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KIRKLAND'S, INC - Quarter Report: 2022 April (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 April 30, 2022

 

or

 

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 – 12,727,615 shares outstanding as of May 23, 2022.

 

 


 

KIRKLAND’S, INC.

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I

FINANCIAL INFORMATION

3

Item 1.

Financial Statements

3

 

Condensed Consolidated Balance Sheets (Unaudited) as of April 30, 2022, January 29, 2022 and May 1, 2021

3

 

Condensed Consolidated Statements of Operations (Unaudited) for the 13-week periods ended April 30, 2022 and May 1, 2021

4

 

Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) for the 13-week periods ended April 30, 2022 and May 1, 2021

5

 

Condensed Consolidated Statements of Cash Flows (Unaudited) for the 13-week periods ended April 30, 2022 and May 1, 2021

6

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

12

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

18

Item 4.

Controls and Procedures

18

 

 

 

PART II

OTHER INFORMATION

19

Item 1.

Legal Proceedings

19

Item 1A.

Risk Factors

19

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

19

Item 6.

Exhibits

19

 

 

 

SIGNATURES

 

20

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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)

 

 

 

April 30,

 

 

January 29,

 

 

May 1,

 

 

 

2022

 

 

2022

 

 

2021

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

5,382

 

 

$

25,003

 

 

$

72,275

 

Inventories, net

 

 

130,855

 

 

 

114,029

 

 

 

76,259

 

Prepaid expenses and other current assets

 

 

10,994

 

 

 

10,537

 

 

 

8,745

 

Total current assets

 

 

147,231

 

 

 

149,569

 

 

 

157,279

 

Property and equipment:

 

 

 

 

 

 

 

 

 

 

 

 

Equipment

 

 

20,012

 

 

 

20,043

 

 

 

20,361

 

Furniture and fixtures

 

 

69,371

 

 

 

69,823

 

 

 

72,001

 

Leasehold improvements

 

 

106,369

 

 

 

106,065

 

 

 

108,307

 

Computer software and hardware

 

 

78,478

 

 

 

77,311

 

 

 

79,837

 

Projects in progress

 

 

2,033

 

 

 

3,366

 

 

 

2,049

 

Property and equipment, gross

 

 

276,263

 

 

 

276,608

 

 

 

282,555

 

Accumulated depreciation

 

 

(228,994

)

 

 

(226,611

)

 

 

(222,873

)

Property and equipment, net

 

 

47,269

 

 

 

49,997

 

 

 

59,682

 

Operating lease right-of-use assets

 

 

134,343

 

 

 

124,684

 

 

 

142,003

 

Other assets

 

 

7,173

 

 

 

6,939

 

 

 

6,036

 

Total assets

 

$

336,016

 

 

$

331,189

 

 

$

365,000

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

47,313

 

 

$

62,535

 

 

$

53,107

 

Accrued expenses

 

 

24,016

 

 

 

30,811

 

 

 

31,142

 

Operating lease liabilities

 

 

41,531

 

 

 

41,268

 

 

 

44,280

 

Total current liabilities

 

 

112,860

 

 

 

134,614

 

 

 

128,529

 

Operating lease liabilities

 

 

118,658

 

 

 

111,021

 

 

 

135,383

 

Revolving line of credit

 

 

35,000

 

 

 

 

 

 

 

Other liabilities

 

 

4,291

 

 

 

4,428

 

 

 

5,776

 

Total liabilities

 

 

270,809

 

 

 

250,063

 

 

 

269,688

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at April 30, 2022, January 29, 2022, and May 1, 2021, respectively

 

 

 

 

 

 

 

 

 

Common stock, no par value; 100,000,000 shares authorized; 12,727,615; 12,631,347; and 14,274,317 shares issued and outstanding at April 30, 2022, January 29, 2022, and May 1, 2021, respectively

 

 

174,045

 

 

 

175,856

 

 

 

174,418

 

Accumulated deficit

 

 

(108,838

)

 

 

(94,730

)

 

 

(79,106

)

Total shareholders’ equity

 

 

65,207

 

 

 

81,126

 

 

 

95,312

 

Total liabilities and shareholders’ equity

 

$

336,016

 

 

$

331,189

 

 

$

365,000

 

 

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-Week Period Ended

 

 

 

April 30,

 

 

May 1,

 

 

 

2022

 

 

2021

 

Net sales

 

$

103,285

 

 

$

123,569

 

Cost of sales

 

 

74,993

 

 

 

83,314

 

Gross profit

 

 

28,292

 

 

 

40,255

 

Operating expenses:

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

20,892

 

 

 

19,113

 

Other operating expenses

 

 

16,798

 

 

 

17,475

 

Depreciation (exclusive of depreciation included in cost of sales)

 

 

1,697

 

 

 

1,613

 

Total operating expenses

 

 

39,387

 

 

 

38,201

 

Operating (loss) income

 

 

(11,095

)

 

 

2,054

 

Interest expense

 

 

156

 

 

 

85

 

Other income

 

 

(72

)

 

 

(80

)

(Loss) income before income taxes

 

 

(11,179

)

 

 

2,049

 

Income tax (benefit) expense

 

 

(3,324

)

 

 

330

 

Net (loss) income

 

$

(7,855

)

 

$

1,719

 

 

 

 

 

 

 

 

 

 

(Loss) earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.63

)

 

$

0.12

 

Diluted

 

$

(0.63

)

 

$

0.11

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

12,565

 

 

 

14,295

 

Diluted

 

 

12,565

 

 

 

15,445

 

 

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 January 29, 2022

 

 

12,631,347

 

 

$

175,856

 

 

$

(94,730

)

 

$

81,126

 

Exercise of stock options

 

 

2,705

 

 

 

16

 

 

 

 

 

 

16

 

Restricted stock issued

 

 

797,849

 

 

 

 

 

 

 

 

 

 

Net share settlement of stock options and restricted stock units

 

 

(224,320

)

 

 

(2,375

)

 

 

 

 

 

(2,375

)

Stock-based compensation expense

 

 

 

 

 

548

 

 

 

 

 

 

548

 

Repurchase and retirement of common stock

 

 

(479,966

)

 

 

 

 

 

(6,253

)

 

 

(6,253

)

Net loss

 

 

 

 

 

 

 

 

(7,855

)

 

 

(7,855

)

Balance at April 30, 2022

 

 

12,727,615

 

 

$

174,045

 

 

$

(108,838

)

 

$

65,207

 

 

 

 

 

Common Stock

 

 

Accumulated

 

 

Total

Shareholders’

 

 

 

Shares

 

 

Amount

 

 

Deficit

 

 

Equity

 

Balance at January 30, 2021

 

 

14,292,250

 

 

$

174,391

 

 

$

(79,469

)

 

$

94,922

 

Exercise of stock options

 

 

10,669

 

 

 

52

 

 

 

 

 

 

52

 

Restricted stock issued

 

 

30,087

 

 

 

 

 

 

 

 

 

 

Net share settlement of stock options and restricted stock units

 

 

(11,339

)

 

 

(257

)

 

 

 

 

 

(257

)

Stock-based compensation expense

 

 

 

 

 

232

 

 

 

 

 

 

232

 

Repurchase and retirement of common stock

 

 

(47,350

)

 

 

 

 

 

(1,356

)

 

 

(1,356

)

Net income

 

 

 

 

 

 

 

 

1,719

 

 

 

1,719

 

Balance at May 1, 2021

 

 

14,274,317

 

 

$

174,418

 

 

$

(79,106

)

 

$

95,312

 

 

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)

 

 

 

13-Week Period Ended

 

 

 

April 30,

 

 

May 1,

 

 

 

2022

 

 

2021

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(7,855

)

 

$

1,719

 

Adjustments to reconcile net (loss) income to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation of property and equipment

 

 

4,499

 

 

 

5,272

 

Amortization of debt issue costs

 

 

23

 

 

 

23

 

Asset impairment

 

 

 

 

 

310

 

Loss (gain) on disposal of property and equipment

 

 

191

 

 

 

(4

)

Stock-based compensation expense

 

 

548

 

 

 

232

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Inventories, net

 

 

(16,826

)

 

 

(14,176

)

Prepaid expenses and other current assets

 

 

932

 

 

 

(522

)

Accounts payable

 

 

(14,806

)

 

 

(2,370

)

Accrued expenses

 

 

(4,884

)

 

 

(6,634

)

Income taxes (receivable) payable

 

 

(3,300

)

 

 

377

 

Operating lease assets and liabilities

 

 

(1,843

)

 

 

(8,736

)

Other assets and liabilities

 

 

(310

)

 

 

(446

)

Net cash used in operating activities

 

 

(43,631

)

 

 

(24,955

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Proceeds from sale of property and equipment

 

 

17

 

 

 

13

 

Capital expenditures

 

 

(2,395

)

 

 

(1,559

)

Net cash used in investing activities

 

 

(2,378

)

 

 

(1,546

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Borrowings on revolving line of credit

 

 

35,000

 

 

 

 

Cash used in net share settlement of stock options and restricted stock units

 

 

(2,375

)

 

 

(257

)

Proceeds received from employee stock option exercises

 

 

16

 

 

 

52

 

Repurchase and retirement of common stock

 

 

(6,253

)

 

 

(1,356

)

Net cash provided by (used in) financing activities

 

 

26,388

 

 

 

(1,561

)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

 

 

 

Net decrease

 

 

(19,621

)

 

 

(28,062

)

Beginning of the period

 

 

25,003

 

 

 

100,337

 

End of the period

 

$

5,382

 

 

$

72,275

 

 

 

 

 

 

 

 

 

 

Supplemental schedule of non-cash activities:

 

 

 

 

 

 

 

 

Non-cash accruals for purchases of property and equipment

 

$

887

 

 

$

700

 

 

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 360 stores in 35 states as of April 30, 2022, as well as an e-commerce website, www.kirklands.com, under the Kirkland’s Home brand.

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 (“GAAP”) 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 March 25, 2022.

Macroeconomic conditions — Economic disruption, inflation, uncertainty, volatility and the COVID-19 pandemic have affected the Company’s business operations. As a result, if these conditions persist and/or worsen, the Company’s accounting estimates and assumptions could be impacted in subsequent periods, and it is reasonably possible such changes could be significant.

Seasonality The results of the Company’s operations for the 13-week period ended April 30, 2022 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 2022 represents the 52 weeks ending on January 28, 2023 and fiscal 2021 represents the 52 weeks ended on January 29, 2022.

Use of estimates The preparation of the condensed consolidated financial statements in conformity with GAAP 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 on long-lived assets, inventory reserves, self-insurance reserves and deferred tax asset valuation allowances.

Note 2 – Revenue Recognition

Net sales — Net sales includes the sale of merchandise, net of returns, shipping revenue, gift card breakage revenue and revenue earned from our private label credit card program and excludes sales taxes.

Sales returns reserve — The Company reduces net sales and estimates a liability for sales returns based on historical return trends, and the Company believes that its estimate for sales returns is a reasonably accurate reflection of future returns associated with past sales. However, as with any estimate, refund activity may vary from estimated amounts. The Company had a liability of approximately $1.2 million, $1.4 million and $1.6 million reserved for sales returns at April 30, 2022, January 29, 2022 and May 1, 2021, respectively, included in accrued expenses on the condensed consolidated balance sheets. The related sales return reserve products recovery asset included in prepaid expenses and other current assets on the condensed consolidated balance sheets was approximately $546,000, $697,000 and $709,000 at April 30, 2022, January 29, 2022, and May 1, 2021, respectively.

Deferred e-commerce revenue —The Company recognizes revenue at the time of sale of merchandise to customers in its stores. E-commerce revenue is recorded at the estimated time of delivery to the customer. If the Company receives payment before completion of its customer obligations, the revenue is deferred until the customer takes possession of the merchandise and the sale is complete. Deferred revenue related to e-commerce orders that have been shipped but not estimated to be received by customers included in accrued expenses on the condensed consolidated balance sheets was approximately $0.9 million, $1.0 million and $1.5 million at April 30, 2022, January 29, 2022 and May 1, 2021, respectively. The related contract assets, reflected in inventory on the condensed

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consolidated balance sheets, totaled approximately $422,000, $518,000 and $715,000 at April 30, 2022, January 29, 2022 and May 1, 2021, respectively.

Gift cards Gift card sales are recognized as revenue when tendered for payment. While the Company honors all gift cards presented for payment, the Company determines the likelihood of redemption to be remote for certain gift card balances due to long periods of inactivity. 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 unredeemed 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) for the periods indicated:

 

 

 

April 30, 2022

 

 

January 29, 2022

 

 

May 1, 2021

 

Gift card liability, net of estimated breakage (included in accrued expenses)

 

$

14,015

 

 

$

14,761

 

 

$

12,586

 

 

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

 

 

13-Week Period Ended

 

 

April 30, 2022

 

 

May 1, 2021

 

Gift card breakage revenue (included in net sales)

$

202

 

 

$

216

 

Gift card redemptions recognized in the current period related to amounts included in the gift card contract liability balance as of the prior period

 

1,940

 

 

 

2,080

 

Customer loyalty program — The Company has a loyalty program called the K-club that allows members to receive points based on qualifying purchases that are converted into certificates that may be redeemed on future purchases. This customer option is a material right and, accordingly, represents a separate performance obligation to the customer under ASC 606 Revenue from Contracts with Customers. The related loyalty program deferred revenue included in accrued expenses on the condensed consolidated balance sheets was approximately $1.2 million, $1.3 million and $1.2 million at April 30, 2022, January 29, 2022 and May 1, 2021, respectively. 

Note 3 – Income Taxes

For the 13-week periods ended April 30, 2022 and May 1, 2021, the Company recorded an income tax benefit of approximately $3.3 million, or 29.7% of the loss before income taxes and expense of approximately $330,000, or 16.1% of income before income taxes, respectively. The change in income taxes for the 13-week period ended April 30, 2022, compared to the prior year period, was primarily due to the loss before income taxes and the tax benefit related to stock compensation in the current year period.

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. As of April 30, 2022 and May 1, 2021, the Company recorded a full valuation allowance against deferred tax assets.

Note 4 – (Loss) Earnings Per Share

Basic (loss) earnings per share is computed by dividing net (loss) income by the weighted average number of shares outstanding during each period presented. Diluted (loss) earnings per share is computed by dividing net (loss) income 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 (loss) earnings 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 (loss) earnings per share, because to do so would have been antidilutive, were approximately 789,000 shares and 50,000 shares for the 13-week periods ended April 30, 2022 and May 1, 2021, respectively.  

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Note 5 – 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 measures certain assets at fair value on a non-recurring basis, including the evaluation of long-lived assets for impairment using Company-specific assumptions, including forecasts of projected financial information that would fall within Level 3 of the fair value hierarchy. The Company uses market participant rents (Level 2 input) 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 (Level 2 input) to quantify fair value for other long-lived assets. During the 13-week period ended May 1, 2021, the Company recorded an impairment charge of approximately $310,000 for fixtures and equipment at two stores which is included within other operating expenses on the condensed consolidated statement of operations. No impairment charge was recorded for the 13-week period ended April 30, 2022.

Note 6 – 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 and sought statutory and punitive damages and attorneys’ fees and costs. 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. The Company appealed that ruling, and on April 27, 2022, the Superior Court of Pennsylvania granted the Company’s petition for permission to appeal. 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.

The Company was 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 United States District Court for the Central District of California. The complaint alleges, on behalf of Miles and all other hourly Kirkland’s employees in California, various wage and hour violations and seeks unpaid wages, statutory and civil penalties, monetary damages and injunctive relief. Kirkland’s denies the material allegations in the complaint and believes that its employment policies are generally compliant with California law. On March 22, 2022, the District Court denied the plaintiff’s motion to certify in its entirety, and on May 26, 2022, the Ninth Circuit granted the plaintiff’s petition for permission to appeal. The Company continues to believe 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 7 – 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

 

 

 

April 30, 2022

 

 

May 1, 2021

 

Stock-based compensation expense (included in compensation and benefits on the condensed consolidated statements of operations)

 

$

548

 

 

$

232

 

Restricted stock units granted

 

 

240,400

 

 

 

119,663

 

 

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During the 13-week periods ended April 30, 2022 and May 1, 2021, the Company also granted performance-based restricted stock units (“PSUs”) that are subject to the achievement of specified performance goals over a specified performance period. The performance metrics for the PSUs are earnings before interest, taxes, depreciation and amortization (“EBITDA”) compared to target EBITDA and also include a relative shareholder return modifier. The Company currently estimates that no shares will be issued with respect to the PSUs granted in fiscal 2021 or 2022.

Note 8 – Share Repurchase Plan

 On December 3, 2020, September 2, 2021, and January 6, 2022, the Company announced that its Board of Directors authorized a share repurchase plan providing for the purchase in the aggregate of up to $20 million, $20 million and $30 million, respectively, of the Company’s outstanding common stock. Repurchases of shares are 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 are 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 April 30, 2022, the Company had approximately $26.3 million 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

 

 

 

April 30, 2022

 

 

May 1, 2021

 

Shares repurchased and retired

 

 

479,966

 

 

 

47,350

 

Share repurchase cost

 

$

6,253

 

 

$

1,356

 

 

Note 9 – Senior Credit Facility

On December 6, 2019, the Company entered into a Second Amended and Restated Credit Agreement (the “Credit Agreement”) with Bank of America, N.A. as administrative agent, collateral agent and lender. The Credit Agreement contains a $75 million senior secured revolving credit facility, a swingline availability of $10 million, a $25 million incremental accordion feature and a maturity date of December 2024. Advances under the Credit Agreement bear interest at an annual rate equal to the London Interbank Offered Rate (“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 Agreement are subject to certain conditions, and the Credit Agreement contains 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 certain events under the Employee Retirement Income Security Act of 1974 (“ERISA”). Upon any such event of default, the principal amount of any unpaid loans and all other obligations under the Credit Agreement may be declared immediately due and payable. The maximum availability under the Credit Agreement 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 Agreement.

As of April 30, 2022, the Company was in compliance with the covenants in the Credit Agreement. Under the Credit Agreement, there were $35.0 million in outstanding borrowings and no letters of credit outstanding with approximately $40.0 million available for borrowing as of April 30, 2022.

 

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Note 10 – New Accounting Pronouncements

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 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 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 11 — Subsequent Event

 

Subsequent to April 30, 2022, the Company borrowed an additional $5.0 million under the Credit Agreement.

 

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

The following discussion and analysis is intended to provide the reader with information that will assist in understanding the significant factors affecting our consolidated operating results, financial condition, liquidity, and capital resources during the 13-week periods ended April 30, 2022 and May 1, 2021. For a comparison of our results of operations for the 52-week periods ended January 29, 2022 and January 30, 2021, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the fiscal year ended January 29, 2022, filed with the SEC on March 25, 2022. This discussion should be read with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

Except for historical information contained herein, certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements deal with potential future circumstances and developments and are, accordingly, forward-looking in nature. You are cautioned that such forward-looking statements, which may be identified by words such as “anticipate,” “believe,” “expect,” “estimate,” “intend,” “plan,” “seek,” “may,” “could,” “strategy,” and similar expressions, involve known and unknown risks and uncertainties, which may cause our actual results to differ materially from forecasted results. Those risks and uncertainties include, among other things, risks associated with the Company’s progress and anticipated progress towards its short-term and long-term objectives including its brand transformation strategy, the timing of normalized macroeconomic conditions from the impacts of global geopolitical unrest and the COVID-19 pandemic on the Company’s revenues, inventory and supply chain, the effectiveness of the Company’s marketing campaigns, risks related to changes in U.S. policy related to imported merchandise, particularly with regard to the impact of tariffs on goods imported from China and strategies undertaken to mitigate such impact, the Company’s ability to retain its senior management team, continued volatility in the price of the Company’s common stock, the competitive environment in the home décor industry in general and in our specific market areas, inflation, fluctuations in cost and availability of inventory, interruptions in supply chain and distribution systems, including our e-commerce systems and channels, the ability to control employment and other operating costs, availability of suitable retail locations and other growth opportunities, disruptions in information technology systems including the potential for security breaches of our information or our customers’ information, seasonal fluctuations in consumer spending, and economic conditions in general. Those and other risks are more fully described in our filings with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K filed on March 25, 2022 and subsequent reports. Forward-looking statements included in this Quarterly Report on Form 10-Q are made as of the date hereof. Any changes in assumptions or factors on which such statements are based could produce materially different results. Except as required by law, we disclaim any obligation to update any such factors or to publicly announce results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

Overview

We are a specialty retailer of home furnishings in the United States. As of April 30, 2022, we operated a total of 360 stores in 35 states, as well as an e-commerce website, www.kirklands.com, under the Kirkland’s Home brand. We provide our customers with an engaging shopping experience characterized by a curated, affordable selection of home furnishings along with inspirational design ideas. This combination of quality and stylish merchandise, value pricing and a stimulating online and store experience allows our customers to furnish their home at a great value.

 Macroeconomic Conditions

Economic disruption, inflation, uncertainty, volatility and the COVID-19 pandemic have affected the Company’s business operations. We continue to closely monitor the impact of these macroeconomic conditions on all facets of our business, which includes the impact on our employees, customers, suppliers, vendors, business partners and supply chain networks. While the duration and extent of these conditions and their impact on the global economy remains 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.

There are numerous uncertainties surrounding macroeconomic conditions and their impact on the economy and our business, as further described in “Item 1A. Risk Factors” of our 2021 Annual Report on Form 10-K for the fiscal year ended January 29, 2022, which makes it difficult to predict the impact on our business, financial position, or results of operations in fiscal 2022 and beyond. We cannot predict these uncertainties, or the corresponding impacts on our business, at this time.

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, gift card breakage revenue and excludes sales taxes. Gross profit is the difference between net sales and cost of sales. Cost of sales has various distinct components, including: landed product cost (including inbound freight), damages, inventory shrinkage, store occupancy costs (including rent and depreciation

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of leasehold improvements and other property and equipment), outbound freight costs to stores, e-commerce shipping expenses 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.

We use comparable sales to measure sales increases and decreases from stores that have been open for at least 13 full fiscal months, including our online sales. We remove closed stores from our comparable sales calculation the day after the stores close. Relocated stores remain in our comparable sales calculation. E-commerce sales, including shipping revenue, are included in comparable sales. Increases in comparable sales are an important factor in maintaining or increasing our profitability.

Operating expenses, including the costs of operating our stores and corporate headquarters, are also an important component of our operating performance. Compensation and benefits comprise the majority of our operating expenses. Operating expenses contain fixed and variable costs, and managing the operating expense ratio (operating expenses expressed as a percentage of net sales) is an important focus of management as we seek to increase our overall profitability. Operating expenses include cash costs as well as non-cash costs, such as depreciation and amortization associated with omni-channel technology, corporate property and equipment, and impairment of long-lived assets. Because many operating expenses are fixed costs, and because operating costs tend to rise over time, increases in comparable sales typically are necessary to prevent meaningful increases in the operating expense ratio. Operating expenses can also include certain costs that are of a one-time or non-recurring nature. While these costs must be considered to fully understand our operating performance, we typically identify such costs separately where significant in the consolidated statements of operations so that we can evaluate comparable expense data across different periods.

Store Rationalization

Our store rationalization strategy includes refreshing mid and high-performing stores and exiting or relocating low-performing stores to better locations. 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 and limited store openings as we execute our store rationalization strategy over the next several years. We believe our ideal store count should be approximately 350 stores.

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

 

 

 

13-Week Period Ended

 

 

 

April 30, 2022

 

 

May 1, 2021

 

New store openings

 

 

 

 

 

2

 

Permanent store closures

 

 

1

 

 

 

5

 

Store relocations

 

 

 

 

 

1

 

Decrease in store units

 

 

(0.3

)%

 

 

(0.8

)%

 

The following table summarizes our open stores and square footage under lease as of the dates indicated:

 

 

 

April 30, 2022

 

 

May 1, 2021

 

Number of stores

 

 

360

 

 

 

370

 

Square footage

 

 

2,882,134

 

 

 

2,961,518

 

Average square footage per store

 

 

8,006

 

 

 

8,004

 

 

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13-Week Period Ended April 30, 2022 Compared to the 13-Week Period Ended May 1, 2021

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

 

 

 

 

 

 

 

 

 

 

 

April 30, 2022

 

 

May 1, 2021

 

 

Change

 

 

 

$

 

 

%

 

 

$

 

 

%

 

 

$

 

 

%

 

Net sales

 

$

103,285

 

 

 

100.0

%

 

$

123,569

 

 

 

100.0

%

 

$

(20,284

)

 

 

(16.4

)%

Cost of sales

 

 

74,993

 

 

 

72.6

 

 

 

83,314

 

 

 

67.4

 

 

 

(8,321

)

 

 

(10.0

)

Gross profit

 

 

28,292

 

 

 

27.4

 

 

 

40,255

 

 

 

32.6

 

 

 

(11,963

)

 

 

(29.7

)

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

20,892

 

 

 

20.2

 

 

 

19,113

 

 

 

15.5

 

 

 

1,779

 

 

 

9.3

 

Other operating expenses

 

 

16,798

 

 

 

16.3

 

 

 

17,475

 

 

 

14.1

 

 

 

(677

)

 

 

(3.9

)

Depreciation (exclusive of depreciation

included in cost of sales)

 

 

1,697

 

 

 

1.6

 

 

 

1,613

 

 

 

1.2

 

 

 

84

 

 

 

5.2

 

Total operating expenses

 

 

39,387

 

 

 

38.1

 

 

 

38,201

 

 

 

30.9

 

 

 

1,186

 

 

 

3.1

 

Operating (loss) income

 

 

(11,095

)

 

 

(10.7

)

 

 

2,054

 

 

 

1.7

 

 

 

(13,149

)

 

 

(640.2

)

Interest expense

 

 

156

 

 

 

0.2

 

 

 

85

 

 

 

0.1

 

 

 

71

 

 

 

83.5

 

Other income

 

 

(72

)

 

 

(0.1

)

 

 

(80

)

 

 

(0.1

)

 

 

8

 

 

 

(10.0

)

(Loss) income before income taxes

 

 

(11,179

)

 

 

(10.8

)

 

 

2,049

 

 

 

1.7

 

 

 

(13,228

)

 

 

(645.6

)

Income tax (benefit) expense

 

 

(3,324

)

 

 

(3.2

)

 

 

330

 

 

 

0.3

 

 

 

(3,654

)

 

 

(1,107.3

)

Net (loss) income

 

$

(7,855

)

 

 

(7.6

)%

 

$

1,719

 

 

 

1.4

%

 

$

(9,574

)

 

 

(557.0

)%

 

Net sales. Net sales decreased 16.4% to $103.3 million for the first 13 weeks of fiscal 2022 compared to $123.6 million for the prior year period driven by an overall decrease in consumer discretionary spending and lower traffic and conversion in stores and online. Comparable sales, including e-commerce sales, decreased 15.8%, or $19.1 million, for the first 13 weeks of fiscal 2022 compared to the prior year period. Comparable sales, including e-commerce sales, increased 75.3% in the prior year period mainly due to COVID-19 store closures in the first 13 weeks of fiscal 2020. For the first 13 weeks of fiscal 2022, e-commerce comparable sales decreased 23.6% compared to the prior year period due to macroeconomic conditions impacting the home furnishing industry leading to lower online traffic and conversion.

Gross profit. Gross profit as a percentage of net sales decreased 520 basis points from 32.6% in the first 13 weeks of fiscal 2021 to 27.4% in the first 13 weeks of fiscal 2022. The overall decrease in gross profit margin was due to unfavorable store occupancy costs, landed product margin, other cost of sales including inventory damages and shrink, distribution center costs and outbound freight costs, partially offset by favorable ecommerce shipping expenses. Store occupancy and depreciation costs increased approximately 240 basis points as a percentage of net sales due to the sales deleverage on these fixed costs. Landed product margin decreased approximately 80 basis points from 57.4% in the first 13 weeks of fiscal 2021 to 56.6% in the first 13 weeks of fiscal 2022, mainly due to lower discounting offsetting some of the expected incremental freight costs. Other cost of sales increased approximately 130 basis points as a percentage of net sales mainly due to increased damages with the increased inventory levels. Distribution center costs increased approximately 50 basis points as a percentage of net sales due to wage inflation and reduced productivity from higher inventory levels and implementation of a new warehouse management system. Outbound freight costs increased approximately 30 basis points as a percentage of net sales due primarily to rate and fuel inflation. Ecommerce shipping costs remained relatively flat at a 10 basis points decrease as a percentage of net sales.

Compensation and benefits. Compensation and benefits as a percentage of net sales increased approximately 470 basis points from 15.5% in the first 13 weeks of fiscal 2021 to 20.2% in the first 13 weeks of fiscal 2022 primarily due to the deleverage of store and corporate payroll expenses along with higher employee benefits expenses.

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Other operating expenses. Other operating expenses as a percentage of net sales increased approximately 220 basis points from 14.1% in the first 13 weeks of fiscal 2021 to 16.3% in the first 13 weeks of fiscal 2022. The increase as a percentage of net sales was primarily related to the decline in net sales, which deleveraged advertising expenses and other fixed costs.

Income tax (benefit) expense. We recorded an income tax benefit of approximately $3.3 million, or 29.7% of the loss before income taxes, during the first 13 weeks of fiscal 2022, compared to an income tax expense of approximately $330,000 or 16.1% of income before income taxes, during the prior year period. The change in income taxes for the 13-week period ended April 30, 2022, compared to the prior year period, was primarily due the loss before income taxes and the tax benefit related to stock compensation in the current year period.

Net (loss) income and (loss) earnings per share. We reported net loss of $7.9 million, or $0.63 per diluted share, for the first 13 weeks of fiscal 2022 as compared to net income of $1.7 million, or $0.11 per diluted share, for the first 13 weeks of fiscal 2021.

Non-GAAP Financial Measures

To supplement our unaudited consolidated condensed financial statements presented in accordance with GAAP, we provide certain non-GAAP financial measures, including EBITDA, adjusted EBITDA, adjusted operating (loss) income, adjusted net (loss) income and adjusted diluted (loss) earnings per share. These measures are not in accordance with, and are not intended as alternatives to, GAAP financial measures. 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 financial measures, in evaluating our operational performance.

We define EBITDA as net income or loss before interest, provision for income tax, and depreciation and amortization, adjusted EBITDA as EBITDA with non-GAAP adjustments and adjusted operating (loss) income as operating (loss) income with non-GAAP adjustments. We define adjusted net (loss) income and adjusted diluted (loss) earnings per share by adjusting the applicable GAAP financial measures for non-GAAP adjustments.

Non-GAAP financial 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 financial measure has its limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.

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The following table shows a reconciliation of operating (loss) income to EBITDA, adjusted EBITDA and adjusted operating (loss) income for the 13-week periods ended April 30, 2022 and May 1, 2021 and a reconciliation of net (loss) income and diluted (loss) earnings per share to adjusted net (loss) income and adjusted diluted (loss) earnings per share for the 13-week periods ended April 30, 2022 and May 1, 2021:

 

 

 

13-Week Period Ended

 

 

 

April 30, 2022

 

 

May 1, 2021

 

Operating (loss) income

 

$

(11,095

)

 

$

2,054

 

Depreciation and amortization

 

 

4,499

 

 

 

5,272

 

EBITDA

 

 

(6,596

)

 

 

7,326

 

Non-GAAP adjustments:

 

 

 

 

 

 

 

 

Total adjustments in cost of sales(1)

 

 

208

 

 

 

(489

)

Asset impairment(2)

 

 

 

 

 

310

 

Stock-based compensation expense(3)

 

 

548

 

 

 

232

 

Severance charges(4)

 

 

13

 

 

 

280

 

Total adjustments in operating expenses

 

 

561

 

 

 

822

 

Total non-GAAP adjustments

 

 

769

 

 

 

333

 

Adjusted EBITDA

 

 

(5,827

)

 

 

7,659

 

Depreciation and amortization

 

 

4,499

 

 

 

5,272

 

Adjusted operating (loss) income

 

$

(10,326

)

 

$

2,387

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(7,855

)

 

$

1,719

 

Non-GAAP adjustments, net of tax:

 

 

 

 

 

 

 

 

Total adjustments in cost of sales(1)

 

 

155

 

 

 

(368

)

Asset impairment(2)

 

 

 

 

 

234

 

Stock-based compensation expense, including tax impact(3)

 

 

(261

)

 

 

72

 

Severance charges(4)

 

 

9

 

 

 

211

 

Total adjustments in operating expenses

 

 

(252

)

 

 

517

 

Tax valuation allowance(5)

 

 

215

 

 

 

(74

)

Total non-GAAP adjustments, net of tax

 

 

118

 

 

 

75

 

Adjusted net (loss) income

 

$

(7,737

)

 

$

1,794

 

 

 

 

 

 

 

 

 

 

Diluted (loss) earnings per share

 

$

(0.63

)

 

$

0.11

 

Adjusted diluted (loss) earnings per share

 

$

(0.62

)

 

$

0.12

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

 

12,565

 

 

 

15,445

 

Adjusted diluted weighted average shares outstanding

 

 

12,565

 

 

 

15,445

 

 

(1)

Costs associated with asset disposals, closed stores and lease termination costs and any gains on lease terminations.

(2)

Asset impairment charges are related to property and equipment.

(3)

Stock-based compensation expense includes amounts expensed related to equity incentive plans.

(4)

Severance charges include expenses related to severance agreements and permanent store closure compensation costs.

(5)

To remove the impact of the change in our valuation allowance against deferred tax assets.

 

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 or relocated stores and existing store refreshes, remodels and maintenance. Historically, we have funded our working capital and capital expenditure requirements with internally generated cash and borrowings under our revolving credit facility.

Cash flows from operating activities. Net cash used in operating activities was approximately $43.6 million and $25.0 million during the first 13 weeks of fiscal 2022 and the first 13 weeks of fiscal 2021, respectively. Cash flows from operating activities depend heavily on operating performance, changes in working capital and the timing and amount of payments for income taxes. The increase in the amount of cash used in operations as compared to the prior year period was mainly due to a decline in operating performance and working capital changes including a decline in accounts payable and increased inventory levels.

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Cash flows from investing activities. Net cash used in investing activities for the first 13 weeks of fiscal 2022 consisted mainly of $2.4 million in capital expenditures as compared to $1.6 million in capital expenditures for the prior year period. The table below sets forth capital expenditures by category (in thousands) for the periods indicated:

 

 

 

13-Week Period Ended

 

 

 

April 30, 2022

 

 

May 1, 2021

 

Technology and omni-channel projects

 

$

1,301

 

 

$

569

 

Distribution center and supply chain enhancements

 

 

585

 

 

 

262

 

Existing stores

 

 

472

 

 

 

176

 

Corporate

 

 

58

 

 

 

33

 

New and relocated stores

 

 

(21

)

 

 

519

 

Total capital expenditures

 

$

2,395

 

 

$

1,559

 

 

The capital expenditures in the current year period related primarily to technology and omni-channel projects, distribution center and supply chain enhancements and the remodel and maintenance of existing stores. Capital expenditures in the prior year period related primarily to technology and omni-channel projects, as well as the opening of two new stores and one relocated store during the period.

Cash flows from financing activities. During the first 13 weeks of fiscal 2022, net cash provided by financing activities was $26.4 million, as we borrowed $35.0 million under our revolving credit facility, which was partially offset by the repurchase and retirement of our common stock pursuant to our share repurchase plan of $6.3 million. During the first 13 weeks of fiscal 2021, net cash used in financing activities was approximately $1.6 million primarily related to the repurchase and retirement of our common stock pursuant to our share repurchase plan of $1.4 million.

Senior credit facility. On December 6, 2019, we entered into the Credit Agreement with Bank of America, N.A. as administrative agent, collateral agent and lender. The Credit Agreement contains a $75 million senior secured revolving credit facility, a swingline availability of $10 million, a $25 million incremental accordion feature and a maturity date of December 2024. Advances under the Credit Agreement 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 Agreement are subject to certain conditions, contains 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 Agreement may be declared immediately due and payable. The maximum availability under the Credit Agreement is limited by a borrowing base formula, which consists of a percentage of eligible inventory and eligible credit card receivables, less reserves.

We are subject to a Second Amended and Restated Security Agreement (“Security Agreement”) with our lender. Pursuant to the Security Agreement, we 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 our assets to secure the payment and performance of the obligations under the Credit Agreement.

As of April 30, 2022, we were in compliance with the covenants in the Credit Agreement. Under the Credit Agreement, there were approximately $35.0 million of outstanding borrowings and no letters of credit outstanding with approximately $40.0 million available for borrowing as of April 30, 2022. Subsequent to April 30, 2022, we borrowed an additional $5.0 million under the Credit Agreement.

As of April 30, 2022, our balance of cash and cash equivalents was approximately $5.4 million. We believe that the combination of our cash balances, cash flow from operations and availability under our Credit Agreement will be sufficient to fund our planned capital expenditures and working capital requirements through the end of fiscal 2022 and over the next several fiscal years.

Share repurchase plan. On December 3, 2020, September 2, 2021 and January 6, 2022, we announced that our Board of Directors authorized a share repurchase plan providing for the purchase in the aggregate of up to $20 million, $20 million and $30 million, respectively, of our outstanding common stock. Repurchases of shares are 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 are based on a variety of factors, including stock price, regulatory limitations and other market and economic factors. The share repurchase plans do not require us to repurchase any specific number of shares, and we may terminate the repurchase plans at any time. As of April 30, 2022, we had approximately $26.3 million remaining under the current share repurchase plan.

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The table below sets forth selected share repurchase plan information (in thousands, except share amounts) for the periods indicated:

 

 

 

13-Week Period Ended

 

 

 

April 30, 2022

 

 

May 1, 2021

 

Shares repurchased and retired

 

 

479,966

 

 

 

47,350

 

Share repurchase cost

 

$

6,253

 

 

$

1,356

 

 

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies during the first 13 weeks of fiscal 2022. Refer to our Annual Report for a summary of our critical accounting policies.

New Accounting Pronouncements

See Note 10 – New Accounting Pronouncements in the condensed consolidated financial statements for accounting pronouncements not yet adopted.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of April 30, 2022, we had $35.0 million in outstanding borrowings under our Credit Agreement. As of May 1, 2021, we had no outstanding borrowings under our Credit Agreement. We borrowed $35.0 million under our Credit Agreement during the first 13 weeks of fiscal 2022, and we had no borrowings or repayments under our Credit Agreement during the first 13 weeks of fiscal 2021. Subsequent to April 30, 2022, we borrowed an additional $5 million under our Credit Agreement. We are exposed to interest rate changes, primarily as a result of borrowings under our Credit Agreement, as discussed in Note 9 — Senior Credit Facility in the notes to the condensed consolidated financial statements, which bear interest based on variable rates. A 1% increase or decrease in the interest rate on borrowings under our revolving credit facility at our recent borrowing levels would not have a material impact to our results of operations.

We manage cash and cash equivalents in various institutions at levels beyond federally insured limits per institution, and we may purchase investments not guaranteed by the Federal Deposit Insurance Company. Accordingly, there is a risk that we will not recover the full principal of our investments or that their liquidity may be diminished.

We were not engaged in any foreign exchange contracts, hedges, interest rate swaps, derivatives or other financial instruments with significant market risk as of April 30, 2022.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. Both our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), after the evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) was performed by management with the participation of our Chief Executive Officer and Chief Financial Officer, have concluded that, as of April 30, 2022, our disclosure controls and procedures were effective as of the end of the period covered by this report.

Change in internal controls over financial reporting. There have been no changes in internal control over financial reporting that have occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II OTHER INFORMATION

For a description of the Company’s legal proceedings, refer to Note 6 Commitments and Contingencies in the notes to the condensed consolidated financial statements.

ITEM 1A. RISK FACTORS

The risk factors described in Part I, “Item 1A. Risk Factors” in the Annual Report on Form 10-K for the fiscal year ended January 29, 2022, should be carefully considered together with the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q and in our other filings with the SEC, in connection with evaluating the Company, our business, and the forward-looking statements contained in this Quarterly Report on Form 10-Q. There have been no material changes to our risk factors as previously disclosed in the Annual Report. 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.

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

Issuer Repurchases of Equity Securities

Shares of common stock repurchased by the Company during the 13-week period ended April 30, 2022 were as follows:

 

Period

Total Number of Shares Purchased

 

Average Price Paid per Share

 

Total Number of Shares Purchased as Part of Publicly Announced Plan

 

Maximum Approximate Dollar Value of Shares that May Yet be Purchased Under the Plan (in 000s)

 

January 30, 2022 to February 26, 2022

 

190,000

 

$

15.54

 

 

190,000

 

$

29,604

 

February 27, 2022 to April 2, 2022

 

249,966

 

 

11.77

 

 

249,966

 

 

26,663

 

April 3, 2022 to April 30, 2022

 

40,000

 

 

8.97

 

 

40,000

 

 

26,304

 

 

 

479,966

 

$

13.03

 

 

479,966

 

$

26,304

 

On December 3, 2020, September 2, 2021 and January 6, 2022, we announced that our Board of Directors authorized share repurchase plans providing for the purchase in the aggregate of up to $20 million, $20 million and $30 million, respectively, of our outstanding common stock. Repurchases of shares are made in accordance with applicable securities laws and may be made from time to time in the open market or negotiated transactions. The amount and timing of repurchases are based on a variety of factors, including stock price, regulator limitations and other market and economic factors. The share repurchase plans do not require us to repurchase any specific number of shares, and we may terminate the repurchase plans at any time.

ITEM 6. EXHIBITS

(a)

Exhibits.

 

Exhibit

No.

 

Description of Document

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.INS

 

Inline XBRL Instance Document

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

 

Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

 

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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: May 31, 2022

 

/s/ Steve C. Woodward

 

 

Steve C. Woodward

President and Chief Executive Officer, and Director

 

Date: May 31, 2022

 

/s/ Nicole A. Strain

 

 

Nicole A. Strain

Executive Vice President, Chief Operating Officer and Chief Financial Officer

 

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