Brand House Collective Inc (TBHC) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Kirklands Inc. fourth 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 Thursday, March 8, 2012. I would now like to turn the conference over to Mr. Tripp Sullivan of Corporate Communications. Please go ahead, sir.

Good morning and welcome to this Kirklands Incorporated conference call to review the Company's results for the fourth 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 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 risk 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 Mike for review of the financial results.

Thanks Tripp, and good morning everybody. I will begin with a review of the fourth quarter financial statements and then finish with financial guidance for the first quarter and performance goals for fiscal 2012. For the fourth quarter, total sales including gift card breakage revenue were $149.1 million, a 6.8% increase versus the prior year quarter. As previously announced, comparable store sales increased 1.4%. E-commerce sales entered the base of comparable store sales in December of 2011 and contributed 80 basis points to the total increase during the quarter. Average sales per store increased 4% over the prior year quarter. The store comp sales increased was driven by a 4% increase in the amount of the average ticket. Increases in both the average retail selling price and the number of items in each transaction led to the overall increase in the average ticket.

The transaction count declined by approximately 3%. Traffic counts increased 2%, but a decline in the conversion rate more than offset the traffic increase. From a geographic standpoint, sales trends continued much like the third quarter. We experienced stronger results in California, Arizona, Florida, the Upper Midwest, and North Carolina. Results were below average in Texas and Louisiana.

E-commerce sales were $3 million for the quarter. In our first full year operating the business, sales were $8.4 million. We experience sales acceleration each quarter since going live in November 2010. Traffic to the site is on the rise, with the unique visits increasing 70% over the prior year during the months of January and February. Merchandise categories showing comp increases were art, floral, seasonal, gifts, mirrors, and textiles. These increases were offset primarily by declines in decorative accessories, alternative wall decor, and frames.

In real estate, we opened 11 stores and closed 3 stores during the quarter, bringing us to 309 stores at quarter-end. 84% of the stores at quarter-end were in off-mall venues and 16% were located in enclosed malls. At the end of the quarter we had 2.1 million square feet under least, a10% increase from the prior year. Average store size was up 7% to right at 6900 feet. Gift card breakage revenue was $800,000 as compared to $250,000 in the prior year quarter, reflecting an increase in the estimate for the expected breakage rate. Gross profit margin for the fourth quarter increased approximately 70 basis points to 43% of sales from 42.3% in the prior year.

The components of reported gross profit margins were as follows. First, merchandise margin increased approximately 40 basis points as a percentage of sales. As expected, lower inbound freight costs positively affected the margin during the quarter, accounting for an increase of 110 basis points. An increase in promotional activity and a higher mark down rate offset a portion of the gains realized from the lower freight costs. Secondly, we recorded a gain of approximately $1.2 million during the quarter related to a change in the estimate of our accrual for customer loyalty points. This adjustment accounted for a benefit to cost of sales of about approximately 90 basis points versus the prior year quarter.

During the fourth quarter we terminated our agreement with our private label credit card and loyalty program provider. As a result of that termination, the loyalty accrual associated with that program was reversed. We have replaced the credit card and related loyalty program with a new provider. The rollout is underway and should be complete before the end of the first quarter of 2012. Thirdly, store occupancy costs increased 15 basis points as a percentage of sales. The increase as a percentage of sales reflects the slight increase in comparable store sales and a reduction in the number of renegotiated leases compared with the prior year. Fourth, outbound freight costs increased 40 basis points due to higher diesel fuel costs, as well as shipping and packaging costs associated with an increase in the e-commerce business. Finally, central distribution costs were essentially flat as a percentage of sales.

Operating expenses for the quarter were $36.6 million, or 24.5% sales, as compared to $33.4 million, or 23.9% of sales in the prior year quarter. Increases in store payroll as a percentage of sales drove approximately 50% of the overall increase. Staffing levels were increased during the fourth quarter to support an increase in planned promotional activity and a larger seasonal merchandise offering. The remainder of the increase was due to several factors, including an increase in corporate salaries as a percentage of sales, increases in accruals related to employee benefits, and higher marketing and professional and legal expenses. These increases as a percentage of sales were offset partly by favorable experience in workers' compensation and general liability claim trends.

Depreciation and amortization was flat on a dollar basis but down slightly as a percentage of sales, reflecting the improvement in total sales trends. Operating income for the fourth quarter was $24.1 million, or 16.1% of sales, as compared to $22.2 million, or 15.9% of sales in the prior year quarter. Income tax expense was $8.9 million, or 37.1% of pretax income, versus expense of $7.9 million, or 35.3% of pretax income recorded in the prior year quarter. Income tax expense for the fourth quarter of the prior year included a net benefit of approximately $800,000 related to an adjustment to the prior year income tax provision, partly offset by a reevaluation of the state tax rate on deferred tax assets, based on tax planning strategies implemented during 2010. Net income for the quarter was $15.2 million, or $0.78 per diluted share, as compared to net income of $14.4 million, or $0.70 per diluted share, in the prior year quarter.

Turning to the balance sheet and the cash flow statement, inventories at January 28, 2012 were on plan at $47.3 million, or $153,000 per store, as compared to $44.5 million, or $148,000 per store, in the prior year. This represents a 6% increase in total inventory and a 3% increase on a per store basis. On a per square foot basis, inventories are down about 3% year over year. We expect to end the first quarter of 2012 with inventory levels in the range of $45 million to $47 million. At the end of fiscal 2011, we had $83.1 million in cash on hand, as compared to $91.2 million at the end of fiscal 2010.

During the year, we repurchased 2.1 million shares of our common stocks for a total of $24.6 million under our repurchase authorization which was established in August of 2011. No borrowings were outstanding under our revolving line of credit at the end of either this fiscal year or the prior. For the full year, cash flows from operations were $41.8 million, as compared to $36.7 million in the prior year. This increase in cash flow from operations primarily relates to the timing of federal and state income tax payments. Capital expenditures for the year were $26.7 million. Of the total capital expenditures, $15.2 million related to new store construction, $8.7 million related to information technology maintenance and projects, and the balance related to maintenance capital expenditures for stores, the distribution center, and the corporate offices.

Final item I will cover before turning it over to Robert is to provide some guidance from our outlook for the first quarter of 2012, some high level performance goals for the full year fiscal 2012. For the first quarter ending April 28, 2012, we expect total sales to be in the range of $98 million to $100 million, reflecting comparable store sales are flat to slightly positive compared with net sales of $94.4 million and comparable store sales decrease of 8.4% in the prior year quarter. We expect some continued benefit from inbound freight cost during the first quarter, likely to be in the range of 30 to 50 basis points. Excluding the freight impact, merchandise margins have been relatively strong for the first quarter to date. Operating expenses are expected to increase as a percentage of sales, primarily reflecting a planned increase in marketing activity.

Earnings per share expected to be in the range of $0.11 to $0.14 per diluted share, compared to $0.15 per share in the prior year quarter. We expect to open approximately 5 stores and close 15 stores during the quarter. For the full-year fiscal 2012, as it relates to store count and store growth, we expect to open 35 to 45 stores and close approximately 25 stores, implying unit growth of between 3% and 6% and square footage growth of 9% to 13%. The store openings will be weighted toward the second half of the year and the closing will be weighted toward the first half of the year. Our topline expectations are for total sales in fiscal 2012 to be above fiscal 2011 in the range of 10% to 12%. This expectation for total sales growth reflects the additional week in the retail calendar for fiscal 2012, which includes 53 weeks. This level of sales growth would imply comparable store sales of flat to slightly positive for the full year, excluding the impact of the additional week of sales.

Based on our current outlook, we would expect operating margin for fiscal 2012 to approximately equal that of fiscal '11. We expect inbound freight cost to be lower than the prior year during the first half of fiscal 2012 and edge upward as the year progresses. We are encouraged by our merchandise margin result thus far, and optimistic about the prospects for our merchandise offering in 2012 and its ability to further improve our merchandise margins. Increases in fuel costs, a planned increase in marketing activity, and investments in additional personnel in key areas of the business to support our growth in technology investments will serve to offset some of the merchandise margin gains.

With a tax rate assumption ranging between 38% and 38.5% for the year, at this time we would expect that earnings per share to be in the range of $1.10 to $1.15 for fiscal 2012. From a cash flow standpoint, we anticipate again generating positive cash flow in 2012, and fully funding our new store growth, technology, and other capital improvements through internally generated cash flow. We do not anticipate usage on our line of credit. Capital expenditures are currently anticipated to range between $29 million and $32 million in 2012, before landlord construction allowances for new stores. We currently estimate that approximately $16 million to $18 million of the total capital expenditures will relate to new store construction, $7 million to $8 million will relate to information technology, with the balance of our capital expenditures relating to distribution center improvements and store merchandise fixture enhancements and other refurbishments. We will update our outlook each quarter during 2012. Thank you, and I will now turn the call over to Robert.

Thanks, Mike. Q4 2011 showed financial and merchandise performance improvement over the prior year quarter and continuation of generally improved trends in our business that began in the third quarter. Although better than originally projected, the Q4 comparable sales increase was moderate, and helped by the entry of our start-up e-commerce business into the comp base in December. Art, as it usually does, lead the way with substantial comp and product margin increase. A strong seasonal offering in both Harvest and Christmas in fourth quarter again drove positive sales and product margin gains as our strategy to buy up to the prior year quarter proved successful, despite the expected promotional season. We see year-round opportunity in seasonal product, which we have historically limited largely to the back half of the year.

Gift and impulse also contributed significantly, and should have full-year impact. Traffic gains in the quarter, as well as an average ticket increase, highlighted the transaction metrics. Conversion percentage was the only metric that was down for the quarter. Transactional metrics for the quarter and the back half were stronger in non-mall stores then malls stores, a trend that we expect to continue in 2012. As we begin 2012, we are encouraged about the composition of our merchandise mix in relation to that of a year ago. We are also encouraged by the early trends we are seeing. Framed art remains a solid and consistent performer entering 2012 with good momentum, and driving our average unit retail to strong sales in large art piece.

We presented new styles and materials in table and floor lamps as we seek to update and upgrade this category. Based on proven success, our proprietary wax programs will be emphasizing candles. We expect our furniture business to continue to provide strong sales, support average ticket gains, and provide both everyday and promotional opportunity. Mirrors gained sales and margin momentum in the fourth quarter, as our inventory levels achieved balance in size and type, which should continue into the first half. Further strength in the quarter is expected in floral and garden, textiles, and our expanding gift business. Seasonal will be important to the quarter, as our expanded Easter offering has performed very well to date.

Our alternative wall decor business is back on plan and should perform better as the year progresses, albeit at lower sales levels then in 2010 and '11 as we adjust SKUs and inventory levels to demand. Our first quarter performance opportunity is on the product margin line. As Mike mentioned, we do expect some incremental tailwind from freight charges during the first half, but that should moderate as the first half progresses and freight rates evidenced announced increases in March and June. It is uncertain if and how much of announced container increases will actually hold in the face of continued tepid worldwide demands. Based on historical experience, both inbound and outbound freight rates, as well as retail sales, will be affected if oil prices continue to rise and remain at historic high levels due to political unrest or the anticipation thereof.

We should continue to get a slight sales boost from results of our e-commerce business as it continues to experience and project rapid growth. We will make adjustments to our distribution center this year to facilitate this growth, however we do not expect e-comm to be a significant percentage of our overall sales for several years, despite building at strong year over year rates. New store growth should continue in the first half as we aim toward a slightly larger class of stores in 2012, suggested by our consistent success in new store performance since resuming building new stores in 2009. Space availability remains a store growth constraint, but we also remain optimistic that we will get more then our share of suitable spaces and remain a force in the process of re-tenanting large spaces for multiple tenants.

Closings can project to continue at fairly high levels for 2012 and '13 as we near the end of our move out from regional and closed models to strip centers. We will likely we rethink our ultimate position in certain existing markets where a suitable opportunity to move off-mall has not or is not likely to be presented in the near or immediate midterm. This year we will also refocus our relocation efforts to work on relocating older deals in [unaccurate] lifestyle centers. We will also continue to develop our presence in the California market where we have seen very nice acceptance. There is really no magic formula. The marketplace is very fragmented and every deal is hard and time consuming.

The only formula for success is to make every deal stand on its own, practice prudence in the deal negotiation and build-out, and react quickly to make the deal and build the stores. Mike mentioned that we would spend slightly more in advertising in 2012. We have developed and distributed our first formal catalog in our history, 24 pages designed to show our new merchandise and showcase the style and pricing. It is a learning process in every way, but we see a great opportunity to build sales, following with customers and brand awareness as we sent them to 1 million customers and distributed 500,000 in our stores. We continue to build on our internet advertising presence with the addition of Twitter during Q4, and Pinterest in the first quarter. We appreciate your continued interest, and we are ready to take questions, operator.

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

This is [Benaven Chalvin] in place of Brad Thomas. You mentioned that you are planning on increasing your marketing expense, and I was just wondering if you could give a bit more color on how much you plan to increase it, where the increase will go, and what the expected benefits will be?

Well, in terms of how much we are talking about here, I think the fiscal year 2011 we spent approximately 1.1% of our sales in marketing and advertising activities. We are talking about a move from that level to in the range of 1.5% to 1.7%, just depending on our success and how we read the activities that we undertake during the first half, and measure them and react.

Those numbers are embedded in our forecast.

They are, and in terms of the activities themselves, Robert mentioned one of them. We did launch a catalog this first quarter. It is our first effort at that in quite some time, and really on that scale ever that we have done. We are anxious to -- we're in the midst of that being out there, and in place, and in everybody's hands. We will be able to measure that better as we get later into the quarter, but that is the type of activity we are talking about. A little bit more mass effort adding to our continued interest in e-mail marketing and online advertising.

I think you can think of that the internet really drives current customers and repeat customers, and you get some new customer benefit. I think we are thinking a little bit more about how we add customers with the advertising expense. Try to do that in a very measured and precise way, and feel our way along with it before we make a much bigger span.

Okay great. Thanks, and could you give a little more color on the cadence of your comp [branded stuff] year, just if it is different from the first half and the second halves, in the second half you have more difficult comparisons. So, just want to see how you are thinking about that.

Well, I think the way it turns out, it is pretty consistent in terms of how we have guided here. I would point out that as we look at the quarters individually here going into this year. Q1 was actually, even though you look at last year's comp as down 8%, actually a little bit tougher comparison. If you go back two years, we were up 12% in that quarter, and it was a very strong quarter in the first quarter of 2010. We obviously were not able to comp that last year. But that rollover effect, if you will, remains, and Q1 was actually a quarter where we generated a lot of sales volume, just we are up against some really tough comps last year.

I think we see opportunity in the remaining three quarters though, especially you would expect to see some in Q2.

Yes.

Neely Tamminga, Piper Jaffray.

Just a couple of questions if I may. First gas prices. You did talk about the freight in terms of, on the movement of your product. But can you remind us historically, has your consumer seen resistance when we go into gas price shocks? Help us to understand some of the historical context there, and then I have a handful of other questions, too.

Okay. Well, I think 2010 was maybe the last period where we saw dislocations in price, and we personally feel like it affected the customer. That was the first time that we spiked to $4 and beyond, and we saw, I think, $147 oil, something like that. I think that was some of the period in time where consumer confidence received some of its, probably, most difficult shocks in the recent past. So, I do not know that it will be quite that event when it goes to $4 this time, Neely, since we have been there before. But I think oil above $100 is not, as of yet, that impactful. Except as it is going to impact some of our outbound diesel. If it goes back up into the $130s or $140s again, I think it will affect business.

Okay, and then a little bit on the regional performance. Mike, I was joined to the call as you are talking about some of your regional under-performance. Could you talk a little bit more, just repeat a little bit of what you said by region? Is it a Company specific situation, or you think there is something going on with those local areas from an economic perspective?

Yes, just to repeat some of that. It was consistent with what we saw, really in Q3, in terms of trend versus total Company. Where we saw the strength was in California, Arizona, Florida, the Upper Midwest, and North Carolina. Then the weakness was in Texas and Louisiana, which is something we have seen, really, throughout 2011.

As to whether it is Company specific, I think there is certainly some economic issues in the Louisiana markets and in some of the Texas markets that are remaining from the oil moratorium and the employment situations in some of those markets. But also, we have been adding a lot of stores in Texas. Filling out some of those markets sometimes impacts your comp a little bit. I do not think that is a huge impact, probably 2 points, 3 points in those markets, but I think it is an impact nonetheless. So, that portion of it would be somewhat Company specific.

Okay, and then from a merchandise perspective, we are hearing a lot about color as being a primarily driver in [apparel land]. Are you seeing some of that across your merchandise categories? I mean, it sounds like you have some pockets of strength and your categories could play really well to that in terms of quick updates and refreshes in homes. Just wondering how you guys were thinking of that internally.

Yes, I think if you walk in our store today, Neely, you would be struck by the impact of color.

Absolutely.

It is very much in the forefront of what is happening in a lot of categories. I think it is very impactful and it has been very helpful to us. If you see our first Spring catalog, you see color's very prominent. We have tried very hard to be more quickly transitioned into Spring this year in 2012, I think as we have discussed with you from time to time, over the last year. So, I think it is certainly a suggestion that you have had, and we certainly agree with it and try to implement it.

Anthony Lebiedzinski, Sidoti & Company.

I was wondering if you could give us an update on your IT systems initiatives. I know you did a point-of-sale last year and are planning to do some improvements in your merchandising systems. So, could you please discuss that, please?

Sure. Well, as you said, we completed our POS activities last year. We [wrote] hardware and software, and that was in place throughout, really, the meat of the fourth quarter. So that was one good one to get behind us, and we are having good results after the fact. So, we are very pleased about that great effort by the team here.

But we also, the biggest effort right now that we are in the midst of, is the merchandising system transition to an Oracle system. That project is ongoing. We are still developing some of the interfaces that will be needed once we go live. That effort -- the timeline on that effort right now is suggesting the Fall. What we will have to do at that point in time is judge, based on where we are in the seasonality of the business. As to whether that is wise to cut over at that point in time once we complete all of the implementation effort. That may result in a deferral until the beginning of next year. So that is the timeline that we are looking at right now. It is an ongoing effort, and a lot of work and energy being expended there, right as we speak.

Okay thanks, and then could you give us another date on the trends that you are seeing in real estate costs?

I think deals are a bit tighter. As I have said, space availability remains some constraint on the number of deals that can be done. I do not think the price is dramatically different year-over-year in 2011 based on what we are seeing for those we have completed so far this year, or last year for 2012. I think it remains much about how quickly landlords are able to get to a place where they can break up existing vacant big box spaces that they have an opportunity to break into multiple tenant spaces, and that represents an investment by the landlord. They always try to find a single user first. I think eventually we will see more and more of that activity, and we are at the forefront of that. So I think we will see a little bit tighter deals, but maybe not as big a factor in 2012 as we might expect.

Okay, and lastly, just wondering, are you including potential future share buybacks in your EPS forecast?

No. We will report that activity as we progress quarter-by-quarter. So, that is based on the current share count coming into the year.

(Operator Instructions) Christine Rapalje. SunTrust Robinson Humphrey.

Just a couple of questions. First, on the conversion, the decline you saw in fourth quarter. Do you see that as an opportunity for some merchandising changes? Or do you think maybe there is some further adjustments to the mix, perhaps away from some of the categories that you noted as having some weakness?

Well, conversion, we had some traffic gains in the quarter. Conversion is, I think, always a factor of level of the traffic and how well they perceive your merchandise. I think any time you do not convert positively, you are asking yourself, can we do this better on the merchandise side. We have already made substantial adjustments to our mix for the first half, and will expect to do that in the back half as we look toward ordering seasonal for the Fall, which we are already in that process right now. So yes, we certainly will, Christine.

Then just secondly, I think you mentioned that you think seasonal, you expect to increase that. Looking forward in the calendar you mentioned Easter being bigger this year. What other opportunity do you see as far as highlighting particular holidays this year?

Well, I hope we execute, both on the merchandise and store side, I hope we execute Mother's Day better. I think it is a great opportunity, the biggest opportunity in the first half. We have thought about that based on experience. We did a little bit more Valentine's this year then we have done in the past, and as I have said, more Easter.

There are opportunities to do things around even miscellaneous, what has become miscellaneous holidays, like Presidents' Day and Fourth of July. When you think of them in the retail context, but the big seasonal piece, always is in the second half for us and always will be. We are going to try to find opportunities around every special event or holiday to present a reason for somebody to come by our store and see what is happening.

Okay. Great. I saw the catalog and it looks really good. Good luck with that.

Thanks. I hope you bought something. (laughter)

There are no further questions at this time. I would like to turn the call back over to you, Mr. Alderson for your closing remarks.

Thanks, guys. We appreciate your time and interest, and we will talk to you in May, I believe. Thanks.