The Brand House reports Q2 challenges but sees positive momentum from Bed Bath and Beyond conversions, driving confidence in future growth.

OPERATOR - (00:01:15)

Good morning everyone and thank you for participating in today's conference call to discuss the The Brand House's financial results for the second quarter ended August 2, 2025. Joining us today are CEO Amy Sullivan and CFO Andrea Courtois and the Company's External Director of Investor Relations, Caitlin Churchill. Following their remarks, we'll open the call for your questions. Before we go further, I would like to turn the call over to Ms. Churchill and as she reads the Company's Safe harbor statement within the meaning of the Private Securities Litigation Reform act of 1995 that provides important cautions regarding forward looking statements. Caitlin, please go ahead.

Caitlin Churchill - External Director of Investor Relations - (00:02:04)

Thank you. 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 provision of the Private Securities Litigation Reform act of 1995. Forward looking statements involve known and unknown risks and uncertainties which may cause the The Brand House's actual results in future periods to differ materially from the forecasted results. Those risks and uncertainties are more fully described in the Company's filings with the Securities and Exchange Commission. A webcast replay will also be available via the link provided in today's press release as well as on the company's website at kirklands.com now I'll turn the call over to the Brandhouse Collective CEO Amy Sullivan.

Amy Sullivan - Chief Executive Officer - (00:02:47)

Amy, Good morning and thank you for joining us today. We're at the beginning of a new chapter as we accelerate our transformation through our partnership with Bed, Bath and Beyond. Our first store is open in Brentwood. Additional store conversions are already underway and the early results validate the strength of the brand to chart a new path forward. Second quarter did bring unexpected challenges, but it also clarified our direction and strengthened our conviction in the future of each brand. Before Andrea reviews the results in detail, I'll share the key factors that shaped the quarter and the progress fueling our path to future growth. As noted in our press release, the second quarter was impacted by two significant events. First, the disruption at our Jackson, Tennessee distribution center following the tornado in late May, and second, the strategic and ongoing liquidation of Select Inventory as we optimize our category mix and prepare stores for Bed, Bath and Beyond conversions. Together, these two events were the dominant drivers of the year over year decline in profitability and created significant pressure on our top line, particularly in our E. Commerce Channel. Looking ahead, we do expect continued liquidation of non go forward inventory as we accelerate store conversions. This is a necessary step, unlocking liquidity by turning inventory into cash and redeploying that capital into the assortments that our customers expect in Bed, Bath and Beyond Home. Our actions are deliberate and our capital is being deployed where it matters most to accelerate store conversions and strengthen our foundation for growth. Last month we opened our first Bed, Bath and Beyond home store in Brentwood, Tennessee and the response has been incredible. National media coverage generated more than 250 million impressions, amplifying the excitement customers showed from the moment the doors opened. Sales continue to exceed our expectations, driven by increases in traffic and average ticket. This new format honors the legacy of Bed, Bath and Beyond as a house of brands with more than 30 trusted national brand names throughout bedroom, bathroom and kitchen alongside seasonally relevant home decor and furnishings. Through our Kirkland's Home brand,, we are seeing significant growth in traffic and more importantly, new customer growth, and that momentum gives us the confidence to accelerate our store conversions. The results make it clear the Bed, Bath and Beyond name is a powerful asset and the nameplate change is proving to be a high return growth engine driving performance for the brand itself while amplifying sales across our Kirkland's Home brand,ed product. We will continue to leverage the Kirkland's Home legacy by bringing the best of its assortments into our Bed, Bath and Beyond Home stores, giving customers curated solutions for every corner of their home. Brentwood is just the beginning. In fact, our next grand opening is this Saturday, September 20th in Spring Hill, Tennessee. Over the next six weeks, four more locations in the greater Nashville market will convert to Bed, Bath and Beyond Home, providing us with a range of store sizes and formats that allow us to fine tune our assortment and capital allocation strategy to ensure we have the correct formula for every store in our fleet. Over the next 24 months, we plan to convert all Kirkland's Home stores into Bed, Bath and Beyond stores to capture this momentum and scale for long term growth. By leveraging our existing infrastructure in stores, supply chain and product development, we're able to execute this as a capital light transformation. Each conversion is expected to cost less than $100,000 in CapEx per store, which allows us to scale quickly, stay efficient and maximize return on capital. As we've discussed before, our vision extends across more than Bed, Bath and Beyond Home to the broader portfolio of Bed, Bath and Beyond brands including Bye Bye Baby and Overstock. Both strategies are still in development and I'm incredibly excited about the opportunity ahead for Bye Bye Baby, which will be the next omnichannel initiative we build from the ground up with our first new store expected in 2026 as announced yesterday, we are also in the early stages of planning an expansion of Kirkland's home into the wholesale market, which would bring our designs to independent retailers nationwide. In addition to creating a new growth channel, wholesale could add scale, improve supply chain efficiency and strengthen the unit economics of our products. We could not be more excited for this next chapter. Our partnership with Bed, Bath and Beyond is the cornerstone of this transformation and Marcus and I share a strong omnichannel vision for how these brands grow. That shared conviction gives us the confidence to accelerate conversions and unlock the momentum we're already seeing. Let me now introduce Andrea, who joined us in late July. With more than two decades of financial expertise in planning, analysis and inventory management, she has already established herself as a key partner in our transformation and will play a critical role in driving our long term growth and success.

Andrea Courtois - Chief Financial Officer - (00:08:32)

Andrea thank you Amy and good morning everybody. I am excited to be a part of the Brand House team in such a pivotal moment in our business. As Amy mentioned, we could not be happier with the reception of the first Bed, Bath and Beyond home store has had since opening in early August and we are all energized for the path ahead. With that said, our second quarter results reflect headwinds in our Kirkland's business as we navigated unforeseen circumstances with the impact the tornado had on our distribution center in late May and began purposeful and disciplined liquidation efforts to optimize inventory ahead of expanding our Bed, Bath and Beyond assortments. For the second quarter, net sales were 75.8 million compared to 86.3 million in the prior year quarter. The decrease was driven by 9.7% decline in comparable sales as well as a decline in store count of approximately 5%. Our stores had a slightly positive comparable sales growth for the quarter driven by increases in traffic and conversion which is which were partially offset by lower average transaction due to liquidation efforts I mentioned. Our positive store comp was offset by a decrease of 38.5% of comparable sales in E Commerce. Our E Commerce business continues to face challenges and was also impacted by the tornado disruption to our distribution center in late May. We estimate this disruption negatively impacted our E commerce sales by 750 basis points and total comparable sales by 190 basis points. Gross margin decreased 410 basis points to 16.3% of sales, primarily driven by a decline in merchandise margin and occupancy deleverage. The decline in merchandise margin was Primarily due to 130 basis points related to liquidation activity, 100 basis points related to the write-off of damaged inventory due to the tornado and and 30 basis points related to incremental tariff costs Our operating expenses increased slightly to 31.1 million from 31 million in the prior year. Quarter during the quarter we incurred 1.3 million in insurance costs related to the tornado damage. Given this incremental expense as well as the lower sales in the quarter as a percentage of sales, total operating expenses was 41.1% compared to 35.9% in the prior year Quarter before we turn our attention to the net loss and adjusted net loss, please refer to the terminology and reconciliation between each of our adjusted metrics and the most directly comparable GAAP measurement in our earnings release issued earlier this morning. Net loss was 19.4 million for the quarter compared to 14.5 million in the prior year Quarter Adjusted net loss, which excludes estimated 2 million for the total impact of the tornado disruption was 17.8 million in the quarter compared to an adjusted net loss of 13.9 million in the prior year. The decline compared to the prior year is primarily attributed to the impact of the headwinds associated with our E Commerce business, the liquidation activity reviewed and incremental tariff costs incurred in the quarter. Adjusted loss per share was $0.90 compared to a loss of $1.11 in the prior year Quarter the year over year improvement in adjusted loss per share was entirely driven by the increase in share count from 13 million shares to 22.3 million shares due to the Beyond transaction that was completed in late third quarter of fiscal 2024. From a balance sheet perspective, we ended the quarter with 82 million in inventory down 12% to the ending prior year Q2 ending inventory. The decrease was driven by a temporary pause in inventory shipments during the beginning of Q2 out of Asia due to tariff uncertainty. We have since received those goods. Inventory is now in a similar position to the prior year and more in line to total comparable sales trends. We had Total debt outstanding 55.2 million at the end of the quarter, which was comprised of 41.5 million under a senior revolving line of credit and 13.7 million in debt to beyond related to the term loan, convertible term loan and sale of a percentage of Kirkland's future revenues to beyond net of debt issuance and original issue discount costs. As of September 16, 2025, the company had 49 million of outstanding debt with 10.8 million of availability after the minimum required excess availability covenant and 13.7 million in term loans to beyond with 20 million available from beyond. As a reminder, availability under our Revolving credit facility fluctuates largely based on eligible inventory levels and as eligible inventory increases in the second and third fiscal quarters in support of our backhouse sales plans, our borrowing capacity increases correspondingly. In summary, as we have detailed, our second quarter results were largely impacted by two factors, the disruption of the tornado and the strategic and purposeful decision to liquidate goods in preparation for our conversion to Bed, Bath and Beyond Home Stores. As we look ahead in the second half of the year. While we do not expect any additional significant expenses related to the tornado damage, we do expect to continue our promotional activity and we will see some incremental tariff costs beginning in the third quarter. Our teams are working hard to mitigate this impact and we will remain focused and committed to setting the stage for the company's next phase of growth in our conversion strategy and plans through our partnership with Bed, Bath and Beyond. I will now turn the call over to Amy for a few closing remarks before we open up the call for questions.

Amy Sullivan - Chief Executive Officer - (00:14:13)

Amy thank you, Andrea. As we close today's call, I want to be clear. We are not simply executing a brand conversion. We are architecting an omnichannel retail transformation. Every detail of the customer experience matters, from the products we design to the way we bring our story to life through marketing, all delivered with the operational excellence our customers expect. With Bed, Bath and Beyond's continued partnership, a leadership team we continue to strengthen and early results that exceeded our expectations and validated our proof of concept. We are accelerating our national rollout with conviction. I want to thank our team for their tireless work and our shareholders for their continued support as we move forward together. The best results are ahead of us and our focus is firmly there. Operator we are now ready to take questions.

OPERATOR - (00:15:10)

We will now begin the question and answer session. To ask a question you may press Star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star then two. At this time we will pause momentarily to assemble our roster. The first question comes from Jeremy Hamblin with Craig Hallam Capital Group. Please go ahead.

Jeremy Hamblin - Equity Analyst - (00:15:47)

Good morning and thanks so much for taking the questions. I wanted to start with the Bed Bath conversions and obviously a really positive launch here of the first one in Nashville and excited to see how the next few rollout here but wanted to get back to I think you noted about $100,000 in conversion costs. I wanted to understand if the first one in Brentwood was at a similar cost, if there was A little bit more invested into that. And just to get a sense for now that we've got a little bit of time with the opening. And I know it drew quite a bit of media attention certainly at kind of the first couple of weeks, but wanted to get a sense for how trends are continuing to develop at that store.

Amy Sullivan - Chief Executive Officer - (00:16:48)

Yeah, I'll take that, Jeremy. So from a capex perspective for Brentwood, and remember, all of our store formats are slightly different, which is why we wanted to use Nashville for the initial pilot, because it gives me five or six formats where I can really work through the formula of how we begin to convert these nations. And so for Brentwood specifically, the capex was actually significantly less. That store is more newly remodeled within the Kirkland fleet. And so it really was as simple as a sign change on the front of the store and all of the other work we did internally as a team just to re merchandise the store using the existing fixtures and structures of the store. So that one was, you know, closer to $30,000. As we get through and look at other stores that might need a flooring change or something more significant to the construction, we still believe we can track in that $100,000 or less range as we convert. As I shared on the my prepared remarks, the next one opening this Saturday required a little more because we changed out the floors, but again, still came under. Came in well under the $100,000 mark. So from a capex perspective, I feel really good about what we've projected in terms of the conversions and then in terms of results. Honestly, we were so thrilled. And you know, you noted the national media coverage that we got for the opening and certainly it was a good reminder of the power of the brand and how much people love and miss Bed Bath and beyond. And I'm pleased to say the results have continued. Traffic is up far significant to what a Kirkland store was. New customer acquisition is really strong and the sales are definitely holding in. And so as we go through, you know, the peak season for what would have been in that store this time last year in Kirkland's, we'll continue to monitor what mix of seasonal products should be in the store versus the legacy bed bath categories. But honestly, all categories are seeing big lifts and really seeing runaway success in things like bedroom and kitchen.

Jeremy Hamblin - Equity Analyst - (00:18:59)

Got it. And then just, you know, you have a little over 300 locations today as we go through this process and converting and you talked about a 24 month time frame, you know, what portion of those, you know, just over 300 locations do you think ultimately will be converted versus I would imagine some maybe, you know, best to be just closed, but wanted to get a sense for, you know, ultimately a couple of years from now where you expect, you know, kind of the chain to be and kind of the mix of the various banners.

Amy Sullivan - Chief Executive Officer - (00:19:40)

Yeah, I would say, you know, we shared this, you know, a few times throughout the year, and even on the fireside chat we did with you all. We are going through, literally location by location and looking at the real estate, the health of the center, the performance that it has done as a Kirkland store, and layering on what we believe the target customer demographics to be for Bed Bath and beyond and the future of our company and making sure that it matches the criteria that we need to see in real estate. And so we want to be very thoughtful about our choices there. We are currently planning to close about 25 stores that have natural lease expirations in January of 2026. So I suspect as we go forward and really continue navigating the review of real estate, as well as making sure that the economics work for each location, I would estimate 250 to 275 of our existing Kirkland stores remaining in the mix over that time. And certainly we're opportunistically looking for other locations. And so as we see success in a market, we want to make sure that we cover both the markets that we're in today as well as the markets that were true to Bed Bath's legacy. You know, our store fleet really well, Jeremy. And if you look at the northeast, that is definitely an area where there's less dominance of Kirkland's. And we know that will be likely a very strong area for Bed Bath. And so of our existing fleet, I'd stick with that 250, 275 number over time. But just know that we do believe there's still upside to that in terms of our real estate portfolio geographically.

Jeremy Hamblin - Equity Analyst - (00:21:19)

Great. And then I want to come back to the issue. Obviously, you guys had, you know, this terrible tornado that ripped through its head, you know, significant disruption to the business. But you're also going through this, you know, kind of re-imagination, this rebirth of the brands. And I wanted to just get a sense for how we should be thinking about the expectations of the store momentum versus your e-commerce business and when you might expect the E. Comm. Portion of your business to see some stabilization. You know, obviously, we're coming into a key part of the. From a seasonal perspective, whether you're talking about harvest or, you know, obviously the holiday season. Do you have a sense for when you think that might be stable? I mean, there's just obviously a lot of moving parts that are going on here with the conversions as well that I'm sure are taking up quite a bit of attention.

Amy Sullivan - Chief Executive Officer - (00:22:25)

Yes. So, I mean, your spot. And we've been talking about this quite a bit this year, is we also want to make sure that the transactions that we're driving towards are the most profitable transactions that we can deliver. And so we're intentionally funding more efforts towards brick-and-mortar as we really try to clean up the balance sheet and improve our liquidity to fund conversions. And so I want to see our owned part of the business, the inventory we own versus the drop ship, as well as the ability to drive, buy online, pick up in store, continue to accelerate as we go into the back half of the year. But we will remain intentional driving more of the brick-and-mortar business. And I think it's okay for the E Commerce business to normalize back down to sort of the declines we were seeing earlier in the year. That's where I'd like to see it go because again, I don't want to continue to push a channel that is less profitable than what we're able to convert in stores.

Jeremy Hamblin - Equity Analyst - (00:23:42)

Got it. Okay, that's helpful. And then you hinted at this, but in terms of just understanding the mechanics behind the sale via intellectual property sale and where, you know, kind of the balance sheet stands, I think by my math is the debt level is about 60, just under 68 million. And then it looks like you have about 30 million or so of total liquidity currently. Can you just confirm?

Andrea Courtois - Chief Financial Officer - (00:24:10)

Yes, yes, that's correct. If you look at our ABL as well as our loan with Bed Bath and Beyond Inc.

Jeremy Hamblin - Equity Analyst - (00:24:19)

Okay, great. And then one other item continues to be a bit of a hot button here, but, you know, tariffs, you know, tariff concerns continues to be fairly significant, particularly for your industry. You know, wanted to get a sense for how we should be thinking about tariff impact here in Q3, Q4. And then, you know, there's this investigation about the, you know, furniture industry, which I know is not a huge portion of your business, but relevant certainly. And wanted to get a sense for what our expectations should be in the back half of the year in terms of, you know, total impact from tariffs. And then as we think about how this potentially plays out in 2026, which obviously is still a guessing game, but how do you feel about your exposures and potential for more domestic sourcing?

Amy Sullivan - Chief Executive Officer - (00:25:25)

Yeah, I would say, you know, as we walk into Q3, obviously, that is when we're receiving the goods that were mostly impacted, particularly in China and the China negotiations. And we shared this pretty on pretty early on, our partners really did meet us in the middle. So I feel like between cost negotiations with our Chinese factories, strategic pricing changes within our business, that we've mitigated some of that from a China perspective. Obviously, we recognize there will be some margin pressure pivoting to sort out what we're in the middle of right now negotiating through the impact in India. Those negotiations are a little tougher at the moment. Again, won't be an impact to Q3, but something that we're navigating day by day. And then, you know, the interesting piece I would say is that as we're converting from Kirkland's, which is, you know, 85, 90% of those goods are our own unique designs, and we're sourcing those directly overseas. As we're converting to Bed, Bath and Beyond stores, we're obviously getting back into the domestic market in a pretty big way. And so I think there's opportunity to continue to balance that dependency as we convert stores. In fact, I'm in New York this week meeting with vendors to begin to buy quantities for the larger chain conversion, and we'll stay close on that, but it's certainly something top of mind. I do expect margin pressures in Q3 just based on the impact from what we've received thus far, but appreciative of the vendor partners for meeting us in the middle. And I think we'll continue to shift away from China as best we can as we move forward.

Jeremy Hamblin - Equity Analyst - (00:27:03)

Are you able to quantify at all in terms of back half of the year expectation for impact on. On gross margin?

Andrea Courtois - Chief Financial Officer - (00:27:12)

Andrea, do you want to give any color on that?

Jeremy Hamblin - Equity Analyst - (00:27:15)

Jeremy?

Andrea Courtois - Chief Financial Officer - (00:27:16)

I think, you know, it's hard to quantify. I would say that you're looking at in Q2, it was 30 basis points of impact to the business. I would say it'll probably be, you know, a little bit more than that, probably in the 100 basis point range during Q3. Although in Q2, Q4, we're thinking there should be limited impact. We're really seeing the. The biggest impact of the tariffs are going to be came in through the inventory coming in through the end of Q2 and the beginning of Q3, which should be selling mostly during the Q3 time period in the beginning of Q4. So really expecting the impact to hit that Q3 time period from a pressure on the gross margin. But as we spoke about in both of Our highlights, we do plan to continue to strategically liquidate non go forward categories and really restructure our stores and get ready for conversion. So I would think about the margin as the liquidation piece potentially having a more impactful on the gross margin than I would necessarily on tariffs as we continue throughout the year.

Jeremy Hamblin - Equity Analyst - (00:28:19)

Fantastic. Last one for me. Just as we look ahead to the conversions and coming back to the cost of that, the timeline and having some momentum here and excitement built around bringing the brand back. How many do you think you might be able to do in 2026 versus 2027?

Amy Sullivan - Chief Executive Officer - (00:28:43)

That is. That's the golden question right now, Jeremy. We have just placed purchases for 30 conversions for the first quarter of 2026 and we are again here in New York this week chasing opportunistically to be back into the back to campus business in a significant way for bed beyond going into the back to campus season of 2026. So to be determined on the number of stores that will impact. But it is our goal for that to be wide and as many stores as we can influence going into that important season. And I think as I look back at the Bed, Bath and Beyond history, the Q2 benefit that we could see compared to the Kirkland's seasonality is really significant. And so if I'm, you know, flashing forward to this time next year, I really see us being able to level out how the quarters play out and really begin to improve our profitability and our revenue in the first half of the year. So it is my goal to be in as many stores as possible based on the inventory that I can get over the next six to eight weeks. So a lot of that will become really crystal clear as we're finishing out Q3 because the buys will need to place for back to campus of next year really need to be solved by the end of October.

Jeremy Hamblin - Equity Analyst - (00:30:09)

Got it. Thanks so much for taking the questions and best wishes.

Amy Sullivan - Chief Executive Officer - (00:30:12)

Thank you Jeremy.

OPERATOR - (00:30:16)

At this time. This completes our question and answer session and concludes today's call. Thank you for your participation. You may now disconnect your lines.