Brand House Collective Inc (TBHC) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Kirkland's Inc. first-quarter 2011 conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded today, Friday, May 20, 2011.

I would now like to turn the conference over to Tripp Sullivan, Corporate Communications. Please go ahead, sir.

Good morning and welcome to this Kirkland's Inc. conference call to review the Company's results for the first quarter of fiscal 2011. On the call this morning are Robert Alderson, President and Chief Executive Officer, and Mike Madden, Senior Vice President and Chief Financial Officer.

The results as well as notice of the accessibility in this conference call are 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, 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, 2011.

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

Thanks, Tripp, and good morning, everyone. Thanks for joining us. We knew the first quarter would be a challenge given the difficult comparisons we were up against from last year's unprecedented results. We were pleased with our earnings performance being above our guidance range despite the decline in comparable store sales. We achieved this level of earnings to a slightly higher merchandise margin than anticipated combined with lower operating expenses and a lower tax rate.

I will turn the call over to Mike, who will walk you through our financial results.

Thanks, Robert. Good morning, everyone. I will begin with the first-quarter review and then finish with financial guidance for the second quarter and performance goals for fiscal 2011.

For the first quarter, net sales were $94.4 million, a 1% increase versus the prior year quarter. As previously announced, comparable store sales decreased 8.4%. Average sales per store were down approximately 6%.

The comp sales decline was driven by a 7% decline in transactions and a slight decline in the average ticket. The decrease in transactions resulted from slightly negative year-over-year traffic counts and a decline in the conversion rate. The decrease in the average ticket was the result of the lower average retail selling price partially offset by an increase in items per transaction.

Comp sales results were relatively consistent across geographic areas of the country and consistent with the pattern we experienced in Q4 of 2010. Among the more significant areas of the country in which we operate, we had better than Company average results in Florida and California and worse than average results in Texas and Louisiana.

Merchandise categories showing comp increases were floral and textiles. These increases were offset primarily by declines in our wall categories and decorative accessories. E-commerce sales, which are not currently included in our comp base, were $1.6 million for the quarter. The business launched in November of 2010, so there were no e-commerce sales in the prior year period.

In real estate, we opened three stores and closed 10 stores during the quarter. At the end of the quarter, we operated 293 stores, 238 of these stores or 81% were in off mall venues and 55 stores or 19% were located in enclosed malls.

At the end of the quarter, we had 1,913,114 square feet under lease, an 11% increase from the prior year quarter. The average store size was 6,529 square feet, which is a 6% increase.

Gross profit margin for the first quarter decreased 313 basis points to 40.4% of sales from 43.5% in the prior year. The components of reported gross profit margin were as follows. First, merchandise margin decreased 175 basis points as a percentage of sales. As expected, higher inbound freight costs negatively affected the margin during the quarter, albeit not to the level we experienced during the back half of fiscal 2010.

The year-over-year increase in inbound freight costs accounted for 94 basis points of the decrease. The remainder of the decrease in merchandise margin was the result of higher rates of promotional activity and markdowns as compared to the prior year.

Secondly, store occupancy costs increased 69 basis points as a percentage of sales. This increase was primarily the result of a decline in comparable store sales and a reduction in the number of renegotiated leases versus the prior year.

Third, outbound freight costs increased 62 basis points as a percentage of sales, reflecting deleverage and an increase in diesel fuel costs as well as shipping and packaging costs associated with e-commerce.

Lastly, central distribution costs increased 7 basis points as a percentage of sales due to deleverage.

Operating expenses for the quarter were $29.7 million or 31.4% of sales as compared to $26.7 million or 28.5% of sales for the prior year quarter.

Deleverage from the comparable store sales decrease led to an increase in store rages as a percentage of sales accounting for 65 basis points of the increase in operating expenses. Stock compensation charges increased 39 basis points as a percentage of sales as a result of the increase in valuations associated with stock option and restricted stock grants.

Marketing expenses increased 37 basis points as a percentage of sales as a result of an increase in promotional activities as well as the decline in comp sales. The remainder of the increase in the operating expense ratio is primarily due to deleverage.

Depreciation and amortization increased 17 basis points as a percentage of sales reflecting the increase in capital expenditures during 2010 combined with relatively flat total sales.

Operating income for the fourth quarter was $5.2 million or 5.5% of sales as compared to $11 million or 11.7% of sales in the prior year quarter.

Income tax expense was $2 million or 38.2% of pretax income versus expense of $4.5 million or 40.6% of pretax income recorded in the prior year quarter. The decline in the tax rate was primarily the result of a reorganization of the Company's legal entity structure, which resulted in a lower projected state tax rate.

Reported net income for the quarter was $3.2 million or $0.15 per diluted share as compared to net income of $6.5 million or $0.32 per diluted share in the prior year quarter.

Turning over to the balance sheet and the cash flow statement, inventories at April 30, 2011 were $44.6 million, which was within our guidance range or $152,000 per store as compared to $38.3 million or $136,000 per store in the prior year. These numbers reflect an increase in total inventory of 16% and an increase of 12% on a per store basis. This compares to an 11% year-over-year increase in total square footage and a 6% increase in average store size.

We expect to end the second quarter with inventory levels in the range of $46 million to $48 million.

At the end of the quarter, we had $90.3 million in cash on hand, an increase of $16.7 million versus the prior year. No borrowings were outstanding under our revolving line of credit.

Capital expenditures for the quarter were $3.1 million, consisting primarily of information technology investments and the construction of three new stores.

The final item I will cover before turning it back over to Robert is provide some guidance on our outlook for the second quarter of 2011 and some high-level performance goals for the full-year fiscal 2011.

For the second quarter ending July 30, 2011, we expect total sales to be in the range of $92 million to $94 million, reflecting a comparable store sales decline in the mid-single digit range compared with net sales of $93.5 million and a comparable store sales increase of 1% in the prior year quarter.

We expect year-over-year inbound freight costs comparisons to moderate with inbound freight costs as a percentage of sales roughly equal to the prior year quarter. However, with current comp sales trends still negative, we expect pressure on the merchandise margin in the form of additional promotional activity and higher markdown rates.

Operating expenses in the second quarter should approximate the amount recorded in the first quarter. Earnings per share are expected to be in the range of $0.01 to $0.05 per diluted share as compared with $0.16 per share in the prior year quarter.

We expect to open eight to 10 new stores and close approximately five stores during the quarter. For the full year fiscal '11 as it relates to store count and store growth, we have moderated our expectations somewhat to account for a tightening in space availability and delays and the expected turnover of chosen locations. We now expect to open approximately 20 net new stores for the full year, representing an increase in total square footage of slightly more than 10% versus the prior year. The store openings will be weighted toward the back half of the year and the timing of the remaining closings will coincide with replacement store openings.

Our topline expectation is for total sales in fiscal '11 to be above fiscal '10 in the range of 6% to 8%. This level of sales increase takes into account the store growth expectations combined with low double-digit negative comparable store sales. The expectations reflect improvement in comparable store sales trends as the year progresses.

Based on our current outlook, we would expect operating margin for fiscal '11 to decline to the 7% to 8% range from the 10.1% recorded in fiscal '10. We expect sourcing cost pressures and outbound transportation costs to increase due to recent rises in oil prices, particularly impacting the back half of fiscal 2011. Some of these increases may be offset by a decline in inbound container rates which are currently below prior-year levels.

Additionally, the low single-digit negative comparable store sales expectation would result in deleverage of occupancy costs and other operating expenses.

With a tax rate assumption of approximately 38.5% for fiscal '11, we would expect earnings per share to be in the range of $0.95 to $1.05 per share for the full year.

From a cash flow standpoint, we anticipate again generating strong operating cash flow in 2011 and fully funding our new store growth and technology improvements through this internally generated cash flow. We do not anticipate any usage of our line of credit in 2011. Our facility expires in October of this year and we are progressing nicely on the renewal or the replacement of this facility.

Capital expenditures are currently anticipated to range between $23 million and $26 million in 2011 before landlord construction allowances for new stores. We currently estimate that approximately $14 million to $16 million of the total capital expenditures will relate to new store construction and $5 million to $7 million will relate to information technology investments with the balance of our capital expenditures relating to maintenance, store merchandise fixture enhancements.

We are also evaluating alternative uses of cash to improve shareholder value given the current size of our cash balance and the projected cash flows from the operations of the business. We plan to update these annual performance goals and outlook each quarter during 2011.

Thank you and I will now turn the call back over to Robert.

Thanks, Mike. First-quarter results were pretty much as expected with difficult comparable sales and earnings per share comparisons due to our historic outperformance during the first quarter of 2010. Our sales results were consistent across our mall and off-mall store groups. Sales metrics were indicative of the results, customer traffic on a quarter-over-quarter basis remained reasonably steady but slightly negative while conversion and total transactions were each down mid single digits. Average unit retail decreased low single digits. Only items per transaction experienced an increase.

We were pleased to exceed our merchandise margin plan for the quarter, which was slightly down to last year. We expected an experienced continued pressure on merchandise margins throughout the quarter due to the impact of container costs on merchandise receipts from products shipped from Asia prior to such costs beginning to moderate, the benefits of which are expected to be felt in the back half of this year.

The pressure on price of products sourced in Asia is evident in our negotiations, but so far manageable and not a major factor for the first quarter. We expect product price pressure to increase throughout the year and to affect merchandise margins somewhat more in the back half but it's difficult to quantify at this point.

As expected and reflected in our plan, consumer reaction evoked a higher degree of promotional activity for Kirkland's throughout the quarter which also affected merchandise margin as we attempted to match prior year's sales with a shorter, more focused two-week events cadence and multiple planned promotions.

Continued sales caution by our middle America-dominated customer base was evident in our stores. While traffic on a quarter-over-quarter basis held reasonably steady, customers continue to be selective and cost-conscious. Price and promotional activity clearly made a difference in the buying decision as stronger sales results were consistently generated for more liberal use of promotional coupons, sales promotions, and merchandise markdowns.

This cautious attitude towards spending contrasted strongly with the prior year quarter, where strong merchandise trends in a wall decor, mirrors, candles, and lighting and decorative accessories led and drove substantial full priced business in a period when all of our merchandise categories performed strongly and positively on a comparable basis.

We expect consumer caution to continue into the present quarter and for the foreseeable future unless gas and food prices moderate, job creation accelerates, and confidence about the economy becomes more widespread, clearly felt, and trusted in households.

Merchandise performance during the first quarter was particularly affected in three categories, mirrors, alternative wall decor, and frames. Before discussing these, I would like to report and comment on the topic of interest from our last call where we mentioned our emphasis in the first quarter on remedying our second-half 2010 struggles with framed images, which is typically about 15% of our annual revenue and thus a very important category. We attacked that problem with a focus on new and more varied content and techniques including offerings from additional vendors; a more focused core offering with fewer promotions that diluted the value of the core group; enhancement of our canvas group to take advantage of emerging trends; fewer SKUs and deeper buys and more balance and consistent in-stock positions across price points and sizes.

We were gratified to experience improved performance in framed images during the first quarter. We actually exceeded our first-quarter sales and margin plan while also increasing our average unit retail.

We had planned the quarter in down in comp sales for art but the positive results suggest that we have made headway in positioning the category for stronger downstream performance.

In alternative wall decor, our metal group featuring new offerings in gauge, color, and finishes showed considerable improvement over performance in the back half of last year and for the first quarter continued to perform satisfactorily to plan. However, the shadowbox class continued to lose sales and margin momentum with the continuous of last year's down trends despite the offerings and strong promotional support. Merchandise trends and innovations ebb and flow in our sector, and it appears this one has ebbed the moment. So we will react accordingly by redirecting our investment.

We are aggressively dealing with recent performance issues in the frames category, seriously decreasing the open to buy dollars devoted to collage frames, reducing our SKU offering, rethinking our core offering, and concentrating on a stronger and more varied effort in tabletop frames, which have performed reasonably well to plan year to date. As we deal with categories in need of improvement, our short product development and delivery cycles from source and internal product development capabilities allow us to be relatively nimble in reacting to business trends, both favorable and unfavorable.

We continue to expect solid business results in the second quarter and beyond in furniture, decorative accessories, candles and lighting, textiles and floral. Our seasonal buys are largely accomplished for the back half and we have strong confidence in their positive contribution to second half business. We have easier comparisons in the back half and that period represents a big opportunity for us.

We continue to work on accretive business and merchandise classes not currently represented in our stores. Second-quarter sales and margin trends quarter to date are reflected in our guidance for the quarter in sales and earnings. We do not expect much benefit to merchandise margin from the inbound freight trends during the second quarter, but we do expect some lift in the second half. Container rates continue to slowly moderate and are on track to stabilize at more historically normal rates.

Our late second-quarter big sale and back-to-school offerings are prospectively promising. In very recent days, oil and gas futures suggest some relief this summer to hard-pressed consumers on fuel prices. Immediate economic pressure from floodwaters impacting families, crops, and homes will eventually recede in the Midwest and lower Mississippi Valley and the storms of spring that pounded the heart of Kirkland's country for weeks will moderate.

Our e-commerce business continues to progress satisfactorily while still very early stage. The SKU set continues to slowly grow and evolve, as does our new platform capability. Our emphasis will continue to be on slow but steady progress toward a significantly larger SKU offering in the Web store with a sizable percentage of SKUs offered exclusively on the Internet as we seek to expand our customer base and serve both stored and unstored areas.

Third-party offerings in fulfillment remain an opportunity and a point of development emphasis. Expansion of style, scale, and price point are equally important in our scope of development work.

Real estate openings in the first quarter lagged our expectations. The market is quietly but perceptibly tightening for both space and deal quality. We believe that this year we can open a net of approximately 20 new stores, equating to slightly more than 10% growth in square footage without sacrificing deal and location quality.

In the first quarter, space turnover on lease space has been delayed in numerous instances for a myriad of reasons, which is unfortunately typical in this space. We opened only three stores during the quarter and closed 10, less and more respectively than we had expected. We expect to open eight to 10 stores in the second quarter. Progress in leasing and space turnover has accelerated during the second quarter, but the openings will be seriously back loaded as always despite our contrary intentions each year.

Vacant large space redevelopment continues to be painfully slow to provide leasable space to the marketplace, but it does seem to be improving slightly. However, landlord preference seems to always favor a single user replacement which slows the process considerably. We expect some pressure on deal availability to develop maybe later this year and beyond absent the reemergence of considerable commercial real estate development. However, we expect such commercial center development to logically follow improvement in a residential real estate market specifically a new housing development and sales. That has not yet happened and it's truly anyone's guess at the moment when our economy begins to generate jobs in sufficient amount long enough to change consumer sentiment and asset disposition and to provide sufficient confidence in future prosperity that cause buyers to pull the trigger a new housing levels that yield a new space dynamic in this marketplace.

All of that said, we don't envision a robust second quarter in sales and earnings, but we do remain somewhat encouraged by indications of improvement in areas of concern in our lead merchandise categories. At the moment, we are not converting customers in sufficient numbers in our stores at a high enough average ticket to drive stronger results than we have opined.

That suggests some convergence of two factors, one that our merchandise mix is not resonating sufficiently with our customers despite the great prices and value that we are offering. And that there remains some serious consumer reluctance in nonessential spending for many reasons. We are aware of the issue and quite engaged in driving our merchandise investment towards greater productivity and I believe that we will see continued progress of the year unfolds.

We will continue our modest level of store growth this year because we're opening very good stores at deal rates that will be beneficial to the Company for many years and it has the corollary benefit of continuing to improve the quality and potential of our store base.

We will remain controlled and productive in our use of inventory and expenses. Our IT investments remain on track and we look forward to both completion and implementation over the next six to 18 months and a gradual lift in productivity and human capability.

Our marketing efforts continue to be Internet-based and directed, which we believe is the best and most efficient use of those dollars both now and in the future and will contribute most strongly to a more productive store group over time.

Our recent surge in acquiring facebook fans is encouraging as we engage a decidedly different and more vocal group of Internet users.

We have many challenges, but we remain confident in our box, our niche, and our team. We expect better results and are fully committed to making that happen for ourselves, our customers, and our investors.

Thanks for your interest and time today. Operator, we are available for questions.

Thank you. (Operator Instructions). Brad Thomas, KeyBanc Capital Markets.

Thanks. Good morning, Robert. Good morning, Mike. I wanted to talk a little bit about just the trends that you saw during the quarter in terms of your sales and what you are seeing thus far in May that lead e you to bring down your sales outlook for the year.

Well, in speaking about the first quarter first here, I think as we I think have discussed in the past, our comparisons were tougher earlier in the quarter and we expected a little better results later in the quarter as we started to go up against some of those easier comparisons. As you look across the quarter, comps were pretty consistent and therefore kind of on a two-year basis we were a little behind the trend we were one in February and March by the time you got to April.

Then as we started May, we are kind of on that same trend and as we typically do, the guidance that we give for the quarter is pretty close to matching what we have experienced this far in the quarter to date. So that is what is behind the outlook that we are at.

Great. And as you think about what may have affected sales over the last couple of months, I recognize there's a number of things at play here, Easter timing changing, higher gasoline prices, whether, as well as some things that you all are working on from a merchandising standpoint. Is there any order that you would put those in that you think is affecting more than others or any other thoughts with respect to what it is that has caused a lack of an improvement over the last couple of months?

You know, Brad, I think we do a really good -- we seem to be a bit stronger in the early part of the second quarter especially February and March. And I think that's sort of a continuation of the things that we do really well. They are a little bit more decor and home-oriented.

I think we have had a little bit of maybe missed opportunity in flipping quickly to a more spring offering and look in our stores. That's something that we will address going forward. We will continue to examine that hypothesis and see how it affects our planning for next year. But I think that's a real opportunity for us and April has been typically a very difficult month.

The second quarter is typically our most difficult quarter. We come out of an extended period of seasonal and high emphasis on decor and a big home decor sale period in January. We seem to have good steam in February and March and then we lose it a bit in April. So I think that's our opportunity and to carry that momentum into May, into Mother's Day and beyond. Easter is not a really big factor for us, but I think our experimentation this year with Easter would lead us to believe that we can do more business around that very short holiday period and I think we will take advantage of that also next year.

Okay, then looking at expenses, SG&A up about 11% year-over-year. You have yet to really get into the majority of your store openings. But would you expect that the --that level of expenses would accelerate, that growth rate would be greater than 11% as we move forward through the year?

Not particularly. I think we said for the second quarter that it would be similar to the first quarter and I think that is pretty much the case for the rest of the year.

Okay, and so then as we think about margins (multiple speakers)

Let me just -- one other point on there. In the third quarter where it looks like a lot of the new store activity will pile up, there may be some additional pressure there, but aside from that, I fall back on what I just said.

Okay. Thanks, Mike. So then just lastly in terms of how to think about gross margins, at this point in time would you believe gross margins would be down in each quarter through the year?

I don't think I would be prepared to say that, Brad. I think we -- (multiple speakers) I think we will have some moderation on the containers, the effect of containers. It's hard to say what the pricing issues will be. It's just really hard to quantify that and we have an opportunity in the back half especially in the fourth quarter.

Certainly, Brad, we expect some improvement in those year-over-year comparisons as we progress through the year.

Great, I appreciate the color. Thanks, Robert. Thanks, Mike.

David Magee, SunTrust Robinson Humphrey.

Good morning, guys. Just a couple of questions. One is, I realize why you are feeling some gross margin pressure. I'm curious what you are seeing, though, in terms of the marketplace here. There also may be the backdrop of your competition being a little more promotional now than maybe six months ago or not. How would you characterize that?

You know, it's really a little hard to always know what the effect of competition is. I wish I could quantify that, David. Really it's a difficult question to answer. I certainly think that the players in the sector are certainly more effective in their store base with their customer base than they were a year, a year and a half ago to the extent that affects us, maybe some. I think Internet sales continue to be an increasingly important factor for all of us who are in a lot of brick-and-mortar stores and not doing a lot of Internet business. But I don't really think that we have a passionate consumer out there right now and I think to a certain extent when you are a trend and style operator like Kirkland's, I think you tend to be affected by that.

So to me, that's the biggest factor, more than particularly any one competitor is affecting us.

With regard to your comments about the seasonal products this fall, you say you have some enthusiasm of what's down the pike there. Can you give us a little color as to what's giving you that enthusiasm in terms of that visibility of that product?

Well, I think we're doing a better job of changing the product and reacting to opportunities that we see to drive better margin and to sell earlier and to get some better price points. And I think we are doing some innovative things that won't be seen everywhere else. So that's product that pretty much the way we ran it last year and the way we are going to run it in the current year will be basically all new product. There's a lot less dependence on the small item pick up business and I think we will be doing more in decorating in the house and outside and we are pretty happy with what we have picked to do this year. So we feel good about it.

We have had good success over the last three years in improving our Halloween harvest and we are adding the back-to-school piece, which was very successful for us last year, which we view as a bit of a seasonal piece for the end of the second quarter and the beginning of the second half.

So across all of those, I think we have some optimism about how well the product will do and how well it will be received.

Thanks, Robert. Lastly maybe for Mike, the container opportunity in the second half of the year, can you give us a little more color as to what has sort of created that opportunity on a year-to-year basis and how big that might be for you all? (multiple speakers)

Yes, we are probably running right now just ballpark about $500 to $600 a container lower than we were this time last year. And as you go into the fall, there's always peak season surcharges that go in. But that was the case last year as well. So that's about the level I think that we will see based on what we know today and we have got some good recent information on that and feel like that's where it's going to be this year.

And as you know, last year we were paying rates that really were at all-time highs really for us in terms of at least since we started in this supply chain and doing things the way we do them now. So that looks like a positive for the back half at least today it does.

Thanks, Mike. Good luck, guys.

Anthony Lebiedzinski, Sidoti & Company.

Good morning. You mentioned that you are excited about some of the back-to-school items and some other seasonal items. What are the other things can you do to improve your product mix, which I think, Robert, you said that you highlight that the current merchandise mix is not resonating well.

Well, I think we have some areas of concern and we have some areas that are doing really well. And as I said, I think we have made great progress in the framed images piece of the business, which is a really big piece, and we have been seeing some improvement in the other areas of the wall. The wall is about a third of our business, Anthony, and so it's important for us that we get that right. And we have had recent improvement in the alternative wall decor and mirror side of the business, which we are hopeful will be sustained. And we are redirecting investment out of some classes that are not doing well and hopefully, that rather than to keep doing the same thing and hoping, we will put it in a place where we are seeing some clear productivity.

So I think at the end of the day, it's always about using dollars the most productively -- in the most productive way. I think that's what we're working on right now. We have a lot of things that are going well but we have two or three things that have been somewhat miserable for several months and it is time to really dig in and change and either fix it or dramatically collapse the category and redirect that money.

Okay, and also can you give us a timeframe as to the IT system rollout schedule? I know you have -- obviously last year you did the e-commerce and can you give us a sense as to the other IT initiatives, the timeframe, the expected benefits from those?

Sure, Anthony. It's Mike. The first one, and we are really in the throes of it now, is point-of-sale. We are in the midst of rolling out new hardware for our stores currently and we are planning to roll the software later this year. Some of that may bleed over into the early part of next year just given holiday season and our reluctance to be a lot -- messing in that area, with the stores busy during Q4.

So the POS system, hardware early, software later in the year, and possibly early '12 and then the other major project, our merchandising system, our merchandise management system that we are pushing hard. But I think what we have said about that timing is spring of 2012 and those benefits obviously relate to our -- really a key benefit would be the way we assort our stores and system providing us additional capabilities and really getting the inventory assortment down to the store level better than we do today, tailoring the assortment more for taste, and the impact that geography has on our customer, our stores in different areas, and the taste level in those areas.

So I think you implement it in the spring and we need some time to run the system and I think you start seeing benefits maybe later in '12 and beyond on the merchandising side.

Okay, then I think you mentioned that you are still looking for alternative uses of cash flows. I assume that you are still looking at a potential share buyback or dividend?

Yes, I'm not -- really go into specifics there. I think we took a step here in actually speaking to it in the release and here on the call and we are in active mode in evaluating that. We will have more to say about that once we complete that evaluation.

Neely Tamminga, Piper Jaffray.

Girls are last, not first on this Q&A. Just wanted to ask you guys a little bit more about the technology investments. You know, I hear some of the benefits you are talking about, Mike, and I think this is exactly the way forward thinking retailers need to go in terms of just go ahead and spending this year's returns down the road.

But curious a little bit about the POS upgrade, specifically what you are looking for in terms of benefits and capabilities, kind of things you can do now versus things that enable you to do later. And then also on the merchandising planning side, is it really tailoring for taste based on inputs from buyer or is it even a little bit more science fiction-y where it is based on purchasing behavior and customer attributions that drives mix of suggestions on the tailoring? Just trying to get a sense a little bit more of the benefits you guys are going to be seeing.

I will start on that and Robert probably has some thoughts too. On the point-of-sale, the first thing on the point-of-sale I would say is we are coming from a position with a current product that is very expensive to maintain and very customized for Kirkland's over the period of about 11 years. So it has become very cumbersome to keep up to date and do upgrades and continue to invest in. So that was really the triggering reason that we went to this is to get away from what we had and get with a vendor that has more capabilities in keeping up with the emerging technology and is investing in the space. So that was a key consideration.

What we expect to get out of the point-of-sale is an easier to manage system in the stores. It's more efficient. It has some workforce management capabilities that we don't have today that will allow us to really manage payroll better, schedule staff better, and it will also allow us to do some different sorts of promotions that our system today currently isn't capable of handling.

So it's both on the operations side as well as the merchandising side that I think it benefits us. And then again, my point about keeping up with emerging technologies, mobile and other such things that we want to make sure that we are in position to take advantage of going forward.

Mike, just a little bit more on that. Can I ask just on the POS again, just one little quick question? So do you guys have the traffic counters in your stores and in all doors? Is that something you guys can maybe tie with labor-management down the road?

Yes, that's potential. That's another potential thing we can do. We do some of that today because we do have the data and even though we use a lot of manual process to do those functions today, we can get at that some because we know hour by hour how many people are coming in the store and we can schedule to that. But I think the tying in with the new system will also benefit us there.

I think what you are looking for is something that is helpful at store level without having to have a lot of back-office management involved with scheduling and things like that, Neely. It allows a store manager to be a lot more reactive and use their labor a lot more wisely. So you're right, it's really important stuff from that standpoint.

Absolutely, and I think it's worth just pausing and recognizing where you guys have come from with respect to that even though you have [flown] a good store over the years and just continues to be this positive trend even though there is obviously a larger macro trend going on. But it's good to see that you guys are still investing in technology and not really slowing down.

I think retail is going to keep changing. You know, we are going to see a lot of things happen around smartphones and smart tablets and we need to be able to do anything the customer wants to do and is common and innovative in the marketplace. I think that's what we are -- we are examining all of these technologies as we are working with the POS so that we will be prepared to implement what we need to implement to stay relevant with the customer and really a generational change that is happening across all age groups with the use of technology and shopping.

So we are hopeful that the systems that we are putting in are going to make us a much smarter and much more capable retailer downstream.

Best of luck, you guys.

Thank you, we appreciate it. We will get you on the Q better next time, maybe.

Just a little bit of Southern hospitality redefined.

We've got the guy in here with us right now. We will talk to him when this call is over.

Jennifer a from a land, Sterne, Agee.

Thank you. I was wondering if you could talk about -- I know you were working on with the addition of Kim O'Dell last year some changes to your visual merchandising strategy and also in terms of some of the signage and messaging within the stores getting -- moving away from more of just a pure price point message. So I was wondering if you could talk about any changes there that might be coming later this year?

I think we are going to be in a continual mode of change, Jennifer. I think we are trying a lot of different things and we are trying locational signage as well as sales signage and we are trying to get signage that is more noticeable and provides a better hook for customers and that is more pleasing and creates an impression. So we are looking at several different things with not only our group but our adviser and then also some third-party vendors who may be able to give us some help there.

This is something that is sort of new territory for Kirkland's, as you know, from digging into this a bit and we are learning as we go and we are trying to catch up pretty quickly. I think you will continue -- hope you see continued improvement.

With respect to how we display merchandise in the store, we have looked at several different iterations of how we should arrange product and how we guide customers through the store. And we have modified some of the things that we tried earlier in the year where we found them to be somewhat difficult to understand and implement out in our stores. So we have simplified that some, but we are still looking for really two or three things that we engage the customer quickly when they come in the store, that we interest the customer quickly, and that it's very easy to understand the things that are important from an investment in the store and things that have been advertised and communicated to the customer so that they are able to go to those things quickly and efficiently and shop.

And then we hope we keep the customer for some period of time and that they see more of our store then just what was involved in a message. So it's a topic and a process that is ongoing.

Okay, so it's evolving. That's understandable. I was -- also I was wondering, I know it's early days, but I was wondering if you could share possibly some of your insights from e-commerce, maybe just in terms of where you are seeing demand from a regional basis and then maybe some of your insights in terms of what you are learning about your customer incrementally and also when you might be testing some new categories?

Well, I think most of the progress that we are going to see there is in front of us over the next 12 months to see major change in what we are doing right now. We are just beginning to gear up a dedicated buying team and just made a couple of moves there. We are going to be looking at bringing a very experienced e-commerce operator into our leadership team to help us drive that business forward.

We would expect to get some immediate wins from that and I can't tell you exactly what they all are right now because we don't have the person in-house as yet. And we have some work to do strategically to understand how to prioritize that.

I think we are doing well with what we are doing but I anticipate a lot of our big gains to occur in 2012 and beyond. I think the rest of the year we're going to continue to add SKUs to continue to find items that because of scale or style or other reasons that we can't bring them in the store but we can offer them on the Web and be supplemental to the customer.

We are seeing some activity outside the geographic areas where we have stores and that's very encouraging which also suggests to us that we should ramp this business up much faster than we have. And that is what we intend to do.

Okay, great. And then lastly, I was just wondering -- you talked about sourcing cost pressures. It was wondering where you are in terms of your buys and also how you feel about -- it sounds like probably not a good opportunity to pass through some of the increased costs to your consumers, given that they don't seem to be very comfortable right now. But just wondering if you could talk a little bit more about what you are seeing in terms of the sourcing environment and the potential offsets. And if you could quantify at all the level of pressure that you are seeing?

I think I said in the script that it's a point of discussion and especially when we are reordering product and fortunately we don't -- I don't know fortunately or unfortunately -- we don't reorder everything that we sell. We probably reorder 25% to 30% if you look at it on a year-over-year basis. So sometimes that discussion is not as -- or the price increase is not as apparent for a customer moving on to a new product.

But we have been involved in this for so long that we understand in types of product and particular sizes and particular materials what things have historically cost. So there are not many surprises there when it's offered at a higher price.

We said we expect the pressure on that to be more pronounced as we go through the year and I think that's about as much as I can quantify because we have been able to manage this reasonably well so far. I don't think that -- if you look at how our margins dropped out in the first quarter, a large percent of the delta was about freight. And so I think we had pretty good margin results and we were on plan and slightly above plan in the first quarter. So we felt good about that and didn't feel like product price increasing was a big factor in the first quarter. I don't think it will be in the second quarter. It may be in the back half of the year.

I think the situation in China is set. If you have as much inflation as they have had in wages and with the raw materials increases, I don't think we can help but expect that we will have some price increases over the next 12 to 18 months. I think it's a given and that is whether we have container changes or price changes in containers or not.

So how we deal with that with a more reluctant consumer is that I think we're trying to be very selective if we do have price increases and we will not just take the store up. We won't do that. We will be very careful about how we do it and I think we will try to point out to the customer where there is still great value and I think they understand those things.

Okay, very helpful. Thank you.

Beyond that, I don't know much more to quantify for you at this moment in time. It may be more evident later and we can talk about it in some respects.

Okay, thank you. One last quick question. I was wondering, I know it's very difficult to do, but I know weather did not cooperate for you guys throughout the quarter and I was wondering if you are able to just kind of quantify that impact at all both in terms of weather in Texas and then the tornadoes and storm-related activity in the Southeast.

I guess I would say there, Jennifer, it was -- we had some unfortunate periods, as did everyone that has a lot of stores in the South during the first quarter. But if it was very significant, we would have quantified it and put it in. I think it was a marginal impact on us and hopefully we are through those things right now. So --

Okay, thank you very much.

We expected some issues with the flooding on rail deliveries, but it turned out to be somewhat marginal. I think we will be back to normal really in another week or so and we had enough merchandise that I don't think we were dramatically affected.

Okay, great. Thank you very much. Good luck.

Robert Niewijk, Katana Capital.

Good morning. I have two questions related to the lowered guidance. The first is on sales. I heard you say that April and May did not improve as expected given the easier comps, but I didn't hear why. Can you pinpoint a cause or causes for that?

I think Robert touched on some of it. I think just as we got into the springtime, just we felt the merchandise wasn't resonating as well as it was earlier in the quarter.

Okay, and then second, what is the reason for the lowered guidance on net store openings? You went from I believe from 20 to 30 when you add your gross openings and closings down to just a flat 20.

Right, we mentioned a couple of things. First, we really effectively from our prior range of guidance on the growth, we essentially just took it down to the low end, which was net 20. I think due to some delays in spaces that we have already chosen and just the availability of the space, whether it be the tenant that currently occupies is not out yet or the building has not been built for us to come in and finish it out, there's some delays in some of those situations and the space is just tighter. And getting landlords to move in terms of cutting up a bit larger spaces into smaller spaces that we can actually occupy, it's a little bit more challenging than we had expected. So we moderated that growth rate a little bit to account for that.

We've actually had some landlords be honest enough to say, hey, we are slow walking some of this because we think we are going to get a better rate later in the year. And we will still have a space to rent, and we are looking over five to 10 years and not over two or three months. So that's not an unreasonable thing for someone who has an investment in a piece of property.

So I think there's some movement in the marketplace that is causing some of this and I mentioned in my script that landlords prefer a single tenant replacement really to avoid further investment in their property or as much investment as they would have to do if they break it up. And we have seen continued reluctance to break up those big spaces.

Okay, do I take it from that that the lowering is more on the openings side rather than increased closings?

Yes, I think all things equal, yes. The closing number is really driven off of how many of those openings are relocations, because we still have 60 or so mall stores and like stores that we ultimately want to reposition into a better situation. And those opportunities come up and you want to take advantage of those, so that closing number is really contingent upon the relocation activity and not as much just flat shutting down stores.

Okay, thank you very much.

Mr. Alderson, I will now turn the call back to you.

Well, thanks, everyone, for your participation today and your interest in Kirkland's. We look forward to speaking with you shortly.

Ladies and gentlemen, that does conclude the conference call. We thank you for your participation and ask that you please disconnect your line.