Selling a new story

Woody Woodward took over at Kirkland's in the fall of 2018.

Curbside pickup, of all things, gave Woody Woodward a sense that he was breaking through.

Just like millions of other businesses around the world, home decor retailer Kirkland’s needed some time to absorb the arrival of the COVID-19 pandemic last March. With hundreds of stores closed and the majority of its customers under lockdown orders, the Brentwood-based chain canceled orders from suppliers and got on the phone with banks and landlords to negotiate some breathing room. Not long after, as the first shockwaves ebbed, came the discussion about setting up a curbside operation — Kirkland’s version of the urgent “Well, what can we do now?” conversation happening at millions of other businesses.

“We figured it out in two weeks,” Woodward says. “Before, we would’ve been studying it for months!”

The plan, similar to those adopted by many other retailers, did the job of keeping at least some customer traffic coming via the company’s website and giving the company’s store managers and other full-time employees productive things to do during the spring. Still, it was not an easy lift: Woodward and his team had in early 2020 trimmed one out of every six headquarters jobs and permanently closed 27 stores while starting work on culling dozens more. They had followed that up in March by cutting a third of indirect labor at Kirkland’s distribution centers. This was still very much an all-hands-on-deck situation, evidenced by Woodward and CFO Nicole Strain drawing $40 million of just-in-case money on their revolving credit facility.

Woodward’s efforts to get Kirkland’s moving more quickly — a focus since he had come aboard in October 2018 — began to bear fruit. The company’s e-commerce operation generated a third more sales in the first quarter of 2020 than in the prior-year period and was on its way to posting year-over-year growth of 77 percent in Q2. The team’s work on improving the quality of Kirkland’s merchandise was finding an audience in shoppers stuck in homes they wanted to upgrade and seeing headlines of bankruptcy filings by competitors Pier 1 Imports in February and Tuesday Morning in May.

In short, the narrative was changing.

 

Changing the tone

The board of Kirkland’s had hired Woodward, now 64, from its higher-end peer Crate and Barrel, where he had been president and chief merchandising officer for three years after coming over from watch maker Fossil. During his interviews, Woodward had ultimately secured a mandate to ring in some changes at Kirkland’s, which was founded in 1966 and had carved out a value-oriented niche for knickknacks. But the company had run into a wall in the middle of the decade: Growing discounts on goods that weren’t moving as quickly as they should and rising supply chain costs had cut gross margins from more than 37 percent in 2014 to about 31 percent in 2018 — when the company posted a net profit of less than $4 million on sales of $647 million. Kirkland’s, Woodward says, had a growing relevance problem.

“I had said that, if I came, I needed the freedom to make the changes I needed to make,” says Woodward. “We had to kind of kick ourselves in the pants.”

Many incoming CEOs will come in blazing, claiming the right to overhaul this and that and taking few prisoners along the way. But Woodward had his work cut out for him at Kirkland’s, which had long been a family-run company and whose previous two CEOs — the late Robert Alderson and Mike Madden — did not have the same merchandising background. Turning that ship took some tough conversations, he says, but he credits his employee base for being open to the changes he was looking for.

The first few quarters of the transition didn’t produce pretty numbers, though: Same-store sales fell more than 7 percent in 2019, hurt both by declining traffic and smaller transactions, and Kirkland’s booked a $53 million loss that included nearly $20 million worth of asset impairment charges. In June of that year, Woodward said his team “must continue to fast-track our strategy to improve the business,” but investors weren’t waiting around for results: After starting 2019 above $10, Kirkland’s shares slid below $4 in May and finished the year at barely $1. Analysts covering the company moved on and things looked pretty bleak.

But Woodward had the board’s backing for his plan to upgrade the furniture and tabletop assortment at Kirkland’s and make it a more attractive destination for shoppers looking to overhaul an entire room, not just put the finishing touches on pieces bought elsewhere. His goal is to position Kirkland’s a step below names such as Crate and Barrel, Pottery Barn and Williams-Sonoma while still presenting a clear price-to-value proposition. Key to that is buying more goods directly from manufacturers rather than from wholesalers — a move that lets the company pay closer attention to quality and cuts out a middleman’s cut — so that Kirkland’s could market better products at the same price point as before. About 20 percent of Kirkland’s sales last year came from directly sourced products — without the pandemic’s disruption, Woodward says that number would’ve been closer to 30 percent — and the 2021 goal is to get close to 40 percent.

Along with those efforts, Woodward and his team ramped up spending on their e-commerce and distribution infrastructure. In 2019, they leased a 200,000-square-foot distribution center in Dallas and added capacity to service their West Coast stores. They followed that up last year by consolidating one of their two Jackson, Tennessee, centers into the other and opening smaller e-commerce fulfillment centers in Nevada and Pennsylvania. On top of all that came new transportation management software to manage the flow of goods from warehouses to stores and the hiring in early 2020 of Jeff Martin from The Michaels Cos. to be senior vice president of omni-channel retail.

All that legwork — enabled in part by a balance sheet nearly completely free of the debt that contributed to the bankruptcies of Pier 1 and Tuesday Morning — began paying off when COVID hit and what had originally been a four-year plan to take Kirkland’s a notch upmarket was being rapidly condensed.

“We played three innings in Year 1,” Woodward says. “We’ve probably played six innings this past year.”

A key player in that progress has been Strain, who came aboard as interim CFO in May 2017 and had the qualifier removed a little more than two years later. Woodward says she was tireless in negotiating with landlords before and after COVID’s arrival — Kirkland’s eventually closed 61 stores last year, up from execs’ initial target of about 50 — and has overseen other cost-cutting initiatives.

“They’ve made a tremendous effort cost-cutting. At first, they targeted $30 million to $35 million but they’re probably higher than that now,” says John R. Lawrence, a Memphis-based equity consultant who follows retailers. “If you can get costs out with no debt on your books and then generate some comparable-store growth, that’s a pretty tight productivity curve. Then one plus one equals more than two.”

 

Turning up

Investors began making the same calculations as the summer of 2020 drew near. Plus, there were now fewer competitors for more dollars being spent on textiles, furniture and dinnerware. Those dynamics amounted to rocket fuel for the shares of Kirkland’s (and a few of its peers and near-peers): After trading below $1 long enough to get a warning from the Nasdaq, the stock more than doubled in May. It just about doubled in June as well. And it rose more than 60 percent on top of that in July. By the time investors — many of them retail traders firing each other up online — paused to take a breath, Kirkland’s had gone from pennies to more than $11 in three months.

Woodward and his team have since then produced numbers to back up that surge and then some: In their fiscal third quarter, Kirkland’s produced a profit of $12.4 million on sales of $147 million a year after losing more than $22 million on $145 million in revenues. In mid-February, they previewed Q4 profits that will be 60 percent larger still on sales that will be down about 7 percent from a year earlier — when the company ran 59 more stores. Kirkland’s stock has spent most of 2021 well above $20.

“They’re still in the early innings of direct sourcing. That’s a driver that still exists,” Lawrence says. “Furniture, tabletop, top of bed… All of those still have some runway.”

Woodward is sure of that. His group’s second act will be to prove that the early gains weren’t ephemeral and that same-store growth and solid margins are here to say. That means continuing to invest in direct sourcing and refining the Kirkland’s e-commerce platform — which he says has “shown some cracks” — with more lifestyle photography, visualization tools and more opportunities to link in-store shoppers to a broader array of online options. The long-term goal is to have sales come equally from brick-and-mortar stores and the web.

“I hope there’s a lot more opportunity for our investors,” he says. “We’re going to keep pushing.”

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