The Brand House Collective, Inc. (TBHC) Q3 2020 Earnings Report, Transcript and Summary

Good morning. And welcome to the Kirkland's Third Quarter 2020 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 Tripp Sullivan of SCR Partners. Please go ahead.

Thank you. Good morning. And welcome to Kirkland's conference call to review results for the third quarter of fiscal 2020. On the call this morning are Woody Woodward, Chief Executive Officer; and Nicole Strain, Chief Financial Officer. The results, as well as notice of the accessibility of this conference call on a listen-only basis over the Internet were announced earlier this morning in a press release that’s been covered by the financial media. Except for historical information discussed during this conference call, the statements made by company management are forward-looking and made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause Kirkland's actual results in the 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 10, 2020 and quarterly report on Form 10-K -- 10-Q filed on June 4, 2020 and September 9, 2020. I will now turn it over to Woody.

Thanks, Tripp. And thank you to all of our Kirkland's team members who take care of our customers and each other in our stores, distribution center and home office. They make this success possible. This quarter represents a continuation of momentum we established late last year where steps we took to make the company nimbler than ever. We now have a better cost structure and more efficient infrastructure, a merchandising mix that continues to improve and overall far cooler brands. Our ultimate goal is to be a specialty retailer where customers can furnish their entire home on a budget. We are at the beginning of a cycle where we are making that goal achievable at Kirkland's and making these improvements sustainable. These are exceptional results, we are reporting for the third quarter, which sets up well for what is typically our strongest quarter of the coming year. Unlike past years, where the third quarter was mostly about creating and launching point for maximum velocity in the fourth quarter, we were able to generate a positive store comp and e-commerce comp of nearly 50% and increase in our cash position to $37 million, GAAP earnings of $0.82 and an adjusted earnings of $0.66. These significant improvements in our merchandise and gross margin and the reduction in operating expenses are evident in the results in addition to the big contributions from the commerce. We generated the 1.2% increase in net sales with 51 less stores from a comparable period a year ago, with an 8.9% comp in total for the quarter. For November, we were able to maintain strong momentum, particularly in e-commerce and continue to prioritize margin and profitability. While Black Friday has become more spread out over the month, we were still pleased with the sales at that day and on Cyber Monday as well. The shift to online at the expense of store traffic that we had previously referenced was evident last month and we were able to capture that demand. There are a number of well documented trends in the industry that are working in our favor with people staying at home, shopping online, as well as less store based competition. We gained market share with several of these competitors in bankruptcy or liquidation and our omnichannel presence has put us in the right place at the right time. We got the message that customers love to buy online and they are leading us to the right places. However, they are far more trends occurring within our business that we are creating that are within our control, and more importantly, we believe are sustainable over the long-term. I want to spend a little time this morning exploring these adjustments in our merchandise mix and model in more detail. We have purposely bought our existing lot -- our existing customers with us on this transition in our merchandising strategy. We didn’t leave them behind while we grew the customer base. I recognize that was a concern for most brands that have undertaken a transition like we have taken over the past few years. But we didn’t abandon our price point, we left our customers options to buy with better quality and have a relevant assortment at a great value. We have maintained a steady pace to improve quality with stable pricing, because we have taken a portion of the savings, gained from our direct sourcing strategy and put it into the quality of the merchandise. As I have noted before, the customers are already getting the improvements we are putting out there. They are seeing the improved quality and improved design as well. They are increasingly coming to us for their complete decorating projects, instead of only buying the finishing touches. A great example would be in our furniture assortment, along with tabletop furniture has been a runaway success for us. In that category, we have been able to improve our products from non-wood to full-wood furniture at the same price point. The transformation we are making in our existing model is evident in our more effective marketing, the continued growth and profitability of e-commerce and the significantly improved margin profile and leverage inherent in our business. Our marketing is on point and we have a more mature way of handling promotions. The big initiative we have been ramping up on -- is the launch of our new loyalty program that took place in the third week of October. In the weeks since that launch we are seeing an increase in sign-ups and we have already added hundreds of thousands of people to our loyalty program. During the quarter, e-commerce accounted for almost 24% of our sales, compared to 16% of total sales just a year ago and e-commerce is possible in every month of the quarter for the second quarter in a row. Our ship direct from vendor channel was up 122% for the quarter, with 480 basis points of margin gain. As we noted last quarter, in the very near future we expect to add some select brands in this channel, as we grow with the focus on extending from where we have been strong in kitchen and tabletop. The dedicated group within Kirkland's that focuses on this channel has made a lot of progress since we formed it earlier last year -- this year and we expect to have more to report early next year and in the years to follow. During the third quarter we replaced our existing e-commerce distribution center with two more efficient hubs. These hubs should begin to help the profitability in our ship direct-to-consumer channel beginning in the fourth quarter. The store base is more productive with 51 less stores. The growth in e-commerce is offsetting the lost sales from these closed doors, but we are still working to overcome the challenges in foot traffic in the stores. This is not a problem new to Kirkland's and more structural in nature, but we have a higher markup in an increased basket in the stores that we believe is sustainable. We will clearly able to be more productive with a tighter inventory condition than in past years, as Nicole will describe later, the tighter inventory is somewhat of a governor on our topline this quarter and next. This is particularly partially a legacy of the orders we needed to cancel during the pandemic and also in supply constraints across much of the sector. While we might have to excuse in the short-term, we are selling at a higher price point, we are maintaining a promotional discipline and we are getting a larger portion of the newer products. Leveraging our models is substantial, with the $45 million of annualized operating costs we have pulled out of the business through cost containment, the efficiencies and changes in our labor costs and staffing model, while we are right to -- while the right way to think about this improvement is more sequential than a year-over-year basis in terms of our overall profitability, we believe our two-year to three-year EBITDA margin targets are certainly achievable. With the cash we generated this quarter, the level of cash we are now expecting at the year end and the increased visibility in the business, the Board has authorized a new $20 million stock repurchase authorization. In last quarter that we wanted to see another quarter of results before we considered allocating capital to repurchases. With our expectation that we will be debt free at year end and cash is expected to grow in our historically strongest quarter, we believe this is a good way to deploy a portion of our capital. Nicole, why don’t you walk us through our results in more detail?

Thank you, Woody. What we saw in the third quarter results was the incremental consumer demand that is benefiting many of our home décor competitors, but also the beginning of what our model can look like with the foundational changes we have initiated. Within the quarter we had strong e-commerce sales with a year-over-year increase of 50%. Our store traffic improved from Q2 levels and outperformed our segment in ShopperTrak that continues to be negatively impacted by pandemic-related challenges. The changes we have made to improve the quality and design of our merchandise, as well as categories shift towards higher ticket items continue to have a positive impact on our sales. We had early sell-through of our harvest seasonal merchandise and a similar trend in our Christmas collection, which led to our November sales comp increase of 5.5%, which included a year-over-year increase in e-commerce of over 50%. We saw a significant increase in our gross profit margin of 840 basis points, which was driven largely by gains in product margin from simplifying our promotional message and also reducing the depths of offers and the inherent stacking of entire store couponing. We will continue to move towards more targeted customer specific discounting, while always having incentives to encourage customers to purchase. We have benefited from lower store occupancy costs from the closure of underperforming stores and negotiated rent reductions. We also saw favorability from lower freight costs from our DC to our stores driven by lower inventory levels and a rate decline compared to 2019. Gross profit margin was negatively impacted by e-commerce shipping with online sales making up 24% of our total sales and the store-fulfilled notes dropping to 35% of e-comm sales. We do expect to present fulfillment store to moderate closer to 45% to 50% in the mid-term. Finally, distribution costs increased year-over-year, driven by a capitalization entry based on inventory level and timing. We saw the benefit of our cost reductions with a decline in operating expenses at 810 basis points or $11.3 million, driven by the more efficient store labor model, corporate headcount reduction and a justification exercise for all overhead expenses. Excluding current year performance related compensation accruals this represents a 25% reduction in operating expenses, which we expect to be largely sustainable. We expect to continue to see improvements in profitability from higher margins and reduce costs, along with further leverage from continued growth in top-line sales. All of which should better position us to reach our long-term financial goals. Breaking down the comparable sales increase of 8.9%, we had strong comp increases in the first two months of the quarter, driven by the earlier sell-through of seasonal harvest products, followed by a drop off to a flat comp in October with seasonal sales having been pull-forward into September. As a reminder beginning in September of last year, we were much more promotional. So we are comping that impact on those sales and margins. The 49.9% e-commerce comp increase was driven by the direct-to-consumer channel, with our third-party drop-ship revenue up 123% and our own products shipped directly to customer up 77%, both of which were offset by lower increases in the store-fulfilled channels. During the quarter, we closed six stores resulting in a count of 381. Year-to-date, we have opened no new stores and closed 51 underperforming stores or 12% of the store base since the start of the year. We expect roughly 10 additional closures near the end of the fiscal year, but are still working through negotiations with landlords. Gross profit was 36.1% of sales, compared to 27.7% in the prior year quarter. Of the 840 basis point increase, 940 basis points related to an improvement in landed product margin primarily from reduced discounting. Direct sourcing accounted for roughly 100 basis points of the landed product margin improvement. In the latter part of the quarter, we saw initial cost pressures from shipping constraints and rate premium, specifically on product sourced from China. While we are clearly been able to navigate through these pressures and we expect significant year-over-year margin improvement in the fourth quarter, the negative impact on landed margin is expected to increase throughout the remainder of the fiscal year causing year-over-your gains to be less than what we experienced in the third quarter. Store occupancy costs declined by 300 basis points from the prior year due to the closure of underperforming stores, negotiated rent reduction and the leverage of increased sales. Breaking that down, 280 basis points was generated by rent restructuring and the remainder by sales leverage. On the prior call I mentioned that close to a third of our leases had a term renewal in the next ix months to 12 months. We are actively working through those renewals and are continuing to have success in locking in lower rate. Outbound freight, which is the movement of our merchandise from the distribution center to the stores decreased by 70 basis points from the 2019 quarter, driven by reduced route, rate decreases and sales leverage. The reduced routes were driven by store closures and fewer routes to continuing stores, primarily due to higher inventory levels in the prior year. We also saw a rate reduction of roughly 10% year-over-year. DC costs increased to 170 basis points driven by the timing of inventory capitalization and the year-over-year decline in inventory. Excluding this timing effect distribution costs declined by 20 basis points with productivity improvements offset by the channel mix shift with labor costs for pick and ship e-commerce orders exceeding labor costs to ship cases to our stores as a percent of sales. We completed the closure of the Jackson e-commerce distribution center at the end of September. We allocated a portion of our retail distribution center to fulfill e-commerce and stood up our second e-commerce hub within the quarter. This reduced our distribution center total square footage by over 200,000 feet or roughly 16% and place e-commerce distribution much closer to the end customer, which will decrease parcel cost that also improve speed to the customer. We are still in the ramp-up mode for these new facilities and expect to improve throughput and efficiency in the upcoming year. E-commerce shipping costs increased 180 basis points as a percent of total sales due to the higher mix of ship to home sales. Operating expenses excluding impairment improved to 27% of sales, compared to 35.1% in the third quarter of 2019 or a reduction of $11.3 million on a higher sales base. Store operating expenses made up 600 basis points of the reduction, driven by the store labor model implemented at the beginning of the fiscal year and aided by our reduced operating hours, leverage from closing underperforming stores and an overall review of operating costs. E-comm operating expenses increased 10 basis points as a percent of total sales, but leveraged 160 basis points as a percent of E-comm sales, as dollars increased by only $167,000 on the $12 million growth in revenue. Advertising expense declined by $1 million or 70 basis points compared to the prior year, which included advertising support for the new product category rollout. We continue to shift our spend heavily towards digital channels. Corporate operating expenses decreased by $2 million or 140 basis points, driven by reduced headcount, reduced corporate office space and an overall expense review. Performance related compensation accruals in the current year accounts for an additional 100 basis points relative to the prior year. EBITDA excluding impairment and other minor non-operating expenses for the quarter was $18.7 million or 12.7% of sales, compared to a loss of $3.1 million in the prior year quarter or an improvement of $21.7 million. For the quarter, our tax rate was based on a year-to-date discrete calculation, further impacted by a valuation allowance. A normalized rate of 23.3% was used in the non-GAAP adjusted calculation. Our earnings per share excluding non-cash impairment normalized tax rate and other minor non-operating adjustments was $0.66, compared to a loss of $0.53 in the prior year. The GAAP earnings including these items was $0.82, compared to a loss of a $1.61 in the prior year. We ended the quarter with $37.2 million in cash and no outstanding debt, which is a build of $9.6 million from the Q2 level and an increase of $33 million year-over-year, $58 million considering that revolver draw on the prior year. Combined with availability on our revolving credit facility, we had total liquidity of $106.9 million. With our typical cash build in the fourth quarter, we expect to conservatively in the year with approximately $65 million to $75 million of cash. We do not anticipate any borrowings for the remainder of the year. Inventory at the end of the quarter was $83.9 million, compared to $140.2 million in the prior year or 40% lower. The prior year levels were elevated by the rollout of new categories and we currently have 12% fewer stores, but we are down approximately 20% to our plan. This significant receipt that we made while our stores were closed in April followed by vessel and port shipping constraints has impacted our sales to some degree since the latter part of the second quarter. Because we protected seasonal buys, the inventory shortages have been in our core everyday products and it’s been much deeper in some key product categories. We expect to continue to see a sales impact in those categories in the fourth quarter, but expect to return to near planned inventory levels by the end of fiscal year. Year-to-date cash provided by operations was $14.5 million, compared to cash used of $62.4 million in the prior year or a change of $76.9 million. The improvement is due to better operating performance in the second quarter and third quarter, $42.3 million improvement year-over-year and changes in working capital $34.6 million year-over-year improvement. The working capital changes are primarily driven by lower inventory levels, offset by lower related accounts payable. Additionally, we received the $12.3 million income tax refund from the CARES Act NOL carryback in the second quarter. Capital expenditures was $7.6 million, compared to $12.8 million in the prior year and we are primarily driven by investments in supply chain and e-commerce. We still expect capital spend to remain below the low end of the initial range we communicated of $10 million for the year. The financial goals we provided on the second quarter earnings call continue to be relevant as we execute the transformation of our business over the next two years to three years. We summarized those goals on our earnings release this morning. Rather than reading through those again, I’d like to reinforce the overall message we are communicating with our long-term annual financial target. First, they all indicate how we expect to achieve topline growth, margin improvement and cost reductions over this multiyear period, with specific targets to improve our gross profit rate to the low to mid-30% range, improve EBITDA margins at a high single-digit range and improve operating income margins to the mid single-digit range. Second, it’s worth noting that those are annual targets with the seasonality in our business, we typically see stronger performance in the second half of the year compared with the first half. And lastly with -- from a liquidity perspective, our main goal will continue to be maintaining a healthy balance sheet. Within this model, we expect to generate excess cash annually and we will allocate first to projects to drive growth and/or reduce cost, but are also happy to announce that the Board authorized a $20 million share repurchase program. We intend to be disciplined and opportunistic with our share repurchase program and we will provide updates with each earnings announcement regarding activity under the plan. With that, we are ready -- we are now ready to take questions.

[Operator Instructions] And our first question will come from Jeremy Hamblin of Craig-Hallum Capital Group. Please go ahead.

Thank you and congratulations on the really strong results. I wanted to start by asking you about the composition within your same-store sales for Q3. What did you see on average ticket in the quarter and how was that split between average unit retail and units per transaction?

We saw basically a 20% increase in the quarter and average unit retail items per transaction held relatively consistent.

Got it. And in terms of -- you provided so much great detail that I missed some of things, but in terms of the components of the 840 basis points year-over-year improvement in gross margins. Can you just run through those again?

Sure. So product margin was favorable by 940 basis points, e-comm shipping unfavorable 180 basis points, store occupancy favorable 300 basis points, outbound freight favorable 70 basis points, DC costs unfavorable 170 basis points. That was timing and an accounting entry that that will flip in the fourth quarter and then miscellaneous, other unfavorable 120 basis points.

Okay. Got it. And then just looking forward and kind of running through how those various components you expect to play out here in Q4? It sounds like, again, there’s maybe some impact on your inventory levels and maybe not quite as much product margin benefit in the quarter. But can you run through kind of your range of expectations around those particular line items?

Yeah. I think the only thing I would say there and the only real difference going from Q3 to Q4 is the inbound freight that we talked about. And again we still expect to see significant improvement. It may be closer to the Q2 level than the Q3 level. We will continue to have favorability in the store occupancy line. We will likely still have unfavorability in e-com shipping just based on consumer preference that likely continues throughout the rest of the year. The DC cost timing impact that we had in this quarter we would expect to see some of that reverse into the next quarter, so that one will definitely flip.

Got it. And I wanted to just get into the direct sourcing initiative here, that looks like that’s been a big success improving quality of product and keeping prices low. What have you learned so far in the last 12 months from this initiative and how do you expect -- because I -- I am guessing that you probably see margins that would be 500 basis points to 600 basis points lower on the direct source versus third-party source. But how do you expect to use the potential benefits of that program. Is it going to be going to the consumer with low -- in the form of lower prices? Is some of that going to flow through to your bottomline in terms of higher gross margins? Any color you could provide on that?

Okay. Thanks, Jeremy. First of all, what we have learned so far on direct sourcing since it’s new for our company is slow and steady is what wins the game. I mean, we might have gone a little faster on direct sourcing. But remember this is an infrastructure change and it’s a change to our company. There’s been a couple of known benefits that we have received from the direct sourcing. One of them was the sharper price points we got from our wholesale vendors, that were knowing that they were now having to compete with us if we were getting direct sourcing pricing. So there’s been kind of a benefit on both sides, both the better pricing, certainly the better quality has been out there for both sides of the fence, both the direct sourcing and the wholesale sourcing. The other thing is that we are still in the ramp-up stage. This is a multiyear program that will help us. We have learned that we need to provide a more design information to get the kind of products that we are looking for. And I would say that from a costume standpoint, we are just at the beginning of realizing where those costs can be passed on to the financial benefits of the company or whether we should be doing continued upgrades of quality. But we are further along on the quality upgrade, so more and more of the benefit I think comes to us in a financial way as we grow that sector of the business. But like I said at the very beginning, slow and steady is the way to go on the sourcing, because there’s lots for us to learn. Remember that most our competitors do the majority of their sourcing through new direct sourcing and we are still at the early stages of that. I do think that is healthy, the look of our product in our stores was more exclusive and more cohesive, and certainly more design oriented and we have been able to maintain prices and get better quality.

Great. Thanks for that color. And then, in terms of thinking about -- you have got a, I think, a two-year to three-year target of getting to 40% to 50%. Can you give us a sense of where you might expect to be 12 months from now on your direct sourcing initiative? We are going to be looking like 30%, 35% or how much progress can you make in 2021?

Well, we will make more progress in 2021, because remember that we might in this year we had to cancel a significant amount of orders due to the pandemic and a lot of those orders were direct source. So I would say that growing it by 10 basis points, 15 basis points and even 20 basis points. But we are going to let it happen naturally and organically, because we don’t want to force it especially since there is some power, other vendors are coming through with such a desirable price points and we need to make sure that they get the benefits as the long-term Kirkland's suppliers. And so we are looking at it very evenly. But it is a huge opportunity for us over the next two years to three years.

Great. And then on your loyalty program, I wanted to -- you mentioned that you have gained a substantial number of customers here just in the last six weeks. Where does your total loyalty program stand and are there additional benefits to thinking of -- additional color, I should say, on how those loyalty members are spending versus your non-loyalty customers in terms of ticket size, frequency of transaction, et cetera?

Jeremy let me take the first part and then I am going to turn over to Nicole because she might add some very specific information on. Remember that our loyalty program is a multi-phased program. We launched it, but there’s a lot more excitement coming. As we learn more about what triggers customer’s behavior as we get more into the CRM aspects of our business. Our customers have always been loyal to Kirkland's and now and when we launched the program, we just kind of closing for a while. But now that we have reinstituted it, we are getting a big surge of customers. And not only the current customer base, but looks like a younger, more affluent customer. So we are excited about that. And Nicole’s got some possible specifics. She’s looking at her phone right now…

Yeah.

She is having…

I don’t have. I was looking at my phone. So I think to the -- we measure the loyalty program in active purchases. So roughly 7 million people and that’s the plan. What I would say about historically when we had a loyalty program before we changed that a few years ago is we really saw a lot more frequency of purchases in the top tier group and when we changed the loyalty program and took away the points accumulation, we really saw a drop off in that area. So that is really one of them. I think adding new customers is definitely a piece of it and having something that we can promote to push return visit. But having something that benefits that makes that highest here and most important customer I think is going to be one of the biggest wins as we are anticipating the program.

Great. Thanks for that. Just a couple of things and I will hop back and let -- in the queue. Just shipping rates, we have seen surcharges being placed by key distributors. In terms of the impact that you are seeing, are you looking at your shipping rates in terms of what you are potentially charging for your customers for kind of sub $100 orders? Any changes that you potentially implemented at to help offset some of the higher costs associated with higher surcharges?

Yeah. A couple of things, so actually within the quarter, because we have done a lot of things with the hubs and getting closer to the customer, even though our shipping costs were up. The shipping costs as a percentage shipped at home sales actually was favorable year-over-year. So we have been able to absorb that. I think a lot of the things that we are doing now on the direct-to-consumer channel in general is looking at the things that we ship via that channel. Meaning historically we might ship at an $8 item and pay $8 to ship it and so really looking at that as minimum AUR. How can we bundle things? How can we look at that a little bit differently? So we had already done a lot of those analytics beforehand. We are seeing rate increases to some degree. We are also seeing caps on pickups from our passable partner which has made as zone skip and do additional things to try and get around that. But I would say all in all we are actively working on all options to offset cost increases and don’t expect that to be material as we move forward.

Great. And then you guys have made some changes to your operating hours, and obviously, reduced substantially the number of stores you had. What were the total number of operating hours down in Q3? And then what do you expect in terms of operating hours to be down for Q4?

Yeah. I don’t know that calculation off the top of my head. But I can definitely work on that one and get back to you. I will say in general, we had taken three hours out of every store when we reopened after closing down for COVID. We had made the decision in November and December that we would expand back out for peak and so I would expect a decrease in operating hours to be much lower in the fourth quarter. But that after Christmas peak we will go back down to the hours that we had before, which was the three hours per store less than what we were last year.

All right. Thanks for the color. I will hop back into the queue.

Thanks, Jeremy.

The next question comes from John Lawrence of Baraboo Growth. Please go ahead.

Thank you. Good morning.

Good morning.

Yeah. Woody would you give a little bit -- a little more color on the product categories throughout the quarter and sort of how they lined up with what you told us for the first half of the year and just when you came aboard and some of those projects -- some of those new categories that you talked about have they worked themselves into the mix and why you are excited about those?

Okay. Well, first of all, I may go back to kind of the thing that we have been establishing over the years and that’s our seasonal product. It was exceptionally received better quality and we had a very improved sell-through. We spoke of our harvest product and now into Christmas with the Christmas product. So that would be one of the biggest wins and that’s something that we have learned we are good at. Customers recognize this is a great place to come and buy their seasonal product. But underlying that, we have seen some very, very impressive benefits to a couple of categories. One, furniture, we have been able to furniture to, like I said, on the call earlier improve our quality and improve our design and we redesigned some of our most -- some of our largest volume lines and they are now just hitting the stores and being received, it’s subtle. It’s not dramatic. It’s still going to be a best seller. But we were able to improve the quality and keep the price points the same. So for instance, kind of on your overall runaway success and we have a lot of runway there. We have very big sights on the future of the furniture business within Kirkland's and as we are learning how to deal with it through our infrastructure and learning how to source it in a more effective way. The second category that has just been a runaway success is anything related to tabletop. We came out with our own exclusive line of dinnerware called Simple Things, some textiles called Simple Things and it’s just been a resounding success. And what’s also been a success of the things that surround that, glassware, flatware, just the ins and outs of that business. And so we are going to be expanding that in most of our stores. Certainly testing it first in 30 to 40 stores and really expanding that tabletop assortment. But to really show a little bit more dominant too, with this is probably where we are getting the benefit of one of our major competitors not being here and that would be a huge category for them. The rug category, I’d say, it is still in development. It’s improving as we speak. We are not giving up on it. It’s been good, but we just need to make sure that we are satisfying the customer with what they are really looking for. Our core categories have probably hit the hardest in terms of some of the inventory shortages. But I look at that as a real positive. We needed to make changes in our art and wall décor category, our mirror category and the pandemic allowing us to lower the inventory, allows us to take fresh eyes and look to a future as to what our customers really want in us, in our -- we used to be a much more dominant player in the wall décor and art business and we are tracking -- we are intending to gain that back. But we had to kind of do a pause and it’s giving us a chance to look forward with the assortments that are coming in for January and February. I think are a spectacular improvement to what we had before in terms of look and design at the same kind of price point. So, I think we are going to be giving our customer a real reason to shop. Hopefully they will be using their gift cards and their purchasing now in December coming in January and February, March, with a whole new fresh look at some well-designed products that’s get in the line of our casual farmhouse style. So does that answer your question or do you -- would you like me to develop more?

That’s great. Thanks for that color.

Sure. Thanks.

Are you -- as you -- the follow up to that is, you mentioned some of these categories and the factories and some of your vendors that realize now that you are in the space. I assume that’s what you are talking about when you mentioned better wholesale deals? And obviously, more or less paying some of these vendors against each other? Is that fair?

Yeah. Or maybe not hitting and against each other, but then looking across the value and saying, I got a sharp eye in the game. We had to ask for better packaging, because we are having -- last year we had some damage issues and there is just no excuse for that. So we are going back to all of our vendors simultaneously both wholesale and direct shipment and improved our packaging, so we are getting to the customer in a more elegant way. And I think everybody has just realized that we have a big opportunity here at Kirkland's and we should take advantage of the fact that some of our competition has gone and when we have a new opportunity to satisfy customers in a bigger way. And I think the overall thing that’s helping our vendors right now is looking at us as a holistic home furnishing resource versus just buying items, the key items and trying to deliver that through high traffic. Traffic is an ominous and complex theme and we all have to deal with the retail right now. So we have to come up with solutions of how do we win even with flat or declining traffic and that’s why we ran on the basis of adding higher AUR, a better design to the product, so that we can sell more to each customer that walks in the door.

Thanks a lot. Congrats on the progress.

Sure. Thank you, John.

The next question comes from Chris Sakai of Singular Research. Please go ahead.

Hi. Good morning. I just had a question, I guess, currently, what are you guys experiencing in-store foot traffic due to COVID restrictions and this is better or worse than expected?

That’s a really good question, because we all read all those articles that were in the news about that people were going to not shop on Black Friday. We did work very diligently to pull in many sales force from the Black Friday weekend, not really knowing what to expect. And then knowing behold people came. I mean I was in the stores on Friday and we were busy and people were wearing masks and they were people were wearing masks and they were being respectful of each other’s space. And I think that we are a little bit of a low risk place to shop, because we are not one of those huge volume as warehouse stores that have hundreds and thousands of people. Ours is a little bit more pace. But our stores are busy and we were proud of the results that we got from our Black Friday and then following to the Cyber Monday. I think people just love coming to Kirkland's because one of our messages is to bring happiness home and we try to be a happy place for customers to shop. We really take that seriously. Our store associates had improved so much. They are doing such a great job and they are really embracing the fact that. We have got a really offer the best we can to our customers every single day, every single customer.

Yeah. I think I would just add to that. We are definitely down more than we would like to be. We had improvement as we mentioned in Q3 and we are ahead of ShopperTrak, which is what we always measure ourselves against and they also break that down into the home furnishings and ahead of that measure as well. But definitely are seeing pandemic-related traffic impacting and luckily are seeing a lot of that shift to online to support our e-commerce growth. So at this point just trying to make sure that we can offer the customer the way to purchase that is most comfortable for her and expect I think we will settle back out to a more normalized pace once some things are under control with current issues.

Okay. Great. I guess to go to online you guys break out the online sales for the quarter?

Meaning the comp increase or the total dollars what…

Yeah. The -- I guess, the total dollars -- the total dollar sales, I guess, as a percentage of the total?

Yeah. So total dollar sales just over $35 million. It was 24% of total sales.

Okay. And then, I guess, lastly, do you -- as far as curbside pickup goes, has that been a success and what are you experiencing there?

I am going to give our stores such credit for this. During the first early couple weeks of the pandemic, we didn’t have curbside pickup and we also didn’t even really imagine the contactless portion of that. But our stores organization rallied and within two weeks we got that set up. And yes, it’s been a huge success. It will also be a benefactor if we do have certain stores that do have to close temporarily as some way to satisfy our customers. We have gotten better and better at it. Now most of our customers are coming inside and picking it up versus asking for curbside. But those customers that do ask for a more contactless way, we have set up signs with special parking spaces in front of our stores that if they just call a number, we would bring their product out to them and have no contact. So, yes, I think, it’s been a runaway success and there’s been a lot of learning on how to get better and better at that.

Okay. Great. Thanks.

The next question comes from Matt Schwartz of MAZE Investments. Please go ahead.

Hey guys. Congratulations.

Thanks, Matt.

Thank you.

Well, I have got a couple quick questions. So, obviously, the first quarter was rough on a lot of companies including yours with the dramatic yield…

Yeah.

… decline due to COVID, so when I neutralize that number and just kind of throw a conservative Q1 in there. I already have your EBIT margins running for this year once I start to plug in some of these assumptions you gave for the fourth quarter. I get EBIT margins that are already well ahead of your target like approaching 8% EBIT margins, and I guess, the EBITDA margin would probably be something like 400 basis points better. So can you walk me through your assumptions with those margin targets because to me it looks like you are there and they are going to be substantially better than that going forward?

Yeah. I think the thing that I would just say on that is there’s a lot of unknown. We have a lot of moving pieces and the transformation that we are going through. I do think if everything works as we would like it to then we can hit those targets earlier in the window. And at this point, we will continue to update those as it makes sense. But there are a lot of pieces, there’s a lot of unknown in the macro environment right now and what that may look like as far as topline impact next year. So I just want to make sure that what we put out there is something that we know we can achieve and if all goes well I do think there’s upside to that.

Okay. Thank you. And then also in terms of capital allocation, I think, it’s great that you announced the buyback. I mean, you are -- certainly on my numbers, your current multiple is still half of what your competitors are and you are generating a ton of cash. So what are your thoughts on capital allocation for additional buyback even beyond or even now for dividend or others?

So right now we are continuing to be somewhat conservative about how we look at that and there will be dollars that we want to allocate to growth and to our own internal investments. Outside of that, the share repurchase, I would say, probably, starts out somewhat conservative, but I do -- we all believe that our stock is undervalued and we will continue to look at that as we move forward with a $20 million authorization. I don’t -- I think at this point, again, if we hit the goals that we have in our model, we will generate significant cash and we will continue to look at what the right ways are to spend that money and have the best return.

Okay. Great. And then lastly, obviously, you have done a great job rationalizing the cost structure. Can you help us understand as your e-comm business continues to grow next year, how should we think about your ability to sustain your SG&A dollars next year?

The way that we are looking at that is, I mean, I think, it’s important for us as we move forward for a lot of reasons to remain lean. I actually think we operate much better than we did before and have much more of a sense of urgency. So the way I look at that as we move forward is, as the business evolves, we will need to re-allocate dollars from one area to the next in order to support the right growth. But I am not looking at G&A is having any sort of significant increase based on that growth.

Okay. All right. Thank you very much. Congratulations and I look forward to chatting offline. Thanks.

Thanks, Matt.

Thanks, Matt.

Our next question is a follow up from Jeremy Hamblin of Craig-Hallum Capital Group. Please go ahead.

Thanks for taking the extra question here. I wanted to get into your, Nicole, I know you have got a third of your leases up for renewal and that you have been diligently working on it. I wanted to just get a sense for the conversations you are having with landlords. How effective and I know you can drive a tough bargain. But what percentage of those lease renewals are you seeing dollars and cents lower than what you had before and can you give us any color on the types of maybe total rent reduction that you might expect for 2021?

I wonder if Nicole has ever imagine that she would have a master’s degree in real estate negotiations. But I think she’s earned it this year. So go ahead. Enjoy the benefits of that.

And we actually have a really dedicated person that works on this day-to-day. But what I would say is, probably, 90% of the negotiations we are able to get some benefit. And in a lot of cases its good real estate and they don’t have vacancies and so what we are getting in those is negotiating to continue with flat rents instead of the escalations that are built into a lease. There are a good percentage where we are getting significant up to 50% rent reductions. And at this point because we have worked quite -- we are through, I’d say, the majority of them that don’t have fully executed deals would rather not put out a number on what that looks like. But we will be able to do that in the near future on what year-over-year savings are for next year.

Great. Thanks for the color. Best wishes for the holiday season.

Thank you.

Thank you, Jeremy. Okay. Thank you, Operator. As always, we are available for follow-up questions over the next several days and weeks. But before I sign off, I want to wish everyone on the call a wonderful holiday. Stay safe and healthy and we look forward to seeing you online and in our stores. Thank you.

The conference is now concluded. Thank you for attending today’s presentation and you may now disconnect.