Kirkland's Inc. (NASDAQ:KIRK) Q3 2017 Earnings Conference Call Transcript

Nov 21, 2017 • 11:00 am ET

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Kirkland's Inc. (NASDAQ:KIRK) Q3 2017 Earnings Conference Call Transcript

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Presentation
Operator
Operator

Good day, and welcome to the Kirkland's Third Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Jeff Black with SCR Partners. Please go ahead, sir.

Executive
Jeff Black

Thank you. Good morning, and welcome to the Kirkland's conference call to review results for the third quarter of fiscal 2017. On the call this morning are Mike Madden, President and CEO; and Nicole Strain, Interim CFO.

The results as well as the notice of accessibility of this conference call on a listen-only basis over the Internet were announced earlier this morning in a press release distributed to the financial media. (Forward-Looking Cautionary Statements) With that, I will turn it over to Mike Madden.

Executive
Mike Madden

Thank you, Jeff, and thanks to everyone for joining us this morning. We were pleased with our overall third quarter performance. Our initiatives to control SKUs, optimize promotional activity and rework targeted areas of our assortment are driving improved performance in sales and merchandise margin. At the same time, operating expenses and inventory remained well controlled despite significant disruption during the quarter from Hurricanes Harvey and Irma, and some disruption and cost pressures in our supply chain.

Total sales increased approximately 5%. The top line benefited from strong momentum in e-commerce and solid contribution from new stores. Comparable store sales increased modestly and were up 2%, excluding the impact from hurricanes. And we achieved that increase with a gain in merchandise margin over the prior year, reflecting the merchandising initiatives that are taking hold.

As I mentioned, Hurricanes Harvey and Irma presented significant challenges during the quarter and resulted in the loss of 359 selling days and the closure of 109 stores during the period. As of last week, we are still down one store in Houston area, but all other locations that experienced downtime have now reopened. We expect the remaining store in Humble, Texas to open this week. We're seeing favorable trends in the Houston market, which is typical post these events, and we factored that recovery into our estimate of net loss sales.

In addition to the hurricanes, we faced pressure on our supply chain as we worked through constraints related to a cyber-attack that affected one of our key logistics partners on the West Coast. Downtime caused by the attack led to a temporary logjam of inventory and resulted in higher-than-anticipated labor and transportation costs, as we dealt with a compressed flow ahead of our busy season. These issues also likely dampened sales in the early part of the third quarter due to lower store inventory levels.

Overall, I'm very pleased and impressed with how our teams have managed through the distractions. We continue to make strong progress on our strategic initiatives, and we're doing a much better job of blocking and tackling, managing the day-to-day business with better tools and improved cross-functional communication.

We're encouraged by the trajectory of the business as we approach the heart of the holiday season. Our