Good morning, everyone. And thank you for participating in today's conference call to discuss Kirkland's Financial Results for the Fourth Quarter and Full Year ended January 29, 2022. Joining us today are Kirkland's President and CEO, Steve Woody Woodward; COO and CFO, Nicole Strain; and the company's external Director of Investor Relations, Cody Cree. 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. Cree 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 that this call will be available for replay through March 24, 2022. A webcast replay will also be available via the link provided in today's press release, as well as on the company's Web site at kirklands.com. Now I would like to turn the call over to Kirkland's President and CEO, Steve Woodward. Woody, over to you.

Thank you, Cody and good morning, everyone. As always, I'd like to first recognize our dedicated employees and stakeholders to continue to believe and support our efforts in executing our long-term transformation strategy. This past year has been challenging to say the least, given all the macro environment, unknowns that come with a pandemic, social unrest across the country, high inflation and now the current war in Ukraine. I'm incredibly proud of everyone stepping up to the fight and exceeding my expectations in controlling the things that we can control and executing our strategic goals at the pace of what has been challenging even in normal times. I cannot thank all of you enough for your dedication and commitment. In the past year, we've taken a series of meaningful steps to transform Kirkland's into a true home furnishings specialty retailer with high quality, high style products at affordable price points. Our advances made in diversifying our product mix, improving our direct sourcing capabilities and reinforcing our infrastructure have put us in a strong position for a healthy future. As we look back at the progress we've made, we realize we may have driven our merchandise transformation efforts faster than our ability to migrate customer base, and make the necessary changes to our customer experience and infrastructure. While we have no intention of going backwards from here or wavering on our overall strategy, we do intend to alter the pace of change within our merchandise mix and style elevation. We believe this will allow our customer acquisition efforts time to catch up. The persistent macro environment constraints seem to be having a tangible effect on our consumer. And we believe the impact is exaggerated since we are evolving our target customer product sets, sourcing and customer experience in an already difficult…

Thank you, Woody and good morning, everyone. Before we get into our results for the fourth quarter, I wanted to add to Woody's comments on our transformation progress. In 2019, we started this journey with an adjusted EPS loss of $1.39, decline in sales, gross profit of just under 27% and growing operating expenses at almost 32% of sales, excluding depreciation and impairment. In the past two years, we have closed 71 underperforming stores or over 15% of our store base, truly e-commerce by 50 million or 51%; increased landed margin by over 10 percentage points with comparable freight rates; consolidated distribution centers in Jackson, Tennessee, and reduce square feet of fixed costs by 16%, while adding our first two regional e-commerce hubs; successfully negotiated occupancy cost reductions on average of 13% per store; renewed 45 million of operating expenses and created a leaner, more nimble infrastructure; repurchased 1.8 million or 13% of our outstanding shares. To further highlight how far we've come, we ended 2021 with adjusted EBITDA of $47.8 million or 8.2% of sales. If you remove year-over-year incremental freight cost, EBITDA margin would have been 13.9% and our operating margin would have been 10.3%. Additionally, we no longer have any stores with negative four wall EBITDA. Even with the freight impact and inventory challenges, we still had our most profitable year in over a decade, which we believe is a testament to our organization and the significant progress we've made within our transformation strategy. Again, as Woody mentioned, we made decisions to move away from customers who only shop at a deep discount in order to improve margins, and we decided to close a significant portion of our stores to improve profitability. We are now in the middle of our transformation, which includes the rebuild of our…

[Operator Instructions] The first question today comes from Anthony Lebiedzinski from Sidoti.

So first as far as the commentary about the Q1 so far. Can you give us a sense as to whether March has been better so far versus February? I know there was some weather issues versus last year. So just wanted to get a little bit more details as far as I know use it for the quarter the day that's trending better than Q4, but just wanted to dig in a little bit more into what you're seeing here as of late?

Within the quarter February is a much softer comp. So we actually saw march from a comp decline be a little bit higher than February, but on a much tougher calm. So we shifted, as Woody mentioned in his script, into the furniture event in March and have been really happy with some of the results. Obviously, consumer traffic, which is impacted by all of the things that are happening in the world right now is a piece that we're not as happy with. But as far as the customers’ acceptance of the furniture and the average ticket increase that we've seen from that have been happy with those components. So within Q1, there's a little bit of noise from what was happening last year month to month.

And then speaking of furniture, could you give us a sense as to what that was for the fourth quarter for last year as far as percentage of sales, and what's your expectation is for the year? And also are you including outdoor furniture? When you speak about furniture, are you including outdoor furniture within that as well, or is that going to be separate initiative that you think you will benefit from?

I'll start and then Woody may have something to add. So our plan this year is for furniture to be 19% of our sales, and that's up about 400 basis points from where we were last year. Historically, we have not included outdoor furniture in the furniture category. But going forward, we're looking at that a little bit differently. So the comp numbers will change as we roll outdoor furniture in the future into that category.

We are trying to make sure that our furniture assortments are more in line with the specialty competitive environment and less accessory driven and more furniture driven. We also had to really step back and evaluate our quality of what we are offering. The outdoor category is a big growth opportunity for us. Luckily, we do have our outdoor furniture in stock and ready to go, which should be a win for us in April and May as that season comes on board. And then ultimately, we've just -- we are in pretty good stock situation in our furniture. So we're really optimistic that as this gets set and as customers start walking into Kirkland's, they'll see the new fresh look that we have at a great value and some of the indicators -- some of the specific pieces have been very optimistic and very promising. So, yes, we're excited. We're excited, one, to have the inventory excuse off our back and have any inventory to sell and we are also excited about how our stores look and how assortment is finally evolved into the place where we feel like we can invite customer in and have them have a wonderful experience.

And then you mentioned also that in April you will be launching a new brand awareness test in two markets. So first, how many stores does that involve, those two markets? And then as far as spending on that initiative, can you give us a sense to us to how much you plan to spend on that?

It's two of our bigger markets and also closer to home. So I think that's the reason we are starting there, Nashville and Atlanta. And at this point, we are not looking at it as spending incremental dollars. We are really trying to shift some of the performance marketing that hasn't proven as successful at acquisition efforts mainly we believe because our brand awareness is so low. And for performance marketing to be successful, people have to start with knowing your brand and knowing what you stand for. So overall not looking at it as incremental advertising year-over-year, unless it takes off quickly and we love the results and we are getting enough sales, in order to support us expanding it. But I would say, in those two markets, it's a pretty significant increase. Overall, we are just reallocating our marketing budget though.

The next question comes from John Lawrence with The Benchmark.

So Woody, would you talk a little bit, in the stores over the last couple weeks and first of all, some of the outdoor furniture appears to be, can you talk about some of that transformation appears to be a lot better quality than maybe several years ago and some of that, and first of all, is that correct?

That's absolutely correct. We had gotten into a situation where we found ourselves having the kind of quality that you would find at the big box or even the home improvement stores. And we wanted to move away from that and be more aligned with the specialty retailers where we could be interestingly styled, but at a significant lower price point. So we've kind of recalibrated our entire mix. And this is -- last year was supposed to be the test of that and we got most of our product in late this year, I feel really -- it is a great reflection of who we are where we're going and we do have different price points. We are taking a little bit of a different approach that we were including the cushion pricing with the furniture price, because of our -- sometimes our customers feel like, oh, this is the price of the furniture and then now I have to buy the cushions on top of it. So we've tried to make some adjustments that are more related to our kind of furniture shopping. Our scale is slightly smaller than maybe some of the other specialty retailers. But that seems to fit in with our consumers, whether they living in an apartment or smaller home. But yes, it is hitting the floors right now. Our first ad I think came out today in the email and I'm really proud of the way it looks. So now we have to give the consumer the chance to purchase it. We're clearly in start this year and we're really excited about it.

So just one more question for me is, are there still some -- can you comment on -- is there still some product or availability that still you're missing, or would like to fill a couple of holes from a supply standpoint?

Anthony, I think great question, because there's always something. But I feel like we've finally gotten into the position where our store looks set and we're ready to invite those new consumers into our stores. So it would be probably less obvious to the consumer. Whereas last year, we were really worried about completing big sets. Part of it was a stepping back on our strategy and feeding our collections into a set that kind of blends with the entire store. And so I think we've made really good progress on that. So yes, there's always going to be something, but I don't think that the consumer will see it. I think that they'll walk in and see complete beautiful upgrades to our furniture quality, upgrades to our styling at reasonable prices when compared with some of our specialty competition. And so I think this, just by having the constraints as a macroeconomic environment, this could be our time to shine in the next several months.

Next question comes from Matt Schwarz with MAZE Investments.

I want to make sure I heard you correctly. When you were talking about, I believe it was gross margins being down, was it 200 to 250 basis points, were you talking about the first quarter for that?

So the first half of the year and then I think the back half of the year should be up with similar amount. And it really is when we talked about the inventory flow and shipping the past few products the back half of last year, we know what we paid to ship all the things that we’ll sell for the first half of the year and it was at a higher freight rate than what we retained last year to ship the first half of the year products. But then as we go into the back half, we paid a lot of excess freight to try and expedite holiday products that was late and that goes into not expecting freight rates this year to necessarily decline. But if we manage our flow better, we should have the same similar 200 to 250 basis point upside in Q3 and Q4 and then Q1 and Q2 being down by about that much.

Matt, one of the things that we've done, and I'm proud of how we handle this, was with the increase of freight costs that happened to us in the back half of last year and early into this year. We did have to go through and take some strategic price increases that we felt like were warranted, one, just be competitive and help us with our profitability. And at the same time, we've also reduced some of our discounting, because we've worked so hard to get this new product here. We don't want to bring it in and immediately put it at a deep discount. So those two things, I think have maybe had an impact on consumers, like they're waiting to see what's going to happen. I think the whole world is doing that too. It’s like they're still waiting for us to go 50 off, because that's maybe how we've trained a lot of customers over the years. And so I think it's a change your behavior and it's also setting yourself for a future where we can be more profitable, and not have to be as deeply discounted as our pattern has been in the past.

And the reason I asked is because I know, you get into Q2 and Q3 your merchandise margins, this past year were very strong. And you still feel confident as you get into the back half that you could generate your landed margins that are actually above those levels?

Definitely in Q4. I think the 200 to 250 basis points for the back half, the bulk of that will be in Q4 with some benefit in Q3.

And then just so I have some sense of how things are working with store closures versus comps and things. For the first quarter, if comps run, let's say, similar to Q4, what would total sales be? Total sales would be down a little more than the fourth quarter?

Yes, down about 100 basis points on top of the comp.

And then just lastly, do you think that the occupancy deleverage that you experienced in the fourth quarter at that type of sales level, do you think that's pretty representative of a go forward basis for this year?

I do. I think we are not expecting to have sales be down, what we talked about in Q4 in the first part of Q1 for the full year. But I think on a -- if we are down a similar comp that amount of deleverage makes sense.

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

Thank, Operator, we really appreciate it, Betsy. We'd like to thank everyone for listening to today's call. And we look forward to speaking to all of you when we report our first quarter 2022 results. Thank you.

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