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 29th, 2023. 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. Please note, today's conference is being recorded. 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 Rocco. 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 September 13th, 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 Interim CEO, Ann Joyce. Ann, over to you.

Thank you, Cody and good morning everyone. Before we jump into the results, I want to start by expressing my gratitude For the tireless work our associates at Kirkland's are putting in to return our business to profitability. We knew these efforts were going to translate into immediate success and we remain up against difficult macroeconomic headwinds, but I am confident we are doing all the right things to write the shift and return the company to profitability. As expected, Q2 was a difficult quarter with challenging sales comparison due to prior year inventory liquidation activity. On a macro level, inflation remains a challenge as our customers continue to spend a large portion of their disposable income on necessities and experiences. This shift in consumer behavior that began after the pandemic continued to impact our traffic levels as the battle for share of wallet has become even more competitive. As a result of the difficult year-over-year comparisons and decline in traffic throughout the quarter, Q2 comparable sales were down 9.7%. As we discussed on our last call and as part of our efforts to better engage our customers, we refocused our brand voice toward value and emphasized seasonally relevant home décor, which has historically been a focal point for our brand. And as a result, our Decorative Accessories category delivered a strong comp increase. We expect continued growth in this category in the quarters to come. Additionally, we had a highly successful Christmas and July promo that drove increased demand in early season Christmas décor, which is typically a strong indicator for the back half. The performance in these categories led us to a higher year-over-year conversion rate in both channels, and that trend has continued into Q3. During the quarter, we saw promising indicators from our pivots in the…

Thank you, Ann and good morning everyone. There is no doubt that we faced a challenging quarter in Q2, but we remain focused on the future and our overall vision for the long-term success of our brand. As Ann discussed, we have been performing a deep dive into many areas of the organization to do a thorough health check of the business, a necessary step in returning to profitable growth. At our core, we are a value-based specialty home décor retailer, which means we need to constantly provide our customers with a product assortment that has a distinct point of view and includes the latest styles and trends at a great value. Most importantly, need to make sure we're communicating our style and value to the right customers, while delivering an omnichannel experience that meets her expectations when and where she wants to shop. As we recalibrate our core strategy, we needed to reaffirm why our customers choose Kirkland's Home and the competitive advantages we have in the marketplace. As we've discussed at length, we've strayed from what historically resonated with our loyal customer base and we've suffered because of it. Our entire team has done an excellent job of getting back to the basics to ensure we are keeping our finger on the pulse of our customers at all times. As discussed in the last call, we disappointed our core customer in recent years and it is our top priority to reconnect with her. We have spent time with our customers and associates in stores, online, across social media channels, and through quantitative surveys to ensure the voice of the customer is at the core of every decision we make. Our core customer finds joy decorating her home and entertaining her family, especially around the holidays. Celebration is at…

Thank you, Amy and good morning to everybody. For the second quarter, net sales were $89.5 million, that's compared to $102.1 million in the prior year quarter, which included a 5% decline in the average store count and a comparable sales decline of 9.7%. The decrease in sales was largely driven by traffic declines, both in-store and online, partially offset by an increase in conversion rates. The average transaction value was down 4% for both channels, comprised of small decreases in the average unit retail and items per transaction. Breaking down sales within the quarter, comps were down 10% in May, down 13% in June, and down 6% in July. ecommerce was 27% of total sales during the quarter compared to 28% in the prior year quarter. Stores outperformed ecommerce on a year-over-year basis with comps down 7% versus 17% for ecommerce. From a merchandise perspective, our outdoor category had the largest decline compared to the prior year. This was primarily due to later receipts in the prior year that caused a shift in the selling period from the first to the second quarter in 2022. We also saw declines in higher ticket categories with wall and furniture having the largest declines compared to the prior year. These declines were offset partially by gains in holiday and Decorative Accessories. Sales performance was relatively consistent across geographic regions with slightly better results in the Southeastern Florida and weaker results in Texas and in the West. Gross profit margin increased 140 basis points to 19.5% of sales compared to 18.1% in the prior year quarter. The key components of this year-over-year change are as follows; first, merchandise margin increased 320 basis points to 51.2% versus 48% in the prior year quarter. Lower freight rates and lower inventory levels, along with improved product…

Thank you, sir. [Operator Instructions] And today's first question comes from Jeremy Hamblin with Craig-Hallum Capital Group. Please go ahead.

Thanks for taking the question. I wanted to see if we could get a little bit more color here on the commentary on trends -- same-store sales trends, because it sounded a little mixed that you were encouraged by the early response to seasonal goods, but sensed some caution here in terms of what you saw in August. So, I was hoping you might be able to provide a little more detail maybe on what the combined same store sales was for August? And then also you noted that compares do get a little bit easier from here, wanted to see if you could gauge for us what the magnitude of the compares easing is?

Sure. I'll start Jeremy, this is Mike, and Amy can fill in. But as to trends so far in the third quarter, they continue to be tough, as I said in the prepared remarks. And I would think about it along the lines of how we performed in Q2. But keeping in mind that we are up against the initial part of the inventory liquidation, the really deep phase of it was really kicking in in August this time last year. And so even over the Labor Day weekend, we had a really strong one last year with a lot of liquidation efforts. So, we're going to be coming out of that timeframe where compares for the rest of the quarter do ease up a bit. We had -- and then kind of going deeper into the year, November was a relatively strong month for us last year, but December was very weak. And so we see more opportunity in that timeframe as we've got a better assortment, and we've got a giftable assortment coming in that will support that December timeframe, and we really just didn't have the product last year to really compete. So, that's kind of how the compares play out for the rest of the year. And--

Jeremy, the only thing I would add to that would be -- as you know we're making pivot to our category mix. And so the impact we were able to have on Q2 results and even the first part of Q3 is relatively small. So, the optimism that we're seeing in categories like Decorative Accessories and holiday become more fruitful in the back half because we were able to make larger pivots in the category penetration of those key categories as we move later into the year.

Got it. Thanks. And then in terms of -- you noted that you thought that if you returned to, like, $1.2 million in net sales per store from those the $1 million run rate, and that you had a goal to get back to mid-single-digit to high single-digit EBITDA margin. In terms of just realistically, it seems like that's still going to be a challenge in 2024 unless you really see a massive acceleration in comps. Is that something that you're thinking more of, like, 2025 type target or 2026? Just wanted to make sure that expectations weren't for like a 2024 turn of that magnitude?

Yes. I'll -- Jeremy, I don't think we can sit here and say we'd be at that level for 2024 knowing what's going on in the environment and where we stand in trying to get our customers back in the fold and all the activities that we just talked about on the call here. But I do think we can see market improvement in 2024 relative to 2023 as we have a full year's effect of the assortment changes and the marketing changes that we're talking about so that we can get back to a positive EBITDA position in 2024. How strong of a position that is will depend on just the topline and our progression there. But to get back to that mid to high single, just -- I don't think we're ready to say that's going to happen so quickly, but we are confident as we build on this next year, we can get there beyond 2024.

Got it. And then in terms of just borrowing costs expectations and thinking about where the interest rate environment is, you guys made booths earlier this year to kind of shore up, or extend out your maturity dates. How should we be thinking about, kind of, those interest costs here on a -- either a quarterly basis or an annualized basis, with where kind of rates are currently?

Yes, I would think, like -- I'm looking at the back half last year. We had interest of about a $1.2 million. This year, that's probably going to be up a few $100,000, maybe $0.5 million on top of last year for the back half just knowing where we are and where the rates are today. I do think our borrowings are going to peak out lower than last year because our inventory levels are in very good control relative to last year. So, the borrowing need this year is a little bit less as we've built up here in the season, but the rates are higher. And to your point, that will be a little bit more expense for us this year in the back half versus last year.

Got it. And then and then last one, in terms of the pivot on marketing and noting that you used to have four to six direct mailers, bringing that back to some degree. How do we think about that in terms of your operating expense budget here in the back half of the year? It sounded like you still think it's going to be down year-over-year, but only maybe modestly versus last year. Any color you can share on that?

Sure, Jeremy. I'll take that. And our marketing expense year-over-year is down roughly $5 million and we are self-funding within that current marketing budget, these pivots that we're making in the marketing strategy. As I mentioned before, just more efficiently using the dollars and targeting them to our core customer and in ways that we've used in the past, we're able to self-fund those for the balance of this year. And they'll be strategically built into a relatively flat budget as we plan for next year as well.

Yes. We're kind of aiming for about a $13 million give or take marketing number this year. We may, depending on what we see happen, over the next couple of months, that number may move around a little bit, but I think that's where we'll end up. So, that'll be down year-over-year.

Got it. Thanks for all the color and good luck with the rest of the year.

Thanks Jeremy.

Thanks Jeremy.

[Operator Instructions] Our next question today comes from John Lawrence of Benchmark. Please go ahead.

Yes. Good morning guys. Thanks for all that color. Could you give me -- just a couple of thoughts as Mike, you talk about that what's been impacted in some of those categories that you were pleased with a small in the third quarter as far as holiday and harvest? And as we move forward, just what's the delta as we get to the maximum holiday period. If it's X, what you've seen so far? To what extent does it move up into the mix as we get into peak holiday?

Hi, John. It's Amy. I'll start and Mike can add any color. As we move into the back half of the year, we did plan our most significant comp growth in our Christmas assortment within holiday. Other growth would really come from the Decorative Accessories and giftable parts of the business. So, as we mentioned earlier, we're obviously making sort of live pivot throughout the quarter. But I would say the Christmas growth of about a 5% year-over-year comp is really getting it back to a healthy percent to total. The bigger component of that being this December opportunity to really maximize on the décor and gifts. While at the same time, as I mentioned, furniture still being an important part of our business, getting it back into the teams within our brick-and-mortar assortment so that it allows space and opportunity for the holiday and giftable businesses to really shine.

Yes. It it's going to be a noticeable shift in terms of the penetration of these categories that the seasonal, the [Indiscernible] that we've talked about in Q4. And we did a, I think, a really good job of trying to go deeper in some of those key items for the season as well. So, that's something we just didn't have in place last year. So, we are optimistic about that.

And to follow that are there any guidepost of some of that area -- some of those areas you've really touched I guess they were positive to what it -- can you give any kind of sort of quantify, to what extent they were they were positive and sort of returns on that, how you're looking to measure that particular category, as far as success?

Yes. If you look specifically at the Q2 period and even early sales at the beginning of Q3, Decorative Accessories delivered a double-digit comp increase year-over-year. And so that category, in particular, will continue to grow in its penetration as we get to the balance of the year. And then the other indicator I would share that gives me a lot of optimism for our holiday products in general is we saw really fast turn and success early in the season in Halloween. And as you know, our seasonal businesses really are a high low and we promote them effectively and still ended at a solid margin rate at the end of each season. But the Halloween product in particular sold with minimal discount. And we took the same approach in the pricing strategy and the assortment mix to Christmas that gives me just a lot of optimism that we should see some of that early season selling come through as we get to the latter half of this quarter in our holiday products.

Yes. Last question for me. As you -- Amy, as you looked at that, some of those marketing efforts trying to bring back some of those customers and direct mail pieces to those long time shoppers. What was your sort of bounce back, right, -- or -- so how did you view that sort of -- I know you're changing some things and all of that, but how did you view that sort of spin to do that?

Our approach was several different layers and so we started with a customer survey that we call really fast and high levels of reaction to of our customer that was six to 12 months lapsed, that was really willing to engage and give us feedback on what she was missing from us. Additionally, the Q2 direct mail piece, which in our past, we would normally have targeted to solely our top customers. We sent it to a mix of lapsed and top customers and saw a really promising response to both, with a higher than average conversion rate on that coupon offer. And then the last example I would share would be we sent a customer letter, acknowledging that we are back to our heritage routes and that she can expect seasonally relevant, high-value décor from us for years to come and offered her a coupon offer with that. And these were our most lapsed customers and we really saw a solid response to that as well. So, I think where that leaves us is we have a very active loyalty base. Some who are currently spending at her normal rates than others who have been lapsed longer than we like, and we're really encouraged by her willingness to come back as we get the assortment and the pricing strategy right.

Great. Thanks. Good luck.

Thank you.

Thank you, John.

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

Again, I just want to reiterate our gratitude for the support of our teams, the hard work from our teams, as well as our vendors, and our stakeholders. Thank you all for joining today. We'll talk to you next quarter.

Thank you, ma'am. This concludes today's conference call. You may now disconnect your lines at this time and thank you for your participation.