Good morning and welcome to Kirkland's Fourth Quarter 2018 Earnings 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 Jeff Black with SCR Partners. Please go ahead.

Thank you. Good morning and welcome to the Kirkland's conference call to review results for the fourth quarter of fiscal 2018. On the call this morning we have Woody Woodward, Chief Executive Officer; Mike Cairnes, President and Chief Operating Officer; and Nicole Strain, Interim Chief Financial Officer. The results as well as the accessibility of this conference call on a listen-only basis over the Internet were announced earlier this morning in a press release that has been covered by the financial media. Except for historical information discussed during this call, the statements made by the 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, 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 3, 2018. I'll now turn it over to Woody.

Thanks, Jeff, and good morning. Thanks for joining us to review the fourth quarter and our plans for 2019 and beyond. Today we'll spend more time than usual to review our plan in detail. Since speaking with you last quarter, I've had an opportunity to dig deeper to understand our customers, suppliers, and how our products resonate. As we all know, this sector continues to experience rapid changes in consumer shopping and purchasing pattern and the challenges related to that are significant. After a more full assessment of our strength, I remain optimistic that the issues that have hampered Kirkland's in the fall and we are in a position with the company for profitable long-term growth. We have a strong value proposition, great talent in the organization and a followup plan we're executing. Overall, 2018 was a challenging year. Strength in e-commerce helped drive a modest increase in total sales for the year and the merchandise margin stabilized following several years of decline. We're pleased with the progress in these key areas, but it was not enough to overcome traffic challenges that persisted in the fourth quarter. As we outlined in our third quarter call, we had a strong November. Seasonal categories, including fragrance and candles, textiles and floral, all performed well. December was more mixed. Gifting and service performed well. We had a continuing channel shift in the lead up and immediate aftermath of Christmas impacted brick-and-mortar sales. January traffic was further hampered by weather and port delays that constrained inventory flow. We experienced solid traction on newness in the final month of the quarter, but we need to strike a better balance with clearance to drive post holiday traffic. There are some very important learnings there and the teams did some heavy lifting during the year on operational…

Thank you, Woody. As Woody mentioned, we did not achieve all that we hoped in 2018. However, we were successful in laying the groundwork and making progress on the key initiatives in 2018. I want to add detail on what was accomplished in 2018 that resonated in the resulted and what is in progress and in play for 2019. We strongly believe that as a pragmatic and focused plan to improve our performance while aggressively dressing the macro issues. Our collective plan in merchandising and operations can be summarized in four themes. One, product revitalization and reinvention; two, merchandise margin expansion; three, omnichannel growth, profitability and infrastructure, and four supply chain optimization. I'll start with number one, product revitalization and reinvention. In 2018 as Woody mentioned, we did make assortment improvements in many of the fashion oriented categories; furniture, fragrance, textiles seasonal, gift and floral. Collectively these categories represented positive comp sales. Our biggest lessons [ph] came in wall, frames, and lighting categories. With that context we have taken the following actions. We've reorganized the merchandise organization. This will result in a stronger focus on wall décor as well as in-house design that will improve consistency and design across all categories. The reorganization enables us to lean in on the categories we want to turn around and in support of the new categories producing second half. Table tops, rugs and beddings. It will ducktail into our direct sourcing initiatives, enable us sustain our private brands and ensure success of our new product categories. These important organizational changes were made prior to the beginning of our fiscal year and the teams are up and running. Another key element to support our product initiative is the elevation of quality across the assortment as we create greater alignment with our vendors while raising…

Thank you, Mike. Net sales for the fourth quarter decreased 3.8% or $8.5 million compared to the fourth quarter of 2017. Fiscal year 2017 included a 53rd week which accounted for approximately $10 million of sales. Comparable store sales decreased 3.3% which included an approximately 15% increase in e-commerce revenue and that's on top of the 2% combined comp increase and 35% increase in e-commerce in the prior year. In our brick-and-mortar stores in November we continue to see the strength of our seasonal decorating assortments with both positive traffic and a high single-digit comp sales increase. As we moved into December we saw traffic declines driven heavily by the week before and the week of Christmas. Those trends continued through the month of January with double-digit traffic and comp store decreases. But weather definitely played a role in the January sales decline. We saw softness in traffic across our store base. Overall the traffic decline was partially offset by an increase in conversions. We opened three new stores and closed seven during the quarter ending the year with 428 stores which is a net year-over-year gain of 10 stores or 2.4%. E-commerce accounted for $25.1 million in revenue during the quarter or approximately 12% of total revenue. Traffic increased during the quarter by over 35% which was offset by a decrease in both conversions and average order value. For the quarter, approximately 45% of our e-commerce sales were fulfilled in stores. This percentage increased throughout the quarter as we added SKUs and further messaged our buy Online, Pickup in Store option. The third-party drop ship channel also continued to grow as a percent of our e-commerce revenue. As we move forward we intend to focus on increasing the in-store fulfilment and the third-party drop ship channels, as well as…

Thanks Nicole. Despite the tough year, we’re optimistic that we can achieve improvements in the back half of this year and roll [ph] forward. We are moving quickly on a range of initiatives that will improve the business. On our merchandising side, product timelines are a reality, particularly as we're talking about adding substantial new category. We have a solid leadership team in place and a plan that can change the course of the business. I want to thank all of our associates for working hard to bring our initiatives to life. And now operator, do you want to open it up for questions?

Certainly, and thank you, sir. [Operator Instructions] Our first question today will come from Jeff Van Sinderen of B. Riley FBR. Please go ahead.

All right, good morning, good to see you here taking the bull by the horns to accelerate the programs that are working. Maybe you can speak more about which merchandising initiatives you feel are most critical to your plan in 2019 and when we’ll start to see those reflected in the stores, and then maybe speak to how much of your plan you feel sort of falls under the test and the act category for 2019 and how much are you building on areas of success from 2018?

Great. Thanks Jeff. Okay, so the minute, we realized that we needed to absolutely diversify from the fourth quarter we started investigating and asking customers and also looking at the industry. Remember that I have about 40 years experience in the home furnishings industry, so I was really kind of amazed that we were lacking some of the large category drivers that really benefit most retailers in the first, second, and third quarters, and we just didn’t have that in our midst. We were into many tertiary categories that we were able to cut off a long tail and have a SKU rationalization. So let me get into the specifics. Of the three, wall decor and bedding and table cloth, which are all three very large categories in the total scheme of home furnishings that we really weren’t participating in. We have a plan for the back half of the year. Let me back up just a second. We wanted to make sure that when we introduced those that they were proprietary which is taking us a little longer than going into the open market. Because we felt like we needed to if we’re going to introduce those new large categories, we needed them to be proprietary and unique and not following things on the same looks that other retailers had, to really approach it with our modern farm house aesthetics. We’ve also done some of these new categories with our direct sourcing model and that’s why most of these categories land at the beginning of the third quarter and will between in the third quarter and fourth quarter. I would say that that’s about two thirds of our growth. The other third comes from taking our proven key item winners. They have been actually key item winners for years,…

No, yes that helps, and I do have a couple of follow on the, I guess, being in a better position as you think about 2020, early 2020, do you feel like you didn’t have enough merchandise that was clearance on promotion. I think you talked about changing the mix there, balancing the mix of promotion and new merchandise in early 2020. Maybe just touch on what you feel like was not right in the mix in early 2019.

Let me answer that in a couple of parts. One, coming in from other retailers, and looking at our churn, we probably churn our merchandise too quickly because we're so many install many seasonally independent category. So we need to build up a core business that we can rely on, that delivers sales growth over the regular times, because all we seem to be chasing that next seasonal category and we didn’t have the emphasis to build up on our core business. So we’ll be slightly, we’re actually going to treat the churn the same on all of our current assortment and the whole inventory investment will come from the new category and the key items that I listed earlier.

Okay. That’s helpful, and I do have another one and it’s kind of a multipart one, so if you could bear with me a little bit. Woody, I know it’s early and it changes the process but now that you’ve been there a little bit of time, could you maybe give us a little bit more on your longer term vision for Kirkland’s without giving away any sensitive competitive information obviously? So may be talk about how you'd like to see the store environment. So maybe talking about how you’d like to see the store environment evolved, and the customer experience improved, how marketing promotions this kind will plan to that and then I respect to conservative target metrics you provided for 2019 and as we think further out about FY20, what do you see has the most impactful TNL to drive improved margins? And then if you could comment on how you’re thinking about real estate lease renewal to new stores e-commerce and how you’d like to see that mix evolve. I know it is a lot better. All I know that’s a lot there, something you can just hit some of the highlights.

That's good. And I'm going to answer first part I mentioned and turn to over to mike to answer the first part and then turn it over to Mike to answer the FY 2020 in real estate and some of the things that we have, we think really deliver a much improved year for both 2020 and the future. First of all, The long term vision we actually started with some groups that came in and gave us, did a lot of market research and lo a lot of customer research, we are going to be rolling out a new brand logo message, that kind of ties around our next generation store learnings. I feel really excited about it. The long term vision for Kirkland's seems to be the best home furnishing in the specialty retailer in the value space. So we think that there is space above the bin bar less service oriented and retailers. And the very specialized retailers with that however at a higher price point. So we do have some editing to do in that particular area, we could run some tertiary products. But I think that what we have to do is find out definable space. What are the things that customers only come to Kirkland's for or what do they think of they think of Kirkland's and i think we have some of those that we already win at. We win at the sentimental wall decor area. We win at our seasonal products which will probably have one of the best seasonal buyers and the best seasonal assortments out here. We win in the fragrance and the floral, but some of those are relatively small and the impact that we need to win at some of the bigger categories to make a small rubber band to really furnish her home and still do that at a value proposition. So our long term vision is to really be more relevant to the customer in the home furnishing retail arena, but not change our value proposition. We kind of like where we sit right there and I think that we require the customer then to expect that for a better look for the dollars that she can find at other retailers. From a marketing standpoint, we are being very cautious this year. We were not landing most of our new categories in back half of the year and we'll be doing launch marketing for each one of those categories through all of our 4.6 million in the data base, but we want to make sure that we're fully set before we can in 2020 for a very extensive rebranding and look to our marketing. I'll talk a little bit. Mike?

Good morning, Jeff. So let me answer your question on merchandise margin and I'll pack in two areas. As I mentioned in the script, we have now stood up a price and promotional analytical team as of this year and in doing so, with this team will now start to do is look at our overall price and promotional effectiveness. Last year, we built in the forecasting capabilities. Now we are in a position take another bigger step forward to look at the overall effectiveness of what we do when we combine our marketing coupon and our merchandise promotions, so that we can lean in on the promotions that are working the best and then we can rid out the ineffective promotions that are affecting overall merchandise margin. And that has kicked off and I expect that we will start to see some benefit in Q2, more of that benefit later in the year in Q3 and Q4. On direct sourcing, we needed the merchandise vision to catch up with our direct sourcing efforts and we are now there. We have hired a Director of Direct Sourcing. We signed on agents that are focused on China we're now interviewing agents for India. We have built it into our process roadmap and we have already now started talking orders direct or factory. So we are often running on it. I 'm really pleased with where we are at this point. We are now in the process of defining what we believe those penetration and the financial goals will be as it relates to that. And the way we're getting there is we have taken some products that we already purchased where we already know the cost of from our current vendors and we are looking at what that cost benefit will…

Thanks Jeff.

Okay, thanks so much and best of luck in 2019.

I appreciate that.

The next question will come from Anthony Lebiedzinski of Sidoti & Company. Please go ahead.

Good morning, everyone and thank you for taking the questions and thank you for the thorough review of your strategic plans. So as you look at the new product categories that you are about to launch, just wondering about the addressable market if you could just do a deeper dive into that and as well as the competitive nature within that is it as competitive as your core existing categories or less or more, if you could just maybe touch on that please first?

Sure, thanks Anthony for the question. Of course you know there are no categories that are uncompetitive at this stage of the game. We seem to be wind in some of the most competitive categories such as floral, Christmas, other seasonal products, fragrance, which are very much competitive categories. We just look in the big one. So I would say the addressable market in all three of those categories is in the 60 to 70 billion range and we weren’t participating in those. I mean it's – yes, our shifted reps from the consumer showed that our customers really come to us all rugs already. We just came in the store. And a part of it was that we were slightly worried about giving up big stream space and really leaning into some of these categories. But they are the categories that really drive the home furnishing business, all three of those categories which will include rugs, and which we said they were going to be at a value price range your choice, 199. Table top which we approached totally different than my [indiscernible], so we'll be very differentiated from other consumers and we're leaning into a very maxed out value oriented price point, all revolving around the farm house look. So I'm really excited about that and that category involved dinnerware, glassware, table top textiles, flat wear, so it's more than just, it's a bigger area. Now also to support some of these new categories and new businesses, we've had to make some decisions on our floor spacing. We had de-clouded the store, so we took about a 15% reduction out of the store and moved those SKUs online. And now we've added in a dining table to show off our table top business, a queen sized bed that will show off our bedding business and a loveseat that will show off our rug business. And those actually we really need to include those because while there are very good sellers on the ship direct we just felt like that was just potential to get on to the floor to make us look more meaningful. For example, we saw a tremendous amount of dining chairs, but we don’t have a table to put it around, so a lot of these really made sense to make us look like more of especially lifestyle retailer added great value. And so we've already got these products that we developed. They are now on order and that's why and I'm a little bit disappointed that we can't get them in quicker, we've certainly tried and done everything we could, but generally when you're doing proprietary product it does take at least six or seven months to get those developed and written. So yes, your question is right. These are competitive categories. We're approaching it in a uniquely pertinent way and exceptional value and I feel very confident that they are going to win.

Got it, yes, thank you for that thorough explanation. So, just getting back to the quarter, I know you guys touched on whether I know it's something that probably you don’t want to comment on too much, but just wondering if you could perhaps share with us what you thought was the impact of the weather and obviously a lot of other companies have talked about the polar vortex also. Just wondering if you could just comment and what you thought that was in the quarter as well as the first quarter to date?

Yes, Anthony, this is Nicole. So we have done calculations internally. It is probably not something we're going to talk about specifically, but definitely just with the number of store closings we saw week to week weather definitely played a role. I think I mentioned in my comments that we also saw softness across the rest of the chain. So I don’t want to blame it all on weather, it definitely played a role in the quarter and in the first part of Q1, but as far as quantifying specifically, but there is again there softness across the category, but I don’t get into that.

Okay, got it. And then as far as the impact of tariffs, anything that you can share with us as far as what that was for the quarter or anything that's you want to call out as far as 2019?

Anthony, yes for tariffs, as you know we, as it relates to the 10% level tariffs we were able to bring in vendor contributions. We cut surgical price increases and we feel like we adequately mitigated any impact on the tariffs as of yet. But we are obviously, like everybody else, in a wait-and-see mode to any changes in the tariffs. The postponement of the 25% tariffs is one we'll continue to keep an eye on. With that, if that were to be enacted we already have a plan in place for that. But right now we're going to continue on with what we have already put in place for those plus price increases that we have in place and we see very little impact of that in 2019 unless something else changes.

Got it, okay. And lastly, within your EPS guidance for the year, are there any embedded additional share repurchases in that number?

There are. I think what I'd generally say is, we want to continue to be on the market repurchasing shares as it makes sense. We are expecting that number to be lower than the reported number for 2018.

Got it, okay. Okay thank you.

[Operator Instructions] Our next question will comes from Brad Thomas of KeyBanc Capital Markets. Please go ahead.

Hi, good morning everybody. Thanks for taking questions

Thank you, Brad.

Good morning.

And thanks for all the details on the strategic plan. My first question was around stores and you've given a lot of color around that on the call today here and working towards the store of the future if you will. I guess my questions was, for one I apologize if I missed it, but which's was the gross openings and gross closings here for this year? and then I guess Woody, as you think about ,you know turning around the business, trying to accelerate same-store sales, are you committed to continuing to open stores, are you still signing leases or do you think maybe it makes sense to look at, putting a hold on opening new stores until you accelerate same-store sales?

Yes, good morning Brad. In terms of new stores in 2019, what we indicated is we will open up a small number of stores in the range of six to eight and we'll close about the same numbers. So we are slowing the pace down of new stores. We are doing that as we evaluate our model going forward.

Also Brad, just you lean to the question that you had about our current store base. I felt like we needed to make some changes in categorizing the merchandise further was clear when the customer walked in the door. So, we used to be kind of a scattered approach and now we are trying to pour anything that's floral together, anything fragrance together or anything in a furniture shop, wall décor, so that we look more meaningful and destination oriented as the customer walked to the store. We also tried to reduce some of the clutter in our stores so we actually allowed some of these new categories which are bigger. We've also de-cluttered the store with what I call the long tail of things that aren’t really that productive. And some of those went away and some of them went online. So it accounts for about 15% SKU reduction in store.

Got you, okay. And then I apologize if I missed it, I'm sure it will be in the K, but do you have the merchandize margin percentage for the full year and what it ended at?

54.2, which was basically flat the prior year.

Great, and then clearly there are a lot of levers that you pull and initiatives you have in place to try to reduce the cost of inventory you are procuring. I guess, Woody as you think about the value proposition to Kirkland's for the customer, obviously there are some things you feel like you should be able to charge more for others that you needed to provide a better value, but as you blended altogether what you think can drive the most success for Kirkland's as you think about that merchandise margin and trying to pull that as a lever?

Yes, you know our merchandise margins, our product margins are currently healthy. It is what we do to it afterwards and that we're really working I think Mike mentioned the whole initiative for pricing and promotion, sometimes we are so, we have a merchandise promotion have a coupon laid on top of it and I 'm sure the customers actually gets exactly what the price is going to be. So we're decoupling those and layering it all, so they will have a much clearer value proposition. I think our product represents a good value and our direct sourcing will enhance the costing of that, but really I'm not planning on having to take a lower price point across the board, but also not significantly higher. I think that we do win but being a value retailer in this space and I really like that part of our DNA and want to make sure that we are providing the lower alternative cost than some of our specialty retailers that we compete with. So that can be the ongoing goal. The direct sourcing count of course we are one of the very few retailers left that don’t do direct sourcing. And so, that should give us a benefit, although it 's small in this year's plan because we are just rolling that out. But I think by the end of the day when we have that up to a much higher percentage of our total purchases we could help sustainable on our chronic margins and our value equation.

Great and then just as couple of modeling questions as it relates to how we're thinking about seasonality, I think if I heard you right, you are thinking 1Q same-store sales potentially negative, but the earnings will be lower year-over-year? If you can confirm that, that would be great? And then, as we think about 2Q, I mean it is the easiest comparison of the year in terms of the same-store sales. Are you thinking that we can get on to positive territory for same-store sales in 2Q?

Yes, so just high-level. I think when we look at Q1 and a lot of it is just based on traffic trends rolling from January into February are expecting a down comp in the mid to high single digit, also expecting for Q1 expecting product margins to be and March margins to be relatively flat to Q1 of 2018. And I think we mentioned in the call there also are some OpEx initiate dollars buried in Q1 and Q2 that are related to standing out a lot of the initiatives that we talked about. So definitely look at Q1, year-over-year as lower earnings per share for Q2, we're basically looking at it and getting a lot closer to comp sales because again the comps that we're comping against in 2018 was down over 3, so I think we will continue to be on an EPS standpoint, negative 2/2018 but making up some of that ground from Q1 to Q2.

Got you. And then the big wild card is of course 4Q and at present at this point you're modeling for 4Q 19 to have I guess higher EBIT year-over-year?

Yes, actually, yes. It is actually Q3 and Q4. A lot of that is based on the new experiment of the first part of Q3, so it's not all weighed to Q4 that maybe improvements, but equally between Q3 and Q4,

Got you. Very helpful, thank you all so much.

Thank you, Brad.

Thank you.

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference over to Mr. Woodward for any closing remarks.

Thank you very much and we appreciate your interest and we're optimistic about the future. Thanks.

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