Kirklands (KIRK) Q1 2022 Earnings Call Transcript

Kirklands (KIRK 0.45%)
Q1 2022 Earnings Call
May 31, 2022, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, everyone, and thank you for participating in today's conference call to discuss Kirkland's financial results for the first quarter ended April 30, 2022. Joining us today are Kirkland's president and CEO, Steve "Woody" Woodward; COO and CFO, Nicole Strain; and the company's external director of investor relations, Cody Cree. Following their remarks, we'll open the call for your questions. Before we go further, I would like to turn the call over to Mr.

Cree as he 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. Cody, please go ahead.

Cody Cree -- Investor Relations

Thanks, Dave. Except for historical information discussed during this call, the statements made by company management are forward-looking and made pursuant [Inaudible]. Forward-looking statements involve known [Inaudible] 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.

Remind everyone that this call will be available for replay through June 7, 2022. The 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. I would like to turn the call over to Kirkland's president and CEO, Woody Woodward. Woody, over to you.

Woody Woodward -- Chief Executive Officer

Thank you, Cody, and good morning, everyone. It has certainly been a challenging start to the year. Like many of our peers, our first quarter results were significantly impacted by lower customer demand and higher costs associated with various supply chain constraints. Anyone who has been paying attention to the consumer commentary over the last few weeks knows that the broader retail landscape is being notably affected by several concerning macroeconomic trends, including rising interest rates, elevated levels of inflation, the ongoing geopolitical conflict between Russia and Ukraine, and increased supply chain costs stemming from higher freight costs and transportation rates.

Kirkland is not immune to these issues. In some ways, we're feeling it more than our peers in the home furnishing space. It appears our value-focused customer is more negatively impacted by these macroeconomic issues compared to the wealthier customer bases that shop at premium store brands and have more discretionary cash to spend. We believe our consumer has shifted some of their discretionary spend to experiences such as going out to eat or taking a vacation, given the pandemic's restrictions being largely lifted.

Simply put, our customers are not prioritizing their discretionary spending on home furnishings and decor right now. When you combine waning customer demand with wage inflation, a hyper-competitive hiring environment, and heightened freight and transportation costs, you have the perfect storm that makes it exceptionally difficult to generate meaningful sales momentum. Executing upon a meaningful transformation strategy within this environment is even harder. However, we will remain, still remain steadfast in our commitment to becoming a premier home furnishings retailer, offering value, quality, and design throughout an omnichannel experience.

As we discussed a few months ago, we slowed down our pace of change as we weathered the storm and wait for a more opportune time to put our foot back on the gas pedal to accelerate sales growth and expand our customer base. All this being said, we're still making progress on initiatives that are within our control. We launched our advertising tests in April across two key markets, Nashville and Atlanta, to drive brand awareness and generate new customer interest. While you only have just begun to roll out these marketing programs amid a challenging environment, the initial feedback has been positive.

We will continue to gather data from these tests to glean insights on whether these initiatives could work on a broader scale across our national store footprint, once customer sentiment begins to rebound. We also recently test-launched our in-home delivery service to better serve our customers looking to buy bulky items such as furniture and outdoor items with a full national rollout scheduled for the next month. As we've discussed on previous calls, this was an imperative next step in becoming and improving our omnichannel capabilities. We continue to expect this to be a welcome enhancement within our overall customer experience and will continue to look for ways we can better serve our customers going forward.

We are also in the final stages of cleansing our customer data to start actioning our consumer data platform. As you said on previous calls, this will give us some much-needed insights on customer behavior as well as the ability to segment our customer base and target different groups with different offers and messaging. This capability will be especially critical as we navigate through the dynamic consumer backdrop we are experiencing, given the volatile macroeconomic environment and our performance to start the year. We will balance the pace of our transformation in 2022 with prudent expense management, which Nicole will cover in more detail.

Historically, we've relied on strong sales from the holiday season in the back half of the year to generate cash flow. We used to bolster our balance sheet, especially since we burned cash in the first half of the year. While we are positioning our furniture and outdoor categories to allow for more balanced sales throughout the year, we aren't there yet. And with the challenging consumer backdrop, maintaining an adequate cash balance, and appropriately using our credit facility is our top priority.

Nicole will go into more detail regarding our near-term capital allocation priorities, but we plan on operating as efficiently as possible. We believe the strong inventory position that we built was necessary to ensure that we have our shelves stocked when our holiday season arrived and that we weren't leaving any sales on the table due to simply not having the product in time. We are cautiously optimistic that our upcoming holiday season in the back half of the year will help augment our financial results for the year. However, we're also planning on being more promotional than we had originally intended to be in 2022.

We believe this will allow us to fuel sales momentum with our core customer base and work through our inventory stockpile to generate cash flow. We discussed at length in our last call about our customer acquisition challenges and how we're having to slow down from our efforts to allow the market to fully understand our enhanced merchandise assortment without losing our dedicated and loyal customer base. While the challenging consumer backdrop is impacting our results, I think it is relevant to note that Kirkland's has historically performed well during recessions of period or for periods of stagnant growth. As customers get over the initial shock and begin value hunting for ways to upgrade their home furnishings and decor without breaking the bank, we do believe there's an opportunity to capture the attention from a new customer and begin to increase market share.

With our new assortments that feature elevated design concepts and higher quality materials at a value price, we believe Kirkland's home is the perfect place for consumers to stylishly furnish their homes on a budget. For this reason, our unwavering commitment to executing our transformation will continue during these challenging times. Our strategic goals remain the same, and we're doing everything we can to maintain our course and hit our objections. Our shareholders are always top of mind when we're evaluating our strategic direction and ensuring that we are making the best decisions to generate as much long-term value as possible.

We plan on conserving our cash and being prudent stewards of capital as we weather the difficult environment and we anticipate coming out of this even stronger than before. As always, I'd like to recognize our dedicated employees and stakeholders that continue to believe in and support our efforts in executing our transformation strategy. It certainly has been and not been an easy road over the last few quarters, but their perseverance continues to inspire me every day. I firmly believe that we have only just begun to scratch the surface of Kirkland's true potential within the home furnishing space.

And I look forward to what the future holds for us as we continue making progress on our transformation initiatives. With that said, I'll now turn over the call to our CFO, and COO, Nicole Strain, who will provide detailed commentary on our performance in the first quarter and our outlook. I'll be back during the Q&A to answer any questions you may have. Nicole, the floor is yours.

Nicole Strain -- Chief Financial Officer

Thank you, Woody. And good morning, everyone. Before getting to the detail of the numbers, I wanted to summarize what we saw in the first quarter and how it impacted our business. Comps continued to decline within the quarter, driven mainly by lower customer traffic.

Our landed product margin came in better than expected, down 90 basis points to 2021 due to less discounting and taking retail price increases. We've talked in the past about how much of our costs are fixed in the first half of the year, which is in line with our goal to shift our assortment mix to products with stronger selling in the first two quarters. Unfortunately, the first quarter shows deleverage of our operating model at the sales level. Moving into May, we have begun experimenting with our promotional levers to stimulate customer demand and turn through excess inventory.

To date, we are seeing sales improvement from what we saw in March and April, but still down double-digits. We do expect to continue to be more promotional in the near term, which will impact our margins. Given that the second quarter has historically been our toughest quarter. We expect Q2 earnings to decline from Q1.

Lastly, our plan is to finally be in stock from an inventory perspective and bring in products for Q1 and Q2 sales early had a negative impact on our working capital. That was compounded by the slow sales in the first quarter, which resulted in a 35 million draw on our revolving line of credit. I'll get more into our cash flow and how that impacts our capital allocation plan a bit later. Jumping into our results for the quarter, net sales were $103.3 million compared to $123.6 million in the year-ago quarter, which included a comparable store decline of 15.8%.

The decline was exacerbated by macroeconomic conditions impacting the home furnishings industry and driving down traffic and conversion in both our in-store and e-commerce channels. Breaking down sales within the quarter, we had a total comp decline of 5% in February, a comp decline of 19% in March, and a 22% decrease in April. E-commerce accounted for approximately 28% of our sales in the quarter. Gross profit was 27.4% of sales, compared to 32.6% in the prior-year quarter.

The decline was mainly due to deleveraging of fixed infrastructure costs. Landed product margin was 56.6% compared to 57.4% in the prior-year period, with lower discounting offsetting some of the expected incremental freight year over year. Store occupancy costs increased to 15.9% of sales, compared to 13.6% in the prior-year quarter due to the lower sales base. DC costs increased to 5.1% of sales, compared to 4.6% in the prior-year period from wage inflation and reduced productivity from higher inventory levels and the implementation of a new warehouse management system.

Outbound freight costs from our distribution centers to our stores increased to 2.4% of sales from 2% in the prior year, due primarily to rate and fuel inflation. E-commerce shipping costs remained relatively flat at 4.4% of sales, compared to 4.5% in the prior-year quarter. Lastly, other costs of goods sold increased 120 basis points, mainly due to increased damages with the higher inventory. Operating expenses, excluding depreciation and impairment, were $37.7 million or 36.5% of sales, compared to $36.3 million or 29.4% of sales in Q1 2021.

Wage increases specifically impacting store labor, along with increasing employee benefit costs, were the primary drivers for the increase in operating expenses. Adjusted EBITDA, excluding impairment and other minor non-operating expenses, was negative $5.8 million compared to $7.7 million in the same period last year. Our normalized tax rate in the first quarter was 25.5%, compared to 24.7% in the prior-year period. Adjusted loss per share, which excludes non-cash impairment, normalized tax rate, and other minor non-operating adjustments was $0.62 compared to adjusted earnings per share of $0.12 in the prior year.

GAAP loss per share, including these items, was $0.63 compared to earnings of $0.11 in the prior year. We ended the quarter with $5.4 million in cash and utilized $35 million in borrowings on our revolving credit facility. As mentioned before, we shipped and paid for the bulk of the inventory. We expect it to sell for the first half of the year during Q1, which resulted in us tapping our revolving credit facility.

With slower sales and our harvest and Christmas inventory arriving in the second quarter, we expect to be further drawn on the credit facility through the third quarter. We expect to reduce the borrowings significantly as we sell through this holiday inventory in the fourth quarter and right-size our overall inventory position. We have taken a series of actions to reduce our reliance on the credit facility, which includes reducing expected inventory receipts by approximately 50 million in the back half of the second quarter through the remainder of the year. Implementing operating cost reductions in the remainder of the fiscal year of $12 million to $15 million and increasing our level of promotion to turn through existing inventory at a faster pace.

Inventory at the end of the quarter was $130.9 million, which was an increase of $54.6 million from the same time last year and up $16.9 million compared to the end of the fiscal year. We expect our inventory levels to peak in August and decline to under 100 million by the end of the fiscal year. We continued our share buyback program in the first quarter with approximately 480,000 shares repurchased for 6.3 million at an average cost of $13.03 per share. At the end of the first quarter, we had a cumulative authorization available of 26.3 million.

We continue to believe in share repurchases as a valuable component of our capital allocation strategy. However, given the market conditions and our current forecasted reliance on our credit facility for the upcoming quarters, we are focusing first on making sure we maintain the liquidity needed to support the business. Additionally, our credit facility places certain restrictions on share repurchases while in a borrowing position. We will revisit this program as cash flow allows.

Our transformation efforts remain, and I believe we've built a strong operational foundation that will carry us through this challenging environment. Although we are operating with macro headwinds, we remain confident that we are on the right track and executing according to our strategic transformation. We will continue to focus on the areas we can control and on unlocking the potential of Kirkland as a specialty home furnishings retailer. Thank you all for joining us today.

And operator, we are now ready for Q&A.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from Jeremy Hamblin with Craig-Hallum Capital Group. Please go ahead with your question.

Jeremy Hamblin -- Craig-Hallum Capital Group -- Analyst

Thank you and good morning. So I wanted to start by asking about inventory management and so forth. In terms of getting that inventory level down below $100 million, the first part is understanding the composition of the elevated. I think, my math inventory was up about 70% year over year.

Obviously, seeing sales trends down, high teens and total. In terms of thinking about the component parts of that inventory, how much of that was just, the freight impact and whether it's fuel surcharges, other costs as opposed to the actual piece themselves that are kind of stacking up. I wanted to just see if we could get an understanding of the component parts and how much of this is actually just inflationary pressures that are hitting you guys?

Nicole Strain -- Chief Financial Officer

I think a couple of pieces there. So when we compare to last year, we were really low from an inventory perspective. So we had been operating well under where we wanted to be. So we're definitely seeing freight be a big piece of the growth and we also have the 8 million of seasonal that we are carrying over to this holiday season.

So I'd say that the right number for us is somewhere in between where we were a year ago and where we ended the quarter. So, if that helps.

Jeremy Hamblin -- Craig-Hallum Capital Group -- Analyst

That is helpful. And then in terms of what you're seeing in the industry, because I think your observation is right that consumers are shifting where they're spending dollars, maybe perhaps more on experiences. But certainly, we've seen the home furnishings category soften as a whole. I wanted to get an understanding, you noted that perhaps you have a less affluent customer, more value-oriented, I wanted to get an understanding of how you're seeing the industry pivot here, as I think even at the high end, they've seen kind of a rolling over and in sales trends? And whether or not you're getting a whole category that's starting to be a little bit more promotional? And whether or not you see that as potentially impacting your ability to clear through goods here over the next couple of quarters?

Woody Woodward -- Chief Executive Officer

All right. Jeremy, thanks for the question. It's, Woody. Multiple things are embedded in that.

First of all, let's talk about the industry as a whole. I think that people are, when times are tough and you're filling up your gas tank at $120, $100, and then you go to the grocery store and it's expensive. They are just being more cautious on those discretionary items like what we sell. We don't sell one thing that a customer has to have, we sell things that our wants and dreams.

In the history of the company, when times have gotten tough and we've gone into a recessionary time period, we were -- we benefited from some of that as being a value player. So we're anticipating that, as people kind of change and refocus back on their homes, which, if you look at housing and all of the components that make that up, I don't think that we have a disaster on our hands. We just have a shift of focus. But we are seeing our brethren both at the high end, medium, and low end, being more promotional right now.

And that's because the inventory situation caught a lot of us off guard. We were so low by ending last year that we wanted to be in stock this year for our customers. And it came right at the time the inflation started and the war started. So I think everyone is a little bit bloated on inventory and they don't want to be.

So we will have to be more promotional, I think, in the coming months to liquidate through and get ourselves right at the right level of inventory, which I think Nicole said is around 100 million or a little bit less as we go into the next year. All that being said, the component of our inventory is fairly good. I mean, we were not bloated in one particular category. We seem to be it's just the lack of traffic that's caused this decrease in an expectation in sales.

And so we don't have a lump problem. We have kind of like an overall issue where we're just lowering the inventory. It's good inventory. It just we didn't sell as fast.

And then one other component of that inventory that I think I should mention is that when you have traffic declines like we've had in the past quarter due to these macroeconomic environments, both the things that we've changed dramatically and the things we haven't changed dramatically are both experiencing the same kind of downtick. So in areas like our candle assortment where we didn't change that much, they're appealing the decline and areas where we changed dramatically with our increase in furniture and the quality and all the design aspects declined about the same amount. So we do know that it's an overall macro hit on our sales numbers versus it being in one particular market. The one area that we will be a little bit more promotional during the next very short period of time is making sure that we liquidate our outdoor category so that we don't carry that seasonal inventory into the third and fourth quarters.

Jeremy Hamblin -- Craig-Hallum Capital Group -- Analyst

Great. That's helpful color. And in taking that a step further, you noted, I think, the cutting of roughly 50 million or so of inventory receipts in the back half of the year. Wanted to get a sense of, the kind of the component, departments, or categories where you might be seeing that presumably you're not in holiday or seasonal, but wanted to get an understanding between furniture, wall decor, art textiles, and lamps.

Where is the kind of the bulk of those reductions being made?

Woody Woodward -- Chief Executive Officer

We are definitely trying and making every effort to protect our fall harvest and our holiday assortment because that's what people come to us every year and they really know us for that. And we have a big opportunity from last year when we just were out of stock on those items. So those are protected and those are actually on the water right now. So we expect to be fully in stock when we launch.

Plus, we have the $8 Million carryovers from last year for a holiday. So we may come out of the gates a little faster on some of those assortments. The rest of the reductions of $50 million come from two points. One, it's pure cancelations.

Most of our vendors want us to be in a good inventory position, so they've been very accepting of certain items being canceled. And the second one is just shifting the product out to a later date. And I would say that most of those $50 million are in core products that just didn't hit their sales plans for the first quarter and are right now missing some of their sales planning for the second quarter. And we're just lowering overall that inventory exposure to make sure that we come in at the right amount for the end of the year.

So it's kind of across the board, I would say because we'd grown faster and furniture might be a little bit heavier there, but generally, it's across all categories and just trying to get that inventory in the right position.

Jeremy Hamblin -- Craig-Hallum Capital Group -- Analyst

Got it. Last one. And then I'll hop out of the queue. In terms of thinking about store closures, right? I think you closed one store in a quarter.

I think, obviously, profitability metrics have changed here, and are part of the plan here in kind of right-sizing where the businesses did. Do we need to think about closing more stores? Or, I know that Nicole and the team have done a lot of hard work on getting the leases kind of shored up here over the last couple of years. But I just want to understand that component, of decision-making on a go-forward basis.

Nicole Strain -- Chief Financial Officer

Not a significant change at this point. Jeremy, I think that it will close. We've got a couple of additional closures that we'll have this year and then we'll have the normal lease renewals that happen at the end of the year where we will evaluate what sort of rent reductions we can get on those stores that we're keeping open. Just until it doesn't make money, the handful that we've talked about and getting down closer to 350, but not really changing anything significant otherwise at this point.

But we'll continue to watch it.

Jeremy Hamblin -- Craig-Hallum Capital Group -- Analyst

Great. Thanks for all the color. Best wishes, guys.

Nicole Strain -- Chief Financial Officer

Thank you.

Woody Woodward -- Chief Executive Officer

Thank you, Jeremy.

Operator

[Operator instructions] Our next question comes from Anthony Lebiedzinski with Sidoti and Company. Please go ahead with your question.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Hey, good morning, everyone. Thanks for taking the questions. So first, in terms of the quarter-to-date, the commentary looks like you're still down double digits so far in May, talked about a little bit of some pulling some promotional levers. Could you perhaps expand on that as far as what you're doing there? And also, just wanted to kind of tie that in with the marketing tests that are still in their initial stages in Atlanta, and Nashville, whether you've seen any incremental improvement in those two markets, or is it just too early to say?

Woody Woodward -- Chief Executive Officer

It starts with the marketing tests and it's really -- thanks for the question, Anthony. The marketing tests are really too early to read. We feel that there is some optimism there, but it's still in the early weeks of that. And so we're going to -- we need to make sure that we give that some time.

One market, the national market is responding slightly better than the Atlanta market. But, it's still too early to tell. So those are ongoing and it's exciting to be driving down the road and hearing one of our commercials on the radio or seeing it on TV. So we will continue those.

And then on the other question, I'm going to let Nicole answer that because it's --

Nicole Strain -- Chief Financial Officer

Yeah, I think it's just generally what we're realizing from a promotional perspective is it takes more right now to get the customer in the store. And so we've increased the level of our merch promotions, and we've also increased the level of our coupons. And at this point, it looks like we will need to continue that in the near future. But we've seen some success.

We just came off of Memorial Day, which obviously was very promotional for everyone, and are seeing when we're willing to go to a deeper level of discount, we are seeing the customer demand change a little bit.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

OK. Thanks for that. And then can you give us an update on your direct sourcing initiatives?

Woody Woodward -- Chief Executive Officer

Yeah. We're making very good progress. So it seems that we were making good progress on the things we can control. But then when we come back in, some of the cancelations have to come through that direct sourcing.

But our goal still remains this year in the 45% to 50% of our assortment being direct sourced. And we will hit those goals even despite some of the cancelations and other things. We are finding that our Asian sourcing is coming along just fine, although we are mitigating our exposure to not be so dependent on only one country. And then, we are looking at and opening up some sourcing out of Mexico, which seems to be promising for the future.

But, yes, generally, we're in good shape on that initiative. It's still producing very good results, plus giving us exclusive merchandise that can't be found anywhere else.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Gotcha. And in terms of your sourcing, most of that comes from China. Have you guys been impacted materially as far as just the lockdowns there? I know, your inventory seems to be solidly in pretty good shape based on your comments. But just wondering if you could just comment on the situation specifically in China?

Nicole Strain -- Chief Financial Officer

We haven't really, we haven't -- the ports that we are shipping a lot of our holiday out of aren't the ones that have been impacted. So to this point, no.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Got it. OK. And then the last question for me. So I think, Nicole, you mentioned that you have some cost-cutting moves.

I think we talked about $12 million to $15 million of that good. Could you perhaps expand on that or give us some more details as to what you're looking to do there?

Nicole Strain -- Chief Financial Officer

Sure. There are the biggest categories for us that that we can find dollars in our store labor advertising and IT spend. So really trying to balance continuing to do the things that we need to move the business forward but take out costs or regulate costs to match the sales levels that we're seeing. So it's pretty much spread as a percent equally through Q2, through Q4, obviously much easier to take dollars out of Q3 and Q4 because we're more variable and less fixed at that point.

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

Got it. All right. Well, thank you and best of luck.

Woody Woodward -- Chief Executive Officer

Thanks, Anthony.

Nicole Strain -- Chief Financial Officer

Thank you.

Operator

Our question comes from John Lawrence with Benchmark. Please go ahead with your question.

John Lawrence -- The Benchmark Company -- Analyst

Yeah. Hi, guys. Good morning.

Woody Woodward -- Chief Executive Officer

Hey, John.

John Lawrence -- The Benchmark Company -- Analyst

Just a couple of questions, Nicole, can you talk a little bit about this ongoing freight expense and what we see, and I know it was accelerated in the fourth quarter? And what have you seen so far this year and what continues to be the impediment to that higher cost? Thanks.

Nicole Strain -- Chief Financial Officer

Sure. We just rolled into our new contract rates and those were about what we were paying last year. If you take out the additional that we had to pay to get Christmas here. We are seeing, right now spot rates under our contract rates in some ports.

So I do think as people pull back demand and overall, there's more supply than people wanting to ship goods for the rest of the year that we may see some benefit in inbound freight costs, at least, so. But for right now, we're paying similar to paying on average 10,000 a container, which is similar to what we were paying last year outside of Christmas.

John Lawrence -- The Benchmark Company -- Analyst

Yeah. And in the last question there, can you delve into that a little bit more about the second quarter. And, I understood you just be a little worse than the first quarter. Is that what you got into?

Nicole Strain -- Chief Financial Officer

It is from a top-line perspective, forecasting something similar to where we are in May with being down low double-digit. And then I think the biggest impact is what we're expecting from a margin perspective, and that is just being more promotional to move through some of the excess inventory. Outside of that, it is our lowest sales volume quarter. So the P&L really deleverages pretty quickly, especially gross profit.

So again, just it's always been our toughest quarter and I think we'll see the same thing this year.

John Lawrence -- The Benchmark Company -- Analyst

Yeah. And just -- I'm sorry, one more is that when you look for that second half of the year and especially the fourth quarter. That advertising that you've tested where you make a decision, say, August or September, of how much to play into that? Say, in the holiday timeframe.

Nicole Strain -- Chief Financial Officer

I think so. We'll continue to watch it and make decisions as it makes sense. I think, for us trying to get new customers. We really realized last year in the back half.

Better to do that in the first half. We really are strong and a lot of people come to us for holidays, so really trying to make sure we have the holiday inventory set on our set dates. And I think if we message that to our existing customers that there will be demand for the holiday product. It is that the time period that a lot of people come to us, but we'll continue to watch the advertising and move forward, or slow down as makes sense based on results.

John Lawrence -- The Benchmark Company -- Analyst

All right. Thank you.

Nicole Strain -- Chief Financial Officer

Thank you, John.

Operator

[Operator instructions] Our next question comes from Barry Haimes with Sage Asset Management. Please go ahead with your question.

Barry Haimes -- Sage Asset Management -- Analyst

Thanks so much for taking my question. I have a couple of questions, I'm just trying to understand the inventory situation a little bit better. So the roughly 100 million that would be the right-sized inventory. Is that assuming that the lower level of sales that you experienced in the first quarter continues, or does that assume some rebound? And second is, in terms of the and granted, last year was too low.

But if we just look at the difference, how much of it the inventory increase is just price, versus units and then how much of that, inventory, the difference between, let's say, 100 and where you are now. Are in sort of spring seasonal goods, like the outdoors that you really want to sort of move before you get to the holiday versus inventory, that's everyday kinds of things that you would normally carry all year round? Thanks so much.

Nicole Strain -- Chief Financial Officer

Sure. So let me know if I missed any of those. But starting with the first one, we aren't factoring in a significant rebound as looking at receipt cuts. It made sense to assume at least relative to 2019, which will look a bit different versus last year, that we would make some improvement just by being more promotional, but not an overall change in the macroeconomic environment or anything significant.

So, there could be some upside there from a sales perspective. And going back to the second one, which I believe was freight. So freight right now is running about 35% of our cost of goods sold. So that has been a significant piece.

We also have seen materials increase and price increases from vendors. Pretty tough for us to quantify that because we don't reorder a lot of SKUs that were not ordering like items on like items. So somewhat difficult to quantify that piece. What was the other --

Woody Woodward -- Chief Executive Officer

Units.

Nicole Strain -- Chief Financial Officer

Units.

Woody Woodward -- Chief Executive Officer

Yeah.

Nicole Strain -- Chief Financial Officer

So the unit one is also a bit interesting as we've moved our mix of what we sell more toward furniture, the units are actually not increasing at the same pace as the rest. We're basically getting higher-cost units and bigger and bulkier units. So the whole composition of our inventory has changed. We're looking at the back half of this year a little bit differently and trying to make sure that we have some of the more the lower ticket items that people and if the economy is slowing that that are easier for people to come in and make the decision to purchase.

Did I miss anything?

Barry Haimes -- Sage Asset Management -- Analyst

Is the seasonal component of the average?

Nicole Strain -- Chief Financial Officer

Yeah. Right now, I would say we don't have significant risk. We obviously, as Woody mentioned, we'll need to move through outdoor in the next month and a half. There's a portion of outdoor.

It's not significant that will carry over in our DC again, just because it doesn't make sense to ship it out to the stores and discount it significantly. But I think that will impact our margins in Q2. I don't expect us to have a significant amount of inventory at the end that we're trying to burn through at a really high discount rate.

Barry Haimes -- Sage Asset Management -- Analyst

Great. Thanks so much. And I just missed when you said freight as a percent of the cost of goods sold, could you just repeat that number?

Nicole Strain -- Chief Financial Officer

Yes, about 35%.

Barry Haimes -- Sage Asset Management -- Analyst

35%. Thanks so much. Appreciate help. Good luck.

Woody Woodward -- Chief Executive Officer

Thank you, Barry.

Operator

Our next question comes from John Lewis with Osmium Partners. Please go ahead with your question.

John Lewis -- Osmium Partners -- Analyst

Good morning, guys. How are you?

Nicole Strain -- Chief Financial Officer

Good morning.

Woody Woodward -- Chief Executive Officer

Good morning, John.

John Lewis -- Osmium Partners -- Analyst

Yeah. Just a couple quick ones, I guess just the start out on accounts payable, you're in $47 million, last year you're at -- you closed the year at $62 million. Where do you see your accounts payable? There's a huge drag in cash flow this quarter. What was that look like?

Nicole Strain -- Chief Financial Officer

In a normal time here, the AP appears about 60% of our inventory and that holds in most cases what's different right now is we brought the inventory in early. So we're paying for it before we sell it and that's flip-flopped that ratio to roughly 38%, I think, and that does equate to about $30 million. So, we knew that that would be a working capital hit. But by the end of the year, we should be back to AP being close to 60% of that $100 million inventory number.

John Lewis -- Osmium Partners -- Analyst

If I'm doing this right, your inventory will go from now $130 million to, let's say, $100 million. So you should squeeze $30 million in cash out of inventories. And if you take 60% of $100 million, your payables should be at 60. So you should really be closer just on those two components to putting $45 million in cash on your balance sheet.

Is that roughly right?

Nicole Strain -- Chief Financial Officer

From where we are right now, yes.

John Lewis -- Osmium Partners -- Analyst

Right. OK. OK. That's I guess that was one of my main questions.

And then I guess, can you get into you talk a little bit about cost reductions. I think you said $12 million to $17 million. Can you, can you unpack that a little bit?

Nicole Strain -- Chief Financial Officer

$12 million to 15 million. And you're right, we went through really everything and we've taken $45 million of cost out a couple of years ago. So we are relatively lean but really trying to right size for the sales levels that we're seeing. I'd say a third of that is coming out of store labor and that in some cases we had added open hours back to stores going back at the stores that are low sales volume and taking that last hour of the day back off.

Marketing also is probably about a third of that and that is looking at where we're spending marketing that we may not be getting the benefit and holding that to a time when we are getting the demand from it. The rest comes from, here and there, like every available place that we could come up with dollars that weren't necessary. IT projects that we had planned that weren't essential and weren't sales-driving are the biggest part of that other third.

John Lewis -- Osmium Partners -- Analyst

Got it. I guess the other thing I was going to ask is, given your historic ratio between inventory and access, your credit facility,  given that your inventories, or where they are, did you think about expanding that line?

Nicole Strain -- Chief Financial Officer

We do have. And one thing to keep in mind that the130 inventory number, it's a GAAP number which is a bit different than what we get credit for with the bank. That number compared to the 130 GAAP was about 83 million. So there are obviously valuations that are applied against that.

And there are warehouse caps and other things that are in our GAAP number. We do have the accordion feature, which is $25 million on top of the $75 million that if we needed, we could go to the bank and request that. But beyond that, haven't really gotten any further. We don't think that will need it, but I do think it's an option for us if we did.

John Lewis -- Osmium Partners -- Analyst

Got it. Yeah. I mean, I look at it as you got $10 in inventory per share. You'll even buy your numbers here.

You'll put a net cash balance on the balance sheet. And I guess the way I was looking at it is even if you're EBITDA is $20 million to $25 million, if you were to cut your shares in half, you'd have over $3 a share in EBITDA on a $5.5 stock. It seems like kind of a no-brainer. And if you go back to -- if you ever get back to $47 million, $50 million, you're looking at $8 a share if you had a $6 million share count.

So I think the opportunity to repurchase equity at these prices given enormous fairly high inventory turns. There's for structural seasonal reasons, there's always a Thanksgiving, there's always a Christmas. So it just seems to me that with buying your equity, your market, if you look at your market cap, the inventory, it's $0.50 on the dollar. So, yeah, it's -- I guess we also looked today even in the current market the peers are trading at almost 3 times inventory and we're at 0.5 times market cap inventory.

So we think the stock is absolutely undervalued and get the tough macro headwinds. But we'll catch up and I appreciate all your efforts.

Woody Woodward -- Chief Executive Officer

Thanks, John.

Nicole Strain -- Chief Financial Officer

I think, John, my thoughts on that is we'd love to be buying back our stock at $6 a share and would love to have back what we've already done and be buying at this level. And we do believe that we are continued to be undervalued. I think the balances -- our credit agreement does have some restrictions on how much availability we have to have in order to make share repurchases at any point in time that we're borrowing. So we're just balancing a lot of things in the near term and making sure that we maintain the right liquidity to support the business.

But I agree. And we agree with all the things that you said.

John Lewis -- Osmium Partners -- Analyst

Thanks.

Woody Woodward -- Chief Executive Officer

Thanks, John.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Woodward for any closing remarks.

Woody Woodward -- Chief Executive Officer

Yeah. Thank you, operator, Dave. We'd like to thank everyone for listening to today's call, and we look forward to speaking to you when the report of our second quarter 2022 results comes out. And again, thanks for joining us.

Operator

[Operator signoff]

Duration: 45 minutes

Call participants:

Cody Cree -- Investor Relations

Woody Woodward -- Chief Executive Officer

Nicole Strain -- Chief Financial Officer

Jeremy Hamblin -- Craig-Hallum Capital Group -- Analyst

Anthony Lebiedzinski -- Sidoti and Company -- Analyst

John Lawrence -- The Benchmark Company -- Analyst

Barry Haimes -- Sage Asset Management -- Analyst

John Lewis -- Osmium Partners -- Analyst

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