Brand House Collective Inc (TBHC) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to this Kirkland's Inc. conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Tripp Sullivan. Please go ahead, sir.

Good morning and welcome to this Kirkland's Inc. conference call to review the Company's results for the second quarter of fiscal 2005. On the call this morning are Jack Lewis, President and Chief Executive Officer, and Rennie Faulkner, Executive Vice President and Chief Financial Officer. The results, as well as notice to the accessibility of this conference call on a listen-only basis over the Internet, were released earlier this morning in a press release that has been covered by the financial media. Except for historical information discussed during this conference call, the statements made by Company management are forward-looking and made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties 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 the Company's annual report on Form 10-K filed on April 14, 2005.

With that said, I will turn the call over to you, Jack.

Good morning. Thanks for joining our call this morning. The primary purpose of today's call is to report sales and earnings results for the second quarter of fiscal 2005. I will summarize some of the key aspects of our financial results, and I will also comment on the progress we are making in repositioning the Company for success in the second half of the year. Rennie will review the second-quarter financial statements that were included in the press release and provide some commentary on our financial outlook for third quarter and the remainder of fiscal 2005.

For the second quarter, we had a net loss of $0.29 per diluted share consistent with our previously issued guidance. We reported a net loss of $0.14 per share for the second quarter of 2004.

As previously announced, comp store sales for the quarter decreased 10.2%. Producing comparable store sales increases remained difficult throughout the quarter as we experienced negative comp store sales in core categories including framed art, lamps and garden.

We also experienced a comp decline in our gift and novelty category. As I will discuss later, we are deemphasizing our commitment to certain novelty merchandise that does not fit our customer's desire for traditional and eclectic items for her home. We produced positive comp sales results in furniture, alternative wall decor, floral, mirrors, textiles and candles. These increases were largely due to new and unique items being added to the merchandise assortments in these categories. The quarter was characterized by declines in customer traffic, traffic in both mall and off-mall stores. However, our off-mall stores were more successful than the mall stores in overcoming these traffic challenges by increasing customer conversion rates and achieving higher average dollar transactions.

Accordingly, overall sales performance for off-mall stores was superior to mall stores. Off-mall stores were low single digit negative for the quarter, and average sales volume in off-mall comp stores was 17% higher than mall stores. The new store class of 2004, which was 80% off-mall, produced similar encouraging results. We adopted an aggressive clearance strategy in our stores throughout most of June and July as we took steps to markdown underperforming merchandise and redirect fall open to buy dollars to more productive categories and items. This clearance effort was successful, but it significantly impacted gross margin for the quarter.

We ended the quarter in good shape on inventories, and our stores are now positioned well to receive fresh merchandise that we believe will support better sales and better gross margins in the second half of the year.

On the real estate front, we opened 10 stores and closed nine stores during the quarter, bringing our year-to-date activity to 19 openings and 26 closings. All of the new stores are off-mall, and all but one of the closings are mall stores.

As of quarter end, we had 313 stores in operation, 216 in malls and 97 off-mall. For all of fiscal 2005, we anticipate opening 60 stores and closing 30, which will bring our total store count to 350 at year-end. At year-end we expect our store base to be comprised of 212 mall locations and 138 off-mall locations.

At this point, Rennie will take you through financial segments that were included in the press release.

Thanks, Jack. Good morning, everybody. I will begin with a review of the second-quarter income statement. Net sales for the first quarter or for the second quarter rather were $86.8 million, a 2.4% increase from 84.7 million in the prior year's second quarter. The comp store sales decrease of 10.2%, primarily resulted from fewer transactions due to weak customer traffic trends. Customer conversion rates were slightly lower for the quarter, reflecting conversion improvement in off-mall stores but slightly lower conversion in mall stores. The average retail selling price was slightly down, but was more than offset by an increase in the number of items per transaction resulting in an increase in the average ticket.

Our comparable store sales figure reflects a refinement to our previous calculation methodology. In order for our comp sales results to more fully reflect underlying business performance, stores will now be included in the comparable store sales calculation on the first day of the month following the 13th full fiscal month of sales. Previously stores were included in the comparable store sales calculation on the first day after they had been in operation for one full fiscal year. The change in methodology had virtually no effect on the second-quarter comp sales number.

Gross margin for the first quarter -- for the second quarter decreased to 22.6% of sales from 25.9% in the second quarter of 2004. The principal factor in the year-over-year margin decline was a lower merchandise margin due to the high-level of markdowns during June and July. The occupancy component of gross margin also increased as a percentage of sales due to the deleveraging effect of the comp sales decline.

The other components of cost of sales, freight and distribution costs decreased slightly as a percentage of sales reflecting very strong performance by our logistics team in the areas of distribution center efficiency and transportation cost management.

Operating expenses increased to 29.2% of sales from 27.7% of sales in the second quarter of fiscal 2004. Although both corporate and storage expenses were below plan on a dollar basis, the expense ratio was above plan due to the deleveraging effect of the negative comp sales. Payroll increases from additions to management, as well as the expenses associated with management recruitment and relocation, were areas of expense growth during the quarter. Total operating expenses increased 7.9% for the quarter, slightly below the 8.3% year-over-year growth in the store base.

As we work to restore stronger sales and gross margin performance in the second half, we are working equally hard to control and where possible reduce operating expenses, while still insuring the necessary staffing and infrastructure support for our growth plans.

Depreciation and amortization rose 90 basis points as a percentage of sales, primarily reflecting the new store openings in 2004 and 2005. The majority of leases for our off-mall stores now have five-year terms with a minimum of two five-year options. Accordingly, we typically are depreciating the leasehold improvements over five years rather than 10, which was our customary treatment with a 10-year mall lease.

Another factor leading to higher depreciation expense in the second quarter was the equipment and systems investments that were made in connection with the June 2004 startup of our new distribution center. Interest expense was less than prior year as revolver borrowings were below prior-year levels throughout the quarter. Our effective tax rate for the quarter was 39.5%, same as the prior year quarter.

And finally, net loss for the quarter was 5.7 million or $0.29 per diluted share as compared to a net loss of 2.7 million or $0.14 per diluted share in the second quarter of fiscal '04.

Turning to the balance sheet, the Company ended the quarter in solid financial position. Inventories at July 30, 2005 were 46 million or 147,000 per store as compared to 42 million or 145,000 per store July 31, 2004. These inventory levels were in line with our expectations coming out of the quarter as we begin the buildup for the holiday season.

At quarter-end, we had $2.7 million in borrowings outstanding under our credit line as compared to 11.1 million at 7/31/04. We are in a solid liquidity position as we anticipate significant merchandise receipts and also high levels of new store construction activity during the next eight to 10 weeks. Our credit line will provide ample funding for these inventory and capital requirements.

For fiscal 2005 we are estimating capital expenditures of approximately $27 million to $29 million, the majority of which relates to new store construction. Net of landlord allowances we estimate that the net cash outlay for capital investment in fiscal 2005 will be $15 to $17 million.

The final topic that I will cover briefly today is our guidance for third quarter 2005 and updated guidance for the fiscal year. For the third quarter of fiscal '05, we're forecasting a loss of $0.12 to $0.16 per diluted share. We are estimating that our comparable store sales will decline by 3 to 6% for the quarter.

As Jack will discuss in a minute, our merchandising and marketing teams have made great progress on developing strategies and tactical plans for third and fourth quarter. Our goal remains to return to positive comp store sales in the second half of the year. However, we are maintaining a cautious outlook for third quarter as we expect the impact of these plans to not be fully reflected until early 2006.

For fiscal 2005 we now are forecasting earnings of $0.12 to $0.20 per diluted share with a comparable store sales decrease of 5 to 7% for the full year. For the full year, we're revising our guidance to reflect final second-quarter numbers and a conservative approach to the timeframe one can reasonably expect for a meaningful upturn in sales trends. This guidance reflects the sales expectations for fourth quarter that is modestly better than third quarter, but still in low single digit negative territory.

I will now turn it back to Jack for update on our progress on positioning the Company for success in the second half of the year.

Everything we do at Kirkland's starts and ends with the customer, and this principle has been at the center of our planning for the second half of 2005. During the past two months, our management team has been digesting the results of a comprehensive customer research study -- visiting stores, talking to our customers and establishing strategies to gross sales in the third and fourth quarters. Through this research and through our sales successes and our shortcomings, our customer has spoken to us very clearly about the merchandise she wants to see when she stops at Kirkland's. She also has spoken clearly regarding the type of experience she is looking for when she visits our stores.

On the merchandise side, we want Kirkland's to stand for traditional and eclectic styles and value. Always value. Price is very important to our customer. I'm pleased with the progress we are making in creating merchandise assortments that meet our expectations on style and value.

We are focusing our merchandise assortments on thrust departments that we have identified as having large sales potential. Examples include candles, textiles and wall decor. We also are improving our methods of purchasing and allocating goods to ensure that stores with the largest sales potential are receiving adequate breadth and depth of assortment.

On the store side, we're aiming for our stores to be fun and entertaining to our customers. A place where she can always expect to see new and inviting displays that make shopping easy and that inspire confidence about what she is buying for her home. Our people are excited about a renewed and intensified emphasis on engaging our customer and helping her to coordinate looks that reflect her style.

The past 10 weeks have been busy ones as we have analyzed and evaluated our business performance. We have instituted changes in the tools and processes we use to manage our merchandise assortment. Made important decisions about which merchandise categories to fund aggressively and which to deemphasize. Assessed our marketing strategies and expanded our commitment to fourth-quarter advertising. We have made key additions to our team and built a complete merchandise and financial plan for the second half of the year. Weak traffic continues to be an obstacle to achieving positive comparable store sales, but we feel confident in the changes we are making and believe that they will lead to better business performance in the months ahead.

We also continue to see positive results from our strategy of opening stores off the mall. Better sales, lower operating costs, closer to our customer and more convenient to her lifestyle. We look forward to reporting our progress to you over the next several quarters.

That concludes our prepared remarks. Operator, we now would like to take questions.

(OPERATOR INSTRUCTIONS). Neely Tamminga, Piper Jaffray.

I just have a couple of questions for you all. In terms of traffic, obviously it's a tough environment out there for your core customer with the gas prices. I was just wondering for this holiday what some of your additional marketing plans might be to help generate that traffic back into stores? And then I have just a housekeeping question on the balance sheet after that.

Okay. The customers tell us repeatedly the reason they shop other stores is to buy merchandise that fits their lifestyle. And when you quite offering that assortment of merchandise, their traffic does diminish in the stores. Our focus is on traditional merchandise and eclectic styles. This is what our research has indicated this customer is looking for, and we have accelerated the process in making sure that we have the merchandise assortment that meets her expectations.

In addition to that, we will be doing more advertising. In fact, there will be almost twice as much advertising in the fourth quarter than we had last year, and the circulation will go up about five times over last year. So the merchandise assortment will improve, and our marketing messages will be increased considerably.

And can you give us a sense of when that might go into effect? Is that an October event? Is that a November event?

November.

November? Okay. And then just a follow-up question for Rennie here on the balance sheet. Rennie, is there just a timing change going on here with the Accounts Payable being up 25, 26%? Can you give me a little bit more color as to why Accounts Payable are up?

Yes, I think that really is just the timing issued. I think the timing effect was most pronounced really when you look at the year-end balance sheet. Really from the standpoint of year-over-year, the growth in payables fairly well tracks the growth in inventory. I think we did have some timing issues in terms of the way things fell in at year-end.

(OPERATOR INSTRUCTIONS). Peter Benedict, CIBC World Markets.

A couple of questions. Rennie, do you have the mall and off-mall square footage numbers at quarter-end? And if you could just talk a little bit about maybe the sales (inaudible) trends that you're seeing off-mall versus on the mall?

And then as a follow-up to that, the depreciation you had spoken a little bit about why that has been running a little bit faster. Do you expect a consistent growth rate in the back half of the year? I think it has been growing around 30% in the first half of the year, so how do you see that through the balance of this year?

Okay. First of all, on the footage, at the end of the quarter we had total footage -- let's see -- we had total footage of about 1.5 million feet. Really when you look at it compared to year-end, the overall growth in the footage has been fairly modest because we have had a number of closings in addition to the openings. But in terms of the mix, it is about almost right at 2/3 mall and 1/3 non-mall footage at the end of the quarter.

As to sales per foot, we have been opening larger footprints in our off-mall stores. Our footprint for the class of 2005 new stores is going to average over 6000 feet, which will be the first time that is the case -- that has ever been the case. As a result, while we are pleased with the sales result, the sales per foot numbers are lower than our comp stores and our establishment mature stores either in mall or outside the mall. So sales per foot has been lower, but operating profit -- overall operating profit in the box has been a lot higher, and that just is due to the occupancy cost benefit that we get from going off-mall.

On depreciation, the answer there is that you will see a little bit of a slowdown in that 30% kind of year-over-year growth because we are anniversaring the DC that came up in June of '04. We still are going to have this issue with more of our leases being done in a five-year structure than a 10-year structure. But the 30% number will ebb somewhat in the second half.

Okay. That is helpful. Then, one follow-up if I could, Rennie. On the operating expenses that you say grew about 8%, is that the type of growth rate we should think about for the back half and what you're assuming in your guidance? You mentioned that you might try to squeeze that a little bit more. What can you kind of tell us about that? Thanks very much.

I think that as you model it, I think looking at operating expense growth to roughly track the growth in the store base is a reasonable way of looking at it. As I mentioned in my prepared remarks, as much as we're doing a lot of things in terms of the merchandising and marketing areas of the business to get the top line and the margin going back in the right direction, there actually are a number of other things we are looking at below the gross profit line to improve and give us the ability to leverage expenses at lower levels of comp.

So while we're doing that and while we have identified a number of initiatives, I think from a planning and guidance standpoint, thinking about operating expense growth around that store growth number is the way to do it.

David Magee, SunTrust Robinson-Humphrey.

Good morning. Can you -- excuse me, if I miss this -- did you all comment about when your clearance activity and the transitional activity was largely completed at this point, and at what point do you think the stores are reset this fall the way you want them to be?

They are largely completed at this point. Labor Day weekend will be the last push we really have on clearance, and that should eliminate any remaining clearance we have at this point.

Coming out of Labor Day weekend, our stores should be set for the fall season. We have already started receiving harvest and Halloween merchandise, and Christmas has also begun to be delivered to the stores.

To the extent that you've got some of the fall merchandise in the stores right now, are you happy with what you have now in terms of the sell-through?

Yes, we are very happy. Our results are actually exceeding plan at this point.

Great. Thanks a lot, guys.

There appear to be no further questions at this time. I would like to go and turn things back to Mr. Lewis for any additional or closing comments.

Okay. We would like to thank everyone for your participation in the call today. We will be available for follow-up questions you may have later today. We also look forward to speaking with you on our next quarterly conference call and thanks again.

And again, that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.