onto our floors, so we can look like we're a holistic home furnishings retailer. And this has been so well received initially on the first sofa that we've landed in the vegan leather. And by the way, vegan leather is just kind of a fabric. It's not leather from some tomato or something. Anyway, so we've had some really nice surprises on the customer acceptance of those products. And I think as we grow our ability to get that to customers with a white glove delivery in the future, it even enhances that more. Most of the things we're landing now are meant to be able to be picked up within the store or put into the customer's SUV. So anyway, we're really proud of where we are. It's been very methodical. And I think this AUR is going to be an important story. The other side of that is that remember that our ability to move towards this direct sourcing is unrelated to all of our competition who had done that years ago. We were a little late to the game. And so those benefits come to us in the next - this year and the next several years that other people won't be seeing.

Got it. Thanks so much for that color, Nicole and Woody. And then in terms of just looking at the back half of the year in the comparison. So last year, your third quarter gross margin was unusually high for that particular quarter. Just as we look to update our models here and keeping in mind what you said as far as the mid single digit comps for the back half as well as earnings improvement. I mean, are you looking to see - are you looking actually to have earnings improvement in both quarters, or be more weighted toward the fourth quarter when you have an easier same store comparison? Maybe if you could just give us a little bit more color as to how we should update our models, that would be great.

Yeah. So just starting with top line, I already mentioned in Q3 the opportunity really is in October. But in the back half, mid single digit comp increase, a significant opportunity exists in Q4. So even looking at that, I think the opportunity on the top line is higher in Q4. And a piece of that is really low store traffic in late November and December in the past year because of the new wave in COVID cases. But probably the bigger thing specific to us is we were down 30%, 40% in inventory, in furniture and art, and really didn't have anything for the customer to buy in a lot of cases. So that's a pretty significant opportunity that I think we'll see in the third quarter but more so in the fourth quarter. And then to margins, you mentioned because we sold harvest through without having to go past the initial discount, the actual margin rate for Q3, the landed margin is going to be tough to comp. And so that, I think we've talked about before, but we'll make that up in other areas. In Q4, a better comp, but also, I would say, on the Christmas product that we're bringing in, paying a little bit more to get that on the water. We've been able to offset some of that with pricing that we took on the Christmas product. So I would look at it and say margin is a tougher comp. And the bottom line, a tougher comp in Q3, but quite a bit more opportunity in Q4. I think bottom line Q3, we could likely be similar to last year and then Q4, more opportunity.

Okay. Got it. Thanks a lot. That definitely helps. And then a couple of other quick questions, if I may. So as far as the store base target now moving to 350 versus 300 to 350 previously, can you give us a time line as to when you would expect to get to that 350 store count?

Yeah. I think I - and obviously, every year, so we went from 60 to 70 stores that were four wall negative EBITDA to now one. So we made a lot of progress last year. We do have a group of stores that we know are not in markets that we want to be in long-term. So - but they're profitable because we have had significant rent reductions. We've changed the labor model, the margins are much better. So a little bit of that is just where is the decision point where they're down to a level of profitability that leads us to want to close it. So it's not going to happen all in 2022. I think we talked about before having a handful of closures, maybe 5 to 10 of those this year. And then I think the same thing as we move forward. And it really will just depend on where those stores continue to perform from a sales perspective.

Got it. Okay. And then last question from me. So could you give us an update on your loyalty program, where you are in terms of membership there and kind of your expectations going forward?

Yeah. I think just overall, what I'd say on the loyalty program is we're really happy that we got it re-launched. We have a new Head of Marketing now who's taking a look at the program and how that fits in with customer acquisition. And we've always talked about Loyalty 2.0, which will be much more targeted at peers and would offer different things. We're happy with the loyalty program. We've made some projects - some progress in sign-ups. But I think the potential is really remaining as we dig further into that and how we can make it more targeted and more specific.

Got it. All right. Well, thank you very much. And best of luck.

Thanks, Anthony.

Thank you.

The next question comes from John Lawrence with Benchmark. Please go ahead.

Yeah, thanks. Good morning. How are you?

Morning.

Morning.

Yeah, Woody, would you dig in just a little bit your comments about the freight situation, and on the other side we've got this direct sourcing. And you mentioned the fact that it was some of the work that you've done in the last couple of years. Yet can you comment a little bit how you're able to and describe maybe the bad side of the freight, and then the positive, how you're able to get this direct sourcing on the floor?

Yeah. This is - I can speak for everyone most likely in the home furnishing industry, and overall, just the supply chain industry has really been hard to navigate and it's still somewhat unpredictable. But I think what we're doing is we're hitting a stride of how can we win in our particular part of what we can do. And right now, unfortunately, it's paying more to get these containers on the water. We realize that not having the inventory was more damaging than paying more for the inventory getting in here, and that continues. Hopefully, there'll be a day in next year where that starts to moderate and actually works in our favor. But we've made really good decisions. So what we've done is make sure that every single shipment is prioritized. Is it an urgent shipment where we're willing to pay additional for that container? Is it something that's nice to have that fills back in our core? And so we really prioritized our harvest shipments, and that's why we're in such a good stock shape on harvest. And that will pay dividends, not only right now, but as we get into that October period, where we ran out last year that will help us bridge the gap of Christmas, the next Christmas wave, which we've also prioritized. Those two categories are important for us because customers really recognize us for that, and it brings traffic into our stores. Right now, we're pretty well set up for some of the core categories, furniture, mirrors. Any place where we've got good inventory ramp and good sales, which is a really good indicator that our merchandise direction is paying off. And I think that we're just learning how to navigate this. And it's not everywhere around the world, but certain parts are very, very complex. And so we're watching those. We're micromanaging what goes out of those ports and really making sure that we at least can communicate. If you have three containers, which one should you put on the ship right now and which one can you hold another week. So part of it is just us really doing our homework and due diligence.

Great. Thanks for that. And just that process on the direct side, much of this work has been done prior to all this disruption, I assume?

Yes. And it's something that is a work-in-progress. We had to build the teams. We picked all the - what we consider the very best agents to represent us overseas. And now the fruits of that work over the past year and half, its starting to come through and accelerate. Like we said, we'll end up in the 38% to 40% range of direct sourcing this year with the goal to continue to push that. And the residual benefit, I think, that Nicole mentioned is we get more exclusive product that is well designed. And now our stores are actually looking like a fully curated casual home furnishing store, which is our goal all the way along. But when you're buying it from a group that is - you're buying off the shelf, it's harder to make sure that our look is exactly 100% our look. And then if we can really stay behind the fact that we have exclusive product at great value.

Great. Thanks. And one last question for me. Do you have a plan or that prototype of what the remodel would look like? And have you re-modeled any of those at this point?

Yeah. We've done, over the past 2 years, a series of tests. And really, for us, you know, a lot of our stores have darker walls and darker carpet. And it's just how do we make the stores lighter and brighter so that the merchandise really shows up. So in saying we're going to refresh the majority of our store base. It's not a significant contribution for store. It really is focused on painting the walls, changing the flooring and making sure the lighting is right. And really, we've seen it make a significant difference. I mean, the comments we've had are, it looks like there's different merchandise in the stores that we refresh versus the one that haven't been. So I think it's really going to be a key part of making the changes that we're making in merchandise be reflected to the customer in the store.

Great, thanks. Congrats and good luck.

Thanks, John.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Woodward for any closing remarks.

Thank you, Betsy. We'd like to thank everyone for listening to today's call. And we look forward to speaking with you when we report our third quarter 2021 results. Thanks again for joining us.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.