KIRKLAND'S, INC - Quarter Report: 2020 October (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended October 31, 2020

☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ______to ______.

Commission file number: 000-49885

Kirkland’s, Inc.

(Exact name of registrant as specified in its charter)

Tennessee	62-1287151
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)

5310 Maryland Way
Brentwood, Tennessee	37027
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (615) 872-4800

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	KIRK	NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☒	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ☐ NO ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, no par value – 14,255,596 shares outstanding as of November 27, 2020.

KIRKLAND’S, INC.

TABLE OF CONTENTS

		Page

PART I	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets (Unaudited) as of October 31, 2020, February 1, 2020 and November 2, 2019	3
	Condensed Consolidated Statements of Operations (Unaudited) for the 13-week and 39-week periods ended October 31, 2020 and November 2, 2019	4
	Condensed Consolidated Statement of Shareholders’ Equity (Unaudited) for the 13-week and 39-week periods ended October 31, 2020 and November 2, 2019	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the 39-week periods ended October 31, 2020 and November 2, 2019	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23

PART II	OTHER INFORMATION	23
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 6.	Exhibits	25

SIGNATURES		26

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KIRKLAND’S, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share data)

	October 31,			February 1,			November 2,
	2020			2020			2019
ASSETS
Current assets:
Cash and cash equivalents	$	37,189		$	30,132		$	4,202
Inventories, net		83,874			94,674			140,222
Income taxes receivable		5,441			243			547
Prepaid expenses and other current assets		9,586			6,462			7,870
Total current assets		136,090			131,511			152,841
Property and equipment:
Equipment		20,583			21,390			21,524
Furniture and fixtures		74,121			80,622			80,869
Leasehold improvements		111,155			123,022			125,294
Computer software and hardware		78,636			73,984			73,311
Projects in progress		1,382			6,862			11,815
Property and equipment, gross		285,877			305,880			312,813
Accumulated depreciation		(217,737	)		(223,017	)		(216,717	)
Property and equipment, net		68,140			82,863			96,096
Operating lease right-of-use assets		156,924			200,067			210,213
Deferred income taxes		—			1,525			944
Other assets		5,831			6,476			6,283
Total assets	$	366,985		$	422,442		$	466,377
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	53,339		$	59,513		$	68,395
Accrued expenses		27,037			28,773			23,527
Operating lease liabilities		46,015			53,154			53,210
Total current liabilities		126,391			141,440			145,132
Operating lease liabilities		159,030			195,736			206,789
Revolving line of credit		—			—			25,000
Other liabilities		8,147			8,311			8,883
Total liabilities		293,568			345,487			385,804
Shareholders’ equity:
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at October 31, 2020, February 1, 2020, and November 2, 2019, respectively		—			—			—
Common stock, no par value; 100,000,000 shares authorized; 14,255,596; 13,955,826; and 13,897,530 shares issued and outstanding at October 31, 2020, February 1, 2020, and November 2, 2019, respectively		173,792			172,885			171,585
Accumulated deficit		(100,375	)		(95,930	)		(91,012	)
Total shareholders’ equity		73,417			76,955			80,573
Total liabilities and shareholders’ equity	$	366,985		$	422,442		$	466,377

The accompanying notes are an integral part of these financial statements.

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KIRKLAND’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)

	13 Weeks Ended						39 Weeks Ended
	October 31,			November 2,			October 31,			November 2,
	2020			2019			2020			2019
Net sales	$	146,609		$	144,936		$	348,578		$	394,469
Cost of sales		93,738			104,800			249,751			276,792
Cost of sales related to merchandise purchased from related party vendor		—			—			—			14,749
Cost of sales		93,738			104,800			249,751			291,541
Gross profit		52,871			40,136			98,827			102,928
Operating expenses:
Compensation and benefits		21,343			29,115			60,157			83,333
Other operating expenses		16,682			20,208			44,843			54,998
Depreciation (exclusive of depreciation included in cost of sales)		1,613			1,602			4,683			5,177
Asset impairment		177			3,392			9,027			7,251
Total operating expenses		39,815			54,317			118,710			150,759
Operating income (loss)		13,056			(14,181	)		(19,883	)		(47,831	)
Interest expense		95			169			484			307
Other income		(86	)		(158	)		(272	)		(712	)
Income (loss) before income taxes		13,047			(14,192	)		(20,095	)		(47,426	)
Income tax expense (benefit)		691			8,114			(15,650	)		921
Net income (loss)	$	12,356		$	(22,306	)	$	(4,445	)	$	(48,347	)

Earnings (loss) per share:
Basic	$	0.87		$	(1.61	)	$	(0.31	)	$	(3.42	)
Diluted	$	0.82		$	(1.61	)	$	(0.31	)	$	(3.42	)
Weighted average shares outstanding:
Basic		14,249			13,867			14,121			14,116
Diluted		15,075			13,867			14,121			14,116

The accompanying notes are an integral part of these financial statements.

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KIRKLAND’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except share data)

	Common Stock						Accumulated			Total Shareholders’
	Shares			Amount			Deficit			Equity
Balance at February 1, 2020		13,955,826		$	172,885		$	(95,930	)	$	76,955
Employee stock purchases		34,999			35			—			35
Restricted stock units vested		32,341			—			—			—
Net share settlement of restricted stock units		(8,663	)		(8	)		—			(8	)
Stock-based compensation expense		—			307			—			307
Net loss		—			—			(7,438	)		(7,438	)
Balance at May 2, 2020		14,014,503			173,219			(103,368	)		69,851
Restricted stock units vested		230,688			—			—			—
Net share settlement of restricted stock units		(5,110	)		(5	)		—			(5	)
Stock-based compensation expense		—			329			—			329
Net loss		—			—			(9,363	)		(9,363	)
Balance at August 1, 2020		14,240,081			173,543			(112,731	)		60,812
Exercise of stock options		1,464			12			—			12
Restricted stock units vested		18,575			—			—			—
Net share settlement of restricted stock units		(4,524	)		(39	)		—			(39	)
Stock-based compensation expense		—			276			—			276
Net income		—			—			12,356			12,356
Balance at October 31, 2020		14,255,596		$	173,792		$	(100,375	)	$	73,417

	Common Stock						Accumulated			Total Shareholders’
	Shares			Amount			Deficit			Equity
Balance at February 2, 2019		14,504,824		$	169,477		$	(38,677	)	$	130,800
Cumulative effect of change in accounting principle		—			—			(331	)		(331	)
Employee stock purchases		6,880			68			—			68
Stock-based compensation expense		—			560			—			560
Repurchase and retirement of common stock		(287,056	)		—			(2,368	)		(2,368	)
Net loss		—			—			(8,921	)		(8,921	)
Balance at May 4, 2019		14,224,648			170,105			(50,297	)		119,808
Employee stock purchases		22,354			77			—			77
Restricted stock units vested		70,725			—			—			—
Net share settlement of restricted stock units		(10,792	)		(44	)		—			(44	)
Stock-based compensation expense		—			731			—			731
Repurchase and retirement of common stock		(345,906	)		—			(1,046	)		(1,046	)
Net loss		—			—			(17,120	)		(17,120	)
Balance at August 3, 2019		13,961,029			170,869			(68,463	)		102,406
Employee stock purchases		36,453			45			—			45
Restricted stock units vested		98,298			—			—			—
Net share settlement of restricted stock units		(23,937	)		(33	)		—			(33	)
Stock-based compensation expense		—			704			—			704
Repurchase and retirement of common stock		(174,313	)		—			(243	)		(243	)
Net loss		—			—			(22,306	)		(22,306	)
Balance at November 2, 2019		13,897,530		$	171,585		$	(91,012	)	$	80,573

The accompanying notes are an integral part of these financial statements.

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KIRKLAND’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

	39-Week Period Ended
	October 31,			November 2,
	2020			2019
Cash flows from operating activities:
Net loss	$	(4,445	)	$	(48,347	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation of property and equipment		17,810			21,156
Amortization of debt issue costs		70			41
Asset impairment		9,027			7,251
Cumulative effect of change in accounting principle		—			(331	)
Loss on disposal of property and equipment		104			150
Stock-based compensation expense		912			1,995
Deferred income taxes		1,525			759
Changes in assets and liabilities:
Inventories, net		10,800			(55,788	)
Prepaid expenses and other current assets		(3,124	)		2,443
Accounts payable		(4,735	)		27,845
Accounts payable to related party vendor		—			(8,166	)
Accrued expenses		(1,704	)		(3,547	)
Income taxes receivable		(5,230	)		(1,041	)
Operating lease assets and liabilities		(7,091	)		(7,161	)
Other assets and liabilities		570			300
Net cash provided by (used in) operating activities		14,489			(62,441	)

Cash flows from investing activities:
Proceeds from sale of property and equipment		168			—
Capital expenditures		(7,580	)		(12,759	)
Net cash used in investing activities		(7,412	)		(12,759	)

Cash flows from financing activities:
Borrowings on revolving line of credit		40,000			25,000
Repayments on revolving line of credit		(40,000	)		—
Refinancing costs		(15	)		—
Cash used in net share settlement of restricted stock units		(52	)		(77	)
Proceeds received from employees exercising stock options		12			—
Employee stock purchases		35			190
Repurchase and retirement of common stock		—			(3,657	)
Net cash (used in) provided by financing activities		(20	)		21,456

Cash and cash equivalents:
Net increase (decrease)		7,057			(53,744	)
Beginning of the period		30,132			57,946
End of the period	$	37,189		$	4,202

Supplemental schedule of non-cash activities:
Non-cash accruals for purchases of property and equipment	$	414		$	1,818
Operating lease assets and liabilities recognized upon adoption of ASC 842		—			295,240

The accompanying notes are an integral part of these financial statements.

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KIRKLAND’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 - Description of Business and Basis of Presentation

Nature of Business - Kirkland’s, Inc. (the “Company”) is a specialty retailer of home décor in the United States operating 381 stores in 35 states as of October 31, 2020, as well as an e-commerce website, www.kirklands.com.

Principles of consolidation - The condensed consolidated financial statements of the Company include the accounts of Kirkland’s, Inc. and its wholly-owned subsidiaries, Kirkland’s Stores, Inc., Kirkland’s DC, Inc., and Kirkland’s Texas, LLC. Significant intercompany accounts and transactions have been eliminated.

Basis of presentation - The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and are presented in accordance with the requirements of Form 10-Q and pursuant to the reporting and disclosure rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC on April 10, 2020.

Novel coronavirus (“COVID-19”) - The COVID-19 pandemic has created significant public health concerns as well as economic disruption, uncertainty, and volatility which has negatively affected the Company’s business operations. As a result, if the pandemic persists or worsens, accounting estimates and assumptions could be impacted in subsequent interim reports and upon final determination at year-end, and it is reasonably possible such changes could be significant, although the potential effects cannot be estimated at this time.

On March 19, 2020, the Company closed all of its retail store locations in response to the COVID-19 pandemic. The Company took a number of actions to mitigate the impact of the decreased sales due to the COVID-19 related store closures including:

•

Cancelled orders and delayed merchandise receipts to manage inventory levels, and extended payment terms with product and non-product vendors to improve working capital.

•

After paying all store team members during the first two weeks of the closure, furloughed all part-time store employees and temporarily reduced the pay of full-time managers and key employees.

•

Permanently reduced corporate costs including permanent labor reductions, reduced marketing spend and lower corporate headquarters rent.

•

Permanently reduced distribution center indirect labor and furloughed a portion of direct distribution center labor, while further reducing hours to match demand.

•

Significantly reduced transportation expenses with limited deliveries to stores and the delay/reduction of inbound freight receipts.

•

Borrowed $40 million on its $75 million revolving credit facility.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss carry backs to offset 100% of taxable income for taxable years beginning before 2021. The CARES Act allows net operating losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company received $12.3 million in federal tax refunds under the CARES Act for previous year filings during the 13-week period ended August 1, 2020. The CARES Act also provides for an employee retention payroll tax credit for employers subject to closures due to COVID-19. In addition, the CARES Act permits delayed payment of the employer-portion of social security taxes. The delay applies to social security taxes due on wages paid between the date of enactment of the CARES Act and January 1, 2021 with half of the delayed payroll taxes due by December 31, 2021 and the other half due by December 31, 2022. The Company pursued all relevant measures under the CARES Act during the 13 and 39-week periods ended October 31, 2020, including net operating loss carry backs, wage credits and payroll tax deferrals in order to improve liquidity. We will continue to assess our treatment of the CARES Act to the extent additional guidance and regulations are issued.

During the 13-week period ended August 1, 2020, the Company repaid the $40 million that was borrowed under the revolving credit facility, and the Company’s stores started offering contactless curbside pickup and then reopened to in-store customer traffic throughout the second period consistent with applicable federal, state and local regulations and restrictions. Stores initially reopened with restricted operating hours and limited staffing with store merchandise deliveries from the distribution centers gradually resuming. During the 13-week period ended October 31, 2020, the Company’s sales improved with increased e-commerce demand, and stores generally increased their operating hours, staffing and merchandise deliveries. The increased sales combined with the reduced merchandise receipts led to inventory shortages in key categories.

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The extent of the impact of COVID-19 on our business and financial results will depend on future developments, including the duration and spread of the outbreak within the markets in which we operate and the related impact on customer confidence and spending, all of which remain highly uncertain.

Seasonality - The results of the Company’s operations for the 13 and 39-week periods ended October 31, 2020 are not indicative of the results to be expected for any other interim period or for the entire fiscal year due to seasonality factors.

Fiscal year - The Company’s fiscal year ends on the Saturday closest to January 31, resulting in years of either 52 or 53 weeks. Accordingly, fiscal 2020 represents the 52 weeks ending on January 30, 2021 and fiscal 2019 represented the 52 weeks ended on February 1, 2020.

Use of estimates - The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from the estimates and assumptions used. It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than those at fiscal year-end.

Changes in estimates are recognized in the period when new information becomes available to management. Areas where the nature of the estimate makes it reasonably possible that actual results could materially differ from amounts estimated include, but are not limited to, impairment assessments of long-lived assets, inventory reserves, self-insurance reserves and income taxes.

Gift cards - The Company uses the redemption recognition method to account for breakage for unused gift card amounts where breakage is recognized as gift cards are redeemed for the purchase of goods based upon a historical breakage rate. In these circumstances, to the extent the Company determines there is no requirement for remitting card balances to government agencies under unclaimed property laws, such amounts are recognized in the condensed consolidated statements of operations as a component of net sales.

The table below sets forth selected gift card liability information (in thousands) included in accrued expenses in the condensed consolidated balance sheets for the periods indicated:

		October 31, 2020				February 1, 2020				November 2, 2019
Gift card liability, net of estimated breakage		$	11,915			$	13,128			$	11,187

The table below sets forth selected gift card breakage and redemption information (in thousands) for the periods indicated:

	13-Week Period Ended				39-Week Period Ended
	October 31, 2020		November 2, 2019		October 31, 2020		November 2, 2019
Gift card breakage revenue	$	208	$	243	$	555	$	774
Gift card redemptions recognized in the current period related to amounts included in the gift card contract liability balance as of the prior period		1,724		1,814		4,220		5,349

Note 2 - Income Taxes

An estimate of the annual effective tax rate is used at each interim period based on the facts and circumstances available at that time, while the actual effective tax rate is calculated at year-end. For the 39-week period ended October 31, 2020, the Company was not able to use the estimated annual effective tax rate due to an inability to reliably estimate the annual effective tax rate; therefore, the actual effective tax rate for the period was used.

For the 13-week periods ended October 31, 2020 and November 2, 2019, the Company recorded income tax expense of 5.3% and 57.2% of the income (loss) before income taxes, respectively. For the 39-week periods ended October 31, 2020 and November 2, 2019, the Company recorded an income tax benefit of 77.9% and income tax expense of 1.9% of the loss before income taxes, respectively. The change in income taxes for the 13-week period ended October 31, 2020, compared to the prior year period, was primarily due to using the discrete method in the current period compared to using the estimated annual effective tax rate method along with recording a valuation allowance against deferred tax assets in the prior year period. The change in the income tax rate for the 39-week period ended October 31, 2020, compared to the prior year period, was primarily due to a $12.3 million income tax benefit related to the carryback of the 2019 federal net operating loss to prior periods pursuant to the CARES Act, a $2.0 million income tax benefit related to the carryback of the projected fiscal 2020 loss to years with a 35% statutory tax rate, partially offset by $3.0 million due to the valuation allowance against deferred tax assets compared to recording a $11.3 million valuation allowance against deferred tax assets in the prior year period.

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The Company recognizes deferred tax assets and liabilities using estimated future tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities, including net operating loss carry forwards. Management assesses the realizability of deferred tax assets and records a valuation allowance if it is more likely than not that all or a portion of the deferred tax assets will not be realized. The Company considers the probability of future taxable income and our historical profitability, among other factors, in assessing the amount of the valuation allowance. Adjustments could be required in the future if the Company estimates that the amount of deferred tax assets to be realized is more than the net amount recorded. Any change in the valuation allowance could have the effect of increasing or decreasing the income tax provision in the statement of operations based on the nature of the deferred tax asset deemed realizable in the period in which such determination is made.

Note 3 – Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during each period presented. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding plus the dilutive effect of stock equivalents outstanding during the applicable periods using the treasury stock method. Diluted earnings (loss) per share reflects the potential dilution that could occur if options to purchase stock were exercised into common stock and if outstanding grants of restricted stock were vested. Stock options and restricted stock units that were not included in the computation of diluted earnings (loss) per share, because to do so would have been antidilutive, were approximately 1.2 million shares and 1.6 million shares for the 13-week periods ended October 31, 2020 and November 2, 2019, respectively, and 1.4 million shares and 1.6 million shares for the 39-week periods ended October 31, 2020 and November 2, 2019, respectively.

Note 4 - Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The carrying amounts of cash and cash equivalents, accounts receivable, other current assets and accounts payable approximate fair value because of their short maturities.

The Company maintained The Executive Non-Qualified Excess Plan (the “Deferred Compensation Plan”). The Deferred Compensation Plan was funded, and the Company invested participant deferrals into trust assets, which were invested in a variety of mutual funds that were Level 1 inputs. The plan assets and plan liabilities were adjusted to fair value on a recurring basis. The Board of Directors approved the termination of the Deferred Compensation Plan effective September 6, 2019, and all remaining balances in the Deferred Compensation Plan were paid out during the 13-week period ended October 31, 2020. Deferred Compensation Plan assets and liabilities were approximately $1.9 million and $1.8 million as of February 1, 2020 and November 2, 2019, respectively, and were recorded in other assets and other liabilities in the condensed consolidated balance sheets.

The Company measures certain assets at fair value on a non-recurring basis, including the evaluation of long-lived assets for impairment using Company-specific assumptions that would fall within Level 3 of the fair value hierarchy. The Company uses market participant rents to calculate the fair value of right-of-use assets and discounted future cash flows of the asset or asset group using a discount rate that approximates the cost of capital of a market participant to quantify fair value for other long-lived assets. See Note 10 to the condensed consolidated financial statements for further discussion.

Note 5 - Commitments and Contingencies

The Company was named as a defendant in a putative class action filed in April 2017 in the United States District Court for the Western District of Pennsylvania, Gennock v. Kirkland’s, Inc. The complaint alleged that the Company, in violation of federal law, published more than the last five digits of a credit or debit card number on customers’ receipts. On October 21, 2019, the District Court dismissed the matter and ruled that the Plaintiffs did not have standing based on the Third Circuit’s recent decision in Kamal v. J. Crew Group, Inc., 918 F.3d 102 (3d. Cir. 2019). Following the dismissal in federal court, on October 25, 2019, the Plaintiffs filed a Praecipe to Transfer the case to Pennsylvania state court, and on August 20, 2020, the court ruled that the Plaintiffs have standing. However, the court also certified the standing issue for an interlocutory appeal, and the Company has filed a petition for allowance of appeal with the Pennsylvania Supreme Court. The Company continues to believe that the case is without merit and intends to continue to vigorously defend itself against the allegations. The matter is covered by insurance, and the Company does not believe that the case will have a material adverse effect on its consolidated financial condition, operating results or cash flows.

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The Company has been named as a defendant in a putative class action filed in May 2018 in the Superior Court of California, Miles v. Kirkland’s Stores, Inc. The case has been removed to Federal Court, Central District of California, and trial is currently set for November 8, 2021. The complaint alleges, on behalf of Miles and all other hourly Kirkland’s employees in California, various wage and hour violations. Kirkland’s denies the material allegations in the complaint and believes that its employment policies are generally compliant with California law. The parties are currently engaging in discovery, and the Plaintiff has until April 9, 2021, to file for class certification. The Company believes the case is without merit and intends to vigorously defend itself against the allegations.

The Company is also party to other pending legal proceedings and claims that arise in the normal course of business. Although the outcome of such proceedings and claims cannot be determined with certainty, the Company’s management is of the opinion that it is unlikely that such proceedings and any claims in excess of insurance coverage will have a material effect on its consolidated financial condition, operating results or cash flows.

Note 6 - Stock-Based Compensation

The Company maintains equity incentive plans under which it may grant non-qualified stock options, incentive stock options, restricted stock, restricted stock units, or stock appreciation rights to employees, non-employee directors and consultants. Compensation expense is recognized on a straight-line basis over the vesting periods of each grant. There have been no material changes in the assumptions used to compute compensation expense during the current year. The table below sets forth selected stock-based compensation information (in thousands, except share amounts) for the periods indicated:

	13-Week Period Ended				39-Week Period Ended
	October 31, 2020		November 2, 2019		October 31, 2020		November 2, 2019
Stock-based compensation expense (included in compensation and benefits on the condensed consolidated statements of operations)	$	276	$	704	$	912	$	1,995
Stock options granted		—		74,468		—		504,961
Restricted stock units granted		—		42,424		1,050,421		501,141

Note 7 - Related Party Transactions

The Company had an agreement with a related party vendor to purchase merchandise inventory. The vendor was considered a related party for financial reporting purposes because its principal owner is the spouse of the Company’s former Vice President of Product Development and Trend. As of June 14, 2019, the vendor is no longer a related party. The table below sets forth selected results related to this vendor, for the time period that the vendor was a related party, in dollars (in thousands) and percentages for the periods indicated:

	13-Week Period Ended						39-Week Period Ended
	October 31, 2020			November 2, 2019			October 31, 2020			November 2, 2019
Related Party Vendor:
Purchases	$	—		$	—		$	—		$	19,577
Purchases as a percent of total merchandise purchases		—	%		—	%		—	%		9.4	%

Note 8 - Share Repurchase Plan

On September 24, 2018, the Company announced that its Board of Directors authorized a share repurchase plan providing for the purchase in the aggregate of up to $10 million of the Company’s outstanding common stock. Repurchases of shares will be made in accordance with applicable securities laws and may be made from time to time in the open market or by negotiated transactions. The amount and timing of repurchases will be based on a variety of factors, including stock price, regulatory limitations and other market and economic factors. The share repurchase plan does not require the Company to repurchase any specific number of shares, and the Company may terminate the repurchase plan at any time. As of October 31, 2020, the Company had approximately $21,000 remaining under the current share repurchase plan. The table below sets forth selected share repurchase plan information (in thousands, except share amounts) for the periods indicated:

	13-Week Period Ended				39-Week Period Ended
	October 31, 2020		November 2, 2019		October 31, 2020		November 2, 2019
Shares repurchased and retired		—		174,313		—		807,275
Share repurchase cost	$	—	$	243	$	—	$	3,657

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Note 9 - Senior Credit Facility

On December 6, 2019, the Company entered into a Second Amended and Restated Credit Agreement (the “2019 Credit Agreement”) with Bank of America, N.A. as administrative agent and collateral agent, and lender. The 2019 Credit Agreement replaced the Company’s Amended and Restated Credit Agreement dated as of August 19, 2011, as amended by that Joinder and First Amendment to Amended and Restated Credit Agreement dates as of February 26, 2016 (the “2016 Credit Agreement”) and, together with the 2019 Credit Agreement, the (“Credit Agreements”). Like the 2016 Credit Agreement, the 2019 Credit Agreement contains a $75 million senior secured revolving credit facility, a swingline availability of $10 million and a $25 million incremental accordion feature. The 2019 Credit Agreement contains substantially similar terms and conditions as the 2016 Credit Agreement, and extended its maturity date to December 2024. The 2016 Credit Agreement was scheduled to expire in February 2021. Advances under the Credit Agreements bear interest at an annual rate equal to LIBOR plus a margin ranging from 125 to 175 basis points with no LIBOR floor, and the fee paid to the lender on the unused portion of the credit facility is 25 basis points per annum.

Borrowings under the Credit Agreements are subject to certain conditions and contain customary events of default, including, without limitation, failure to make payments, a cross-default to certain other debt, breaches of covenants, breaches of representations and warranties, a change in control, certain monetary judgments and bankruptcy and ERISA events. Upon any such event of default, the principal amount of any unpaid loans and all other obligations under the Credit Agreements may be declared immediately due and payable. The maximum availability under the facility is limited by a borrowing base formula which consists of a percentage of eligible inventory and eligible credit card receivables, less reserves.

The Company is subject to a Second Amended and Restated Security Agreement (the “Security Agreement”) with its lender. Pursuant to the Security Agreement, the Company pledged and granted to the administrative agent, for the benefit of itself and the secured parties specified therein, a lien on and security interest in all of the rights, title and interest in substantially all of the Company’s assets to secure the payment and performance of the obligations under the Credit Agreements.

As of October 31, 2020, the Company was in compliance with the covenants in the 2019 Credit Agreement. Under the 2019 Credit Agreement, there were no outstanding borrowings and $1,750,000 in letters of credit outstanding, with approximately $69.7 million available for borrowing, as of October 31, 2020.

Note 10 - Impairments

The Company evaluates the recoverability of the carrying amounts of long-lived assets when events or changes in circumstances dictate that their carrying values may not be recoverable. This review includes the evaluation of individual under-performing retail stores and assessing the recoverability of the carrying value of the assets related to the stores. Future cash flows are projected for the remaining lease life. If the estimated future cash flows are less than the carrying value of the assets, the Company records an impairment charge equal to the difference between the assets’ fair value and carrying value. The fair value is estimated using a discounted cash flow approach considering such factors as future sales levels, gross margins, changes in rent and other expenses as well as the overall operating environment specific to that store. The amount of the impairment charge is allocated proportionately to all assets in the asset group with no asset written down below its individual fair value.

In connection with the adoption of the new lease accounting standard at the beginning of fiscal 2019, the Company reviewed its store portfolio for possible impairment, as the new right-of-use assets were included as part of the long-lived asset group that was evaluated for impairment. As of the beginning of fiscal 2019, the Company recorded an adjustment to increase the opening balance of accumulated deficit by approximately $0.3 million for the cumulative effect of the adoption of ASC 842 for right-of-use assets at six of the impaired stores.

During the 13-week periods ended October 31, 2020 and November 2, 2019, the Company recorded an impairment charge of approximately $15,000 and $41,000 for right-of-use asset impairment at two stores and one store, respectively. The Company also recorded an impairment charge totaling approximately $162,000 and $3.4 million for the 13-week periods ended October 31, 2020 and November 2, 2019, respectively, for leasehold improvements, fixtures and equipment at four stores and 17 stores, respectively, for which the carrying values exceed the respective fair values for these assets. The total impairment charge, net of tax, for the 13-week periods ended October 31, 2020 and November 2, 2019 was $121,000 and $2.5 million, respectively.

During the 39-week periods ended October 31, 2020 and November 2, 2019, the Company recorded an impairment charge of approximately $6.2 million and $525,000 for right-of-use asset impairment at 24 stores and three stores, respectively. The Company also recorded an impairment charge totaling approximately $2.8 million and $6.7 million for the 39-week periods ended October 31, 2020 and November 2, 2019, respectively, for leasehold improvements, fixtures and equipment at 22 stores during each period for which the carrying values exceed the respective fair values for these assets. The total impairment charge, net of tax, for the 39-week periods ended October 31, 2020 and November 2, 2019 was $6.9 million and $5.5 million, respectively.

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Note 11 - New Accounting Pronouncements

New Accounting Pronouncements Recently Adopted

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement,” which amends the disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The Company adopted this guidance in the first quarter of fiscal 2020. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes.” The amendments in this ASU simplify the accounting for income taxes by removing specific exceptions included in Topic 740, introducing simplifications and making technical corrections. For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, with early adoption permitted. The Company adopted this guidance in the second quarter of fiscal 2020. For the 26-week period ended August 1, 2020, the pretax loss was greater than the forecasted pretax loss for the year, which historically resulted in a calculation that limited the tax benefit that could be recorded. The adoption of ASU 2019-12 provided the Company an exception to this methodology. The adoption of this guidance did not have any other material impact on the Company’s condensed consolidated financial statements and related disclosures.

New Accounting Pronouncements Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This guidance is in response to accounting concerns regarding contract modifications and hedge accounting because of impending rate reform associated with structural risks of interbank offered rates (IBORs), and, particularly, the risk of cessation of the London Interbank Offered Rate (LIBOR) related to regulators in several jurisdictions around the world having undertaken reference rate reform initiatives to identify alternative reference rates. The guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The adoption of this guidance is effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not expect the adoption of this guidance to have a material impact on its condensed consolidated financial statements and related disclosures.

Note 12 - Subsequent Events

On December 3, 2020, the Company announced that its Board of Directors authorized a new share repurchase plan providing for the purchase in the aggregate of $20 million of the Company’s outstanding common stock. Repurchases of shares will be made in accordance with applicable securities laws and may be made from time to time in the open market or by negotiated transactions. The amount and timing of repurchases will be based on a variety of factors, including stock price, regulatory limitations and other market and economic factors. The share repurchase program does not require the Company to repurchase any specific number of shares, and the Company may terminate the repurchase program at any time.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide an understanding of our financial condition, change in financial condition, cash flow, liquidity and results of operations. The following MD&A discussion should be read in conjunction with the condensed consolidated financial statements and notes to those statements that appear elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020, filed with the SEC on April 10, 2020 (the “Annual Report”). The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed or referred to in the forward-looking statements. Factors that could cause or contribute to any differences include, but are not limited to, those discussed under the caption “Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995” and under Part II, Item 1A - “Risk Factors.”

Introduction

We are a specialty retailer of home décor in the United States, operating 381 stores in 35 states as of October 31, 2020, as well as an e-commerce website, www.kirklands.com. Our stores present a curated selection of distinctive merchandise, including holiday décor, furniture, wall décor, art, textiles, mirrors, fragrances, lamps and other home decorating items. Our stores offer an extensive assortment of holiday merchandise during seasonal periods. We provide our customers an engaging shopping experience characterized by casual, comfortable merchandise with a southern feel and a modern flair at a discernible value. This combination of quality and stylish merchandise, value pricing and a stimulating online and store experience has led us to develop a loyal customer base.

Impact of COVID-19 Pandemic on our Business

On March 11, 2020, the World Health Organization declared COVID-19 a global pandemic and recommended containment and mitigation measures worldwide. The pandemic and these containment and mitigation measures have led to adverse impacts on the U.S. and global economies. From a more macro-economic perspective, there continues to be significant uncertainties associated with the COVID-19 pandemic, including with respect to the severity of the disease, the duration of the outbreak, actions that may be taken by governmental authorities and private businesses to attempt to contain the COVID-19 outbreak or to mitigate its impact; the extent and duration of social distancing and the adoption of shelter-in-place orders; and the ongoing impact of COVID-19 on business and economic activity.

The COVID-19 pandemic has impacted our business operations and results of operations for the first 39 weeks of fiscal 2020 as described in more detail below, due to decreased customer traffic, retail store closures and supply chain restrictions. The evolving COVID-19 pandemic could continue to have an adverse impact on our results of operations and liquidity; the operations of our suppliers, vendors and customers; and on our employees as a result of quarantines, facility closures, and travel and social restrictions. While the ultimate health and economic impact of the COVID-19 pandemic is highly uncertain, we expect that our business operations and results of operations, including our net sales, earnings and cash flows will continue to be materially impacted.

On March 19, 2020, we closed all of our retail store locations in response to the COVID-19 pandemic. We took a number of actions to mitigate the impact of the decreased sales due to the COVID-19 related store closures including:

•

Canceled orders and delayed merchandise receipts to manage inventory levels, and extended payment terms with product and non-product vendors to improve working capital.

•

After paying all store team members during the first two weeks of the closure, furloughed all part-time store employees and temporarily reduced the pay of full-time managers and key employees.

•

Permanently reduced corporate costs including permanent labor reductions, reduced marketing spend and lower corporate headquarters rent.

•

Permanently reduced distribution center indirect labor and furloughed a portion of direct distribution center labor, while further reducing hours to match demand.

•

Significantly reduced transportation expenses with limited deliveries to stores and the delay/reduction of inbound freight receipts.

•

Borrowed $40 million on its $75 million revolving credit facility.

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On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss carry backs to offset 100% of taxable income for taxable years beginning before 2021. The CARES Act allows net operating losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The CARES Act also provides for an employee retention payroll tax credit for employers subject to closures due to COVID-19. In addition, the CARES Act permits delayed payment of the employer-portion of social security taxes. The delay applies to social security taxes due on wages paid between the date of enactment of the CARES Act and January 1, 2021 with half of the delayed payroll taxes due by December 31, 2021 and the other half due by December 31, 2022. The Company pursued all relevant measures under the CARES Act during the 39-week period ended October 31, 2020 including net operating loss carry backs, wage credits and payroll tax deferrals in order to improve liquidity.

During the 13-week period ended August 1, 2020, we repaid the $40 million that was borrowed under the revolving credit facility, and our stores started offering contactless curbside pickup and then reopened to in-store customer traffic throughout the second period consistent with applicable federal, state and local regulations and restrictions. Stores initially reopened with restricted operating hours and limited staffing with store merchandise deliveries from the distribution centers gradually resuming. During the 13-week period ended October 31, 2020, our sales improved with increased e-commerce demand, and stores generally increased operating hours, staffing and merchandise deliveries. The increased sales combined with the reduced merchandise receipts led to inventory shortages in key categories.

There are numerous uncertainties surrounding the crisis and its impact on our business, as further described in Part II Item 1A – Risk Factors, which make it difficult to predict the impact on our business, financial position, or results of operations for the remainder of fiscal 2020 and beyond.

OVERVIEW OF KEY FINANCIAL MEASURES

Net sales and gross profit are the most significant drivers of our operating performance. Net sales consists of all merchandise sales to customers, net of returns, shipping revenue associated with e-commerce sales, and gift card breakage revenue and excludes sales taxes. We use comparable store sales to measure sales increases or decreases from stores that have been open for at least 13 full fiscal months. Prior to fiscal 2020, stores closed during the year are included in the comparable store sales calculation only for the full fiscal months of the year the stores were open. In fiscal 2020, we changed our comparable sales calculation to remove closed stores from the calculation the day after the store closes. Relocated stores are removed from the comparable store base when the existing store closes, and the new replacement store is added into the comparable store sales calculation after 13 full fiscal months of activity. E-commerce store sales, including shipping revenue, are included in consolidated comparable store sales. Increases in comparable store sales are an important factor in maintaining or increasing the profitability of existing stores.

Gross profit is the difference between net sales and cost of sales. Cost of sales has various distinct components including: product cost of sales (including inbound freight, damages and inventory shrinkage), store occupancy costs (including rent and depreciation of leasehold improvements and other property and equipment), outbound freight costs (including e-commerce shipping) and central distribution costs (including operational costs and depreciation of leasehold improvements and other property and equipment). Product and outbound freight costs are variable, while occupancy and central distribution costs are largely fixed. Accordingly, gross profit expressed as a percentage of net sales can be influenced by many factors including overall sales performance.

Store Optimization

As part of our store optimization strategy, which includes exiting unprofitable stores and shrinking the store base over the next several years, we closed 51 store locations in the 39-week period ended October 31, 2020. We are prioritizing sustained improvement in overall profitability and developing a future state plan for infrastructure that complements our omni-channel concept and improves the customer experience. We anticipate additional store closures as we execute our store optimization strategy over the next several years.

The following table summarizes our store openings and closings during the periods indicated:

	13-Week Period Ended						39-Week Period Ended
	October 31, 2020			November 2, 2019			October 31, 2020			November 2, 2019
New store openings		—			1			—			5
Permanent store closures		6			—			51			1
(Decrease) increase in store units		(1.6	)%		0.2	%		(11.8	)%		0.9	%

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The following table summarizes our open stores and square footage under lease:

	October 31, 2020		November 2, 2019
Number of stores		381		432
Square footage		3,039,097		3,437,072
Average square footage per store		7,977		7,956

13-Week Period Ended October 31, 2020 Compared to the 13-Week Period Ended November 2, 2019

Results of operations. The table below sets forth selected results of our operations both in dollars (in thousands) and as a percentage of net sales for the periods indicated:

	13-Week Period Ended
	October 31, 2020						November 2, 2019						Change
	$			%			$			%			$			%
Net sales	$	146,609			100.0	%	$	144,936			100.0	%	$	1,673			1.2	%
Cost of sales		93,738			63.9			104,800			72.3			(11,062	)		(10.6	)
Gross profit		52,871			36.1			40,136			27.7			12,735			31.7
Operating expenses:
Compensation and benefits		21,343			14.6			29,115			20.1			(7,772	)		(26.7	)
Other operating expenses		16,682			11.4			20,208			14.0			(3,526	)		(17.4	)
Depreciation (exclusive of depreciation included in cost of sales)		1,613			1.1			1,602			1.1			11			0.7
Asset impairment		177			0.1			3,392			2.3			(3,215	)		(94.8	)
Total operating expenses		39,815			27.2			54,317			37.5			(14,502	)		(26.7	)
Operating income (loss)		13,056			8.9			(14,181	)		(9.8	)		27,237			(192.1	)
Interest expense		95			0.1			169			0.1			(74	)		(43.8	)
Other income		(86	)		(0.1	)		(158	)		(0.1	)		72			(45.6	)
Income (loss) before income taxes		13,047			8.9			(14,192	)		(9.8	)		27,239			(191.9	)
Income tax expense		691			0.5			8,114			5.6			(7,423	)		(91.5	)
Net income (loss)	$	12,356			8.4	%	$	(22,306	)		(15.4	)%	$	34,662			(155.4	)%

Net sales. Net sales increased 1.2% to $146.6 million for the third 13 weeks of fiscal 2020 compared to $144.9 million for the prior year period. Comparable sales, including e-commerce sales, increased 8.9%, or $12.0 million for the third 13 weeks of fiscal 2020 compared to the prior year period. This was partially offset by the impact of permanent store closures, which contributed to a decrease in net sales of $10.4 million. Comparable sales, including e-commerce sales, decreased 6.4% in the prior year period. For the third 13 weeks of fiscal 2020, e-commerce comparable sales increased 49.9%. For e-commerce, comparable sales benefited from an increase in website traffic and an increase in average ticket. The merchandise categories contributing most to the comparable store sales increase for the third 13 weeks of fiscal 2020 were holiday, textiles, and furniture, which were partially offset by decreases in gift, art and mirrors.

Gross profit. Gross profit as a percentage of net sales increased 840 basis points from 27.7% in the third 13 weeks of fiscal 2019 to 36.1% in the third 13 weeks of fiscal 2020. The overall increase in gross profit margin was due to favorable merchandise margin and store occupancy costs, partially offset by unfavorable outbound freight and distribution center costs. Merchandise margin increased approximately 820 basis points from 51.8% in the third 13 weeks of fiscal 2019 to 60.0% in the third 13 weeks of fiscal 2020 mainly due to lower promotional activity and increased direct sourcing. Store occupancy and depreciation costs decreased approximately 300 basis points as a percentage of net sales due to store closures, negotiated rent reductions and the leverage of increased sales. Outbound freight costs were approximately 110 basis points unfavorable as a percentage of net sales due to increased e-commerce shipping expenses of approximately 180 basis points due to the higher mix of ship-to-home e-commerce sales partially offset by improved store outbound freight of approximately 70 basis points driven by reduced routes from the distribution centers to the stores, shipping rate decreases and sales leverage. Distribution center costs were approximately 170 basis points unfavorable due to the lower warehouse expense capitalization adjustment driven by lower inventory levels.

Compensation and benefits. Compensation and benefits as a percentage of net sales decreased approximately 550 basis points from 20.1% in the third 13 weeks of fiscal 2019 to 14.6% in the third 13 weeks of fiscal 2020, primarily due to lower store payroll expenses due to a revised store labor model and lower corporate salaries and wages due to reduced head count.

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Other operating expenses. Other operating expenses as a percentage of net sales decreased approximately 260 basis points from 14.0% in the third 13 weeks of fiscal 2019 to 11.4% in the third 13 weeks of fiscal 2020. The decrease as a percentage of net sales was primarily due to cost savings initiatives and lower advertising, professional fees, utilities and travel expenses.

Asset impairment. During the third 13 weeks of fiscal 2020, we recorded an impairment charge of approximately $15,000 for right-of-use asset impairment at two stores and $162,000 for property and equipment impairment charges at four stores compared to an impairment charge of approximately $41,000 for right-of-use asset impairment at one store and $3.4 million for property and equipment impairment charges at 17 stores in the prior year period.

Income tax expense. For the 13-week periods ended October 31, 2020 and November 2, 2019, we recorded income tax expense of 5.3% and 57.7% of the income (loss) before income taxes, respectively. The change in income taxes for the 13-week period ended October 31, 2020, compared to the prior year period, was primarily due to using the discrete method in the current period compared to using the estimated annual effective tax rate method along with recording a valuation allowance against deferred tax assets in the prior year period.

Net income (loss) and earnings (loss) per share. We reported net income of $12.4 million, or $0.82 per diluted share, for the third 13 weeks of fiscal 2020 as compared to a net loss of $22.3 million, or $1.61 per diluted share, for the third 13 weeks of fiscal 2019.

39-Week Period Ended October 31, 2020 Compared to the 39-Week Period Ended November 2, 2019

Results of operations. The table below sets forth selected results of our operations both in dollars (in thousands) and as a percentage of net sales for the periods indicated:

	39-Week Period Ended
	October 31, 2020						November 2, 2019						Change
	$			%			$			%			$			%
Net sales	$	348,578			100.0	%	$	394,469			100.0	%	$	(45,891	)		(11.6	)%
Cost of sales		249,751			71.6			291,541			73.9			(41,790	)		(14.3	)
Gross profit		98,827			28.4			102,928			26.1			(4,101	)		(4.0	)
Operating expenses:
Compensation and benefits		60,157			17.3			83,333			21.1			(23,176	)		(27.8	)
Other operating expenses		44,843			12.9			54,998			14.0			(10,155	)		(18.5	)
Depreciation (exclusive of depreciation included in cost of sales)		4,683			1.3			5,177			1.3			(494	)		(9.5	)
Asset impairment		9,027			2.6			7,251			1.8			1,776			24.5
Total operating expenses		118,710			34.1			150,759			38.2			(32,049	)		(21.3	)
Operating loss		(19,883	)		(5.7	)		(47,831	)		(12.1	)		27,948			(58.4	)
Interest expense		484			0.1			307			0.1			177			57.7
Other income		(272	)		—			(712	)		(0.2	)		440			(61.8	)
Loss before income taxes		(20,095	)		(5.8	)		(47,426	)		(12.0	)		27,331			(57.6	)
Income tax (benefit) expense		(15,650	)		(4.5	)		921			0.3			(16,571	)		(1,799.2	)
Net loss	$	(4,445	)		(1.3	)%	$	(48,347	)		(12.3	)%	$	43,902			(90.8	)%

Net sales. Net sales decreased 11.6% to $348.6 million for the first 39 weeks of fiscal 2020 compared to $394.5 million for the prior year period. Comparable store sales, including e-commerce sales, decreased 6.7%, or $25.1 million for the first 39 weeks of fiscal 2020 compared to the prior year period. In addition, the impact of permanent store closures contributed to a decrease in net sales of $20.8 million. Comparable store sales, including e-commerce sales, decreased 9.3% in the prior year period. For the first 39 weeks of fiscal 2020, e-commerce comparable sales increased 53.2%. For e-commerce, comparable sales benefited from an increase in website traffic and average ticket.

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Gross profit. Gross profit as a percentage of net sales increased 230 basis points from 26.1% in the first 39 weeks of fiscal 2019 to 28.4% in the first 39 weeks of fiscal 2020. The overall increase in gross profit margin was due to favorable merchandise margin and store occupancy costs, partially offset by unfavorable outbound freight and distribution center costs. Merchandise margin increased approximately 390 basis points from 52.8% in the first 39 weeks of fiscal 2019 to 56.7% in the first 39 weeks of fiscal 2020 mainly due to lower promotional activity and increased direct sourcing. Store occupancy and depreciation costs decreased approximately 60 basis points as a percentage of net sales due to store closures and negotiated rent reductions. Outbound freight costs, which include e-commerce shipping, increased approximately 140 basis points as a percentage of net sales, which was driven by increased e-commerce shipping expenses of approximately 230 basis points due to the higher mix of ship-to-home e-commerce sales, partially offset by improved store outbound freight of approximately 90 basis points driven by reduced routes from the distribution centers to the stores and shipping rate decreases. Distribution center costs were approximately 80 basis points unfavorable due to the lower warehouse expense capitalization adjustment driven by lower inventory levels and sales deleverage.

Compensation and benefits. Compensation and benefits as a percentage of net sales decreased approximately 380 basis points from 21.1% in the first 39 weeks of fiscal 2019 to 17.3% in the first 39 weeks of fiscal 2020, primarily due to lower store wages due to a revised labor model, lower corporate salaries and wages due to reduced headcount, partially offset by higher bonus expense.

Other operating expenses. Other operating expenses as a percentage of net sales decreased approximately 110 basis points from 14.0% in the first 39 weeks of fiscal 2019 to 12.9% in the first 39 weeks of fiscal 2019, primarily due to numerous cost saving initiatives and lower professional fees and travel costs.

Asset impairment. For the first 39 weeks of fiscal 2020, we recorded an impairment charge of approximately $6.2 million for right-of-use asset impairment at 24 stores and $2.8 million for property and equipment impairment charges at 22 stores compared to an impairment charge of approximately $525,000 for right-of-use asset impairment at three stores and $6.7 million for property and equipment impairment charges at 22 stores in the prior year period.

Income tax (benefit) expense. We recorded an income tax benefit of approximately $15.7 million, or 77.9% of the loss before income taxes during the first 39 weeks of fiscal 2020, compared to an income tax expense of approximately $0.9 million, or 1.9% of the loss before income taxes during the prior year period. The change in the tax rate for the first 39 weeks of fiscal 2020 compared to the prior year period was primarily due to a $12.3 million income tax benefit related to the carryback of the 2019 federal net operating loss to prior periods pursuant to the CARES Act, a $2.0 million income tax benefit related to the carryback of the projected fiscal 2020 loss to years with a 35% statutory tax rate, partially offset by $3.0 million due to the valuation allowance against deferred tax assets compared to recording a $11.3 million valuation allowance against deferred tax assets in the prior year period.

Net loss and loss per share. We reported a net loss of $4.4 million, or $0.31 per diluted share, for the first 39 weeks of fiscal 2020 as compared to a net loss of $48.3 million, or $3.42 per diluted share, for the first 39 weeks of fiscal 2019.

Non-GAAP Financial Measures

Adjusted net income (loss) and adjusted income (loss) per share. To supplement our unaudited consolidated condensed financial statements presented in accordance with generally accepted accounting principles (“GAAP”), we provide certain non-GAAP financial measures, including adjusted net income (loss) and adjusted diluted income (loss) per share. These measures are not in accordance with, and are not intended as alternatives to, GAAP. We use these non-GAAP financial measures internally in analyzing our financial results and believe that they provide useful information to analysts and investors, as a supplement to GAAP measures, in evaluating our operational performance.

We define adjusted net income (loss) and adjusted diluted income (loss) per share by adjusting the applicable GAAP measure to for non-GAAP adjustments.

Non-GAAP measures are intended to provide additional information only and do not have any standard meanings prescribed by GAAP. Use of these terms may differ from similar measures reported by other companies. Each non-GAAP measure has its limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of the Company’s results as reported under GAAP.

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The following table shows a reconciliation of net income (loss) and diluted income (loss) per share to adjusted net income (loss) and adjusted diluted income (loss) per share for the 13 and 39-week periods ended October 31, 2020 and November 2, 2019:

	13-Week Period Ended						39-Week Period Ended
	October 31, 2020			November 2, 2019			October 31, 2020			November 2, 2019
Net income (loss)	$	12,356		$	(22,306	)	$	(4,445	)	$	(48,347	)
Non-GAAP adjustments, net of tax:
Closed store and lease termination costs in cost of sales⁽¹⁾		(577	)		—			(533	)		—
Asset impairment⁽²⁾		121			2,548			6,927			5,526
Stock-based compensation expense, including tax impact⁽³⁾		196			954			1,082			2,397
Severance charges⁽⁴⁾		6			100			683			707
Other costs included in operating expenses⁽⁵⁾		54			—			155			92
Total adjustments in operating expenses		377			3,602			8,847			8,722
Tax valuation allowance⁽⁶⁾		(2,431	)		11,336			3,040			11,336
CARES Act - net operating loss carry back⁽⁷⁾		268			—			(14,328	)		—
Total non-GAAP adjustments, net of tax		(2,363	)		14,938			(2,974	)		20,058
Adjusted net income (loss)	$	9,993		$	(7,368	)	$	(7,419	)	$	(28,289	)

Diluted income (loss) per share	$	0.82		$	(1.61	)	$	(0.31	)	$	(3.42	)
Adjusted diluted income (loss) per share	$	0.66		$	(0.53	)	$	(0.53	)	$	(2.00	)

Diluted weighted average shares outstanding		15,075			13,867			14,121			14,116
Adjusted diluted weighted average shares outstanding		15,075			13,867			14,121			14,116

(1)	Costs associated with closed stores and lease termination costs, including amounts paid to third-parties for rent reduction negotiations, lease termination fees paid to landlords for store closings and gains on lease terminations.

(2)	Impairment charges include both right-of-use asset and property and equipment impairment charges.

(3)	Stock-based compensation expense includes amounts expensed related to equity incentive plans including the tax impact.

(4)	Severance charges include expenses related to severance agreements. This also includes permanent store closure compensation costs.

(5)	Other costs include corporate lease negotiation fees associated with rent reduction in fiscal 2020 and write-offs of excess and obsolete supplies in fiscal 2019.

(6)	To remove the impact of the Company’s valuation allowance against deferred tax assets.

(7)	The Company recorded an income tax expense (benefit) related to the carry back of fiscal 2019 and estimated fiscal 2020 federal net operating losses to prior periods as permitted under the CARES Act in fiscal 2020.

Liquidity and Capital Resources

Our principal capital requirements are for working capital and capital expenditures. Working capital consists mainly of merchandise inventories offset by accounts payable, which typically reach their peak by the early portion of the fourth quarter of each fiscal year. Capital expenditures primarily relate to technology and omni-channel projects, distribution center and supply chain enhancements, new stores and existing store remodels. Historically, we have funded our working capital and capital expenditure requirements with internally-generated cash or borrowings under our revolving credit facility.

Cash flows from operating activities. Net cash provided by operating activities was approximately $14.5 million during the first 39 weeks of fiscal 2020 compared to net cash used in operating activities of approximately $62.4 million for the first 39 weeks of fiscal 2019. Cash flows from operating activities depend heavily on operating performance and changes in working capital and the timing and amount of payments for income taxes. The increase in the amount of cash from operations as compared to the prior year period was due to an improvement in operating performance and decreased cash used to purchase inventory, partially offset by lower accounts payable.

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Cash flows from investing activities. Net cash used in investing activities for the first 39 weeks of fiscal 2020 consisted of $7.6 million in capital expenditures slightly offset by proceeds from the sale of property and equipment of $0.2 million as compared to $12.8 million in capital expenditures for the prior year period. The table below sets forth capital expenditures by category (in thousands) for the periods indicated:

	39-Week Period Ended
	October 31, 2020		November 2, 2019
Distribution center and supply chain enhancements	$	4,496	$	4,057
Technology and omni-channel projects		1,974		2,986
Existing stores		758		2,869
Corporate		352		121
New stores		—		2,726
Total capital expenditures	$	7,580	$	12,759

The capital expenditures in the current year period related primarily to distribution center and supply chain enhancements including consolidating the e-commerce distribution center into the store distribution center in Jackson, Tennessee, standing up new e-commerce hubs and upgrading the warehouse management system. Technology and omni-channel projects include website enhancements and the launch of a new loyalty program. Capital expenditures in the prior year period related primarily to distribution center and supply chain enhancements, improvements to existing stores, the opening of five new stores and information technology and omni-channel improvements.

Cash flows from financing activities. In the first 39 weeks of fiscal 2020, we borrowed and made repayments of $40.0 million under our revolving credit facility. In the first 39 weeks of fiscal 2019, we borrowed $25.0 million under our revolving credit facility which was partially offset by share repurchases of $3.7 million

Senior credit facility. On December 6, 2019, we entered into the 2019 Credit Agreement with Bank of America, N.A. as administrative agent and collateral agent, and lender. The 2019 Credit Agreement replaced the 2016 Credit Agreement. Like the 2016 Credit Agreement, the 2019 Credit Agreement contains a $75 million senior secured revolving credit facility, a swingline availability of $10 million and a $25 million incremental accordion feature. The 2019 Credit Agreement contains substantially similar terms and conditions as the 2016 Credit Agreement, and extended its maturity date to December 2024. The 2016 Credit Agreement was scheduled to expire in February 2021. Advances under the Credit Agreements bear interest at an annual rate equal to LIBOR plus a margin ranging from 125 to 175 basis points with no LIBOR floor, and the fee paid to the lender on the unused portion of the credit facility is 25 basis points per annum.

Borrowings under the Credit Agreements are subject to certain conditions and contain customary events of default, including, without limitation, failure to make payments, a cross-default to certain other debt, breaches of covenants, breaches of representations and warranties, a change in control, certain monetary judgments and bankruptcy and ERISA events. Upon any such event of default, the principal amount of any unpaid loans and all other obligations under the Credit Agreements may be declared immediately due and payable. The maximum availability under the Credit Agreements is limited by a borrowing base formula, which consists of a percentage of eligible inventory and eligible credit card receivables, less reserves.

The Company is subject to a Security Agreement with its lender. Pursuant to the Security Agreement, the Company pledged and granted to the administrative agent, for the benefit of itself and the secured parties specified therein, a lien on and security interest in all of the rights, title and interest in substantially all of the Company’s assets to secure the payment and performance of the obligations under the Credit Agreements.

As of October 31, 2020, we were in compliance with the covenants in the 2019 Credit Agreement. Under the 2019 Credit Agreement, there were no outstanding borrowings and $1,750,000 in letters of credit outstanding, with approximately $69.7 million available for borrowing, as of October 31, 2020.

As of October 31, 2020, our balance of cash and cash equivalents was approximately $37.2 million. We believe that the combination of our cash balances, cash flow from operations and availability under our 2019 Credit Agreement will be sufficient to fund our planned capital expenditures and working capital requirements for at least the next twelve months.

Share repurchase plan. On September 24, 2018, we announced that our Board of Directors authorized a share repurchase plan providing for the purchase in the aggregate of up to $10 million of our outstanding common shares. On December 3, 2020, we announced that our Board of Directors authorized a new share repurchase plan providing for the purchase in the aggregate of $20 million of the Company’s outstanding common stock. Repurchases of shares will be made in accordance with applicable securities laws and may be made from time to time in the open market or by negotiated transactions. The amount and timing of repurchases will be based on a variety of factors, including stock price, regulatory limitations and other market and economic factors. The share repurchase plan does

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not require us to repurchase any specific number of shares, and we may terminate the repurchase plan at any time. As of October 31, 2020, we had approximately $21,000 remaining under our $10 million share repurchase plan. The table below sets forth selected share repurchase plan information (in thousands, except share amounts) for the periods indicated:

	13-Week Period Ended				39-Week Period Ended
	October 31, 2020		November 2, 2019		October 31, 2020		November 2, 2019
Shares repurchased and retired		—		174,313		—		807,275
Share repurchase cost	$	—	$	243	$	—	$	3,657

Related Party Transactions

We had an agreement with a related party vendor to purchase merchandise inventory. The vendor was considered a related party for financial reporting purposes because its principal owner was the spouse of our former Vice President of Product Development and Trend. As of June 14, 2019, the vendor is no longer a related party. The table below sets forth selected results related to this vendor, for the time period that the vendor was a related party, in dollars (in thousands) and percentages for the periods indicated:

	13-Week Period Ended						39-Week Period Ended
	October 31, 2020			November 2, 2019			October 31, 2020			November 2, 2019
Related Party Vendor:
Purchases	$	—		$	—		$	—		$	19,577
Purchases as a percent of total merchandise purchases		—	%		—	%		—	%		9.4	%
Cost of sales	$	—		$	—		$	—		$	14,749

Contractual Obligations

Not applicable to smaller reporting companies.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies during fiscal 2020. Refer to our Annual Report on Form 10-K filed with the SEC on April 10, 2020 for a summary of our critical accounting policies.

New Accounting Pronouncements

See Note 11, New Accounting Pronouncements, to the condensed consolidated financial statements for recently adopted accounting pronouncements.

Off-Balance Sheet Arrangements

As of the date hereof, we did not have any off-balance sheet financing arrangements.

Nasdaq Delisting Notice

On April 24, 2020, we received a deficiency letter from the Listing Qualifications Department of the Nasdaq notifying us that, for the last 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued inclusion on the Nasdaq Global Select Market, referred to as the minimum bid price rule. In accordance with Nasdaq Listing Rules, we had an initial period of 180 calendar days to regain compliance. On June 10, 2020, we received a letter from the Listing Qualifications Department of Nasdaq stating that our common stock had a closing bid price of $1.00 per share or greater for 10 consecutive days from May 26, 2020 to June 9, 2020. Accordingly, we have regained compliance with the Nasdaq Listing Rules, and this matter is now closed.

Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

The following information is provided pursuant to the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Certain statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q are “forward-looking statements” made pursuant to these provisions. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Words such as “should,” “likely to,” “forecasts,” “strategy,” “goal,” “anticipates,” “believes,” “expects,”

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“estimates,” “intends,” “plans,” “projects,” and similar expressions, may identify such forward-looking statements. Such statements are subject to certain risks and uncertainties, including, without limitation, the impact of public health issues, such as the current global pandemic of COVID-19, which could cause actual results to differ materially from the results projected in such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

The risk factors listed below and in the other sections of this Form 10-Q provide examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements. These forward-looking statements speak only as of the date of this report, and, except as required by law, we undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report.

We caution readers that the following important risk factors, among others, have in the past, in some cases, affected and could in the future affect our actual results of operations and cause our actual results to differ materially from the results expressed in any forward-looking statements made by us or on our behalf.

•

The COVID-19 global pandemic has had and is expected to continue to have an adverse impact on our business, financial condition, results of operations and liquidity.

•

If we fail to identify, develop and successfully implement immediate action plans and longer-term strategic initiatives, our financial performance could be negatively impacted.

•

If we are unable to successfully maintain, improve and grow a best-in-class omni-channel experience for our customers, it could adversely affect our sales, results of operations and reputation.

•

If we are unable to profitably operate our existing stores, grow online sales and effectively execute our store closing strategy, we may not be able to execute our business strategy, resulting in a decrease in net sales and profitability.

•

We may not be able to successfully anticipate consumer trends, and our failure to do so may lead to loss of consumer acceptance of our products, resulting in reduced net sales.

•

Our success depends upon our marketing, advertising and promotional efforts, and loyalty programs. If we are unable to implement them successfully, or if our competitors market, advertise or promote more effectively than we do, our revenue may be adversely affected.

•

We may not be able to successfully respond to technological change, our website could become obsolete and our financial results and conditions could be adversely affected.

•

If we fail to maintain a positive social media brand perception, it could have a negative impact on our operations, financial results and reputation.

•

If we do not generate sufficient cash flow from operations, we may not be able to implement our business strategies and fund our obligations.

•

Insufficient cash flows from operations could result in the substantial utilization of our secured revolving credit facility or similar financing, which may limit our ability to conduct certain activities.

•

The uncertainty regarding the potential phase-out of the London Interbank Offered Rate (“LIBOR”) could adversely impact our results of operations and cash flows.

•

We face an extremely competitive specialty retail business market, and such competition could result in a reduction of our prices and a loss of our market share.

•

Our results could be negatively impacted if our merchandise offering suffers a substantial impediment to its reputation due to real or perceived quality issues.

•

Our business depends upon hiring, training and retaining qualified employees.

•

Weather conditions could adversely affect our sales and/or profitability by affecting consumer shopping patterns.

•

We are exposed to the risk of natural disasters, pandemic outbreaks, global political events, war and terrorism that could disrupt our business and result in lower sales, increased operating costs and capital expenditures.

•

The recent Coronavirus outbreak has been declared a pandemic by the World Health Organization and recently has spread to the United States and many other parts of the world and may adversely affect our business operations, store traffic, employee availability, financial condition, liquidity and cash flow.

•

Our performance may be affected by general economic conditions.

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•

Our profitability is vulnerable to inflation and cost increases.

•

Our business is highly seasonal and our fourth quarter contributes to a disproportionate amount of our net sales, net income and cash flow, and any factors negatively impacting us during our fourth quarter could reduce our net sales, net income and cash flow, leaving us with excess inventory and making it more difficult for us to finance our capital requirements.

•

Inventory loss and theft and the inability to anticipate inventory needs may result in reduced net sales.

•

Failure to control merchandise returns could negatively impact the business.

•

We may experience significant variations in our quarterly results.

•

Our comparable store net sales fluctuate due to a variety of factors.

•

Our freight costs and thus our cost of goods sold are impacted by changes in fuel prices.

•

New legal requirements could adversely affect our operating results.

•

Litigation may adversely affect our business, financial condition, results of operations or liquidity.

•

Product liability claims could adversely affect our reputation.

•

If we fail to protect our brand name, competitors may adopt trade names that dilute the value of our brand name.

•

We are dependent on foreign imports for a significant portion of our merchandise, and any changes in the trading relations and conditions between the United States and the relevant foreign countries may lead to a decline in inventory resulting in a decline in net sales, or an increase in the cost of sales resulting in reduced gross profit.

•

We depend on a number of vendors to supply our merchandise, and any delay in merchandise deliveries from certain vendors may lead to a decline in inventory, which could result in a loss of net sales.

•

Our success is highly dependent on our planning and control processes and our supply chain, and any disruption in or failure to continue to improve these processes may result in a loss of net sales and net income.

•

Our business could suffer if a manufacturer fails to use acceptable labor and environmental practices.

•

Failure to protect the integrity and security of individually identifiable data of our customers and employees could expose us to litigation and damage our reputation; the expansion of our e-commerce business has inherent cybersecurity risks that may result in business disruptions.

•

Our hardware and software systems are vulnerable to damage that could harm our business.

•

We depend on key personnel, and, if we lose the services of any member of our senior management team, we may not be able to run our business effectively.

•

Our charter and bylaw provisions and certain provisions of Tennessee law may make it difficult in some respects to cause a change in control of Kirkland’s and replace incumbent management.

•

If we fail to maintain an effective system of internal control, we may not be able to accurately report our financial results.

•

The market price for our common stock might be volatile and could result in a decline in the value of your investment.

•

If we fail to remain in compliance with the Nasdaq listing requirements, our common stock could be delisted.

There have been no material changes to our risk factors listed above, which were previously disclosed in more detail in our Annual Report on Form 10-K for the fiscal year ended February 1, 2020 and our Quarterly Reports on Form 10-Q for the quarterly period ended May 2, 2020 and August 1, 2020 except for the updates set forth in Part II Item 1A - Risk Factors of this Form 10-Q regarding the impacts of the COVID-19 pandemic.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable to smaller reporting companies.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Both our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15(d)-(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) have concluded that as of October 31, 2020 our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Change in internal controls over financial reporting. There have been no changes in internal controls over financial reporting identified in connection with the foregoing evaluation that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

In addition to factors set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Statement for Purposes of the ‘Safe Harbor’ Provisions of the Private Securities Litigation Reform Act of 1995,” in Part I - Item 2 of this report, you should carefully consider the risk factor below and the risk factors discussed in Part I, “Item 1A. Risk Factors” in the Annual Report on Form 10-K for the fiscal year ended February 1, 2020, and in Part II, “Item 1A. Risk Factors” in our Quarterly Reports on Form 10-Q for the quarterly period ended May 2, 2020 and August 1, 2020, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

The COVID-19 global pandemic has had and is expected to continue to have an adverse impact on our business, financial condition, results of operations and liquidity.

The COVID-19 global pandemic has negatively impacted the global economy, disrupted consumer spending and global supply chains, and created significant volatility and disruption of financial markets. We expect the COVID-19 global pandemic will continue to

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have a material impact on our business, including our results of operations, financial condition and liquidity. The extent of the impact of the COVID-19 global pandemic on our business, including our ability to execute our near-term and long-term business strategies and initiatives in the expected time frame, will depend on future developments, including the duration and scope of the pandemic and responsive governmental regulations and orders. The effects of the COVID-19 pandemic are uncertain and cannot be predicted, including the impact on our suppliers and disruptions to the global supply chain; our ability to sell and provide our products, including as a result of travel and social restrictions and people working from home; restrictions or disruptions to transportation, including reduced availability of ground or air transport; and the willingness or ability of our customers to pay for our services and products.

As a result of the COVID-19 global pandemic, and in response to government mandates or recommendations made by governmental or other authorities, as well as decisions we have made to protect the health and safety of our employees, consumers and communities, we temporarily closed our retail stores. While our stores have reopened consistent with governmental guidelines, there can be no reassurance that they will not be temporarily closed again or that our customers will be willing to visit retail stores again in the near future. We also may face longer term store closure requirements and other operational restrictions with respect to some or all of our physical locations for prolonged periods of time due to, among other factors, evolving, continued, increasingly stringent, or reinstated governmental restrictions including public health directives, quarantine policies or social distancing measures. Additionally, the COVID-19 pandemic may impact our ability to adequately staff our stores and distribution centers if our employees are hesitant or unwilling to return to work for fear of contracting COVID-19. As a result, the COVID-19 pandemic is adversely impacting, and is expected to continue to adversely impact, our financial results.

The negative impact of the COVID-19 pandemic could lead to continued net sales decreases at our retail store locations. Reduced retail sales or additional temporary store closures would further negatively affect our results of operations and liquidity.

In addition, consumer fears about being exposed to or contracting the disease may continue, which will continue to adversely affect traffic to our stores. Consumer behavior and spending may also be negatively impacted by general macroeconomic conditions, including general economic uncertainty, unemployment rates, recessionary pressure, the access to unemployment compensation and other economic relief, fiscal policy changes, and consumer confidence, including the significant economic downturn, job loss and lower discretionary income resulting from the COVID-19 global pandemic. This may negatively impact sales in our stores and e-commerce channel. The continued significant reduction in consumer visits to, and spending at, our stores, caused by COVID-19, and any decreased spending online caused by decreased consumer confidence and spending following the pandemic, has and may continue to result in loss of sales, profits and other material adverse effects.

The COVID-19 global pandemic also has the potential to significantly impact our supply chain if the factories, suppliers, distribution centers, logistics operators and/or other service providers that we rely upon are disrupted, temporarily closed or experience worker shortages. We may also see disruptions or delays in shipments and negative impacts to pricing of certain components of our products. Even if the impact of the pandemic on domestic markets improves, because we rely on a global supply chain, we may continue to experience disruptions in the supply of globally sourced inventories.

In addition, the impact of COVID-19 on macroeconomic conditions may impact the proper functioning of financial and capital markets, foreign currency exchange rates, commodity prices and interest rates. The continued disruption of global financial markets as a result of the COVID-19 global pandemic could have a negative impact on our ability to access capital in the future. Even after the COVID-19 global pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future.

The extent of the impact of the COVID-19 global pandemic on our business is highly uncertain and difficult to predict, as information is rapidly evolving with respect to the duration and severity of the pandemic.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Repurchases of Equity Securities

On September 24, 2018, the Company announced that its Board of Directors authorized a share repurchase plan providing for the purchase in the aggregate of up to $10 million of the Company’s outstanding common stock. On December 3, 2020, the Company announced that its Board of Directors authorized a new share repurchase plan providing for the purchase in the aggregate of $20 million of the Company’s outstanding common stock. Repurchases of shares will be made in accordance with applicable securities laws and may be made from time to time in the open market or by negotiated transactions. The amount and timing of repurchases will be based on a variety of factors, including stock price, regulatory limitations and other market and economic factors. The share repurchase plan does not require the Company to repurchase any specific number of shares, and the Company may terminate the repurchase plan at any time.

The Company did not repurchase any shares of common stock during the 13 weeks ended October 31, 2020. As of October 31, 2020, the Company had approximately $21,000 remaining under the $10 million share repurchase plan.

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ITEM 6. EXHIBITS

(a)

Exhibits.

Exhibit No.		Description of Document
10.1+*		Employment Agreement, effective September 22, 2020, by and between Jeffrey T. Martin and Kirkland’s, Inc. (Exhibit 10.1 to the Company’s Current Report on Form 8-K dated September 23, 2020)
31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2		Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2		Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
101		Interactive Data File (Quarterly Report on Form 10-Q, for the quarter ended October 31, 2020, furnished in XBRL (eXtensible Business Reporting Language))

*	Incorporated by reference.

+	Management contract of compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

		KIRKLAND’S, INC.
Date: December 3, 2020		/s/ Steve C. Woodward
		Steve C. Woodward President and Chief Executive Officer
Date: December 3, 2020		/s/ Nicole A. Strain
		Nicole A. Strain Executive Vice President and Chief Financial Officer