Good morning, everyone, and thank you for participating in today's conference call to discuss Kirkland's financial results for the Fourth Quarter and Fiscal Year Ended January 28th, 2023. Joining us today are Kirkland's Home CEO, Steve "Woody" Woodward; EVP and CFO, Mike Madden and the company's External Director of Investor Relations, Cody Cree. Following the remarks, we'll open the call for questions. Before we go further, I'd like to turn the call over to Mr. Cree as he reads the company's Safe Harbor statement with the meaning of the Private Securities Litigation Reform Act of 1995, provides important cautions regarding forward-looking statements. Cody, please go ahead.

Thanks, Jamie. 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 and 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 April 11th, 2023. 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'd like to turn the call over to Kirkland's Home CEO, Woody Woodward. Woody, over to you.

Thank you, Cody, and good morning, everyone. It's a pleasure to be speaking with you all today. And as I announced this morning, I've provided the Board of Directors with notice that I will be retiring from my position at the end of May, and as a result, the board has commenced a CEO transition plan. It's been an honour leading this great organization since 2018. I have respect for our board and all the great colleagues I've served over these past five years. While I couldn't have predicted all the highs and lows we would face on this journey, I knew our transformation plan would take time and patience. The largest and most successful home furnishings retailers in our industry all took decades to reshape their business, build their reputation and capture market share to become the leaders they are today. So we knew this is not going to be an overnight success. In fact, the last several years have truly been some of the most challenging periods I've ever experienced throughout my career. However, I'm proud of our organization's ability to navigate this highly volatile macro environment and the resilience of our team makes me proud to serve alongside them. I firmly believe that this organization has made significant improvements across every facet of the business and is in a better position to capitalize on the opportunities that lie ahead. As our board considers its options for my successor, I will be staying as CEO through the end of May to ensure a smooth transition. Ann Joyce, a member of our board, will be stepping in as the Interim CEO. By way of background, she has served as a senior executive in many senior executive roles throughout the retail industry over the past three decades, including notable brands…

Thank you, Woody, and good morning, everybody. For the fourth quarter, net sales were $162.5 million compared to $176.2 million in the year ago quarter, which includes a 4% decline in store count and a comparable store sales decline of 6.1%. The comparable store sales result was largely driven by a year-over-year traffic decline, partially offset by an increase in the average ticket. E-commerce was 25% of total sales in the quarter, which was similar to the prior year. Breaking down sales within the quarter, comps were flat in November, followed by a decrease of 11% in December and a decrease of 8% in January. Gross profit margin declined 850 basis points to 24.8% of sales, compared to 33.3% in the prior year quarter. There are five components to this year-over-year change as follows. First, merchandise margin declined 420 basis points to 49.9% versus 54.1% in the prior year quarter. Increased discounting associated with our efforts to reduce inventory levels and sell through the holiday assortment along with higher inbound freight rates, led to this decrease. As we've previously discussed, inbound freight rates spiked in late '21 and early '22 and much of the product that sold through in Q4 carried the impact of higher freight rates and cost of goods. Second, central distribution costs increased 170 basis points to 6.3% of sales from 4.6% in the prior year quarter. Operational inefficiencies in our distribution centers resulting from elevated inventory levels and uneven product flows led to the increase. These costs spiked in the first and second quarters and were capitalized as the underlying inventory was held prior to sale. Most of the inventory that sold through during the fourth quarter was burdened by these costs. Third, store occupancy costs increased 140 basis points to 9% of sales from 7.6%…

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Jeremy Hamblin from Craig-Hallum Capital Group. Please go ahead with your question.

Thanks for taking the questions. So I wanted to start with the commentary around adjusting the merchandise assortment. And it sounds like what you've suggested is maybe you were a little too aggressive in some of the changes in merchandise assortment over the last couple of years that maybe your value customer felt somewhat neglected. In terms of that rebalancing of the assortment that you mentioned, how long do you expect that to take, what do you think that, that will do in terms of impacting your overall average ticket? You know, how do we think about that in terms of comps getting back from down high single-digits to flat or positive? How is that going to play out in terms of the mix of ticket versus transaction growth?

Well, good question, Jeremy. That's I mean we had a good insight into this year was coming and it might be a challenging year. And we also realized that maybe we pushed our furniture assortment too aggressively. And so while we're not backing off of the idea of being a complete home furnishings retailer and having the total package, we have let the customer guide us a little bit more fluently. So one, we started making these decisions that we wanted to have more opportunity at the opening price point is for two reasons. One, because that's what our customer was asking for. And number two was, you know, settling into the fact that there might be recessionary pressures or whatever the macro environment was. So starting in the fourth quarter of last year, we have purchased products in the $20 range and under to be about 40% of our assortment. Now that's skew numbers because remember that some of these are huge power skews where we might have ordered, you know, 5,000 before we've ordered 10,000. These are proven bestsellers. And not only did we buy it that way, but we've also adjusted our visual presentation in the stores to show that and make it easy for the customers that are just coming to spend $20 to $50, that these are the choices that they have. And so I think it's very clear it does build up. We've gotten some traction in the first quarter and we're enjoying that benefit and it really comes out throughout the entire year and we'll be fully set and have that equation with the 40% of our purchases in the $20 and under set for the third and fourth quarter. So we're really excited about it. And like I said, we're not reducing our emphasis. We're just letting the customer guide us now that we've got a fully laid out assortment and strategy. And we've done a really good job of bringing in these power items and key items for the balance of the year.

Hey, Jeremy, just to add on to that, because you're asking about ticket. And one thing I would say our team's been working on this. Our buys is they start flowing in toward the back half. We're going to really reflect what we talked about here today. But as it affects ticket, I think the way we're looking at this is, you know, first of all, we're still going to have a healthy assortment of higher ticket furniture in the store. But with these other items surrounding it, it's going to help us drive items per transaction better. And couple that with what we've seen in the ticket so far with the higher ticket items driving that historically. Well, now I think we have a better chance to drive IPT and conversion in the stores with this. And that's kind of how we're looking at the ticket mix here, knowing that traffic may still be difficult in the near term.

Got it. That's helpful. And then in terms of the inventory overall, so you had some nice recapture from a working capital perspective on your inventories this year. I think about plus 30 million as you go through this kind of swinging back on the product assortment. How should we be thinking about like from a cash flow perspective? You did end the year with inventories that were at least 5 million higher than what you had expected in January when you updated. How do we think about the level of inventories and from a working capital usage perspective, is that something that, you know, obviously, if you see a real acceleration of sales, then you know, that won't have as much of an impact. But should we be thinking about inventories as something that's going to be a cash usage this year or something that could also contribute to your cash flow?

Yeah, the way first of all, to touch on the ending inventory number in '22, it was a little higher, I think largely due to sales being a little underperforming in December and January. And the other thing I'll mention is transit times have gotten tighter. So our receipts were showing up a little bit earlier than they had been in previous quarters. So that that timing effect had a little bit of an impact there as well. But as I look into '23, I think you should probably think about it as neutral, I think and maybe a slight cash generator just given where we are from a store count basis as we end the year I think the way to think about it is we'll probably end the year right around the way we started it with a little bit of a, you know, obviously a peak into third quarter as we prep for the high selling season. And then that coming back down to at or a little bit below where we started is the way to think about it. But it's a traditional type of ramp up and ramp down that we didn't see in '22. We expect to see that in '23.

Got it. And then last one for me before I hop out of the queue. In terms of the store portfolio. So you closed ten locations in Q4 I think 16 or no for the year. As you take a look at where the store portfolio is today, is there any thought that maybe I'm sure that some of those stores are losing money on a four wall basis. You know is there thought that maybe you might need to trim more stores on a go forward basis or how should we be thinking about that as we look at '23?

Yeah, right now we're looking at that as kind of a maintain strategy. I mean, I think you may see a few stores drop off kind of similar to what you saw in '22. But we've done a lot of work over the last few years to get our rents in line. And I think largely that's accomplished. You know, we can still track down a few of those and get rent reductions. But I think it's a maintain thought process. And we've done some recent analysis on our store base and looking at how well traffic those centers are using some of the mobile phone data that's out there. And what it tells us is we're by and large, we're in really good centers across the board. So I think with these changes that, that we're expecting to see with our merchandise and hopefully some sales momentum as the year progresses I think we want to hold on to our store base. Now, to your point, we're constantly analyzing areas of the country, areas of the store base that we think we can improve and maybe, you know, maybe reduce our exposure. But largely I think we want to see the store base benefit from what's coming.

Got it. All right. Thanks, guys, and best wishes this year.

Thanks.

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

Yes. Good morning and thank you for taking the questions. And Woody best of luck in your pending retirement. Certainly a pleasure to work with you last few years.

Thank you.

Sure. So first as far as just going back to the fourth quarter, just curious, as far as same-store sales, were there any regional differences that you can speak of? And as far as product categories, can you maybe just highlight what perhaps worked and what, you know, what were the biggest laggards in terms of product categories?

Yeah. Anthony, in the fourth quarter, I would say from a region standpoint, things were pretty even across the board. There were really no geographic areas that were all that, you know, different than others from a merchandise standpoint. I think the big call out about the fourth quarter I think was we looked good in November. We did really well with our seasonal assortment. It performed very well in December or in November and then through Black Friday. And I think what we saw in December was the effect of a lot of cutbacks that we had to make earlier in the year in our assortment. So we kind of found ourselves in a position where the mix was a little off, just given all the cancellations and effects of really having to run that inventory down last year. So we felt like our mix got a little off and we saw that in December. So what we're doing this year to recover to that is really focusing on the seasonal by making sure it's deep enough in the key items that we know sell instituting a lot of these lower price point items that Woody mentioned across the assortment and taking advantage of that time frame between Black Friday and Christmas where we felt like we just didn't have the ammunition that we normally have. So that's kind of the take forward. And, you know, I think we'll be in a better inventory position, better merchandise mix position this year relative to last year.

Got you. Thanks for that. And then in terms of the inventory, are you pretty much now flushed out of the higher cost inventory? How should we think about that?

We pretty much are, Anthony. The freight costs had been declining all really all last year after it spiked early. And now we're in the period where most of the buys that we have on the floor and in our DCs reflect that. So right now the freight looks like it will be a benefit this year as well as the distribution center cost effectiveness. Those two spiked at about the same time and affected the seasonal selling in Q4 and then bled over a little bit into Q1. And as we work our way through the rest of the year, absent any change in the supply chain environment that seems to be through.

Got you. Okay. And then in terms of the merchandise margins, I think, Mike, you mentioned that so far, Q1 to date, they're running about 150 basis points higher than a year ago. If you could just kind of help us understand as far as, you know, if everything goes kind of according to your plan as far as, you know, being able to hit on your goals as far as this rebalanced merchandise strategy, what's kind of the potential improvement for merch margins?

Yeah. So we're talking about 150 basis points so far this quarter. And just keep in mind, last year, first quarter was our highest margin quarter. We hadn't really gotten to the point where we started discounting aggressively. So we're up against kind of the toughest comparison, if you will, on the merchandise margin. And we're eclipsing it right now so far, which is good news. And as we get into the third, the second, third and fourth quarters, we were -- we're doing a lot of discounting and we were trying to clear a lot of inventory. And we don't have that overhang this year that we did last year. So I think the possibilities there in terms of running at a higher merchandise margin for the balance of the year is there for us.

Got you. Okay. And then and lastly as far as this rebalanced merchandise strategy. So obviously I think it makes a lot of sense given the current slowdown, macro slowdown, are you looking to do more advertising? I mean, what is going to be the main way that you're looking to get people into the stores so they know that you're -- you do have more affordable price points?

That's a good question. I mean, we've given a lot of thought in terms of heading into what is kind of a recessionary like environment. And our belief here is that our promotional strategy can really be effective in driving that traffic. I mean, we've got some margin room to do discounting both at the category level, using some coupons, and then backing that up with a strong marketing message. We've already seen some things in Q1 that are working. And so we're trying to we're kind of looking at this week to week and seeing what worked and we're going to apply that going forward and with a little bit more margin to work with, I think, that will help us. And then as we get into the back half I think we'll have more of an assortment to back it up. So I think it's a lot about our promotional strategy. That's where we're really spending our time and trying to understand what's driving it and when it does, how to deploy that going forward. So that's what I would say there.

Got it. Okay. Well, thank you and best of luck.

Thanks, Anthony.

Thank you.

And our next question comes from John Lawrence from Benchmark. Please go ahead with your question.

Yeah. Good morning, guys.

Good morning.

Hey, John.

Yeah. Congrats, Woody, for a hopefully a wonderful retirement. I've enjoyed it over the last few years. Thanks.

Thank you so much, John.

Would you talk about, I mean, we talk about 40% of the mix, but we get to the second half. How much of that? What percentage would that be now as far as the value merchandise opening price point, how much of the mix would we have today?

You know, that's a good question because we are working towards getting it up to that 40%. And I want to talk about the components that make that up. But right now we're running about 30%. Traditionally, when you look at it on an annual basis, we've been around 35%. So, you know, to move that category by 5% or 6% in the overall scheme of things is pretty good. And what we did to fund that was that we went back and we picked all of our items in furniture that have been very successful and have caused us to have gains in the past years. And we really narrowed that down and we took some of those dollars out of furniture to fund this increase of new items that are more in line with our taste level, more in line with our design. But certainly, you know, below the price points that we've had and we've rebalanced our marketing that was very heavily focused last year on room settings and higher ticket and kind of said, let's do both, let's have some of that. But let's also really emphasize to our core customers that we have this new quick come in, surprise and delight, pick up something around $20 to $30 and really make happiness happen in our stores. And the stores have embraced it. Our customers are loving it. And so as those products flow in, and we actually -- not just the flow in product, but we emphasize how we show those products in the store because remember, we had that up to maybe 30% in the past, but we made it almost like a hunt that the customer had defined. Now we're putting that on table, really focusing on them and saying, here's a whole table of items under $20, if you're interested in that. And the taste level and items, they really look great. So a lot of work's gone into that. Amy Sullivan and her team have done a fantastic job about recalibrating towards what we think the customer wants right now and being able to make those adjustments, so we can reap the benefits this year.

Yes. And just quickly, Woody, would you give us just a little insight into maybe a couple of those categories that you're really aiming for or showing some promise first half of the year that stretch -- consumer is going to find a real value?

Yes. Really, there's a couple that have been ongoing successful both in the back half of last year and certainly into this year. Our customer loves newness. So our floral category has been wonderful. It kind of feeds into that lower price point coming in and getting something, whether it's a REIT or an arrangement for your table. So that's been doing really well. Our textile business continues to do really well. And our furniture business at the end of last year was very good, and this year, it's stabilized and our inventory levels are kind of where we want them to be. So we have multiples categories that are doing well. And right now it's just the balancing of making sure we think we have some payback that we need to do and some decorative accessories where our price points got a little too high and we lowered those, so that somebody can come in and buy something for their home that's fun and exciting. We've had some pluses and minuses in our wall decor business. But generally, our art business has been pretty well done for this past. And so there are definitely pluses and minuses. And I think that our stores probably look better than they've looked for a long time. If you walk in, it doesn't look like we cut our inventory. It looks like we've just really leaned into the items that we feel like the customer is desiring right now.

Great. Thanks. Good luck.

Thank you.

And ladies and gentlemen, with that, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to the management team for any closing remarks.

Yes, I'd like to just say thank you for the past 4.5 years, your support. I think that we have done so much to stabilize the ship and get us ready for the next 10 to 15 years as a value player in the home furnishings pyramid for specialty. And I just want to say thank you to everyone, thank you to every associate that's been working so hard on this transition and thanks to all of our supporters out there, and look forward to better results. Thanks.

And ladies and gentlemen that does conclude today's teleconference. You may now disconnect your lines at this time. Thank you for your participation.

Thank you.