Good morning and welcome to Kirkland’s First Quarter 2017 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Jeff Black with SCR Partners. Please go ahead.

Thank you. Good morning and welcome to Kirkland’s conference call to review results for the first quarter of fiscal 2017. 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 accessibility of this conference call on a listen-only basis over the Internet were announced earlier this morning in a press release distributed to the financial media. Except for historical information discussed during this call, the statements made by Company management are forward-looking, 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, including annual report on Form 10-K filed on March 31, 2017. With that I’ll turn it over to Mike.

Okay. Thanks, Jeff, and good morning to everyone. The first quarter was in line with our expectations and I’m pleased with the way our team is executing on our priorities for 2017. Overall, the quarter was highlighted by stabilization in several key product categories, strong ecommerce performance and definitive progress on the path to improve our pricing, promotional mix and merchandise assortment. Total sales increased modestly, benefiting from a higher store count versus last year. Sales and traffic trends are still a bit choppy but the overall result improved sequentially from February to April, and we had a solid Mother’s Day event to start Q2. Ecommerce sustained it’s healthy sales momentum and achieved improved bottom-line performance. We’re encouraged by trends in the channel which accounted for about 10% of our total revenue in the quarter. We’ve upgraded the customer facing aspects of kirklands.com with expanded content and a stronger call to action that’s generating better rates of conversion. At the same time, investments in fulfillment and the expansion of supplier direct partnerships are starting to ease the strain on our supply chain while broadening our assortment and speeding up delivery times to customers. That has the potential to improve our profitability and drive a better shopping experience. We’ll continue to widen our capabilities as we expand our omni-channel platform. We managed expenses well given the pressure on brick and mortar comps. Likewise, inventories remained in check as we controlled the levels and flows of product. While our store comps were under pressure during the quarter, it was not a story of broad weakness across categories. We had improved performance in lamps, floral, clocks and decorative accessories. Categories including art, textiles and fragrance are still in transition. As expected, gross margin was affected by our initiatives to recalibrate these assortments in…

Thank you, Mike. Before I begin, I’d like to take this time to acknowledge all of my friends and colleagues at Kirkland’s who I’ve worked closely with over the years. We’ve accomplished much together and there is much more to come at Kirkland’s with its very talented and experienced team. This is a bitter sweet moment for me as Kirkland’s has been home for much of my career. And while I didn’t speak this out, I’m leaving for a company outside of this sector that offers a unique opportunity for me personally. Now, on to the quarter. Net sales for the first quarter increased 2.3% with total comparable store sales decreasing 3.8%. Brick and mortar comparable store sales declined 6.6%, driven primarily by an approximate 8% decline in brick and mortar traffic. Geographically, while store traffic was down across most of our states, we saw a better performance from stores in our northeast regions which experienced better traffic trends than the chain average. The traffic decline was somewhat offset by both a positive conversion rate in stores, marking three quarters in a row and a higher average ticket. We opened eight new stores during the quarter and we closed 11, ending the quarter with 401 stores, representing 19 more units or 5% more than the end of Q1 2016. Moving on to e-commerce sales. E-commerce generated $13 million in total revenue during the quarter and accounted for approximately 10% of total revenue during Q1, a 32% increase over last year. This increase was driven by a combination of strong increases in website traffic, conversion and average order value. We also saw a healthy increase in revenue derived from our third-party drop ship initiatives which accounted for almost 11% of our e-commerce revenue during Q1 2017 compared to less than 2%…

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Jeff Van Sinderen with B. Riley. Please go ahead.

I wanted to ask a little bit more about e-com. The growth was particularly strong in Q1. Just wondering, what sort of growth rate we should expect for e-com for the remainder of the year. And then, also, how should we think about the overall comp progression for the remainder of the year and where do you feel like you have the most opportunity in comps?

Okay. Jeff, I’ll start there, Adam may pitch in on some of the comparison questions. E-commerce, nice growth; we were very pleased with 32% growth; it exceeded our internal plan. We saw it across most of the categories. So. It was a broad-based increase. Traffic was up, conversion was up, and ticket was up online. So, pleased to see the consistency and the increase across the board. As we look ahead, the amount of growth we would expect is probably a little bit less than that. I wouldn’t take 32 out for the year but we do expect to exceed 20% as we look forward. And we’re very pleased with that business; we’re also pleased with the profitability gains that we saw. It’s only 10% of the business, it’s growing, and we’re seeing a lot of more efficiency coming out of our supply chain in our fulfillment operation. As far as the comp comparisons overall, as you look for the rest of the year for the whole business, we believe the most opportunity is going to come in the back half, particularly as you get into the fourth quarter when we’re up against very little marketing. And we have been working along the way here this year to identify some traffic drivers and we’ve got some early results we’re happy with there. So, we’ll deploy that in the fourth quarter, much better prepared on the merchandise site on with the assortment going into the fourth quarter. So, we do have much optimism as we head into the back half. As far as the comparisons Adam, do you want to add anything to that?

Sure. I think you said that well; expect slight improvement in Q2 from Q1 levels, strong improvement in back half. And Jeff, if you look on a three-year stack basis with our brick and mortar comps, those comparisons ease quite a bit as we roll into Q2 through Q4.

Okay, that’s helpful. And then, as we’re thinking about gross margin, I guess also along those lines through Q2, and then I know you mentioned that we still have some clearance in Q2, some pressure there. But beyond that, as we think about gross margin, should we be thinking maybe kind of sequential improvement in gross margin?

Yes, Jeff. I mean, the second quarter is going to have a little bit more clearance on it. I mentioned three areas, particularly art and textiles. So, we’re really cleaning up that assortment and we feel like we’ll be through most of what we want to get through by the beginning of the second half. So, those two key areas will weigh on the second quarter a little bit. But as we move through the year, both on the assortment side of things and on this pricing initiative, pricing and promotion initiative, we believe we’ll be much better positioned in the back half as we start to use coupons that don’t overlap or stack. We removed clearance from some of the promotions that we’re running, all to maximize margin. Right now, we’re dealing in a period where we’ve got some clearance still going on, we’ve got some wins that we’re seeing in this business on that pricing initiative and it’s kind of buttoned up against each other. As we get into the back half when we clear through what we want to clear through, we’ve got a better line of sight to margin improvement when you combine the better assortment with the promotional changes that we’re making.

Okay. That’s helpful. Thanks for taking my questions and best of luck. We can take the rest offline.

Thanks.

The next question comes from Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

So, I guess first off, I just have a more of a bigger picture question. So, in the past, you guys have talked about opening at least 500 stores. Given that what’s happening in brick and mortar retail and the shift towards more e-commerce, is that still a goal of the Company to get to 500 locations?

Yes, it is, Anthony. I mean, I think some as what we’re experiencing right now cyclical, there is certainly some secular components to the changes that we’re seeing but even having said that, we’re a 400-store retailer today. We’ve got ample opportunity to grow into some of these markets that we’re under serving, northeast being a good example where we’re devoting about 20 of the 30 new stores this year to that area of the country and we’re seeing good results early. So, store openings are still a big part of our strategy and I would not go back on that 500 store goal, given what we’ve seen in the recent quarters; we still see opportunity there.

And you mentioned that you will be doing certainly a different job as far as with the coupons and doing less of that. My question to you is the coupons -- how big of a traffic driver were they to your stores and what’s the risk of that as you take away those coupons that you’ll see less traffic to your stores?

Let me be clear to you on the coupons. We’re not necessarily eliminating a lot of coupons here, Anthony; it’s a little more subtle. Coupons are a big part of the business and they’re a big traffic driver for us; we know that and we’ll continue to use coupons to drive traffic. I think the key here is to eliminate the stackability of those coupon, the overlapping nature of some of the in-store promotions we do, lift the coupons, the overlapping nature of clearance and its impact on the coupon usage. So, as I mentioned in the remarks, we’re using more the regular price coupons and we are trying to time our events such that the coupon can continue to drive traffic but not overlap as much with some of the in-store activity that we historically deployed and continue to do so. So, it’s a lot of analytical work that we’re in the midst of; we’ll continue to take what works and deploy it for the whole Company, and over time that improves the margin.

So, as far as e-commerce, you mentioned better profitability in that. Although I did hear I think one of the remarks that there were some increases in shipping costs as well. So that being said, I guess with more drop ships and so on, so do you think you’ve further opportunity to improve the profitability of ecommerce going forward?

Yes, we do. And the online or the third-party usage, while it does drive transportation cost in isolation, when you look at that metric and we always call that out, that was appropriate; we’re making up for that elsewhere and payroll in the DC, in store payroll. Not handling that product makes a huge difference to the overall profile and that’s helped us. As we look ahead beyond, this year, we start using buy online and pick up in store technology that can further our ability to be more profitable there. So, we’re encouraged by the third-party business that we’ve launched. Adam mentioned it’s 11% of the overall, and that is part of the reason why if you look at e-com in isolation as best you can that that’s actually helping us, not hurting us.

And what’s the expected timeline for both, the buy online, pick up in store?

Not defined; we’ve got some building blocks that we’re working through this year, namely an upgrade to our warehouse management system but it will be a focus of next year.

Got it, okay. And lastly, could you give us an update on your K Club rewards program, where that is as far as number of members and what are you seeing there as far as number of transactions or frequency of your customers that are our K Club numbers? Thank you.

The K Club program represents roughly 85% of our business. So, it its fully matured in that sense. We continue to use it to feed into our marketing capabilities, and over time we’ll use it more to even then target customers and their individual shopping behaviors. So, our K Club is still a vital part of our relationship with the customer and will continue to be so. It’s very much an analytical tool for us and we continue to use it to drive our marketing and e-commerce strategies.

[Operator Instructions] The next question comes from David Magee with SunTrust. Please go ahead.

Adam, best of luck to you. We’ll miss you.

Thank you very much. I appreciate that.

Just a couple of questions, one is, I know there is a lot of noise in the first quarter with regard to the Easter shift and all that. I’m curious how you feel about the market itself around you, just home décor marketplace based on what you’re seeing with promotions out there et cetera? Do you feel like it’s stabilizing or even possibly improving sequentially?

Well, in the quarter, David, we saw when you try to strip out the shift component, we definitely were weaker in February and improved a bit as the quarter progressed. I think that that -- I attribute that more to some of the traction that we’re starting to gain and aspects of our initiatives and strategy, speaking for the whole market, there is a lot of growth in the overall market and there is a projection for growth there. So, I think for us, it means highlighting the points where we can differentiate ourselves, one being our value proposition and how strong that is; one being our product and how differentiated it has the potential to be, and then, our store experience which is very much unlike the other retailers that are actually growing in the space right now, the big box concepts that are entering a lot of these markets. So, we-- our strategy is all geared to provide the support and ability to drive those three components because that’s what really differentiates our brand and that’s how we gain share going forward. But the space, stepping back from it all, I think is about how it’s been for the last couple of quarters, but still a stable sector within all of retail, when compared to some of the other slices of the pie.

Secondly, just with regard to all the Company specific improvements that you pointed out here very well and the fact that the comparisons do get easier, throughout the year, particularly on a one-year basis but even on a two-year basis. Do you think that the fourth quarter based on how you sort of set things up here, do you think that you could show positive traffic growth by the fourth quarter?

Well, I mean we’ve not planned for that in our forecast or even in our internal plan. But we certainly see more potential for that timeframe. And just to underscore that, we’re gearing up for this holiday period. We’ve got -- we’re well in advance of where we’ve been in terms of the assortment, the strategy for presentation, the marketing that goes with it. And in particular on the marketing, recall that last year we pretty much turned off all of our external marketing, save digital strategy that ended up kind of backfiring on us. So, the social media aspect of that just did not drive what we were looking for. We’ve done a direct mail piece here, a couple of pieces here in the first quarter, toward the end. We’ve added a digital banner ad that drives traffic directly to the stores and the site that we’re seeing good results from. So, we’ll have those activities in place to support the assortment change and the marketing and visual aspects of our holiday plan. So, we feel much more prepared and better suited to drive a traffic gain, should the external environment provide those conditions for us.

And just lastly with regard to the growth in e-commerce, are you seeing a disproportionate amount of business coming from areas in which you don’t have stores now?

I wouldn’t say disproportionate. We get our share of business just from being visible on the web and we reach people that are beyond our store base. But the majority of the activity on the site comes from areas in which we have a store presence and that continues to be the case.

The next question comes from Brad Thomas with KeyBanc. Please go ahead.

Good morning. This is Sumit Desai on for Brad, and best of luck Adam. In terms of your pricing and promotion related initiatives, what type of impact are you seeing on average ticket and merchandise margin? Additionally, how meaningful was the impact of SKU rationalization in the quarter?

The SKU rationalization, I’ll start there; that’s the work in progress. We’ve got a goal that -- to reduce SKU count by up to 10%; we’re -- we’ve done that in one of our stores that we’re using as our test kind of model store for this initiative. So, the full impact of SKU rationalization, and I would add category rationalization in with that because we’re looking at those two in tandem, will be felt in 2018. We’ll gain some benefits in categories from this as we get into holiday season, but the bulk of it and the role of this would occur when we get into 2018. As far as the pricing and promotion initiatives, we have increased our upfront pricing a bit coming into the year which is helping our ticket and we’ve held the ticket up during the quarter. The margin is improving based on some of these changes as I mentioned in earlier question to the couponing strategy. Right now, you are not seeing that in the overall margin results because we do have a lot of clearance activity going on as we work through a couple of categories in particular that have been underperforming. But as we get toward the back half, we expect benefits from this pricing and promotional mix changes to help our margin in Q3 and Q4.

Okay. Thank you. And then, how have your recent openings been performing and how are your year two stores doing as they enter the comp base? And as you slow store growth this year, is there a potential tailwind from lower cannibalization as store growth slows?

The new stores that we’ve opened so far this year we’re pleased with; they are hitting our internal target. I mentioned earlier a couple of them are in dense markets, one being Paramus, New Jersey to call out an example; there is also one in the Wilmington, Greater Philadelphia area which is very dense market that we just recently opened. Those are examples of good solid opening that we’ve had in real estate that’s a little bit apart from what we’ve done historically. So, we’re encouraged by that. The other piece of your question was cannibalization. As -- I don’t know how to build in a tailwind. We’ve been working on cannibalization, we measure it every time we open a store. So, we try to mitigate to and diminish that as much as we can but we are going to have some naturally as you build stores with this year’s class being a little lower, I think the effective cannibalization will be under a little bit better control.

This concludes our question-and-answer session. I would like to turn the conference back over to President and CEO, Mike Madden for any closing remarks.

We appreciate all the questions and the attention, and we look forward to reporting back at the end of Q2 and for the rest of the year on our progress. Thanks for joining.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.