Ladies and gentlemen, thank you for standing by and welcome to Kirkland's Incorporated Third Quarter 2014 Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, Thursday, November 20, 2014. I will open the conference over to Mr. Jeff Black from SCR Partners. Please go ahead sir.

Good morning and welcome to the Kirkland's Inc. conference call to review the company's results for the third quarter of fiscal 2014. On the call this morning are Robert Alderson, Chief Executive Officer; Mike Madden, President and Chief Operating Officer and Adam Holland, Vice President of Finance and Chief Accounting Officer. The results, as well as the notice of the accessibility of this conference call in 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. These may cause Kirkland's actual results in future periods to differ materially from forecasted results. The 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 April 17, 2014. With that, I’ll turn the call over to Robert for an introduction. Robert?

Thanks Jeff, and thanks everyone for joining us today. We are very pleased to announce that Kirkland's has again delivered quarterly comp sales and earnings above expectations. I am equally pleased that our very early pre Black Friday Q4 results in November are consistent with such trends. As always the compressed and unusually -- and usually highly eventful 67-week period from Thanksgiving weekend through the first two weeks of January will largely determine the success of the holiday season and our fourth quarter. Our business continues to perform consistently both in-store and online. Customers continue to respond nicely to our high wave current style offerings and home and wall décor, gift and seasonal product. As Adam will describe in some detail momentarily, comparable product margin conversion, items per transaction and transaction trends continue to be favorable and inline with our positive direction in recent quarters. Traffic improved slightly versus the prior year consistent with our 2014 results, which is a positive trend in this retail environment which encourages business to flow to developing online channels. Mike will discuss the company's current situation in some detail on our viewpoint on the California Port of Entry of situation in his remarks. However I will say that our long experience with importing large amounts of product where timing of receipt is important as well as constant monitoring of the labor situation at the port, led us to several actions to lessen the sales impact and any slowdown in delivery especially in a very important sales run-up to Christmas. Thus while hopeful that the situation will resolve in the short run, we are as well prepared as we can be under the circumstances for both the fourth quarter and the first quarter of 2015. Our transition in leadership continues to run smoothly as we seek to fill additional leadership roles in our organization being necessary to support our proposed growth rate in stores and online sales. All in all we are at a moment of significant excitement about the state of our company and its opportunity for growth in what finally seems to be an improving economy. For just a little help and better timing from Mother Nature during the next several weeks, we should see a strong quarterly end to a very good year and continuation of the company's positive momentum. Thanks, and I will turn it over to Adam to provide some color on our financial results.

Thanks Roberts. Good morning everyone. For the third quarter net sales are 117.2 million, a 10.4% increase versus the prior year quarter. Comparable store sales including e-commerce sales increased 6.3%. Comparable brick-and-mortar sales were up 4.8%. E-commerce revenue was $7 million for the quarter, a 38% increase over the prior year quarter. At the store level, the comp sales gain was driven by a 4.5% increase in transactions coupled with a slight increase in the average ticket. The increase in transactions resulted from a 4% lift in the conversion rate combined with a slight increase in traffic. The increase in the average ticket was the result of an increase in items per transaction partially offset by a decrease in the average retail price. From a geographic standpoint, sales were generally positive across most of the country. We opened 10 new stores and closed one store during the third quarter bringing us to 337 stores at quarter's end. At the end of the quarter 2.54 million square feet under lease, a 6% increase from the prior year. Average store size was up 2% at 7,538 square feet. Gross profit margin for the third quarter increased 30 basis points to 39.0%, which is the highest Q3 gross profit margin we have had since fiscal 2009. The first component of gross profit margin -- merchandise margin increased 100 basis points to 56.3%. The increase was primarily due to a year-over-year reduction in markdowns and promotional activity. As expected inbound freight cost had little impact on merchandise margin during the quarter. Store occupancy costs were flat as a percentage of sales versus the prior year. And outbound freight costs were up 48 basis points as a percentage of sales, primarily due to an increase in the e-commerce business. We also experienced higher cost related…

Thanks, Adam. We are extremely pleased with our third quarter performance finishing above our expectations for sales and earnings. Our comparable sales increase of 6.3% was on top of 4.9% performance in the prior-year quarter and it was driven by a continuation of positive traffic, conversion and merchandise margin trends. These metrics underscore that our merchandise assortment, and our in-store key are improving as we start the cycle against better performance. Additionally our e-commerce business accelerated to a 38% growth rate during the third quarter and now accounts for about 6% of total revenue. During the third quarter each of our major product division, wall décor, home décor, seasonal and gift recorded comp increases led by home décor and seasonal. Within home décor we saw particular strength in our textiles, fragrance and housewares categories. In seasonal, our decision to increase the buy for harvest and Halloween décor was beneficial resulting in a 28% comp increase for our fall offerings which carried healthy product margins. Our merchandise margin was up 100 basis points over the prior year reflecting the performance of the seasonal assortment and a slightly lower overall markdown rate as compared to the prior year. On the real estate side, we continue to press forward to complete our new store activity for the year. We opened 10 new stores during the third quarter and closed a one store. We continue to see strong performance out of our 2014 class of new stores. Early run rates for this class are performing nicely to our internal plans. During the quarter we also finished two major projects that will provide significant long-term benefits for the company. First we completed go live on our order management system. This will support our feature multi-channel initiatives by providing a flexible foundation for handling orders, directing…

Certainly. (Operator Instructions) And the first question is from the line of Neely Tamminga with Piper Jaffray. Please go ahead.

Great, thank you, and congratulations for the phenomenal execution on this quarter you guys. Well done.

Thank you.

So question for you on merchandise margin. Could you help us a little bit more on the contextualizing of the increases you are seeing on merchandise margin as it relates to IMU versus the shrink versus -- I just want to make sure that we are really understanding kind of what's the underlying trend there for Q3 and kind of what you are expecting for Q4. So contextualizing that would be helpful. And then secondly for me on the gas prices. I have seen gas prices have come down and there's been a lot of conversation around what that might mean for the consumer. I am more interested in what that actually means from the transportation component of your cost that you think about next year? Can we remove some fuel surcharges of (inaudible) transportation agreement? So help us think to that. Thank you.

Okay Neely, on the first question as it relates to margin for Q3, we have seen a slight increase in our IMUs throughout the year, so that is a positive. But we have also seen a lower markdown rate and more control on our promotional activity. And those are the keys to what you saw in Q3. There was really no noise related to the shrink in Q3. The point we were making about the shrink in Q4 is we are up against a credit in the prior year, that based on our projections might weight about 20 basis points on our margin comparison in Q4. As it relates to Q4 proper, I think our guidance is that we would expect a slight increase in merge margin in Q4 even with that shrink impact. But it would be a little bit less than Q3 given just the comparisons we are up against and what we are trying to I guess predict a little bit as it relates to the port situation and how that might flow through the business. So that's really the margin piece. As it relates to fuel prices, we -- that adjusts at least the way it works with us. That component of our transportation expense adjusts up and down based on the underlying price of diesel in our case. And so we would avail ourselves of that lower prices as we continue to ship product. So that's how that works for us. On the inbound side, it's a little bit more static and if a longer term trend of lower fuel -- bunker fuel in that case, prices would stay down, we would benefit on that. But that's you are looking into next year and hopefully that holds.

That's helpful Mike. And just one real fine point clarification. The increase that you guys are expecting in merchandise margin, the slight increase for Q4 being less than what you saw in Q3 but yet your gross margin -- now I understand that you are guiding to slight increase in gross margin, to leverage an occupancy in theory should be greater, right, for Q4, given those sheer volume of sales that you flow through on Q4. Is that a fair way to kind of think about the potential for opportunity?

Neely, this Adam. Yes, that's right. There are other components lever much more heavily in Q4 as compared to Q3. Those right are the few points [ph].

Okay and (inaudible). Thank you and best wishes this holiday season to you all. Thank you.

Thanks Neely.

You next question is from the line of Mark Montagna with Avondale Partners. Please go ahead sir.

Hi, thank you. Just a question about e-commerce and you had spoken about pegging into supplier direct fulfillment that in-store fulfillment. Wondering what percentage of the product or what percentage of the overall fulfillment do you think will be done by in-store or supplier direct and then say the fulfillment center?

I mean, target predicting exactly where that's going to shakeout out of Mark. We are going after those two things -- next year with our order management system now in place. As it relates to in-store fulfillment about 40% of our revenue is shipped to store today. So what we are thinking there is that a piece of that would be able to be fulfilled from the stores inventory rather than us going through the mechanics of shipping it out of our DC which is kind of alleviate some pressure on our operation there and provide, I think, a better experience for the customer as they can avail themselves of the product sooner. So that's an important initiative and it has a chance to eat into a good chunk of that 40% we are talking about in terms of ship to store. On the supplier direct side, that is where we are looking really doing hand fee assortment, provide more choice of existing skews and different styles, introduce new products. So we will stage that in maybe a little slower but it's going to be important part of expanding the skew count online without having the -- again, pressure the fulfillment side too much and again if it's win-win, it give the customer more choice and it gives us a way to drive business without increasing the cost on the operation.

Okay. When you look out to next year do you see that more as a -- when it comes to margin -- operating margin expansion, do you see it more as a merchandise margin opportunity or more of a expense leverage opportunity or equal?

I would put it more on the expense leverage opportunity Mark. We have been in a period of, as I mentioned in the remarks, a period of investment, and so our expense structure has changed a bit over the last four years, and we are now gearing up to grow in a way that that will really show a lot of that leverage via real estate, e-commerce and the comp growth. So I would put more of the weight on the leverage but I would still make the point that we feel like that merge margin is not even though we are approaching our more recent peak. We don't feel like that previous peak is a cap any more because of the investments we have made in technology and all the things we have done here in the business to try to bolster that side of the business for growth. So we feel like that's still an opportunity but I would not rank it equal quite as you look ahead to next year with the leverage opportunity exists there.

Okay, and then just last question just dealing with the Christmas merchandise. You guys have an incredible assortment in display of it in the store. And I am wondering could you bring it in better -- could you bring in more this year, did you bring it in earlier, are you betting more on this inventory than last year. Just wanted to understand how you are positioning it?

Yeah, I think the -- we definitely bought it up this year, not as much as I mentioned on the fall side, we bought that up more heavily. But we did buy additional seasonal product this year. We brought it in maybe a little earlier, but it was about like last year. And we are exited about the assortment. We think that a lot of the big weeks are ahead of us here yet but they'll get about where we are.

Okay, excellent, thank you.

Next question is from the line of David Magee with SunTrust. Please go ahead.

Yeah, hi everybody. And congratulations on a good quarter.

Thank you David.

Thank you David.

I wanted to ask a couple of things. One is it seems like one of the themes come out third quarter earnings for retailers is some topline upsize but also commentary about promotional environment being worse year to year. And it looks like that you guys are almost unique and not feeling that same sort of pressure right now. Is that because of you have the proprietary nature of your products or is there something else at play here that sort of providing that mode?

I think that proprietary nature does provide us some insulation. I don't think we are insulated from promotional environment in the fourth quarter that reaches everybody. And we mentioned it in our comments, I think it will be a highly promotional season. Will it be any different that last year for us, not sure but going in, we don't see a big difference and we prepared our promotional calendar accordingly.

Secondly the e-commerce growing faster and been at 6% of sales overall. Have you detected any sort of cannibalization -- obviously we can't see the numbers here because your comps are strong but is there any concern as you get closer to say 10% that maybe [inaudible] overall some from ecommerce.

I think to say that there is no cannibalization is incorrect. We certainly knew that going in when we launched the site four years ago. So it's just providing our customers another way to engage with us. And based on that, we take in kind of slower approach maybe to building that business up. We are up to 6%. We are not trying to get the 10% next quarter or trying to get the 10% in a way that keeps the site profitable and complements what we are doing in the store and proceed that way. So I think that helps offset some of the cannibalization fear and that they will continue to take that approach. There's two things I mentioned next year are big for us as we start to get more multi-channel and I think that we will address the cannibalization through the way we are trying to build that business.

Okay, thanks Mike. And then lastly as you think about closing the gap on the EBIT margin hopefully next several years and then being sort of a function of sales productivity and express leverage. As you look at your sales productivity, do you see it mostly been a traffic opportunity to the stores or do you still have opportunity for conversions in basket size given your history overtime?

I think it's all three. Certainly the traffic is a big component give our -- trying to develop our brand in a bigger way and reach newer customers and our loyalty program driving repeat visits is big part of that too. So traffic's big but it's not the only opportunity for us. As an off-mall retailer, we think our conversion rates have improved but aren't by any means where they need to be. And so we feel there's opportunity there. And then on the ticket side, as our merchants work on the assortment and the composition of it, I think overtime, that's going to be a focus there. So I think it's all three and don't view any of those as kind of maximized that we can't really address in any way.

Great. Thank you and best of luck here.

Thanks David.

Next question is from the line of Joan Storms with Wedbush Securities. Please go ahead.

Hi, good morning. Great quarter, congratulations. I never step up for one second. So I was wondering if you -- afterwards but on the port situation, Robert has mentioned that the beginning, I missed that detail?

What about it specifically?

I was wondering are you -- is there going to be any impact in the fourth quarter?

Well I mentioned in my comments as well that yes. I mean everybody's dealing with this. We have our seasonal products and key promotional product for the big weekends coming up in-house and prepared -- we are getting good container flow. So we just happen to manage the situation and as we get out beyond Christmas and into January is where it's a little less transparent. But at this stage it's some thing that we feel like we can manage.

I that -- I mean when I look at your guidance for the fourth quarter -- came sort of conservative to me. I think I am okay with the comps that are unknown. But is that why the earnings guidance is really unchanged even though you have a life beat for the third quarter.

There's some potential for some inbound freight pressure. There's been a lot of talk about surcharges going into effect. Hasn't happened yet. But It's something there is watching and could have an impact on kind of late Q4 and going into Q1. But again we are right now we are just monitoring and will overreact as we need to.

Putting right now Joan, it's a slowdown, and as Mike said containers are flowing, if it becomes a work stoppage more like 2002, then we have a different situation. And as Mike mentioned we don't think we have significant risk until we are post Christmas, with our pretty intense promotional period which is the post Christmas event and big sale which dominates the first two to three weeks of January before we go into full blown clearance as we clear that quarter. So right now we think we are managing reasonably well. We took some steps to try to be in a better inventory position in case the slowdown actually occurred as we suspected that it would and now it's a matter of seeing how it plays out and as he said, all we can do is monitor it closely which we are doing. We are getting two or three reports a day on what's happening and then we react. And I think that is trying to getting front of it and that's what we try to do so far, and then we will see what happens.

You get all the belly news on hand early too and you can see the steps a lot there.

Yeah.

I was wondering if you could comment at all on your e-commerce business. You seem to be managing really well. You got a steady growth tree, you are adding skews there. And you look at it like a tier 1 which the growth is like skyrocketing out of control and it's costing them to have to wait. Once you are in it, you are in it. And it's costing more and more. Can you comment about what you guys have to be doing differently to manage your business better than the tier 1?

Well I mean I can assure you it's a lot of work and it's a big change for our business too. So it -- there's a lot that goes into it and there a lot of change in the organization as a result of it that we are having to manage. But I think the way the approach we have taken is that kind of big change in the business and we are trying to manage it and have as measured of an approach to it as we can have. This reaches out to stores ultimately if we do it well and that required a lot of process change and a lot of adjustment to how we work and those kind of things take time to perfect and we are trying to do it that way, I mean, perfect it overtime and get really good at this. But in my view -- in our view, to do it all at once was not an option for us and we are trying to take it one step at a time. Robert?

Joan, I think about it this way because it think, you have to have a -- an underlying sense of what you want to accomplice. And with e-commerce our sense of what we wanted to accomplish was we wanted to sell as much as the customer wanted to buy from us. As their habits change with technology advances and we wanted to be prepared to be able to do that and do that confidently and efficiently but our effort is always to look at this about how do we improve in-store business with the online opportunity. And we also have a significant organic growth opportunity in stores so we don't really feel compelled that we have to drive all of our go forward growth off of this other channel. So I think it gives us an opportunity to be patient and to be thoughtful and conservative and to make sure that as we move forward, we do so in a way that satisfies and doesn't disappoint customers. And it also allows us to be very careful about how we build our own line of Merchandise base and so I think as we improve practices and capabilities, we hope to strengthen our stores. So I mean that's the philosophy that we take and how we approach every decision in this business.

Rob, that's very helpful. Thank you and have a great holiday season.

Thank you.

(Operator Instructions) The next question is from the line of Anthony Lebiedzinski with Sidoti. Please go ahead.

Yes, good morning. Just a couple of questions. First on the store growth I think you mentioned that you expect a 10% square footage growth. Is that for the next year or two or would you say that's for the next five years and how should we think about the long-term view of growing the store business?

I think that's kind of the rate we would say over a longer term at this juncture Anthony. And certainly next year, this year we didn't quite hit that at seven but we talked about that in the last call. And we are better prepared going into next year and beyond to hit that kind of rate. And we are going to be doing a lot of work on this over the next several months to really pinpoint and target what that looks like over a longer time horizon. But I think that's the way to look at it. I think you are on it.

Okay, good. And also when you look at the next year's openings are they mostly in existing markets or new markets. How do you characterize the new store openings that you plan for next year?

Next year we will be -- it's going to be a mix. I mean this year even we had -- if we look at 34 that will open, 14 of those were some form of a real OE. There are market that we exited and re-entered or close and open. The rest of them were in-fills or new and majority of that was in-fills of that left over. And when I say infill I mean adding a store to a market that's unsaturated but we are already in but we don't have the density. And so I think next year it will probably be similar where you have a -- but fewer reloads but more in-fills than just brand new markets. But we've just got -- we've got a lot of markets where we aren't as saturated and we have got some work to do. But there will be a mix of infill and new-properly more toward the infill site.

Okay. Thank you for that color. And also, Robert, at the beginning you mentioned that you are looking to still fill in some leadership roles. Can you just give us a little bit more details about that and expect the timing of that?

Well timing is as it happens. And they were something we are. We have recently added Vice President of Logistics. We've had that position before but used a replacement. We made an add in our IT group on the development side for e-commerce at high level. We just -- I think we mentioned that in Mike's remarks that we added a Vice President at real estate, Position that we had not had in the business or a while and we also just this week, welcomed a new Vice President of human resources and it will continue to look at our opportunities in marketing and e-commerce and there may be others but I think we are trying to get back to a level of staffing where we are able to support the growth and operational activities that we have and support those opportunities. Do we are working on it and we will let you know as we continue to fill those sport.

Okay, this sounds good. And lastly looking at the k club, you mentioned that I think over 2/3 rd of your transactions are coming through that. Just wondering if there's a way for you to say how many of those members are brand new customers with her plans. Just wanted to get a better idea as to whether your branding strategies actually resulting in more and new customers come a long way that you can give us some data around it?

Probably, I am not ready to really go into that, but I will -- because it's hard to know whose move in the first year of program where we signed about 3 million plus. Right now so as we start to crime compare [inaudible] are doing through the loyalty program with our reach on the FSIs and the external marketing. There's a way we can start to match that up. But we are still trying to build back customer database if you will so that we can really see what touch points are bringing into our store. But I don't know that I can say how much of the loyalty build-up has been new versus existing because this is our first foray rally into tracking.

All right. I think the interesting thing is going to be not so much new in all our maybe but I would suggest we get some experience with the data over the next year or two to begin to understand. If we in fact expand our age and demographic groups and begin to look at a little bit broader customer base and maybe a slightly different customer base than we enjoy today. And that continues with progress in the business then we know we are headed in the right direction where it would end. Also they were doing the right kinds of things to satisfy those members they signed up for a loyalty program, we are doing what they want.

Okay, sounds great. And best of luck during the holiday season.

Thank you.

The next question is from the line of Bruce Gellar with DGHX [ph]. Please go ahead.

Good morning guys. I have head from some other strip center based retailers who are growth oriented that there is a real Lack of quality shopping center availability at the moment. And I am curious as you push towards an acceleration to 10% square footage growth, what your thoughts are on that and if there is any risk that you may be sacrificing the best locations in order to try to achieve that goal?

First of all if that's the case, we are only doing the deal that make our model or fit our profile that we feel really good about it. It that were the case we wouldn't push for that target. But we feel that there is enough opportunity for us to do that kind of growth per rate in the near term. We've been in the market for the last couple of years doing that level of deal -- those, that level of deals. So at the moment I think there's enough for us to hit that. We would like to see I guess a pick-up in development that's been slow to build. But right now we are seeing enough choice to feel like we can do a 10% growth rate.

And also to say that we really haven't looked closely at doing more development deals and that's something that we can do that we can add to our mix of opportunities that there are at the right moment we are certainly well positioned financially to be able to do that should we wish. So we will see. I think that's a developing or changing dynamic if you will. And I think it also has a lot to do with your relationship with the landlord community and your use and productivity. So we will see how it plays out,

Okay. Switching topics it look like by year end you will be pushing north of $90 million on your cash balance which is over 25% of your market cap. Really significant number which you have carried for a few years now. And while you are stepping up the growth rate, it looks like you are pretty much able to fund that internally. So I am curious what their priorities are or kind of sense of urgency to make a balance sheet more efficient, take some of that cash back to shareholders whether it's through a dividend or more aggressive share repurchase or what the thought process is on maintaining such a significant cash balance. I recognize it's a high class problem, but it is somewhat inefficient.

We have a -- you have mentioned the priorities I think the growth is a priority for us right now with the whether stores are e-commerce initiatives. Those are -- that we are able to internally fund a lot of that to your point. We do have a buy back in place, so we do have that mechanism that work for us. And as we go through -- if we do finish the year and have that kind of balance that the DOF will consider other ways to put that to work. And understand the question.

Okay. And I guess if I could just ask one more. It looks like the fourth quarter last year was a tough quarter for you guys and so it's nice to hear that you are off to a really good start this year. And I would think typically anything above a 2% comp would start to result in pretty strong incremental margins. But it doesn't seem like your guidance on a 5% to 6% comp is really estimating that there is going to be pretty good incremental leverage above that 2% log on [ph]. Just curious -- I know you have talked about some issues but again comparing those are relatively tough quarter last year, I am a little surprised that there's not more operating leverage potential in the fourth quarter.

Yeah, this is Adam. I think part of that answer is the one time charges for the prior year which we called in the script which is causing some downward pressure on the year-over-year comparison. So that's one piece of it. And the other I think is just we have been as we mentioned in the prepared remarks we have been investing heavily in things like marketing, e-commerce, corporate payroll to support all those initiates, new technology. And we have build up our organization as a result of it and we will as we move out of this year and into next year and beyond, we will start to cycle against a reduction in that build-up and right now you still seeing the after-effect or the impact of that build-up in the numbers as we prepare to grow. And once we start growing the leverage should be a lot stronger than it is right now.

I see. Okay, fair enough. Well thank a lot and good luck in the holiday season.

Thank you. We appreciate your being with us today and we look forward to talking to you later about what really happened in the fourth quarter. Thanks.

So there appear to be no further questions. Mr. Alderson, I will turn the call back over to you for any closing remarks.

We are done, thanks.

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