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 2023 ended February 3rd, 2024. Joining us today are Kirkland's Home CEO, 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 this call 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 Danielle. 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 28th, 2024. 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 CEO, Amy Sullivan. Amy, over to you.

Thank you, Cody, and good morning, everyone. It's great to be joining today's call as the new CEO of Kirkland's Home. I'm incredibly excited in the opportunity at hand to restore our business to historical levels of operating performance and ultimately reach new heights. Having spent more than a decade of my career at this great company in various leadership roles, I've had the opportunity to see what works and what doesn't work. The strategic repositioning initiatives that we've implemented during the past year are centered around returning to our value heritage. These initiatives are a modernized version of a previous playbook that consistently delivered healthy results and we believe we can achieve those results again. Although our financial performance has lagged for some time, I wanted to remind everyone of the brand power we have as the original Kirkland with a strong following built over 50 years. This has culminated into over 1 million followers on both Instagram and Facebook, over 7 million customer transactions per year, and more than 18 million customers in our loyalty program. We remain optimistic that with the right strategy and place we can unlock significant value from our powerful Kirkland's plant. With that broader framework in mind, let's jump into how we closed out the year and the progress we're making towards our five strategic priorities. Fiscal 2023 was a year of significant change across our entire organization and we are proud to report that we saw some of our initial repositioning strategies take hold during the holiday season. Going into this period compared to the same period last year, we had improved marketing, relevant merchandising, more appropriate levels of inventory and a more effective pricing and promotion strategy. As a result, we generated a 1.7% increase in our comparable sales, a strong…

Thank you, Amy, and good morning, everyone. For the fourth quarter, net sales were $165.9 million compared to $162.5 million in the prior year quarter. The fourth quarter of fiscal 2023 included 14 weeks as compared to 13 weeks in the fourth quarter of last year. The extra week of sales this year amounted to approximately $6.6 million. Comparable sales using a 13-week comparison increased 1.7% for the quarter. The average store count was down 5% compared to the prior year quarter. The increase in comparable sales was driven by an increase in store traffic and omnichannel conversion, partially offset by a decline in the average ticket in both channels. Breaking down sales within the quarter, comps were up 1% in November, up 5% in December and down 4% in January. January business was hampered by winter weather, which disproportionately affected our store footprint. Store sales drove the overall comparable sales increase for the quarter posting an increase of 5%, while e-commerce was down 8%. E-commerce accounted for 23% of total sales in the quarter, down from 26% in the prior year quarter. From a merchandise perspective, decorative accessories, seasonal, gift and lamps all had strong increases versus the prior year as we repurposed our assortment to emphasize faster turning, lower price point options. Declines in the wall categories, furniture and housewares partially offset the gains. Sales performance was relatively consistent across geographic regions with particularly strong results in Florida. Gross profit margin increased 720 basis points to 32% of sales compared to 24.8% in the prior year quarter. The five components of this year-over-year change were as follows. First, merchandise margin increased 410 basis points to 54% versus 49.9% in the prior year quarter. Improved sell through of our seasonal inventory assortment combined with lower freight rates and a…

[Operator Instructions] First question comes from Jeremy Hamblin of Craig-Hallum Capital Group.

I wanted to come back to the commentary around near-term results. So it sounds like slightly positive comps in February. You noted that March was a bit softer, which I'm assuming means maybe flat or slightly down year-over-year. Can you just remind us, when we look at the comparisons that you have year-over-year, how April shapes up? And then, as a follow on, you noted that you expect some nice improvement on gross margin in Q1. I wanted to see if you could give us a sense of the magnitude that you might be expecting there?

Jeremy, let me give a little context on sort of March, April, and then Mike can give you some specifics. Just as a reminder, for this period that we're in right now, we're lapping pretty high furniture sales. And specifically in March, we had a really robust all furniture event last year in 2023, so I think some of our softness year-over-year is really in still that consistent sort of pressure to the decline in that furniture category, we're still seeing positive momentum in the go forward categories of growth for us, but lapping some of that higher AUR pressure that we're up against last year I think is really a big part of March as well as the calendar shift that we're in this year, and we really, as Mike said, expect that to come back around as we get closer to Easter, which is a key period for us. And then I'll let Mike comment on.

Yes. And just to add to that, I think if you look at the comps like you're asking, Jeremy, I think it's a little difficult because of the calendar shifts. You have not only a calendar shift with Easter, you've got a retail calendar shift that we're dealing with and have been talking about. On paper, actually April was the stronger month last year in the first quarter. But just looking at our promotional calendar and what we have planned, I wouldn't weigh too much into that in terms of evaluating as we progress what we're up against just because the calendar is quite different. So I'll just make that point. And then on your question about the margin, we continue to see positive trends in each component of the margin, which is encouraging. We're doing a lot of work on the merchandise margin. Amy went through a lot of that in her remarks. That's a key component to driving continued merchandise margin improvement for the rest of the year. But if you kind of dig in, so that's our merchandise margin improvement and we expect that to continue this year. But also on the supply chain side, which is included in our gross profit margin. We've eliminated a lot of fixed costs, closing two hubs last year, closing a lot of off sites. We've revised our parcel contract, so that's helping us on the e-commerce side. We're doing a really good job of managing routes to our stores and kind of cutting them back where needed to reduce the cost there. And our labor efficiency is getting better along with lower inventory levels. We expect all of that to really be in play for the year. So I think last year, we had a gross profit margin of 26.7%. We've got ample improvement or ability to improve on that for Q1. I don't think it'll be to the level of Q4 just because of the amount of sales that flow through during that time frame, but I do expect that we'll see significant improvement.

And let me just transition here to the comment around your e-commerce platform which, it sounds like, great improvement on store traffic. E-commerce is struggling a bit more and I wanted to get into a little bit more demand about the relaunch plan for 2025. So is a relaunch around e-com more just about fitting the assortment to better meet the needs of what the online shopper is? And is that when you talk about a relaunch of that platform, is would it be, you know, what portion of the assortment might be different for your e-commerce channel as opposed to what customers are going to see in stores? And then secondly, do you have from, like, a technology investment needed to do that relaunch, can you talk about anything that you think you might need to help support that as you move forward?

Sure. So at sort of the highest level, we need to go through and really define the channel strategy for e-commerce. I made a comment in my remarks that e-commerce historically at Kirkland has been more of just an extension of the brick and mortar strategy, and we recognize that the customer shopping behavior is different online. And as I shared, those higher ticket categories like furniture and wall decor have historically been a much more significant part of that business, and that predates even our prior strategy. It's always been a little heavier in those categories. And so I think we've got to do a better job at ensuring that we're adequately supporting the assortment mix needs. And some of the planning and allocation health checks that we're doing right now is going to help give our merchant team better visibility to demand forecasting online and how that differs in store. So it certainly starts with having some adjustments to the assortment strategy to ensure that we're giving that online customer what she needs. In terms of how it would compare to a brick and mortar assortment, we definitely want the overall brand experience, aesthetic, design to still be very much one brand, but we believe there's opportunity online obviously to have some white space opportunities, test into some new businesses in the future, our drop ship business is a good place to do that. So that's really sort of assortment mix part of it. And then on the technology side, our current platform is 12 years old and so most folks go and upgrade technology every 4 or 5 years, and so we are really at that point where we're behind the game, in my opinion, on really the baseline expectations of what our current customer experience should…

And then just last two for me and I'll hop out of the queue. What is your CapEx expectation for 2024? And then on the balance sheet side, what, Mike, do you think would be kind of the peak need based on your current outlook in terms of what you might draw down on your credit facility?

Yes. So looking at the CapEx, last year I think we're at 4.7% or 4.8%. I think it'll be a little bit less than that this year. We've got some projects that we are doing, but it's very much a maintenance CapEx budget year. So I expect that will be could be $3 million, $4 million range. I mentioned we're trying to be play a little offense. I mean, we talked about the e-commerce platform. We also talked about some real estate. I mean we're trying, it won't be a big program, but we're at least going through an evaluation to really target where we might be able to fill out some markets or enter some tried and true areas that we know will really work for us. So we're trying to hold back some capability to do that. On the balance sheet side, obviously, our seasonality dictates how borrowings occur in our inventory flow. And we expect a normal buildup in inventory. I think we will peak out higher than last year on the borrowings simply because we're starting higher. We do have more capacity and that capacity expands as we get deeper into the season. But how much and the timing will really have a lot to do with that, but it's going to be more than last year, but we do have additional capacity to cover that this year.

The next question comes from John Lawrence from The Benchmark Company.

Amy, can you talk a little about when you went into holiday and just, looking at the whiteboard across the categories, what would you say you give the grades to? What you expected to be really good and how that turned out from sort of the planning and allocation standpoint and presentation and, maybe what surprised you or what disappointed you in the assortment?

Sure. I would say, obviously, just from a volume perspective and another win for this category is that holiday continues, as we all know to be really a hero category for this brand. And so we had really strong results. I think the merchants of that team did a really great job of right sizing the value and buying into depth of key items. We had a handful of items in our floral category that really had a viral reaction out in the consumer marketplace. So that was a huge win for us. Strategically, we reimplemented the gift category, which you've been with us long enough to know that has historically been a faster turning, really high margins, and we were very pleased. I'm not shocked because I think we all had really high expectations of the category, but it did exceptionally well to the point of there were weeks in the peak holiday season where one individual gift item was the top item in the company. And so we really feel good about the fact that we have gotten back into that business, and we're going to maximize that all four quarters of the year. Even if you think about the first half of the year, we have a Mother's Day period that we think we really walked away from over recent years, and that could give us some real upside in the first half of the year, largely driven by that gift assortment. And then I would say another big surprise probably is just ongoing turnaround of that decorative accessories category. If you look back at sort of historical years at Kirkland, that has been a category that's really been a driver in the front half of the year and tends to fall off a little bit in holiday because of holiday decorating, but as I shared in my commentary, it had just immense growth and continues to be a really strong driver for us. And then I guess I would say in terms of sort of disappointment, obviously, the furniture and wall categories continue to turn a little slower than we would like them to. It's categories that we are down trending as well, so nothing that I don't think we can't manage through. But we were very pleased that between the in-store traffic the improvement and conversion that we were able to overcome those deficits and fourth quarter was the categories that really drove fast turning sales.

And just to, go through January a little bit, obviously, it cost you a point, point and a half. I assume that, any stores here, in the Med South where I assume closed for several days, real impact. I assume not only customers couldn't get to the store, but neither could employees, correct?

Yes. John, that was true. I mean, I think we just the way our store footprint is laid out, we took the brunt of that. So it was about $2 million, we mentioned that in Amy's remarks about it would have been a little bit closer to 3% on the comp had it been kind of a normal month. I mean, we know whether gives and it takes. So we'll be up against this next year. Hopefully, that will help January and at the end of this fiscal year, but yes.

So last question for me is when you look at the store fleet, the 9 or 10 stores you closed during the quarter, as you look at that and Amy, when you took the top spot and you and you look across the fleet of stores, are there some of those I assume with these changes over the last 6 months and improvement, there's some of those stores that are staying open that would have been closed. Is that fair?

Certainly. I mean, we've seen improvements definitely in some of our former top volume stores that sort of returned to their top spot, and that's really also kind of driving force behind this wish list of stores that we're targeting for potential new openings, too. If you go back and look at the store closures over the past 3 to 4 years at Kirkland's on an old strategy, it made sense at the time perhaps to close some of those stores because of the market they were in. But as we reposition, we were able to use some customer data to sort of overlay on our old real estate map and our new real estate map and some very obvious opportunities where there's a dense population of our current core customer where we could go back into those and really stimulate sales. So, on both ends, seeing some positivity and our sort of historic real estate strategy really resonating with the changes that we've made.

And just the idea that can you give us a sense of how many of stores are close to that you know, 1.2, 1.4, and gaining on those numbers as we speak. And, I know there's work to be done there, but a sense of some of those who've got to be approaching those numbers?

Yes. I mean, that's an average. So we're currently at like a between $1 million and $1.1 million let say. And I'm really talking about stores. We're not allocating any e-comm necessarily to that other than BOPIS. But I think to Amy's point, what we've seen, I think the takeaway for now on what the merchandise strategy and how that is feeding into our stores, what we're seeing is some of the historical strong market areas that we've been in are picking up faster than maybe some of the more recent ones that we did in, say, the last 5 years or so. So I think that speaks to a customer base that knows us, that has been with us over these years and is seeing the changes that we've implemented over the last 12 months starting to show up. And that's drawing her in, and I think that's part of the traffic increase we're seeing in the stores right now. So more to come on that, but I think that's why we think if we look at like we have built a wish list and we don't know how many opportunities will really present themselves so quickly, but we want to be there and ready to go because we feel strongly that if we fill back into some of these areas, we'll be successful.

At this time, this completes our question-and-answer session and concludes today's teleconference. Thank you for your participation. You may now disconnect your lines.