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JACKSON, TN-Kirkland’s management knew the company was in trouble and advised the world beforehand. But, that did not seem to make early FY 2007 numbers any easier to deliver during a Friday conference call, as officials of the home décor chain recited sharp sales declines and other harsh financial details for the 13-week period ending May 5th. Revenue dropped year-over-year from $92.6 million in Q1 2006 to $82.3 million, and comparable sales at 156 mall-based stores plunged by 20%. The 191 non-mall units did not fare much better, tailing off by 16.8%.

“Our team is obviously very disappointed with the first-quarter results,” president and COO Catherine David remarked, bemoaning that leadership “took our eye off the ball” and failed to deliver on presentation, price and product. Kirkland’s posted a net loss of $7.5 million, or 38 cents per share, more than double the $3 million loss (18 cents per share) registered a year earlier.

Store traffic was so weak that management advised analysts of the torpid start during a mid-March conference call. “I think we were pretty much on target with the severity of the trend described,” said David on Friday. CEO Robert Alderson was equally blunt, offering that, “we have some big challenges ahead” that he anticipates will not be overtaken by mid-year.

According to Alderson, rising energy costs, the housing slump and increasing, voracious competition are all dogging the Nasdaq-listed company, which was founded in 1966 in downtown Jackson by Chairman Emeritus Carl Kirkland. Declining disposable income is alarming for a chain whose customers “don’t need anything we sell to sustain life; just to make it better,” noted Alderson. In that environment, “tragic trends may not reverse in the near term,” he acceded

“Competition is not going to lessen,” opined Alderson, warning that others might slash prices “to change the current fortunes.” Annual sales and earnings guidance is being suspended “due to the persistence of adverse trends in the home décor sector, and our on-going turnaround efforts,” announced CFO W. Michael Madden.

Guidance will be issued one quarter in advance, he said, subsequently delivering a bleak Q2 forecast. Kirkland’s anticipates a net loss of 35 to 40 cents per share and a decrease in comp-store sales of 12% to 15%, Madden relayed, with total revenues seen dropping into the $85-million to $88-million range.

Stores in the North and Midwest have struggled enough to prompt a promised shakeup in regional oversight, but Alderson says first-quarter difficulties were spread through Kirkland’s 37-state footprint. The company closed 12 units and opened 10 in the first quarter.

Kirkland’s began a national expansion after going public in 2002 with a goal to open upwards of 650 units. Given difficulties dating back more than a year, however, that pace has slowed. The company operates under the Kirkland’s and Kirkland’s Home names along with a dozen Briar Patch by Kirkland’s.

The chain has 12 openings slated for the second quarter, with six stores targeted for closing. Capital expenditures of $3.7 million for the quarter were largely the result of new construction, said Madden, who anticipates total capital costs to reach $16 million to $17 million in FY 2007.

Landlord allowances should cut Kirkland’s contribution to between $5 million and $6 million for the year, however, said Madden. There was also a five-cents-per-share in Q1 related to the opening of a sales support office in Nashville.

Store operations is one of several areas Kirkland’s is striving to achieve better performance, Alderson pledged in recognizing the March hiring of Jeff Ostler as director of stores. After similar stints at Dollar General Corp. and Hastings Entertainment, Ostler brings “a pragmatic and tactical approach,” said Alderson, expressing confidence he will address inefficiencies and problems such as those created by running two divergent retailing groups in the mall and non-mall formats.

Kirkland’s has also been hurt by merchandising missteps, stressed the management, so much so that there has been a shakeup at the top in that division and a restructuring of departments to create greater fusion among merchandising, marketing and sales divisions. Two significant Q1 additions were Sharyn Hejel from Bed Bath & Beyond to become Kirkland’s general merchandising manager and Anthony DeBruno as vice president of planning and allocation after leading the strategic merchandising program for the Bombay Co.

There were some successes in product selection, said David, with the company moving to “take back the wall” market in decorations, and also guessing right on certain textiles and decorative accessories. Lead items in design themes did well in Q1, said David, but not so much for secondary products.

In one design category, 10% of the product represented 70% of the sales. Secondary items “were definitely more fringe in terms of broad appeal, and we paid for that mistake,” said David. The company will invest more in the primary sellers, she said, part of a multi-pronged response to the difficult first quarter.

Buying practices are already shifting to focus on best sellers, and David said that approach will trickle down to the sales floor. “Merchandise themes are not inherently unproductive financially if executed with the key item mentality,” offered David. Those leading-edge products, she said, will be also emphasized in window displays and marketing campaigns.

Maintaining that, “we’ve had the vision, but the execution and process piece has not been there,” Alderson said he is encouraged in the recent management hires and the company’s agility in shifting course to reflect new millennium challenges. “Our much anticipated turnaround is not going to happen in the second quarter, but I am confident we will soon experience improvement,” he said.

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