Ladies and gentlemen, thank you for standing by, and welcome to the Kirkland's, Inc. Third Quarter 2013 Conference Call. [Operator Instructions] As a reminder, this call is being recorded, Thursday, November 21, 2013. I would now like to turn the conference over to Mr. Tripp Sullivan of Corporate Communications. Please go ahead, sir.

Good morning, and welcome to this Kirkland's, Inc. conference call to review the company's results for the third quarter of fiscal 2013. On the call this morning are Robert Alderson, President and Chief Executive Officer; and Mike Madden, Senior Vice President and Chief Financial Officer. The results, as well as notice of the accessibility in this conference call on a listen-only basis over the Internet, were released earlier this morning in a press release that has been covered by the financial media. 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 provisions 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, including the company's annual report on Form 10-K filed on April 18, 2013. With that said, I'll turn the call over to Mike for a review of the financial results. Mike?

Thank you, Tripp, and good morning, everybody. Our third quarter results featured a return to positive comparable store sales and another strong year-over-year increase in our merchandise margin, leading to a better-than-expected earnings performance. For the third quarter, net sales were $106.1 million, a 9.8% increase versus the prior year quarter. Comparable store sales, including e-commerce sales, increased 4.9%. Comparable brick-and-mortar sales were up 3.7%. And e-commerce sales were $5.1 million for the quarter, a 34% increase over the prior year quarter. As a reminder, each quarter during fiscal '13 starts 1 week later than the same quarter of fiscal '12, due to the retail calendar for fiscal '12 having 53 weeks versus the typical 52 weeks. For the third quarter, this shift had a positive impact on the reported comparable store sales results by approximately 50 basis points. The 3.7% comp sales increase in our brick-and-mortar stores was driven by an increase in the average ticket, combined with the slight increase in transactions. The average ticket was up 3%, driven by an increase in the average retail price per item, offset slightly by a small decline in items per transaction. The year-over-year transaction count was up nearly 1%, reflecting an increase in the conversion rate that almost overcame a 3% decline in traffic. From a geographic standpoint, sales results were fairly consistent across the country, with particular strength in the State of Florida, where we have 31 stores. Strong performance from our fall seasonal assortment, along with a bit early results from our holiday seasonal product, helped to drive the overall sales increase from a merchandising standpoint. Other significant merchandise categories showing strong positive comp performance were mirrors, wall decor, textiles and housewares. These increases were partially offset primarily by declines in art, frames and floral. We opened 9…

Thanks, Mike. We had a great quarter. Our merchandising momentum and store execution continues to drive strong and better-than-expected results. The strong 4.9% comparable sales increase was driven by low to mid-single digit increases in conversion, average ticket and item retail, which led to a small 1% gain in transactions. Importantly, traffic improved sequentially to a 3% deficit to the prior year quarter, after running down mid-to high-single digits for the first half of 2013. The traffic trend improved as the third quarter progressed and has continued into the early portion of the fourth quarter. The good news in product margin gains continued and helped drive our outperform earnings results for the subject quarter. Comparable quarterly product gross margin improved significantly and contributed to our year-to-date product gross margin gain of 210 basis points. We do expect such trends to continue in the fourth quarter, albeit, at a possibly slower rate of year-over-year increase, as most industry commentary suggests a highly promotional retail environment in the fourth quarter. Better information provided to merchants and planners from our first stage merchandising system upgrade, helped us continue to generate a merchandise offering that is resonating well with our customers. Inventory levels continue in line, despite a diminished markdown rate and a more focused and less reactive promotional schedule. As we enter the high sales period the fourth quarter, our promotional buyers should provide strong traffic and sales incentives and contribute to what we expect to be an improved Q4 performance. We don't anticipate major changes in the macroeconomic environment, although, some recent reports of improved consumer confidence polling are cautiously heartening, but understood to be temporal. Collateral effects of the Obamacare rollout on consumer confidence and attitude towards the holiday season are yet to be determined. If circumstances dictate, we will have…

[Operator Instructions] Our first question comes from the line of Mr. Brad Thomas with KeyBanc Capital Markets.

This is actually Jason standing in for Brad. And Robert, if this is your last call, it's been nice working with you. First, I just wanted to touch on your new advertising. I think you said it's in 10 markets. I was wondering if you can give any more detail around, what some of the performance, deltas between the markets with that advertising? And then how much may have contributed to your comps?

Yes, we're in '10 markets. It covers about 60 stores. So still a pretty small component of the chain. I think, we're focused on what's going on in those individual markets, the media we're using in those individual markets, which is a combination of cable and print. So we are, I guess, early on in this, and we've got a gradual approach to how we roll it out to the full chain. But I think, what we're saying at this moment is we're seeing enough of the sales lift to generate incremental margin dollars on top of the cost. And we believe and understand that as you get into this, it takes some time to mature. So we'll be monitoring, as we stay in some of these markets for an extended period of time, how much of an additional ramp-up we get. But I'm not ready to start quantifying the impact on the comps because it's still such a small slice of the chain, and we'll keep reporting on this as we go forward.

And have you meant -- have you talked about anything on what you expect for advertising spending in '14? I know you said it was up $1 million this quarter.

Yes, we said it was up $1 million this quarter. I think embedded in what we said related to Q4 would be a similar type of increase. We have not yet spoke about Q4 or 2014 other than to say, we will continue to monitor the success of what we're doing today and have a plan to gradually push it out to other markets in the chain.

Jason, I think it's clearly a crawl walk run plan. And I don't think we'll deviate from that, unless we see some out of bounds results, which I really don't expect. I think it will be incremental.

Okay. And then on e-commerce, it was about 5% of sales this quarter. I mean, do you guys have kind of a target on where you think that could be next year, 3 years, 5 years out, what kind of mix you expect?

We have internally talked about 10% goal over a period of a few years. And we have, I think, are tracking along toward that. It's becoming, as a lot of other retailers are saying, it's becoming increasingly difficult to carve it out that way because there's so many touch points and the multi channel nature of the company and where were headed. That's going to become even more cloudy as we go forward. It's all good, but it's hard to break it out in terms of the percent of the business. We will continue to do so as long as it's relevant.

And then have you seen any differences in basket size, frequency or any sort of -- I know you talked about more multichannel, any of the halo or maybe markets where you are good in e-commerce? Does that spillover in the stores or any more details around that?

Right now, the reach in e-commerce is mainly within our footprint. But you can see some good activity in markets like in the Pacific Northwest and New York City and other major metro areas, where we are starting to attract some customers, I think, as a result of our digital marketing that we're doing. Our basket size is increasing, as we've increased the skew selection on the site. And that's a key metric that we look at. The average order value is actually over $100 an order. So bigger ticket purchases online.

And then how does that compare in terms of magnitude to the basket in-store?

Basket in-store is kind of, depending on the season, between $35 and $40.

Our next question comes from the line of David Magee with SunTrust Robinson.

You mentioned that the promotional environment, I guess, just are progressing as you would expect right now. Is that -- did I hear that correctly?

Yes, I think, so far, we've seen good results. We're still pre-Black Friday, and I think the season is yet to unfold. But there has been a bit of commentary from the whole -- from the general retail sector indicating an expectation of great promotion. We've seen a little bit of it, but not enough yet to say, "Hey, that's clearly a big trend. " I think the JCPenney factor is somewhat of an unknown, and there'll be some great promotions online. There is no question about that. But so far, our business seems to indicate that we're holding well to plan.

The conversion rate right now and the transaction size, how close are those metrics to their historical high in the past? Do we have more upside there next year, or does next year, does traffic become the primary comp driver?

Well, I think, obviously, traffic will continue to be a focus, because we want to see that return to sequentially positive results. And we think there is upside there. And I believe there is upside on the conversion. And in the other metrics, I think our average unit retail has done rather nicely and our average ticket has done rather nicely, and you have to be a little bit careful about what you wish for on items per transaction, depending on what you're trying to do at the time. But I think there's upside across the board.

And lastly, do you all have the ability to sell the items on the website directly from the store inventory?

Not yet, David. But that is a -- that's an initiative that we are in the midst of. What we did...

Is that likely 2000...

...2014. What we are doing now that is an improvement is we're showing more SKUs that are available in-store only on the site. We've also added a feature where you can check the inventory of those items online and determine if it's in quantity in your home store that you designate as a shopper for us. So big improvements there. We are pushing forward toward a shared inventory mix in the near future.

And once you have that capability, I guess, you'd be able to sell clearance merchandise online perhaps more efficiently than maybe in the past?

That would be an opportunity for us, yes.

Our next question comes from the line of Jeff Black with Avondale Partners.

When you look at the gross margin, we're just curious what really drove the improvement? Was this better in-stocks in core from what you've been working on, or was it better sell-throughs in some of the fashion product? And looking at where we are on merchandise margin, given your guidance, how far is there to go there in the next few years, and I guess, in '14, what do you see as the biggest opportunities on gross margin?

Well, let me start with the last and say that I don't expect us to sequentially deliver 200 to 300 basis points over the next 4 or 5 quarters. But we do expect and are working toward reasonable incremental gains, and we think that has been driven in some respects by a better-executed core item strategy. And we've mentioned or called out specifically the great performance of seasonal in the third and early fourth quarter, which is typically higher-margin product and has limited quantity, and there is some sense of urgency involved with it. So those are all positive things. But I think you also have to look across the board at your core merchandise offering, and with the possible exception of a little bit of dip that we've had in framed art in the last couple of quarters, the rest of the merchandise mix has performed very well. And I think, controlled inventories, very controlled promotions that are very focused and provide a very nice offering to the customer, as well as moving some things that we need to move, along with a good product have contributed to an overall better margin. So I think it's a very holistic effort on the merchandising side, and better information is certainly a part of it, but you have to have the execution piece in the store. I think we have gained a lot of traction with organizing our stores much better and to making them more plausible to be shopped by the customer and more focused, and we have a big visual effort that's been going on now for the last year to coordinate merchandise, visual and execution in the stores. So all of that really has to work together to deliver the kind of sell-through that you want. And when you get the sell-through, you get the margin.

And Jeff, just to add to that. Historically speaking, that part of your question, with our guidance this year, I think, that would still imply that we're about a 100 basis points short of where we had been about 3 years ago on the merchandise margin. So that would suggest still some improvement to go from there with better tools in-house today than we had. So we think there is some upside to continue.

And then just a clarification. On the traffic, did you guys -- is it implied that the traffic is better in the test markets or the markets where you're using the advertising test?

It is. We are measuring all metrics in those markets against the control group. And traffic is one of those metrics, and that would -- that shows that we are ahead of the control group by a good margin on traffic. Primarily, we want to look at ultimately, just the sales, because conversion comes into play with some of the advertising with the print. But traffic is up to answer your question, yes.

Our next question comes from the line of Neely Tamminga with Piper Jaffray.

Here is a variety of questions I have for you. On the shared inventory initiative, Mike, if you could talk us through some of the key metrics that we're interested in, that would be really helpful. I mean, it's great that you guys are moving in that direction. Is this a first half '14 or a second half '14 initiative? And will you go by category or kind of like site-wide? That's the first part of my question. And then, secondly, related to that, if you could talk to maybe how much of the sales online have you identified as being held back because of stock-outs. So what really is kind of the topline driver by fulfilling some of these orders will be helpful. I think of situations like, given your wall decor right now, you go to your new arrivals, you're largely stocked out of wall decor on that landing page. How much of this has been kind of then holding actually your overall topline back is just the perspective that we would love to have. Related to is your SKUs per store. So you've got SKUs in your store, how much -- how many of those SKUs are actually shown on your website and how many can you actually purchase on your website? So I'll just pause there and see if you could guide us a little bit on the shared initiative.

We'll do the best I can on those. First of all, the -- what was the first part of your question, again, in shared initiatives.

The timing.

Yes, we are working on that as we speak. The -- we need some technology to be added to our order management-type technology that we're going to leverage to be able to get to that. That's a next-year project. It's unclear as to in what phases that will roll out. And you mentioned kind of starting with certain categories that may very well be a direction we head down, because that could get it in potentially sooner. But it's a next-year initiative. I don't want to say which quarter yet without -- we're still working through the work plan on that project. But it's a top priority in e-commerce next year. The stock-outs component, I think that is really one of the things we're trying to address in going to a shared inventory. I don't think, overall, we have a terrible problem with stock-outs. I think, when we have an item that starts to sell really well as we do throughout our business, you know we have lead times and sometimes it's hard to fill those back in. So I think you see some of that online, just like you see it in the stores. But if we are able to leverage the store inventory to fulfill that order and allow the customer to get it however they want it, that's going to reduce those stock-outs quite a bit. As far as the stores SKUs that are available for sale online, we now have over 4,000 SKUs online because we've added out 1,300, as I mentioned earlier, that are only available in store. So we are now showing almost a full assortment, I would say, online, both what's being sold as web exclusive items through the website and what is also being sold in the stores. So we have a good mix of that. So we're over 4,000, if you include the in-store portion and we've added 1,300 of those to the site lately. And another thing we're doing next year, just to bolt on to those few things that you did mention is to go to, in connection with this Order Management technology, to go to some third parties and have drop-ship capability, so we're not having to fulfill the orders ourselves all the time.

I would also mention that, I think, we recognize the power of leveraging that store inventory for the web, and as Mike said, top priority, but we are also attacking in different ways, too. I mean, we're going to try to -- were testing some rapid-response replenishment that might be available if we can make this work and work with our systems. So we see the need and appreciate the urgency, and I promise you, we're on it.

Just one more follow-up. Could you, in theory, launch Buy Online, Pick up in Store since you've got the local store inventory already available as a bridge before you get to that, or is that not? Do you need that incremental tuck for the order management in order to do it?

I think to do it effectively, we would need to install Order Management. I don't think we're at a point where we can say, "Hey, you can order it, but pick it up in store. " Now we do have in-store pickup of online items that represent an opportunity where you're too bulky to ship or for some reason, shipping is not feasible, and we're leveraging that opportunity really well. But on the other side of that, I don't think we can short-circuit that yet.

And Neely, one important thing and how we're thinking about it is, we've got feedback on our site we've launched, and you can see on our site where you can drop in your feedback. And we're going to react a lot to what the customer is really asking for. I mean, one of the things -- they want be able to decide how it's delivered. They want to be able to pick up an item in the store to save on their shipping. They want to use different varieties of payment, and we're getting that feedback constantly. And we're trying to pull that together into some initiatives that will facilitate a better experience.

Okay, great. And then just 2 brief questions. One would be, what other trends -- like how much are corporate sales relative to your total sales trends? And has that been an up-trending category and is that something that you guys are thinking at about possibly expanding? Does it makes sense? And then, secondly, this is really a financially sort of question. I don't think you covered this off specially, but you obviously took an increase in bonus accrual for Q3 because trends are better relative to last year. Just wondering, if you basically accounted for the trends continuing on with the guidance in place for Q4 also in that bonus accrual, or we also seeing a show bonus accruals in Q4. Did you kind take the second half in Q3?

Yes, on the bonus accrual, the main reason for the call outs, because last year, it was -- there was not one, so we've got kind of a comparison issue that we're calling out. That would really the flow -- the accrual kind of flows in according to the sales contribution, the revenue contribution by quarter, and that is in our -- that's embedded in our plan all the time, and what we try to do is gauge the payout relative to the guidance that we give. So it should match up with sales in terms of contribution and it's always trying to keep pace with what the current guidance is or forecast is for the company. And your other question about corporate sales...

Are to talking about large-quantity sales like to hotel banners....

Yes, it was like the interior designer market, who obviously uses -- Kirkland's as a resource, I'm just wondering if that's been a source of potential upside for you guys of late too with the housing market kind of stabilizing and coming back?

We think there's some upside there. It's a couple percent of sales. And we have people who, in our group, that actively worked market. But that's been a little hard for us to gain really big traction in. And I don't, honestly, I don't know what the future holds for that. I think we'll continue to offer the opportunity. And we -- it's probably priority 6 or 7 in a list of things that we're trying to do now, because the Web Initiatives along with the improvements that we're trying to do in our merchandising systems. I think, all of those things are so hugely important to the overall that we just least haven't gotten to that one as a big project yet"

[Operator Instructions] Our next question comes from the line of Joan Bogucki-Storms with Wedbush Securities.

Mike, if you could just quickly go over sort of the modules that you -- since you implemented the merchandising, the foundation system last year, what have you turned on, module-wise year-to-date, what's left for this year, and what comes sort of the beginning of 2015? And then with that, what kind of, like, potentially the -- what sort of tools does that bring to the buying team?

Okay. Yes, last year, we implemented the foundation of the Oracle system in the third quarter. And this year was all what we called internally our Phase II, which was really addressing the merchandise planning side of the capabilities of the overall suite of products in Oracle. That included merchandise financial planning, which is now in place, and we are starting to work with that and started that in the third quarter. We had previously gone live with a new allocation module and a new replenishment module. So kind of connecting that with the core strategy that we've been talking about in merchandising, you can imagine, you've got now core items that are being set up as replenishable in the system using the new technology. So allocation, replenishment, financial planning in place, location planning in place, what we have yet to implement and are working on that for the balance of the year is assortment planning and item planning, which is really the beginning part of the feed up through the entire plan. So that's really going to give the buyers and the planners that clear path from -- to build a bottoms-up plan to meet the financial plan targets for the company. There is a lot of benefit in the things we've already rolled in, because a lot of what we did in those areas of merchandise planning were very manual and are arduous. But we are happy to say we're going to be going in the next year with all those tools in place. So as we plan our seasons we're going to be much better equipped to do so.

Okay, excellent. And I apologize if this was already been asked. I had to step out for 1 second. On the whole traffic, so that, you had mentioned in the beginning of the call the transactions were slightly positive and so -- and that historically, if the conversion was working in the ticket, then traffic would follow. So how are you thinking about traffic for the fourth quarter and heading into 2015?

Well, we -- I think, you summed it up pretty well. I mean, that's what we've said that we were happy to see, for the first part of the year, the ticket be up and be consistently up. The margin to go along with that had been a positive for us, particularly in Q2 and Q3, and then the conversion rate being positive. And those indicators typically lead to better foot traffic down the road. We were pleased to see the decline in traffic go down. We were showing 6% to 7% declines in the first half and we have just reported a 3% decline in the third quarter. And I would say it's fair to say that traffic got better as the quarter progressed, so we entered the fourth quarter with a little bit better trend. So hopefully, that continues. And I don't know if I'd say what '15 is going to look like, but if we keep performing on those other metrics, I would feel good about it, absent some macro effect that I can't know what it is yet. So...

Our next question comes from the line of Anthony Lebiedzinski with Sidoti & Co. Anthony C. Lebiedzinski - Sidoti & Company, LLC: Just firstly, on just on e-commerce. So more and more online retailers are doing free shipping promotions or discounted shipping promotions that you have a goal to eventually expand that business to 10% of your overall sales. So will you need to do more of that in order to get there? And Just wanted to get better clarity as to how you're thinking about free shipping?

Well, first of all, over 40% of our orders is Pick Up In Store, so -- that is free shipping for the customer, and they look at it that way. They enjoy that. They like to go to stores too, so we get the benefit of them coming in to pick it up and not have to pay shipping for it because it's riding along the truck with everything else. So that's a big point. And then, on the promotion side, we do run free-shipping promotions from time to time. But as we see what promotions really are effective online, you'd be surprised that when we run other style promotions, other category focuses or flash sale and things like that, we actually get a better response. Anthony C. Lebiedzinski - Sidoti & Company, LLC: Okay. And that's helpful. And I think you mentioned at some point that you would look to do some third-party fulfillment. Would that be a lower margin business?

Well, yes, it would be. I mean, it'd be a different model, and because we wouldn't be holding inventory, it would be structured much differently. So it'd be lower margin, but it'd be no expense. It's just the matter of how that works out with the vendors. Anthony C. Lebiedzinski - Sidoti & Company, LLC: Got it. Okay. And just looking at the guidance for the fourth quarter, you expect same-store sales to be up 1% to 2%. The third quarter, you did 4.9%. So is that just because the third quarter comparison was easier, or was there anything else going on in terms of how you set about the guidance?

Well, the 1% to 2% was a full year... Anthony C. Lebiedzinski - Sidoti & Company, LLC: Yes, you're right. It's 2% to 4%.

It's 2% to 4%. And I think its just our reflection of what we have in our plan, in our forecast and what we were seeing coming into the quarter and our view of the calendar and how that's going to flow, and that's where we ended up. So I don't see it as any kind of comparison issue or anything like that. Third quarter, actually, on paper was an easier comparison based on last year's down 5%. Anthony C. Lebiedzinski - Sidoti & Company, LLC: I understand, okay. And lastly, it sounds like you will be pursuing the branding initiatives going forward. It is leading to incrementally higher sales, better margins for you. So with that in mind, so as you look to continue with your branding initiatives and keeping in mind maybe perhaps other costs as well for next year, what kind of same-store sales gain would you need in order to leverage your operating expenses?

Yes, I would continue to say in a 3% to 4% range, it's hard to -- like we called out today, it's 1 quarter, so it's a little more difficult to apply that to a full year, because if you looked at other quarters, you see different results. But in the one we just gave, if you excluded the marketing investment, if you kind of carved out the incentive year-over-year comparison issue, we did leverage the rest of the SG&A by about 90 basis points. And with some more growth next year, I think that would maybe help us to leverage those expenses overall even better. But there will be the investment in marketing, and we will continue to push forward with that slowly, as Robert mentioned, and smartly. And we'll talk about the impact on the SG&A. But, I think, in general, I would say about 3%.

And our final question comes from the line of David Berman with Berman Capital.

I think I've got the perfect question to ask you being the very -- the best [ph] one right at the end. There was a study recently that showed that when a CEO leaves a company, generally speaking, he leaves at the top, when the stocks are at the top and the business is at top, because he works damn hard to make he's leaving the business in a good way, et cetera, et cetera. So the question, Robert, is what do you think of that study, and how do you think Kirkland's is going to do going forward without you? And by the way, congratulations on an absolutely remarkable job. This company was almost out of business many years ago, and you've done one of the most incredible turns in retail history.

Well, thank you for all of that. I think Kirkland's is going to do very well. I think the collaborative efforts of a lot of good people over the last 3 to 4 years have been aimed toward putting a great foundation and putting a lot of capability in the hands of some very capable people, so that we could compete efficiently and productively in this sector. And I think that's where we are. And I don't know about everybody leaving at the top. I hope that, as I continue to see what happens with Kirkland's that this is the beginning rather than the peak of something, and I think that it can be and will be, and I have confidence that our Board will make the transition and hand off work really well this time. It hasn't in the past, but that doesn't mean we won't have a good one this time. So I look forward to the future, and I think everyone is poised and prepared for that. And with that said, David, thank you always for provocative questions. It's always a pleasure to get your questions.

Yeah, we had to end it up in a very positive note. I think that is terrific. Well done. Absolutely well done. And you've done a great job, and let's hope that these guys can carry on doing what you did.

Thank you. Mr. Alderson, you now may proceed with the conference.

Okay, thank you. Well, thanks for your time today and for your interest in Kirkland's, as we previously said, and we'll speak to you in March about what happens in the fourth quarter. So thanks again. Have a great holiday.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and please ask that you disconnect your lines.