Good morning, everyone, and welcome. Thank you for participating in today's conference call to discuss Kirkland's financial results for the First Quarter ended April 29, 2023. [Operator Instructions]. Joining us today are Kirkland's Home Interim CEO, Ann Joyce; President and COO, Amy Sullivan; EVP and CFO, Mike Madden; 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. Also, just a reminder, the call is being recorded. Cody, please go ahead.

Thanks, Andrew. 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 June 15, 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, Interim CEO, Ann Joyce. Ann, over to you.

Thank you, Cody, and good morning, everyone. It's great to be joining you in my new role as Interim CEO. I've spent the last 2 years as a Board member and have been in this role a little over 2 months. And while there's a great deal of work to be done, being involved at this level has reinforced my view that our best days are ahead. Before we get into the quarter's results, I want to comment on my initial impressions and talk about what's next. As discussed on our last call, we disappointed some of our loyal customers in recent years by placing too much emphasis on promoting higher ticket items. Our overall voice changed and we struggled to keep our customers engaged. We missed some seasonally relevant times of the year that had historically brought strong customer response. Kirkland's appeal has always been its ever-changing seasonally relevant product assortment that provides fashionable, curated looks, which our customers rely on to update their home decor affordably. Our highly nimble team diligently monitors the dominant home, decor trends and quickly develop our merchandise assortment accordingly. This skill allows us to provide our customers with fresh products that are relevant, stylish and within their budget. We are renewing this proven model while also expanding upon some of the recent successes that we've seen in the business. One of these successes has been the transformation of our sourcing model, allowing us to upgrade our design, enhance product quality and improve margins. We've also learned a great deal about the furniture category and what works and what doesn't work for our customers. These lessons will allow us to appropriately refine our product assortment even more, ensuring it truly fits within our model and meets our customers' expectations. At our core, we are…

Thank you, Ann, and good morning to everyone. For the first quarter, net sales were $96.9 million compared to $103.3 million in the prior year quarter, which includes a 4% decline in the average store count and a comparable store sales decline of 4.4%. The comparable store sales result was largely driven by traffic declines in both stores and online, partially offset by an increase in our customer conversion rate and an increase in our average transaction value. We saw a small channel shift during the quarter as stores performed slightly better than e-commerce on a year-over-year basis. e-commerce was 27% of total sales in the quarter compared to 28% in the prior year quarter. Breaking down sales within the quarter, comps were down 9% in February, followed by a decrease of 8% in March and an increase of 6% in April. During April, we ran a friends and family promotional event that did not occur in the prior year. The event was successful in driving to a positive comp for the month but also helpful and providing insight into how we message promotional events for the rest of the year. Store sales results were relatively consistent across geographic regions with better performance in the Southeast and Florida and weaker results in the Upper Midwest and Northeast. From a product perspective, we showed stronger results in the seasonal floral and outdoor categories. These increases were offset by decreases in furniture and wall decor. As Ann mentioned earlier, as we move into the back half of the year, we have increased our investment in categories that better highlight our value proposition and seasonal relevance. We've also invested in depth in key items within these categories as we felt that was a missed opportunity last year. Further, we plan to introduce more…

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

And Ann, it's nice to have you on the team full time. I wanted to just start by getting a little bit of an understanding of you noted traffic trends remain challenged in that your May comps or your quarters A comps were negative. Wanted to get a sense of magnitude and then as a comparison versus April, where you saw pretty solidly positive comp, your expectation in terms of compares for the remainder of the year. And whether or not you feel good about getting back to kind of a positive comp by the end of Q2 or waiting until the back half of the year?

Okay, Jeremy, I'll start with that. It's Mike. So yes, I mean, April was a strong month for us, given the event we ran. We also had a little bit easier comparison that month. And as we walked into May, we are negative. Traffic trends continue to be kind of tough, both in-store and online. But we expected that really in the second quarter given what we had to do last year to really start clearing inventory. So we view Q2 as a transition and we think as we get into the back half, more of what we talked about in the call in terms of the assortment, in terms of the promotional planning and the impact of those events will take place more in Q3 and into Q4. The depth in the seasonal buys, the allocation of inventory investment into some of these other categories that really can drive more basket are going to be really important and we think we'll be better positioned. So Q2 is definitely a transition quarter. We've got a lot to play out. We've got some events coming up in June and July that will have a big effect on how we finish that quarter. But really, our focus has been on the back half and that's where we see the opportunity, both on the sales side and the margin side. Although I will say, in Q2, margin is a big opportunity in Q2 just because of what we were doing last year to clear the inventory and we hit such a low, I think our gross profit margin in Q2 last year was 18% or so.

Yes. I was encouraged by what we believe was the customer voting on some of the voice changes and some of the product assortment changes that were in April. Also, I think that we did a better job of conversion in April. And as we build the conversion muscle through the back half of the year with what Mike just described in terms of our positioning, I'm encouraged by us being able to control what we can and get better at certain things as the year goes on.

That's helpful. Yes, it sounds like a good test case there in April. But Mike, you did get or kind of alluded to the point that I wanted to hone in on a little bit more, which was your gross margin, obviously, was really tough last year as you were clearing goods. Clearly, inventory levels are pretty tight and in much better shape. Sequentially, typically, Q2 is down from Q1. And I just wanted to get a sense maybe nearer term on where you expect gross margin to play out? I know that you have provided some color on merch margin but my assumption is that you would see pretty significant improvement on overall gross margin in Q2, but maybe sequentially down from Q1. Any additional context or color you can share there?

Yes. I think you're pretty much on it. I think our second quarter margin, just given seasonality in the business, second quarter is a little bit lower in terms of total sales dollars than Q1. So there's a deleveraging effect there. And it's also kind of a -- it's been more of a discount-heavy quarter historically. So that is true, sequentially down from Q1 is the right way to think about it. But on a year-over-year basis, I think we have more opportunity to grow the margin, both the merchandise margin and the gross margin in the second quarter and then for the rest of the year. I think what we'd like to see is our ability to get back toward that 30% number for the year. And the sales and the margin mix will determine where that ultimately shakes out but that's how we're positioning ourselves going into the back half year.

Got it. That's helpful. And then, as you've had a chance to assess the store portfolio, any changes in terms -- it sounds like you're pretty happy with the centers that you're operating in. Also sounds like you've had some opportunity maybe to renegotiate some of your lease deals. But I wanted to get a sense for, is there any thought on relocations, additional closures? It looks like maybe you've closed a couple of locations quarter-to-date, but any color you can share on your store portfolio?

Sure. We're definitely in what I would call maintenance mode in the store portfolio. We want to hold our store count up. There's a lot of changes here we talked about today that we think we'll have an enormous benefit on our store performance. And where we see a store that's in a good retail center that's around a lot of our customers, we want to make a good deal and stay. And that's how we're looking at this. We are relocating a couple of stores this year. I think it's two, and it will be later in the year as we accomplish those, but that would be better positioning successful markets that we're in. And we will do some house cleaning, I would call it, in terms of stores that are not as profitable or not profitable. And that will really come toward the end of the year. And I think it will look a lot like last year. We could close 10 to 15 stores, but they will largely be underperforming stores that we've concluded that's the right move for us to go ahead and exit. So that will come at the end of the year when most of our leases actions actually have to be dealt with. A lot of our leases really coincide with the end of our fiscal year, and we'll be working on that diligently for the rest of the year.

Got it. Thanks. Last one for me is you noted that advertising expense was down. Your overall SG&A was down year-over-year by a few million dollars. I wanted to get a sense in terms of the plan that you're going to execute here, how should we be thinking about that on a go-forward basis, particularly in the back half of the year? Are you still planning -- advertising expense down, should that normalize? And how does that impact your SG&A overall on a year-over-year basis here as we get into the second half?

Yes. I'll provide some high level and then I think we can talk also about how we're thinking about the spend itself and the effectiveness of it, but we did plan it down. In the first quarter, that difference is a little bit more striking than what you'll see for the rest of the year just because we were up against some dollars we spent on a branding test that ran in two markets. And we spent quite a bit of money on that. That was a rollout that we were testing. And we were up against that spend. So there's a chunk of that comparison I called out today that was related just to that. As we look forward, we're looking at roughly $13 million marketing spend this year that compares to a little over $18 million last year. And we're constantly working on ways to make that spend more effective and maybe I'll let Amy finish that.

Hey, Jeremy, it's Amy. So as we think about the back half of the year, particularly as it pertains to advertising budget. We very intentionally preserve dollars for Q3 and Q4 when we will be in a better position in terms of our category mix and our overall value proposition that we want to speak to the customer. Right now in Q2, we're testing a few different tactics, some from our path, some sort of future thinking ideas and marketing as we think about how to demand to drive demand. Direct mail is one that we've got out in a test right now that I feel pretty good about. And then that's something that has worked for us in the past. So I feel good that we have the dollars that we need for the back half of the year as we think about that's the time for our sales peak to come into play. So I think we're well positioned there.

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

Would you talk a little bit about just starting off maybe about the culture and some of the changes and just a deeper dive into this? I know you explained it, but this merchandise changes and known the company for a long time, but just a sense of what that customer is going to see in the store this year at holiday maybe than what they saw last year? And just a little deeper dive into those segments a little bit, please.

Sure, John. This is Ann. I'll start, and then I'll hand it over to Amy. So what I was hoping to make sure I got across is that the essence of what made Kirkland's successful in its inception is still true today, maybe even more so given the macroeconomic conditions. And that's really about the ever-changing seasonally relevant assortment. The customers relied on to be able to update their home decor affordably. No truer words. I mean I think they're more relevant today than they even were in the inception. We had some missteps. And the good news is, we learned a lot in those missteps, right? So we want to take those learnings and move them forward, specifically into furniture. As it relates to the specifics around the back half of the assortment, I want Amy to talk about that, but I do feel very encouraged by the fact that the team has been able to pivot to the back half. And even if you look at 40% of the products being under $20 and speaking that value message, we believe those messages will drive traffic in both channels. And we also believe that we will surprise and delight our customer when they come into the store and see that they can buy gifting and decorating accessories, et cetera, at a price they can afford to enjoy their holidays. And so the pivot of that and the movement of the team and the speed by which they've been able to move is pretty impressive and I think that we're well positioned for the back half. Amy, do you want to give a little bit more color around?

John, I know you've followed us for a long time, so you're really familiar with sort of our historic mixes in the back half specifically in the holiday period. And so I think it will feel very familiar to you in terms of category mix and really focused on sort of those three key time frames of the holiday season, if you think about decorating, entertaining and gifting. And we have a long history in that, that has proven to be very successful for us in the past. Over the past few years, I think the penetration that we've had in the furniture category has overshadowed some of that. We haven't walked away from that, but we need to get back to those historic levels of what the holiday business means to us in the back half of the year. So as we move into this year specifically, you'll feel the broader assortment in holiday, better depth in holiday items and then a heavier focus as Ann and Mike both mentioned in the items under $20, representing 40% of our assortment, which is also comparable to some of our best Q4s in the past. Furniture, as Ann mentioned, we've learned a ton about. It's not going away for us. But I think the breadth of the assortment got too wide. And so we are laser-focused on staying in stock and the proven items within furniture that work because we do believe it's a foundation. If you think about our store format, our customer comes to us for inspiration and how she puts the looks together and decorates her room. So it's important to us, but we want to flip back to ensuring that we're heavily focused on how she decorates, and celebrate sort of every moment throughout the year, specifically focused on Q4 right now.

Great. Thanks for that. And then, secondly, you've learned a lot over the last few years about this direct sourcing. Has the furniture direct sourcing spilled over some other -- where are the learnings that you've picked up from that? And how does that go forward?

Sure. I'll take that one. It's Amy again. So our overall direct sourcing penetration, as you've heard us mention before, it's close to half of our business. And it's really pretty evenly spread across most of our categories. And so it definitely started heavily in more of our everyday home furnishings if you think about textiles and furniture. But even this year's holiday assortment has a pretty heavy penetration in direct importing And so I would say our biggest learning and takeaway from that over the past few years has been, obviously, some improved IMU and margin out of the gate, better control of quality, better control of design and more unique products to Kirkland's. And so we will continue to leverage that. I want it to be a really natural process for the team to ensure that we're buying the best product at the best cost from the correct vendor, whether that's a direct import or an indirect import. So we're really taking the opportunity now to make sure we're managing it holistically, but it's definitely given us across all of our categories a pretty solid footing to ensure that we have unique high-quality items at a great cost.

Great. Thanks for that. Last one for me, Mike. When you look at the positive comp in April, obviously, was the promotion that hit gross margin to drive that if you x that out with a 4 comp in April, if you just split that month's out, did you see some of those cost leverage a little bit with a full comp or is it not the right way to look at that?

Yes. We certainly gave some margins in that event, but it was productive. I mean we drove margin dollars. And with a 6 comp in April, we are able to leverage a lot of most, if not all, of the expense line items that have been deleveraging quite a bit with the negative comp. So you can see it. You can see that in play when you have a month like that, the flow-through is very strong. So if we can create some momentum here in the back half that model is there for us. I mean if we can have a positive comp in that range that's going to be a good year for us. Just given how much we've taken the fixed cost structure down, we're still able to operate. We still got all that we need. So the flow-through can be strong.

At this time, this concludes our question-and-answer session. I would like to turn the call back over to Ann for closing remarks.

Thank you, Andrew. We'd like to thank everyone for listening on today's call, and we look forward to speaking with you when we report our second quarter 2023 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.