Brand House Collective Inc (TBHC) 2013 Q3 法說會逐字稿

Ladies and gentleman, thank you for standing by and welcome to the Kirkland's Incorporated third-quarter 2013 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 call is being recorded Thursday, November 21, 2013. 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 Kirkland's Incorporated conference call to review the Company's results for the third quarter of fiscal 2013. 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 accessibility of this conference call on a listen-only basis over the internet were released earlier this morning, and the press release 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 18, 2013. With that said, I'll turn the call over to Mike for a review of the financial results. Mike?

Thank you, Tripp, and good morning everybody. Our third-quarter results featured a return to positive comparable store sales and another strong year over year increase in our merchandise margins, leading to a better than expected earnings performance. For the third quarter, net sales were $106.1 million, a 9.8% increase versus the prior-year quarter. Comparable store sales including e-commerce sales increased 4.9%. Comparable brick-and-mortar sales were up 3.7%. E-commerce sales were $5.1 million for the quarter, a 34% increase over the prior-year quarter.

As a reminder, each quarter during fiscal 2013 starts one week later than the same quarter of fiscal 2012, due to the retail calendar for fiscal 2012 having 53 weeks versus the typical 52 weeks. For the third quarter, this shift had a positive impact on the report comparable store sales results by approximately 50 basis points. The 3.7% comp sales increase in our brick-and-mortar stores was driven by an increase in the average ticket combined with a slight increase in transactions. The average ticket was up 3%, driven by an increase in the average retail price per item, offset slightly by a small decline in items per transaction. The year over year transaction count was up nearly 1%, reflecting an increase in the conversion rate that almost overcame a 3% decline in traffic.

From a geographic standpoint, sales results were fairly consistent across the country, with particular strength in the state of Florida where we have 31 stores. Strong performance from our fall seasonal assortment along with a bit early results from our holiday seasonal product helped to drive the overall sales increase from a merchandising standpoint. Other significant merchandise categories showing strong positive comp performance were mirrors, wall decor, textiles, and housewares. These increases were partially offset primarily by declines in art, frames, and floral.

We opened 9 stores and closed 3 stores during the quarter, bringing us to 323 stores at quarters end. 289 of the stores or 89% were in off-mall venues, and 34 stores or 11% were located in enclosed malls. At the end of the quarter, we had 2.39 million square feet under lease, that's an 8% increase from the prior year. The average store size was up 3% at 7,393 square feet.

Gross profit margin for the third quarter increased 357 basis points to 38.8% of sales from 35.2% in the prior year. This increase was primarily due to a large improvement in our merchandise margin, which increased 310 basis points to 55.2% from 52.1% in the prior-year quarter. The increase was primarily due to a year over year reduction in markdowns and promotional activity. Additionally, and as expected, inbound freight costs were lower than the prior-year quarter, accounting for approximately 30 basis points of the 310 basis point improvement. Occupancy costs decreased 65 basis points as a percentage of sales versus the prior-year quarter, reflecting leverage from the increase in comparable store sales. Outbound freight costs were up 29 basis points as a percentage of sales, primarily due to an increase in shipping costs for e-commerce, and central distribution costs were down 12 basis point as a percentage of sales due to leverage from the sales increase.

Operating expenses for the quarter were $35.4 million or 33.3% of sales, as compared to $31.6 million or 32.7% of sales for the prior quarter. The increase in operating expenses as a percentage of sales is related to two items that we have mentioned in our previous calls. First, marketing expenses increased approximately $1 million versus the prior-year quarter as we continue to invest and expand our branding activities. We are advertising in 10 media markets this fall and that is up from 7 test markets earlier in the year, and the early results have been encouraging. We are seeing increases in sales and traffic in these markets when compared to the rest of the chain, and are thus far driving margin dollars better incremental to the cost of the marketing activities.

Secondly, incentive bonus accruals increased approximately $700,000 versus the prior-year quarter. In the prior year there was no accrual for incentive bonuses due to the Company's operating performance, while the current year is thus far tracking closely to internal plans. The remaining operating expenses decreased as a percentage of sales by approximately 90 basis points versus the prior-year quarter, reflecting the impact of the sales increase. Depreciation and amortization was $4 million versus $3.1 million in the prior-year quarter, increasing 60 basis points as a percentage of sales and reflecting the increase in capital expenditures in recent fiscal years, and the implementation of major technology upgrades during fiscal 2012. Operating income was $1.7 million or 1.6% of sales for the third quarter, as compared to an operating loss of $0.7 million or 0.8% of sales in the prior-year quarter. Income tax expense was $674,000 or 40% of pretax income, versus a benefit of $349,000 or 45.6% of pretax loss reported in the prior-year quarter. Net income for the quarter was $1 million or $0.06 per share, as compared to a net loss of $416,000 or $0.02 per share in the prior-year quarter.

Turning to the balance sheet and the cash flow statement, at the end of the quarter we had $54.6 million in cash on hand, as compared to $67.8 million at the end of fiscal 2012, and $34.3 million in the prior-year quarter. The increase in cash reflects the improvement in our operating performance along with the reduction in capital expenditures this year. Inventories were $68.8 million as compared to $64.2 million in the prior year. This reflects an increase in total inventory of 7% and an increase of 2% on a per store basis. The increase in total inventory reflects the year over year increase in store count, as well as the increase in the average store size. On a per square foot basis inventory levels were down slightly from the prior year.

Accounts payable decreased to $24.8 million from $27.8 million in the prior-year quarter, due to the timing of our inventory receipt flow, and the one-week shift in the calendar. At quarters end we had no long-term debt and no borrowings were outstanding under our revolving line of credit. For the first three quarters of the year, cash used in operations was $1.1 million versus $7.4 million in the prior-year period, reflecting the improvement in our operating performance. Capital expenditures were $13.1 million, and that is down from $25 million in the prior-year period, and reflective of a lighter store opening schedule and a reduction in major capital-intensive technology projects.

Now moving to the guidance and before actually going through it I would like to point out a couple of things that will have an impact on the fourth-quarter comparison, both of which were already factored into our full-year guidance. First as mentioned earlier, there was a shift in the retail calendar this year. And as a result of the shift, the fourth quarter of last year contained 14 weeks, while the fourth quarter this year contains 13 weeks. The extra week in last year's calendar represents sales of approximately $7.5 million and estimated earnings of approximately $0.02 per share. Secondly, for comparative purposes it should be noted that in the prior year we reported a $0.03 benefit resulting from a positive change in the actuarial estimates of our general liability and workers compensation self-insurance reserves.

For the fourth quarter ending February 1, 2014, we expect to open eight stores and close seven stores. Three of the openings will occur in November, two of which have already opened, with the remaining six scheduled for late January. One of the closings has already occurred and the remaining five closings will occur after the holiday season. As a result, for the full year fiscal 2013 we will have 24 new stores and 23 closings. This activity will result in square footage growth of 3% for the year due to the average size of the openings being greater than that of the closings. We expect total sales to be in the range of $159 million to $162 million, reflecting a comparable store sales increase of 2% to 4% based on a 13 week to 13 week comparison, compared with sales of $162.9 million and a comparable store sales decrease of 2.6% in the prior-year quarter. This will result in total sales for fiscal 2013 ranging between $464 million and $467 million, and imply a full-year comparable store sales increase of 1% to 2% on a 52 week to 52 week comparison.

Earlier in the fourth quarter the positive comp sales trends have continued; year over year increases in the average ticket and at the conversion rate combined with sequentially improving traffic trends have driven the sales results thus far in the quarter. Merchandise margin trends have continued to show strength and are expected to gain on the prior year during the fourth quarter as a result of an improved seasonal mix -- merchandise mix, controlled promotional activity, and positive inbound freight cost comparisons. Operating expenses are expected to increase on a dollar basis, despite the extra week in last year's calendar, reflecting an increase in marketing expenses associated with our branding initiatives, an increase in the incentive accruals due to improved performance, and the prior-year positive insurance adjustment which equated to approximately $1 million. With an effective tax rate assumption for the quarter between 38% and 38.5%, we would expect to report earnings of $0.77 to $0.82 per share for the quarter, as compared to $0.82 in the prior year. This brings full-year guidance to $0.90 to $0.95 per share, which is an increase from the previous guidance of $0.80 to $0.90 per share.

Given the extensive technology investments we've made in the last few years and a comparative reduction in new store activity, capital expenditures are currently anticipated to range between $18 million and $19 million for fiscal 2013, before landlord construction allowances for new stores. We currently estimate that approximately $11 million of the capital expenditures will relate to new store construction, $5 million will relate to information technology, with the balance of our capital expenditures relating to distribution center improvements and major store maintenance. Given these levels of operating performance and capital expenditures, we expect to end the year with cash balances in the range of $86 million to $89 million. Thanks, and I will now turn it over to Robert.

Thanks, Mike. We had a great quarter. Our merchandising momentum and store execution continues to drive strong and better-than-expected results. The strong 4.9% comparable sales increase was driven by low- to mid-single digit increases in conversion, average ticket, and item retail, which led to a small 1% gain in transactions. Importantly, traffic improved sequentially to a 3% deficit to the prior-year quarter after running down mid- to high-single digits for the first half of 2013. The traffic trend improved as the third quarter progressed and has continued into the early portion of the fourth quarter.

The good news in product margin gains continued and helped drive our outperform earnings results for the subject quarter. Comparable quarterly product gross margin improved significantly and contributed to our year-to-date product gross margin gain of 210 basis points. We do expect such trends to continue in the fourth quarter, albeit at a possibly slower rate of year over year increase as most industry commentary suggests a highly promotional retail environment in the fourth quarter. Better information provided to merchants and planners from our first stage merchandising system upgrade helped us continue to generate a merchandise offering that is resonating well with our customers. Inventory levels continue in line despite a diminished markdown rate and a more focused and less reactive promotional schedule. As we enter the high sales period of the fourth quarter, our promotional buys should provide strong traffic and sales incentives and contribute to what we expect to be an improved Q4 performance. We do not anticipate major changes in the macroeconomic environment, although some recent reports of improved consumer confidence polling are cautiously heartening but understood to be temporal.

Collateral effects of the Obamacare rollout on consumer confidence and attitude toward the holiday season are yet too be determined. If circumstances dictate, we will have margin room to be promotionally reactive to adverse changes for whatever reason in the external environment. Our expanded media marketing tests will continue through the fourth quarter with significant graduated changes in process and media spend, first appearing in the first half of next year. We will be building that media spend very gradually as test results are verified by performance. Such increased marketing efforts and the natural build of traffic we expect to continue from customer reaction to the merchandise mix, should help sustain the recent improving trends in traffic.

The Q3 and partial Q4 results have featured very strong performance from our Halloween harvest and Christmas seasonal product, both highly important to reaching our sales and product gross margin goals for the second half of the year. Halloween harvest is effectively gone from the stores and finished the season nicely above planned in both sales and margin. As previously reported, we adjusted our mix this year based on prior-year trends to reduce Halloween and increase the buy for harvest, which produced an on-time sellthrough with fewer markdowns and contributed nicely to the final result. Our early sales and margin results from Christmas seasonal product are encouraging, but we are pre-Black Friday and have a ways to go before conclusion of the season.

Our previously described plan to deliver Christmas items to the store in multiple waves and to begin store receive slightly earlier than the prior year seems to be productive. Again we have a strong promotional plan for the seasonal shopper in place, but based on early-season results, expect a full and on-time sellthrough at a lower markdown rate for this merchandise throughout the season. We bought this segment of the mix slightly down to last year, but with an increased initial markup. We will report more specifically on seasonal product performance on the next quarterly call.

While seasonal product was certainly helpful to our Q3 results, major product categories must and did perform well in order to produce a mid-single digit comp for the quarter. We experienced comparable gains to the prior-year quarter in all three of the major divisions of the business, that is wall decor, home decor, and seasonal. Mike mentioned the categories that exhibited strong performance during the quarter previously in his detailed remarks. And it is worthy to add that the very important categories of furniture and decorative accessories continue to show nice progress toward positive comp sales after months of focus and rehabilitative work from our merchandising team. The base Oracle information system and core product strategy are clearly contributing to consistent performance gains. At the same time, we are progressing on our second phase installation of Oracle planning and allocation as we reported last quarter. We will report more substantively on that rollout on the next call.

Also as discussed last quarter, our CRM loyalty program rolled out to all stores in the third quarter, and our in-store sign-up process is well underway. While it will likely take several quarters to realize appreciable sales benefits from more highly directed marketing to individuals, the acceptance indicated by the steady and above-plan customer sign-up has been gratifying. The e-commerce business continues to show momentum and gains versus the prior-year period; our newly designed website is more customer friendly and has been well received and contributed to web store performance metrics. Needless to say we will continue to aggressively address opportunities on multiple fronts presented by this channel. Our strong 34% comparable sales result and nearly 5% of total quarterly sales represent gains to plan. Increased conversion experience in the prior quarter continued in Q3. As we said, constant change in scope of offering and improvement in process are the centerpieces of our e-commerce efforts.

As we suggested on our last call, our focus is not on external factors largely out of our effective control that affect business. We continue to drive the rebuilding and recalibration of our Company to prepare it for long-term and consistent results in a highly confident sector. Information merchandising system implementations continue and we will have more to say specifically about 2014 in the stores and backroom on our next call as final project plans evolve and commence implementation. Marketing enhancements for both stores and e-commerce will continue and implement more fully in the first half of next year, both online and in traditional media. We will continue to accelerate the e-commerce business in 2014.

Not unexpectedly, our real estate plan for 2014 will also be more aggressive given the positive trends in our merchandise and unit profitability. We feel it is an opportune time to begin a more aggressive extended real estate ramp. We expect at this time to reach at least 10% square footage growth in 2014. Preliminarily this would imply 45 to 50 new openings and 15 to 20 new closings, but we will provide a more refined schedule on our March call. Next year should begin a period of fewer closings as we have reached a point of diminishing returns for closing older model locations where a viable off-model alternative has not yet presented. In fact, we have begun to extend the leases for some of these mall stores as we recognize that such locations will represent the best retail opportunity for Kirkland's for the foreseeable future. Areas of growth opportunity have been discussed previously but the West Coast, Northeast, mid-Atlantic, and upper Midwest are areas where we have a presence but insufficient market penetration and density. We intend to address those areas with a greater effort.

We also have a tested viable smaller-market store location opportunity that can be layered into our plan in 2014 and beyond that is profitable and very feasible due to the flexibility of the Kirkland's store space needs, and its attraction to the large middle income customer base in such markets. We do expect increased openings to be accretive to earnings in the ensuing fiscal years. We will address more specifics of our real estate effort over the next several communications to investors.

We have been engrossed in a three-year period of intense and reformative foundational work designed to totally recast and reposition the key elements of our Company, including the balance sheet, the store base, systems, marketing, and to add a second and complementary online channel. We see progress and it is now beginning to be reflected in our results and outlook. We remain cautious about the short and midterm outlook for consumer metrics, but we also remain very positive about the progress and prospect for Kirkland's. The heavy lifting is by no means over, but the plan is well understood and well underway. We believe we are at the right moment with our balance sheet and earnings momentum to invest even more strongly but prudently in our business. We look forward to reporting to you again on those efforts in a few months.

We wish everyone a wonderful holiday season, and again remind you that we sincerely appreciate your time and interest in Kirkland's. It is unclear at this moment if this is the last or merely the closest to the last time I will report to you as CEO of Kirkland's. I would remind that the timing of the leadership transition is not important, only the result, as I am committed to and intent to be totally and actively engaged until the handout is fully and satisfactorily implemented. I can express my appreciation to each of you for your interest in and support of Kirkland's. Operator, we are ready to take calls.

(Operator Instructions)

Brad Thomas, KeyBanc Capital Markets.

This is actually Jason standing in for Brad. Congratulation on a great quarter and Robert if this is your last call it's been nice working with you.

Thanks man, you too.

First we just wanted to touch on your new advertising, I think you said it was in 10 markets, was wondering if you can give any more detail around what was some of the performance deltas between the markets with that advertising and then how much that may have contributed to your comps?

Yes, we are in 10 markets that covers about 60 stores, so still a pretty small component of the chain. I think we are focused on what is going on in those individual markets, the media we are using in those individual markets which is a combination of cable and print.

So we are I guess early on in this and we've got a gradual approach to how we roll it out to the full chain. But I think what we are saying at this moment is we are seeing enough of the sales lift to generate incremental margin dollars on top of the cost, and we believe and understand that as you get into this, it takes some time to mature. So we will be monitoring as we stay in some of these markets for an extended period of time how much of an additional ramp-up we get. But I am not ready to start quantifying the impact on the comps because it is still such a small slice of the chain and we will keep reporting on this as we go forward.

Great. Have you talked about anything on what you expect for advertising spending in 2014? I know you said it was up $1 million this quarter.

Yes, we said it was up $1 million this quarter. I think embedded in what we said related to Q4 would be a similar type of increase. We have not yet spoke about Q4 or 2014 other than to say we will continue to monitor the success of what we're doing today and have a plan to gradually push it out to other markets in the chain.

Okay.

Jason, I think it is clearly a crawl, walk, run plan, and I don't think we will deviate from that unless we see some out of bounds results, which I really don't expect. I think it will be incremental.

Okay. And then on e-commerce, it was about 5% of sales this quarter, do you have a target on where you think that could be next year, three years, five years out, what kind of mix you expect?

We have internally talked about 10% goal over a period of a few years, and we have I think are tracking along toward that. It is becoming as a lot of other retails are saying, it is becoming increasingly difficult to carve it out that way, because there are so many touch points and the multichannel nature of the Company and where we are headed, that is going to become even more cloudy as we go forward. It is all good, but it is hard to break it out in terms of percent of the business. We will continue to do so as long as it is relevant.

And then have you seen any differences in basket size, frequency, or any sort of -- you talked about more multichannel, any of the halo or maybe markets where you are going to e-commerce, does that spill over into stores or any more details around that?

Right now, the reach in e-commerce is mainly within our footprint, but you can see some good activity in markets like in the Pacific Northwest and New York City and other major metro areas where we are starting to attract some customers I think as a result of our digital marketing that we are doing. Our basket size is increasing as we've increased the SKU selection on the site, and that is a key metric that we look at. The average order value is actually over $100 an order. So bigger ticket purchases online.

And then how does that compare in terms of magnitude to the basket in-store?

Basket in-store, depending on the season between $35 and $40.

Wow, that is a big jump. All right, we will let somebody else take it. Thanks a lot.

David Magee, SunTrust Robinson Humphrey.

Thank you and good morning guys. Congrats on the great quarter and Robert I hope we have at least one more quarter out of you next year.

Thanks, Dave, we appreciate the kind words.

You mentioned that the promotional environment I guess was progressing as you would expect right now, did I hear that correctly? For the --

Yes, I think so far we have seen good results. We are still pre-Black Friday and I think the season has yet to unfold, but there has been a bit of commentary from the general retail sector indicating an expectation of great promotion. We have seen a little bit of it, but not enough to say hey, that's clearly a big trend. I think the JCPenney factor is somewhat of an unknown, and there well be some great promotions online, there is no question about that. But so far, our business seems to indicate that we are holding well to plan.

The conversion rate right now and the transaction size, how close are those metrics to their historical high in the past? Will we have more upside there next year, or does next year does traffic become the primary comp driver?

Well, I think obviously traffic will continue to be a focus, because we want to see that return to sequentially positive results, and we think there is upside there. And I believe there is upside on the conversion. And the other metrics, I think our averaging at retail has done rather nicely and our average ticket has done rather nicely. You have to be a little bit careful about what you wish for on items per transaction, depending on what you are trying to do at the time, but I think there is upside across the board.

Thank you. And then lastly, do you all have the ability to sell the items on the website directly from the store inventory?

Not yet, David, but that is an initiative that we are in the midst of. For 2014, what we are doing now that is an improvement is we are showing more SKUs that are available in-store only on the site. We've also added a feature where you can check the inventory of those items online and determine if it is in quantity in your home store that you designate as a shopper for us. So big improvements there, we are pushing forward toward a shared inventory mix in the near future.

And once you have that capability I guess you will be able to sell clearance merchandise online perhaps more efficiently than maybe in the past?

That would be an opportunity for us, yes.

Yes. Thank you, guys and good luck this season.

Jeff Black, Avondale Partners.

Congrats on a nice quarter guys. When you look at the gross margin we are just curious what really drove the improvement? Was this better in-stocks in core from what you have been working on, or was it better sell-throughs on some of the fashion product? And looking at where we are on merchandise margin given your guidance, how far is there to go there in the next few years? And I guess in 2014, what do you see as the biggest opportunities on gross margin? Thanks.

Well, let me start with the last and say that I don't expect us to sequentially deliver 200 or 300 basis points over the next four or five quarters, but we do expect and are working toward reasonable incremental gains. And we think that is -- has been driven in some respects by a better executed core items strategy, and we mentioned or called out specifically the great performance of seasonal in the third and early fourth quarter, which is typically higher-margin product, and has limited quantity, and there is some sense of urgency involved with it.

So those are all positive things, but I think you also have to look across the board at your core merchandise offering. And with possible exception of a little bit of dip that we have had in framed art in the last couple of quarters, the rest of the merchandise mix has performed very well. And I think controlled inventories, very controlled promotions that are very focused and provide a very nice offering to the customer, as well as moving some things that we need to move, along with that good product have contributed to an overall better margin. So I think it is a very holistic effort on the merchandising side and better information is certainly a part of it, but you have to have the execution piece in the store.

And I think we have gained a lot of traction with organizing our stores much better and to making them more plausible to be shopped by the customer and more focused, and we have a big visual effort that has been going on now for the last year to coordinate merchandise, visual, and execution in the stores. All of that really has to work together to deliver the kind of sell-through that you want. And when you get the sell-through, you get the margin.

And Jeff, just to add to that, historically speaking, that part of your question, with our guidance this year, I think that would still imply that we are about 100 basis points short of where we had been about three years ago on the merchandise margin, so that would suggest still some improvement to go from there with better tools in-house today than we had. So we think there is some upside to continue.

And then just a clarification, on the traffic, did you guys -- is it implied that the traffic is better in the test markets or the markets where you are using the advertising test?

It is. We are measuring all metrics in those markets against the control group, and traffic is one of those metrics and that would -- that shows that we are ahead of the control group by a good margin on traffic. Primarily, we want to look at ultimately just the sales, because conversion comes into play with some of the advertising, with the print, but traffic is up to answer your question, yes.

Okay, fair enough. Good luck, guys.

Neely Tamminga, Piper Jaffray.

Good morning and congratulations you guys on a well executed quarter. Robert, I echo David's comments, this can't be our last call, so you're going to show up on the last call, it's official.

Thank you, you're very kind.

So here's a variety of questions I have for you. On the shared inventory initiative, Mike, if you could talk us through some of the key metrics that we are interested in, that would be really helpful, I mean it is great that you guys are moving in that direction. Is this a first half '14 or second half '14 initiative? Will you go by category or site wide? That is the first part my question.

And then secondly, related to that if you could talk to how much of the sales online have you identified as being held back because of stockouts? What really is the top line drive by fulfilling some of these orders would be helpful? I think the situation like given your wall decor right now, you go to your new arrivals, you are largely stocked out of wall decor on that landing page, how much of this has been holding actually your overall topline back is just the perspective that we would love to have.

And then related to as your SKUs per store, so you've got SKUs in your stores, how many of those SKUs are actually shown on your website, and how many can you actually purchase on your website? So I will just pause there and see if you could guide us a little bit on the shared initiative.

I'll do the best I can on those. First of all, what was the first part of your question again, shared initiatives?

The timing --

Yes, we are working on that as we speak. We need some technology to be added to our order management type technology that we are going to leverage to be able to get to that. That is a next year project. It is unclear as to in what phases that will rollout, and you mentioned starting with certain categories, that may very well be a direction we head down, because that could get it in potentially sooner.

But it is a next year initiative, I don't want to say which quarter yet without -- we are still working through the work plan on that project, but it is a top priority in e-commerce next year.

The stockouts component, I thing that is really one of the things we are trying to address in going to a shared inventory. I don't think overall we have a terrible problem with stockouts, I think when we have an item that starts to sell really well, as we do throughout our business, we have lead times and sometimes it is hard to fill those back in. So I think you see some of that online just like you see it in the stores, but if we are able to leverage the store inventory to fulfill that order, and allow the customer to get it however they want it, that's going to reduce those stockouts quite a bit.

As far as the store SKUs that are available for sale online, we now have over 4,000 SKUs online, because we have added about 1,300 as I mentioned earlier that are only available in-store. So we are now showing an almost full assortment I would say online, both what is being sold as web exclusive items through the website and what is also being sold in the stores, so we have a good mix of that. We are over 4,000 if you include the in-store portion, and we've added 1,300 of those to the site lately.

And another thing we're doing next year just to bolt onto those few things that you did mention, is to go to -- in connection with this order management technology is to go to some third parties and have dropship capabilities, so we are not having to fulfill the orders ourselves all the time.

I would also mention that I think we recognize the power of leveraging that store inventory for the web, and as Mike said, top priority, but we are also attacking it in different ways, too. We are going to try -- we are testing some rapid response replenishment that might be available if we can make this work and work with our system. So we see the need and appreciate the urgency and I promise you we are on it.

Thank you, Robert and Mike for that. Just one more follow-up. Could you in theory launch buy online pick up in stores since you've got the local store inventory already available as a bridge before you get to that, or is that not -- do you need that incremental tech for the order management in order to do it?

I think to do it effectively we would need to install order management. I don't think we are at a point where we can say hey, you can order it but pick it up in store. We do have in-store pickup of online items that represent an opportunity where you are too bulky to ship or for some reason shipping is not feasible. And we are leveraging that opportunity really well. But on the other side of that, I don't think we can short circuit that, yet.

Neely, one important thing in how we are thinking about it is we've got feedback on our site we've launched, and you can see on the site where you can drop in your feedback, and we are going to react a lot to what the customer is really asking for. One of the things -- they want to be able to decide how it is delivered. They want to be able to pick up an item in the store to save on their shipping, they want to use different varieties of payment. And we are getting that feedback constantly and we are trying to pull that together into some initiatives that will facilitate a better experience.

Okay, great. And then just two briefer questions. One would be, what have your trends -- how much are corporate sales relative to your total sales trends? And has that been an up trending category and is that something you guys are thinking about possibly expanding, does it make sense?

And then secondly, this is just a really a financial question. I don't think you covered this specifically, but you obviously took an increase in bonus accrual for Q3 because trends are better relative to last year. Just wondering if you've basically accounted for the trends continuing or what the guidance implies for Q4 also in that bonus accrual, or would we also see an additional bonus accrual in Q4, because you take the second half all in Q3? Thanks.

On the bonus accrual, the main reason for the callouts because last year it was -- there was not one, so we've got a comparison issue that we are calling out. That would really flow -- the accrual kind of flows in according to the sales contribution, the revenue contribution by quarter. And that is embedded in our plan all the time, and what we try to do is gauge the payout relative to the guidance that we give. So it should match up with sales in terms of contribution, and it is always trying to keep pace with what the current guidance is or forecast is for the Company. Your other question about corporate sales?

Are you talking about large quantities sales --

Yes, or like interior designer market who obviously uses Kirkland's as a resource. I'm just wondering if that has been a source of potential upside for you guys of late, too, with the housing market kind of stabilizing and coming back. Thanks.

We think there is some upside there, it's a couple percent of sales, and we have people who in our group that actively work that market, but that's been a little hard for us to gain really big traction in, and I don't honestly -- I don't know what the future holds for that.

I think we will continue to offer the opportunity, and it's probably priority six or seven in a list of things that we are trying to do now, because the web initiatives, along with the improvements that we are trying to do in our merchandising systems, I think all those things are so hugely important to the overall that we just haven't gotten to that one as a big project, yet.

No shortage of things in the job jar, that's for sure, and that is what I love about you guys. Thanks so much and best wishes for holiday.

(Operator Instructions)

Joan Storms, Wedbush Securities.

Congratulations on a great quarter. Mike, if you could just quickly go over the modules since you implemented the merchandising, the foundation system last year, what have you turned on module wise year to date, what is left for this year, and what comes at the beginning of 2015? And then with that, what -- potentially what tools does that bring to the buying team?

Yes, last year we implemented the foundation of the Oracle system in the third quarter. And this year was all what we called internally our Phase II, which was really addressing the merchandise planning side of the capabilities of the overall suite of products in Oracle. That included merchandise financial planning, which is now in place, and we are starting to work with that and started that in the third quarter.

We had previously gone live with the new allocation module, and a new replenishment module. So kind of connecting that with the core strategy that we've been talking about in merchandising, you can imagine -- you've got now core items that are being set up as replenishable in the system using the new technology. So allocation, replenishment, financial planning in place, location planning in place.

What we have yet to implement and are working on that for the balance of the year is assortment planning and item planning, which is really the beginning part of the feed up through the entire plan. So that is really going to give the buyers and the planners that clear path to build a bottoms up plan to meet the financial plan targets for the Company.

There is a lot of benefit in the things we've already rolled in, because a lot of what we did in those areas of merchandise planning were very manual and arduous. But we are happy to say we are going to be going into next year with all those tools in place, so as we plan our seasons we are going to be much better equipped to do so.

Okay, excellent. I apologize if this was already asked, I had to step off for one second. I missed the whole traffic issue. You had mentioned that in the beginning of the call that transactions were slightly positive, and that historically if the conversion was working and the ticket, then traffic would follow. So how are you thinking about traffic for the fourth quarter and heading into 2015?

Well, we I think -- you summed it up pretty well, that is what we said. We were happy to see for the first part of the year the ticket be up and be consistently up. The margin to go along with that had been a positive for us, particularly in Q2 and Q3. And then the conversion rate being positive, and those indicators typically lead to better foot traffic down the road. We were pleased to see the decline in traffic go down, we were showing 6% to 7% declines in the first half, and we just reported a 3% decline in the third quarter.

I would say it is fair to say that traffic got better as the quarter progressed, so we entered the fourth quarter with a little bit better trend. So hopefully that continues, and I don't know if I would say what 2015 is going to look like, but if we keep performing on those other metrics, I would feel good about it absent some macro effect that I can't know what it is, yet.

Okay great, thank you very much.

Anthony Lebiedzinski, Sidoti & Company.

Thanks for taking the questions, and Robert, I hope you stick around for a little bit more. Firstly just on e-commerce, more and more online retailers are doing free shipping promotions or discounting shipping promotions; you have a goal to eventually expand that business to 10% of your overall sales. Will you need to do more of that in order to get there? Just wanted to get better clarity as to how you're thinking about free shipping.

Well first of all, over 40% of our orders is pickup in store, so that is free shipping for the customer, and they look at it that way, they enjoy that, they like to go to the stores too so we get the benefit of them coming in to pick it up and not have to pay shipping for it because it's riding along the truck with everything else. So that is a big point.

And then on the promotion side, we do run free shipping promotions from time to time, but as we see what promotions really are effective online, you would be surprised that when we run other style promotions, other category focuses or flash sales and things like that, we actually get a better response.

Okay, that's helpful. I think you mentioned at some point that you would look to do some third-party fulfillment, would that be a lower margin business?

Well, yes, it would be, it would be a different model, and because we would not be holding the inventory, it would be structured much differently. So it would be lower margin, but it would be no expense to us, so it is just a matter of how that works out with the vendors.

Got it. Okay. And just looking at the guidance for the fourth quarter, you expect same-store sales to be up 1% to 2%. The third quarter you did 4.9%, so is that just because the third-quarter comparison was easier or was there anything else going on in terms of how you set about the guidance?

The 1% to 2% was a full-year --

You're right, it is 2% to 4%, I'm sorry.

It is 2% to 4%. And I think it is just our reflection of what we have in our plan and our forecast and what we were seeing coming into the quarter. And our view of the calendar and how that is going to flow and that is where we ended up, so I don't see it as any comparison issue or anything like that. Third quarter actually on paper was an easier comparison based on last year's down 5%.

Yes, I understand. And lastly it sounds like you will be pursuing the branding initiatives going forward, it is leading to incrementally higher sales, better margin for you. So with that in mind, as you look to continue with your branding initiatives and keeping in mind maybe perhaps other costs as well for next year, what kind of same-store sales gain would you need in order to leverage your operating expenses?

Yes, I would continue to say in the 3% to 4% range, it is hard to -- like we called out today, it is one quarter so it is a little more difficult to apply that to a full year, because if you look at other quarters you see different results.

But in the one we just gave, if you excluded the marketing investment, if you carved out the incentive year-over-year comparison issue, we did leverage the rest of the SG&A by about 90 basis points. And with some more growth next year, I think that would maybe help us to leverage those expenses overall even better, but there well be the investment in marketing and we will continue to push forward with that, slowly, as Robert mentioned, and smartly. We will talk about the impact on the SG&A, but I think in general I would say about 3%.

Okay, thanks very much.

David [Beaman], Beaman Capital.

I think I've got the perfect question to ask you being the very last one right at the end. There was a study recently that showed that when a CEO leaves the Company, generally speaking he leaves at the top -- when the stock is at the top and the business is at the top because he works damn hard to make sure he is leaving the business in a good way, et cetera, et cetera.

So the question, Robert, is what do you think of that study, and how do you think Kirkland's is going to do going forward without you? And by the way, congratulations on an absolutely remarkable job. This Company was almost out of business many years ago, and you have done one of the most incredible turns in retail history.

Well, thank you for all of that. I think Kirkland's is going to do very well. I think the collaborative efforts of a lot of good people over the last three or four years have been aimed toward putting a great foundation and putting a lot of capability in the hands of some very capable people, so that we could compete efficiently and productively in this sector and I think that is where we are.

And I don't know about everybody leaving at the top, I hope that as I continue to see what happens with Kirkland's that this is the beginning rather than the peak of something, and I think that it can be and will be and I have confidence that our Board will make the transition handoff work really well this time. It hasn't in the past, but that doesn't mean we won't have a good one this time.

So I look forward to the future and I think everyone is poised and prepared for that, and with that said, David, thank you always for provocative questions. It is always a pleasure to get your questions.

We had to end it on a very positive note. I think it is terrific, well done, absolutely well done, and you have done a great job and let's hope that the next guys can carry on doing what you did.

Thanks man. I hope we see you soon.

Thank you. Mr. Alderson you may now proceed with the conference.

Okay, thank you, are we off-line? No? Thanks for your time today and for your interest in Kirkland's as we previously said, and we will speak to you in March about what happens in the fourth quarter. So thanks again, have a great holiday.

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