Good morning, everyone, and thank you for participating in today's Conference Call to Discuss Kirkland's Financial Results for the Third Quarter ended October 28th, 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. 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 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 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 December 7th, 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 diving into our results, I want to thank all of our associates at Kirkland's for their ongoing commitment to the success of this brand. This team has spent the last several months assessing and taking corrective action across every area of the business, all while preparing for the important holiday season. We knew these efforts weren't going to be easy as we remained up against difficult macroeconomic headwinds, but I believe the actions we've taken and the ones we are planning can return us -- this company to profitability. Back in June, we discussed returning to the roots of the Kirkland brand, while continuing to modernize and update where appropriate and where we've seen success. The teams have worked tirelessly to make significant changes to the product, marketing, operational effectiveness, expense management, and culture, and I want to thank them for all their efforts. Our people are our greatest assets and they are experts in their fields, they believe in this brand, and they love our customer. While the third quarter still had its challenges, we began seeing early signs that our strategic repositioning was resonating with our consumer. In fact, we experienced sequential improvements in traffic and comparable sales each month of the quarter, along with expanded gross margins. On the macro level, inflation remains a challenge for our customers, particularly in high-ticket categories, such as furniture and wall décor. However, we have been able to drive improvements in traffic and demand by focusing on lower-ticket items like decorative accessories, seasonal décor, and gifting. As a result, our omnichannel traffic declines improved from down 14% in August to down 6% in September, and down 4% in October. Our Q3 comparable sales improved from down 13% in August to down 9% in…

Thank you, Ann and good morning everyone. I would like to echo Ann's gratitude to our entire organization. I've been incredibly impressed and encouraged by the dedication and willingness to pivot and deliver results this year. On our last call, I introduced five near-term strategic initiatives that we are executing again to return to profitable growth. While we expect these to evolve as we continue to reimagine the possibilities for Kirkland, I'd like to update you on the current progress of each initiative. First, we continue to strengthen our connection to our core customer and are optimistic by the progress we are making to drive engagement and acquisition. Prior to August, our digital marketing tactics were focused heavily on website conversion and generating traffic from prior online shoppers, and we saw an average 17% year-over-year decline in online traffic. So, we made swift changes to our digital marketing strategy to focus on demographic and geographic targeting of core omnichannel customers to drive more visit online and into our brick-and-mortar locations. We were able to cut our ecommerce traffic decline from negative 17% in the first half of the fiscal year to only negative 3% in October. On the brick-and-mortar front, we improved traffic from a decline of 11% during the first half of the fiscal year to down 4% in October. In November, traffic to our stores stayed positive for the first time in 2023. Most recently, we piloted an exclusive video SMS campaign, allowing 1 million SMS subscribers access to an exclusive holiday look book and coupon offer. We achieved the largest volume of clicks and highest revenue of any SMS campaign to-date. We are thrilled with the promising early results of this innovation and look forward to further utilizing this tool as we move into the new year.…

Thank you, Amy and good morning everybody. For the third quarter, net sales were $116.4 million compared to $131 million in the prior year quarter, which included a 5% decline in the average store count and a comparable sales decline of 9.2%. The decrease in sales was driven by decline in the average ticket as well as traffic declines in both stores and online, particularly or partially offset by an increase in conversion rates in both channels. Breaking down sales within the quarter, comps were down 13% in August, down 9% in September, and down 6% in October. Ecommerce was 27% of total sales in the current and the prior year quarter. Ecommerce comp sales were down 8.5% and store comps were down 9.5%. From a merchandise perspective, the largest sales declines were in furniture, wall décor, and harvest. These declines were partially offset by gains in Decorative Accessories and strong early selling of Christmas. Sales performance was relatively consistent across geographic regions with notably better results in Florida and weaker results in Texas and the West. Gross profit margin increased 130 basis points to 23 -- or 26.3% of sales compared to 25% in the prior year quarter. The five components of this year-over-year change were as follows; first, merchandise margin increased 110 basis points to 54% versus 52.9% in the prior year quarter. Lower freight rates and inventory levels, along with improved product flow, drove the increase in merchandise margin. Second, central distribution costs decreased by 110 basis points to 6.1%. The decrease as a percentage of sales is largely due to the reversal of capitalized costs in the prior year as inventory levels declined from Q2 to Q3. With a normalized inventory flow this year, capitalized costs increased slightly along with the seasonal inventory buildup. On a…

Thank you, Mike. Before taking your questions, I wanted to reiterate my thanks to our dedicated associates for what they have accomplished in such a short period of time. To have achieved the improvements that we've talked about today took a tremendous amount of effort and determination. Although there is still much more to achieve, it is important to acknowledge the work that has improved our business trend in such a condensed timeframe. Our improved results are energizing our organization, and we have no plans of slowing down. We're heading into 2024 with a renewed sense of optimism and a plan that we believe will translate into improved financial results. I greatly appreciate all our stakeholders and the support we continue to receive as we strategically reposition the business amidst the challenging consumer environment, I firmly believe that our patients will pay off in the long run. Operator, we're now ready for Q&A.

Thank you, ma'am. Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions] And our first question today comes from Jeremy Hamblin from Craig-Hallum. Please go ahead with your question.

Thanks and congratulations on the improved results and progress against your strategic initiatives. I wanted to start with getting a better understanding of what you're seeing or what you're expecting on the margin front, particularly, you noted that you expect merch margin to continue to improve here in Q4. And I wanted to just get a sense of the potential magnitude around that. Last year, Q4 was pretty tough. There were a lot of markdowns. You made really nice progress here in Q3 to see gross margin up 140 bps. And as we look at Q4, I'm wondering in context of if you saw like a peak in Q4 gross margin of just over 33% and if we go back to 2019, it was like 29.8%. I wanted to just see if you could have a little context for what we think Q4 of this year could look like, whether that's the range or whatnot?

Thanks Jeremy, it's Mike. I'll start and others may want to chime in. I think the one big point I would make going into this is if you compare this year to last year, the way we're coming into this quarter, we came in with a much higher IMUs, where going in margin is better. And that's in part due to some of our efforts with our vendor base, but it's also due to the freight rates being lower. So, we're coming in, in a stronger position. The increase we saw in November was significant. It was a nice improvement from where we had been running. And that had actually started to build through the third quarter. So, we really started early in the fourth -- in the third quarter with some pretty heavy markdowns still moving through a lot in some of these other categories, not fully equipped with some of the changes that we've made in the assortment, and we're in a better position on that front going into Q4. So, those factors, I think, give us that feeling that we have a better chance to improve on that as we move through Q4. And yes, we were still clearing a lot of inventory into December last year that we just don't have to do this year. On the other components, we continue to improve our supply chain efficiency. I think that's going to be in our favor in the fourth quarter. And if we can get some topline momentum to continue through the rest of the quarter, I think we would get back not to those historical levels, but certainly into that 30% range in the fourth quarter on gross profit, and it will depend on the leverage and the sales results as to how well we do, plus or minus. But I just think the overall positioning is better coming into this year as you look at that to last year.

That's great. And then you also noted in your remarks that you did have some larger-ticket items that you may still have in your inventory and looking to move on from, although they're not key items here during the holiday period, it did sound like there was still some items maybe to move through as we get into 2024. And I wanted to just see if you could add a little context around what our expectation should be on that? And how long do you think some of that maybe aged inventory might linger?

Hi Jeremy, it's Amy. I'll take that and Mike can layer on if he wants to add anything else. The two areas in particular where we have higher ticket AUR inventory sort of carrying from the earlier part of the year would be in furniture and sort of all things, wall décor and art. And those categories have always been part of the Kirkland's business and will always be a part of the Kirkland's business. But as you know, earlier in the year, they were a significant penetration to the total, and that has continued to dwindle as we get into the back part of the year. I'm really comfortable with where we are in furniture as we move through the end of this year and into next year, and I think we'll be at the right balance. There's a little bit of residual particularly in the wall areas, and that's a bit of our higher ticket items from earlier in the year as well as just an overall macro decline in that category, but not significant enough that I'm terribly worried about it having a 2024 impact. As we move into this post-Christmas period, not only will we have new spring products coming in to help bring up our IMU, but we'll also use that time as sort of the post-holiday clearance period to really strategically get focused on some of that clearance hangover from earlier in the year and try to get out of that and be clean going into 2024.

Got it. That's great. And then I wanted to move on to your marketing. So, you've made some really nice pivots here on your strategy and how that messaging is being delivered to your customer base. I wanted to understand in terms of your marketing budget for 2023, I think that was down pretty meaningfully on a year-over-year basis as you guys reduce cost. I wanted to get an understanding of what that budget looks like here in Q4? And then as we look ahead into planning for 2024, what should we be expecting in terms of how that marketing budget might compare in 2024 versus 2023?

So, Jeremy, it's Amy again. Right now, we are running around 2.5% to 3% of sales for our marketing budget and we intend to hold that flat as we move into 2024. The difference is we're deploying it in more successful places. And so we've recalibrated how we're spending the marketing budget that we have and testing and learning our way into funding additional things. I mentioned during my script, the new SMS program that we're doing, we've had a lot of success there. So, that's opportunity for next year where we might put some additional funding there and really trying to think of our marketing budget similarly to an open to buy that a merchant would have and as we test and learn things that are working, funding it a little more. It's -- I'd love to grow that budget ever so slightly as sales grow to make sure that we're continuing to capitalize on the positive traffic that we're seeing right now, but we'll stay really close to it and really play it month-by-month.

And Jeremy on the numbers side of that, I mean, we are down about $5 million, give or take, year-over-year, 2023 to 2022 and in the fourth quarter, it's pretty flat. I mean we spend a little bit more in the back half, as you would imagine, and a little bit more in the fourth quarter to support the sales. But it's not going to be much different than what you've seen each quarter this year.

Great. And then I wanted to also just understand, so through -- it looks like you've seen some stability here in the store fleet, wanted to just confirm, as we make this progress back into a positive comp trends and some of the changes that you've made overall. First, wanted to understand whether or not you felt like there was any additional, like acceleration of store closures you had to do as we head into 2024 or if we kind of have just kind of some of the typical closures? One. And then part two would be just in terms of the balance sheet and how you would expect to utilize your credit line here in 2024, there's kind of a natural ebb and flow related to balance sheet and inventory needs as we progress through the year? So, you've already made some really nice paydowns on that debt line here in Q4, but I wanted to just understand what you thought you might need for your kind of peak use of that credit line into 2024? And presumably similar timing where that maxes out in Q3?

Yes. Jeremy, I'll start with the store question. I think the way to think about store fleet right now is we are maintaining. There are going to be a few closings in January. I would expect to see eight or nine closings in January, but I would consider that typical housekeeping and dealing with rent or lease expirations and renewals. So, you'll see that. But largely, we are looking at this as let's improve our position as well as we can in each location and let's consider each location a show play for us that that really drives business to those stores, but also in an omnichannel way. So, those stores are really important for the ecommerce side of the business as well. So, we are maintaining. We would like to get to a point, and that kind of leads into your second question about the liquidity and the balance sheet. We certainly want to build our liquidity position such that we can play a little more offense than we're playing right now. And that's why I cited that in the prepared remarks. I mean, we feel comfortable with our credit line and the way that works and flexes up with our build to peak. But in order for us to be really more offensive in terms of what we're trying to do to speed the turnaround and invest wisely in things that we know will work for us, we need that flexibility. And that's why we're just kind of taking a look at everything. We don't have anything to talk about yet, but we're considering how we might bolster that position throughout 2024.

And this is Ann. In addition to that, I would say, as Amy mentioned earlier about the strategy around igniting the field, it includes physically visiting every single store and understanding what are the triggers to the performance, which is not just location and demographic, but allocation and localization of product, et cetera. And anything that can affect the performance in a positive way, we're taking action on in parallel to their real estate strategy conversation, I mean, the points that Mike just made.

Got it. Thanks for the color. Congratulations and wishing you the best on a great holiday season.

Thanks Jeremy.

Thank you.

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

Good morning.

Hey John.

Congratulations on the numbers. I mean certainly we've seen tremendous change in the stores that we visited and certainly have seen that traffic and resonate across the board. So, congratulations from that standpoint. Can you either Ann or Amy either one just sort of describe a little bit when you laid out the assortment, you mentioned a little bit about it in the prepared remarks, but what -- if you look at that balance of harvest and in the second quarter, you talked about a little bit of sort of that improvement and as you moved into the third quarter, what would maybe be a couple of categories that maybe surprised you or disappointed with you as you just looked, obviously, it all looks very positive. Just trying to dial into some of those categories that may have either work better or worse than you expected?

Sure. So, specific to Q3, I mean, as we mentioned, the Decorative Accessories category really is a standout. And for us, that bases, basket sort of all of the décor accent pieces throughout the customer's home. And over the years of growing furniture, that is one of the categories that historically had been kind of our best value category. And I think the pricing, along with furniture got too high for our customers. So, we really turned that one completely upside down, got back into sort of basics and high-value, high-unit velocity items and saw a ton of success there. You've heard me mention a couple of times the impact and the importance of the seasonal business for us here. And I would say one kind of is a tale of two stories. If you think about Q3, Halloween had just a runaway success, probably the fastest and earliest season demand that we have seen for that business in my time here. And then harvest, I would say, was a little bit disappointing. Some of that, we pulled some of those sales forward into Q2. So, there was a little bit of a pull forward there. But because of the stakes that we were in, in Q3 are still dialing in our marketing strategy still being in the mix of sort of, old product strategy and new product strategy. We had to leverage harvest as a little bit of a loss leader to drive traffic and demand. And so we eroded that AUR more than I would have liked to. And then the last thing I would say is just again on those higher-ticket categories, as I mentioned on Jeremy's question as well, furniture, I feel really good about the direction that, that's heading and getting back into true value furniture for our customer. The low areas are still the ones that industry-wide, we're seeing a dip, but I think we've still got a little bit more work to do in the balance of this year to get the pricing right there. But I feel like we can get that on track as we go into 2024.

Great. Thanks for that. And last thing for me, as you look at that assortment, where do you think you are as you look into 2024 and changes deletions from the assortment, what will we see as we move through the first half of 2024?

You'll see a continuation of more important from the seasonally relevant categories. So, as you think about spring florals, making sure that we're well in stock in the smaller holidays like Valentine's and Easter. And then I would say the biggest sort of shift year-over-year, and I've alluded to this on the past couple of calls, is this notion of always something new. And so just ensuring that we have some faster-turning, lower-ticket, little trend moments that come in throughout the quarter, so, Mother's Day, different holidays that resonate with our customer. And then the other thing I would say is I mentioned the gift and sort of impulse category. And you've been with us long enough to know that used to be a really important part of our business, and we reintroduced that this Q4 and it's doing amazing. So, having that year around next year, I think is going to be some upside for us as well, both in topline sales and certainly in conversion in stores.

Great. Thanks for your time. Congratulations.

Thank you, John.

And ladies and gentlemen, at this time, this completes our question-and-answer session and concludes today's teleconference. We thank you for your participation. You may now disconnect your lines.