Good morning, and welcome to Kirkland's Second Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jeff Black of SCR Partners, Investor Relations. Please go ahead, sir.

Thank you. Good morning and welcome to this Kirkland's conference call to review the Company's results for the second quarter of fiscal 2015. On the call this morning, are Mike Madden, President and Chief Executive Officer; and Adam Holland, Vice President and Chief Financial Officer. The results as well as the notice of the accessibility of this conference call on a listen-only basis over the Internet were released earlier this morning in the press release that's been covered by the financial media. Except for historical information discussed during this 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 the filings with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K, filed April 14, 2015. With that said, I will turn the call over to Mike Madden. Mike?

Thanks, Jeff. Good morning everybody. The second quarter proved challenging in several respects. I'm very pleased that we were able to deliver earnings within the guidance range, especially considering an unanticipated IT expense that impacted our earnings per share by $0.02. Total sales increased at a double digit rate with comps at the high end of our projection. Brick and mortar comps trends accelerated on a sequential basis and e-commerce trends were again robust. The online channel added 2% to consolidated comps, and over 70% of e-commerce revenue was fulfilled through in-store pick up during the second quarter. That was up from less than half last year and is having a positive impact on freight cost and profitability. Overall, sales were driven by strong and in-store conversion and a slight increase in the average ticket. Earnings came in at the low end of our forecast range due to higher operating expenses. The key driver here was the IT expense we referenced in the release this morning. This $0.02 expense related to an isolated one day event in late July that occurred when migrating data from our secondary credit switch server back to our primary server, after having completed an upgrade on the primary. During this migration process, the file containing the data from that particular days credit card sales was discarded due to differences between the servers. Due to strict security measures we have in place to protect customers against theft of personal information, the data needed to recreate the credit file had automatically been sanitized and suppressed and it's not recoverable. This expense represents the amount of that particular days credit sales that we have been unable to collect. We have addressed this technical issue and we're exploring a number of avenues including insurance to recover some of these…

Thank you, Mike. Net sales for the second quarter were up 11.4%, while comparable store sales increased 6.7%. Brick-and-mortar comps were up 4.7%, this was driven by 4% increase in transactions, which was comprised of an increased conversion offset by slight decline in traffic. The number of item sold per transaction was up slightly and average unit retail price was flat for last year, which led to a small increase in the average ticket. E-commerce revenue was $7.7 million for the quarter, that's a 38% increase over the prior year quarter and accounted for approximately 6.7% of total sales during Q2. In the second quarter last year e-commerce was 5.4% of total sales. Comp sales trends in both our brick-and-mortar and e-commerce stores were positive throughout the quarter, but stronger in May and June. Of the nine new stores opened this quarter most occurred in July as we expected. We had some slippage in our construction schedules to close the quarter, but we have opened seven additional stores thus far in August, totaling 17 new stores so far this year. At the end of the quarter, we had 2.7 million square feet under lease and 8% increase from the prior year. Average store size was also up 1% to 7,572 square feet. Second quarter gross profit margin increased 28 basis points to 36.9%. Merchandize margin decreased 13 basis points to 54%. As mentioned on our last call, we had an unfavorable comparison to last year's physical inventory results, which accounted for most of the merchandize margin decline. Moving on to other components of gross profit margin, store occupancy cost decreased slightly as a percentage of net sales during the second quarter of 2015. Outbound freight costs which include e-commerce shipping decreased 51 basis points as a percentage of sales primarily…

Thanks, Adam. And we appreciate everybody taking the time to be on the call today. We're now ready to take any questions.

[Operator Instructions] The first question will come from Brad Thomas of KeyBanc Capital Markets. Please go ahead.

Congratulations on the strong sales here and a nice momentum as we move into the back. half of the year. I wanted to ask about the store openings, that’s something that obviously affects the cadence, the earnings flow during the course of this year? I was hoping maybe you could just provide a little bit more commentary maybe in terms of operating expense dollars or earnings per share in terms of what the drag is we're seeing now from the earlier store openings and what the benefit from these new stores might be as we move into the fourth quarter?

Okay. Brad, this is Mike. We - definitely it does have an impact, particularly in a year where we're really ramping up as I mentioned and trying to get our legs underneath this with real estate and what you saw in the second quarter as we opened nine, which is a little behind what we had expected, so some of those kind of drug into August and we have a big opening schedule planned for the third quarter and that involves a lot of pre-opening activity that's going to pile on in a short amount of time. Now our goal internally has been to not have a lot of opening activity going on during the heavy holiday weeks, which really crank up when you get into November. And we still anticipate that to be the case and we'll have a lot of activity between now and the end of October and not the full benefit from those stores being opened for the entire quarter which weighs on Q3 earnings quite a bit. And then the flipside and the good news of this is we're – the openings we've had so far have been very strong and should that continue we'll have 38, I think is the number 38 or so more stores around 40 more stores going into the fourth quarter than we had last year. So that growth should provide some leverage on the more fixed components of our P&L. Adam, you want to add anything to that?

Yes. The only other thing I'd say regarding the third quarter is the impact of that additional DC, you're seeing the full effect of that in the third quarter. We saw a little bit of a impact in the second quarter of deleverage, you've got a kind of full three months comparison going against the third quarter. So that and the store expense as your weighing down the earnings, but both of those things, you're getting new capacity to get your sales numbers in the fourth quarter.

Great. And then just if I could ask a follow-up on merchandise margins, that’s a line item that has been very strong for the last couple of years. And I think this the first quarter in a while that its been down admittedly against the difficult comparison. How are you thinking about merchandise margin as we move to the back half of the year?

We hadn’t expected a whole lot out of that in this year to start within our guidance. We've had a good run in the last few years. In the second quarter we were also dealing with the ship and some promotional activity which resulted in a little bit more promotional activity in the second quarter due to the calendar changes that were affected by the inventory flow issues in the first half. So that was part of the second quarter. And as we go through, I mean, I still think we have the opportunity to have some modest increases there in the back half and then longer term the benefits from the supply chain and then additional tools on the planning side to better manage our markdowns and our promotion should give us even more upside to that particular line item going forward. So we still feel very good about the assortment, so we have a good opportunity to beat those gross margin numbers even though we've really had a good run on that line item in the last three years.

Great. Thank you so much. I'll turn it over to someone else. Thanks.

Our next question will come from Neely Tamminga of Piper Jaffray. Please go ahead.

Great. Good morning. I just have a couple of questions here. Big picture, Mike, it sounds like the stores are doing really well for you guys I know you open them up. So that's great. As we kind of take a peek into next year, how should we be thinking, should we be thinking about a comparable numbers openings, maybe if you are closings or is there any sort of early – do you kind of offer for us as we think about next year's pattern in cadence given the strength?

Sure. I think we talked about that kind of 10% growth number and that's the way we're looking at next year. As we sit here today and we're playing, before as I mentioned my comments we've already identified the stores for this year, but we're well into preparations for next year. I think the difference in next year you'll see more of the stores opening earlier, given that we're still in the pipeline now. So you won't see this compression that you're saying in Q2, Q3 like this year, going into next. So that would help spread out the workflow a bit, I think it will also help the earnings forecast a little bit more too, so we have a little bit more visibility there.

Okay. That's helpful. And then couple housekeeping sort of questions, on inventory and D&A. One, remind us what we should be looking for, maybe in D&A in terms of dollars this year and do you embed the D&A expense and item and spoken out separately as far as your op income, like do you embed that when we discuss your operating expenses, so I just want to make sure that were all…

We typically – we break that out Neely and - depreciation is definitely gone up in the past primarily due to our insistence investments. The stores have - new stores have quite a piece in that. I think what you're going to see going forward, really starting to at the end of this year and next year, you're going to see more of that depreciation growth coming from our new store build out. And the thing about that is that you're getting sales immediately even when you're adding depreciation expense, sometimes there's a longer tail with investments in IT and takes a little bit longer to leverage those items. But I think what you'll see is the depreciation will increase a little bit more proportionately to store growth after this year.

Okay. That's helpful. And then just one other on inventory if I may. So absolutely appreciate that your inventories are up, because you are opening up new store. So I'm just wondering could you maybe strip out what new stores account for an inventory number and or offer just a inventory on the comp basis, and then that's the housekeeping question. And then more philosophically, what I am haring, when you guys say, it sounds great that you're actually improving the productivity of your online assortment and reducing the SKUs there and that’s helping to improve probably just site time and conversion and overall fulfillment of handling. But I do believe in the longer term you have discussed the idea of going more to [indiscernible] and or expanding the catalog to your vendors, is that still on the docket, you had to reconcile that with your reduced SKU assortment online? Thanks.

Okay. Neely, it’s Mike. I am going to take that e-commerce question and then Adam can handle inventory general question you had. Yes, its still – in terms of expanding the assortment, we talk a lot this year about tightening up, I guess the SKU count and focusing on this in-store delivery which I think both of those being clearly have been beneficial when you look at the results. And we're very pleased with that. As we look to broaden the assortment because we - just because we're down now doesn’t mean that's the way we intended for it to be. We have an ongoing project and we think it will have actual sales starting to emanate from that as we get to the end of the year. But it should deal with third party vendors and that's the way we look at expanding the assortment online is engaging with other vendors that can ship directly from their fulfillment centers and that will help to broaden the assortment in addition to the debts gains that we've had this year in our own fulfillment effort. So that is still a big part of the plan, and in the works. So that is important strategy for us.

And that’s a capital [light] [ph] strategy too, right, that's how we should…

Yes. I mean, we would hold that inventory, so absolutely its capital light, in terms of it's not a huge project, its complicated, but it's not a capital intensive project and once we get up and going we won't be carrying the inventory and that will obviously be a better use of our capital and a easy on our fulfillment effort.

And on the inventory…

And on the inventory question, Adam, to add?

Yes. Neely, to answer your inventory question. Yes, we were up 15%, you can account half that increase was just from the unit – total unit growth which we were up about 7% just total units and as Mike mentioned we do have a lot of stores and unusually high number of stores opening during the quarter in a period where we're actually building the peak inventory. So there is some more on hand than we would typically have for new store openings just because we're about still in the big seasonal selling period. But we feel comfortable with the levels and if you look at the kind of the average inventory at the end of Q2, excluding what's held back in the DC its up around 4% and we're very comfortable with that given our sales guidance range.

Excellent. Thanks, guys. Keep pressing up.

Thanks, Neely.

The next question will come from David Magee of SunTrust. Please go ahead.

Yes, hi. Good morning, guys. This is actually Mitch in for David. First, you recently hired a new VP of Marketing, could you discuss the recent learning’s and maybe some the opportunities basically on that front?

Yes. Brad Wahl, he joined us back in March and happy to have been here. He is getting – he is very busy and accumulating all that comes into our marketing efforts which he is very involved and then he have a lot of activity going on not only to support the brick and mortar, but also the e-commerce business. I think the big focus and I've talked about this on calls in the past, we have a big opportunity and brand development. We are relative unknown I guess compared to some of our competitors and as we expand into other markets and become a larger company, the branding the company is going to carry a lot more weight and be a driver for us. So a big part of his job and our job as a leadership team is to really begin to develop this brand in a way that we haven't been able to yet and that will be in a very involved effort and we want couple that and that's to bring in new customers and acquire new people and make people aware of the strength of our brand. And at the same time we're doing that. There is a big effort on retention. We have royalty program in place and there is a lot of learning there, that we're in the process of to better target those customers and get them back into stores more frequently. So those are the two – that’s how we divide up the work in marketing right now and those are the priorities for us and we'll have a lot more to say about those activities as we go forward.

Okay. Thank you for that. And then second, you mentioned a high percentage of your customers pick up online orders in the store, just curious how much more upside do you see in that metric going forward?

That's a good question. I mean, we move pretty quickly. I mean, if you look at - I mentioned were over 70% now and that was a little less than half last year. We have engineered that a bit ourselves by allowing the customer more flexibility in their fulfillment options and they are taking advantage of it. We've kind of steered it, but the customer is also responding to it, how much more is that going to be, I think it can increase a little bit more. There is always going to be the direct to home business that we'll need to support. But we definitely prefer the in-store delivery because it gets us another store visit and we have evidence that once those customers go into the store, they are spending more and we're ringing another transaction. And not to mention the profitability impact it has given that the shipping rides along with our existing store trucks and that really reduces the expense to us.

Great. Thank you very much.

[Operator Instructions] The next question will come from Kristine Koerber of Barrington Research Associates. Please go ahead.

Good morning. First, with regards to the new store performance, you indicated obviously the new stores are performing well. But are you still seeing a slower ramp for newer stores in new markets?

It’s a mix Kristine, I mean, we've been very encouraged. We've opened some stores in the Midwest in Michigan and we've had extremely strong results. And we're – that's very encouraging because we are going into markets that we aren’t [advance ][ph] and don't have the presence. And so we're seeing a fast ramp, now maybe we'll do better in a couple years, I think we should. But the openings in both existing markets and new markets, at least in this year's class has been comparable and strong.

Okay. That’s helpful. And then as far as the bottom line pick up in-store pick, up are you seeing - is that bringing in new customers as well?

I think for the most parts it's an existing customer, but we’re reaching new people online constantly and our site visits were up 40% and we do a lot of work in the area of digital that paid advertising that drives traffic to the site. And we’re no doubt picking up a new customer's through that, but I wouldn’t say that’s the reason we design this kind of shift to in-store deliveries, it’s more of the customers responding that way. I think as we continue to market the site, tie it in with what’s going on in the brick-and-mortar, we will bring new customers through all of that activity. But the important point right now is we’re getting more transactions out of it, we're getting in-store transaction typically once we have that pickup occur.

And what percentage of the SKU can the customer pickup in stores that older SKUs at this point?

Pretty much all, I mean there are some maybe very small ticket items that - we've pretty much made the SKUs available for whatever method of shipping the customer wants.

Okay. And then can you just talk about customer traffic trends during the quarter and you indicated in the release the trends were uneven - they were uneven last quarter as well. Second question is for promotional events and/or consumers seeing more cautious and what your read is on that?

Suddenly your question broke up, I want to make sure I think I got it. The second quarter was very similar to the first as what I would say and we’re talking about a very slight decline less than 1% for the year. And we are seeing at the same time very strong conversion, some increase in the ticket more the business coming from the site. So I mean there’s lot of factors to take into account, but I wouldn’t say anything in the second quarter traffic related was really much different than what we saw in the first it is pretty much a similar trend. Although you have those ups and downs, which we mentioned in our comments.

Okay. And then just lastly you talked about the holiday line up and the timing with lower-cost this year versus last year?

In terms of merchandising -

Yes, merchandising.

Yes, obviously a big part of our assortment in the third and fourth quarter is seasonally driven. We have a harvest in Halloween presence throughout Q3 and then towards the end of Q3 we also start rolling in our Christmas seasonal, which is a big part of the business. Both of those categories are very important and we feel good about those assortments coming in to the selling period. We highlighted in the remarks that our harvest is off to a pretty good start, its’ still early, but that is a good indicator typically of the entirety of the seasonal assortment and what we might be able to achieve. So, certainly if you went in to the stores today you will see a fall presence starting to show and then as we work into a kind of the latter part of September, you will start to see the winter and Christmas holiday product start to come in and have a big presence as well.

Great. Thank you.

The next question will come from Robin Murchison of Satuit Asset Management. Please go ahead.

I got a couple of questions here and one - first let me just say, I have seen the harvest I think it looks - as you think it looks great, I think it looks fresh and doing good job there. So the first question is only 100 Oaks stores recently. Did that prototype - are you experimenting with that it, it look like that line of site and some of the categories had shifted, our work was on the one side wall and moved over to the other side. And maybe I just haven’t been in that that store for a long time, but it appear to be more open and like I said the line of site looks fresher and more open to me that's my first question?

Well I mean in that particular store, I don’t think we have done a whole lot to change the layout, but I’ll say when you mentioned one to site, that’s very important to us right now and we are experimenting in some other stores and one of the things we really want to do is have a - when you’re walking into that store even outside the store because we’re all small and its 100% now. When you are outside that store, we want you to see in, it’s important for us to have a present and you know what we stand for when you’re walking up and that openness and little more lighting and a little fresher feel kind of all goes into the construction of the store and even in these stores I think feel a lot more open and accessible and nice and inviting than maybe some of our earlier iteration. So I’m happy about what we are doing there. We are also got a lot better about measuring the results in fixtures and presentations that we pulled together. We are doing some really analytical work on that in terms of understanding how much space and how much business is being driven out of that space. So, we are moving some things around and trying to make sure that we can fill that floor with even more product based on the architectural layout of each individual stores. So that our presentation team spend a lot of time on that you may be seeing some of that moving around here locally because we obviously spend a lot of time in these local stores trying things. So I am glad you’re noticing it.

Yes. It looks like the furniture was making a bigger furniture statement instead of being sort of scattered at any rate, I am sure -

On the furniture I'll just add, since you brought it up, one of the things we have been able to do with a little bit bigger stores, we have actually pulled the furniture into more of a shop and so to your point it’s not just scattered around the stores, its featured in a way where you know that’s a key category for us, and you know what our offering is. So that’s definitely been something that we’ve done over the last year.

Okay, thanks Adam. So second question in terms of holiday and buying, not buying I am sure you already got that all put to bed and planned, did you buy in similar depth as to last year’s rate - it seems like last year that you almost ran out of stuff too quickly and I am talking not the Harvest, but Thanksgiving, Christmas holiday and I just wondered how you were thinking about planning your buys this year.

Overall I’d say Harvest is brought up a little, Halloween down a little bit, Christmas up a little bit. So that’s kind of the way we approached it and I think one of the reasons is we did also notice in some of the key items in those seasonal assortments that we did wish we had a little more stock last year. So we did identify some areas and some items in there that we bought heavier.

Thank guys. Good luck.

And this will conclude our question-and-answer session. I’d like to turn the conference back over to Mike Madden for any closing remarks.

Just once again, thank you everybody for being on the call and we look forward to talking with you next quarter. Thank you.