UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended
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:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of |
(IRS Employer Identification No.) |
incorporation or organization) |
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(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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.
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).
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 |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
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 –
KIRKLAND’S, INC.
TABLE OF CONTENTS
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KIRKLAND’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
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October 29, |
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January 29, |
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October 30, |
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2022 |
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2022 |
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2021 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Inventories, net |
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Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment: |
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Equipment |
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Furniture and fixtures |
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Leasehold improvements |
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Computer software and hardware |
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Projects in progress |
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Property and equipment, gross |
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Accumulated depreciation |
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Property and equipment, net |
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Operating lease right-of-use assets |
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Other assets |
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Total assets |
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$ |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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$ |
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Accrued expenses |
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Operating lease liabilities |
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Total current liabilities |
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Operating lease liabilities |
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Revolving line of credit |
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Other liabilities |
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Total liabilities |
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Shareholders’ equity: |
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Preferred stock, |
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Common stock, |
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Accumulated deficit |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these financial statements.
3
KIRKLAND’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
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13-Week Period Ended |
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39-Week Period Ended |
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October 29, |
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October 30, |
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October 29, |
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October 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Net sales |
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$ |
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$ |
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$ |
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$ |
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Cost of sales |
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Gross profit |
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Operating expenses: |
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Compensation and benefits |
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Other operating expenses |
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Depreciation (exclusive of depreciation included in cost of sales) |
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Total operating expenses |
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Operating (loss) income |
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Interest expense |
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Other income |
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(Loss) income before income taxes |
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Income tax expense |
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Net (loss) income |
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(Loss) earnings per share: |
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Basic |
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$ |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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$ |
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Weighted average shares outstanding: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these financial statements.
4
KIRKLAND’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except share data)
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Common Stock |
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Accumulated |
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Total |
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Shares |
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Amount |
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Deficit |
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Equity |
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Balance at January 29, 2022 |
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$ |
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$ |
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Exercise of stock options |
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— |
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Restricted stock issued |
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— |
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— |
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— |
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Net share settlement of stock options and restricted stock units |
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( |
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— |
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Stock-based compensation expense |
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— |
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— |
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Repurchase and retirement of common stock |
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( |
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— |
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Net loss |
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— |
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— |
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( |
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Balance at April 30, 2022 |
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Restricted stock issued |
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— |
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— |
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— |
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Net share settlement of restricted stock units |
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( |
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( |
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— |
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Stock-based compensation expense |
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— |
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— |
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Net loss |
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— |
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— |
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( |
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Balance at July 30, 2022 |
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Stock-based compensation expense |
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— |
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— |
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Net loss |
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— |
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— |
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( |
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Balance at October 29, 2022 |
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$ |
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$ |
( |
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$ |
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Common Stock |
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Accumulated |
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Total |
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Shares |
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Amount |
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Deficit |
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Equity |
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Balance at January 30, 2021 |
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$ |
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$ |
( |
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$ |
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Exercise of stock options |
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— |
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Restricted stock issued |
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— |
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— |
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— |
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Net share settlement of stock options and restricted stock units |
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( |
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( |
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— |
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Stock-based compensation expense |
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— |
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— |
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Repurchase and retirement of common stock |
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— |
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( |
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Net income |
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— |
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— |
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Balance at May 1, 2021 |
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Exercise of stock options |
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— |
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Restricted stock issued |
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— |
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— |
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— |
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Net share settlement of stock options and restricted stock units |
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( |
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( |
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— |
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( |
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Stock-based compensation expense |
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— |
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— |
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Repurchase and retirement of common stock |
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( |
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— |
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( |
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Net income |
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— |
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— |
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Balance at July 31, 2021 |
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( |
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Restricted stock issued |
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— |
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— |
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— |
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Net share settlement of restricted stock units |
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( |
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( |
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— |
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Stock-based compensation expense |
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— |
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— |
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Repurchase and retirement of common stock |
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( |
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— |
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( |
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Net income |
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— |
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— |
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Balance at October 30, 2021 |
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$ |
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$ |
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$ |
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The accompanying notes are an integral part of these financial statements.
5
KIRKLAND’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
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39-Week Period Ended |
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October 29, |
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October 30, |
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2022 |
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2021 |
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Cash flows from operating activities: |
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Net (loss) income |
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$ |
( |
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$ |
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Adjustments to reconcile net (loss) income to net cash used in operating activities: |
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Depreciation and amortization of property and equipment |
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Amortization of debt issue costs |
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Asset impairment |
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Loss (gain) on disposal of property and equipment |
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Stock-based compensation expense |
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Changes in assets and liabilities: |
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Inventories, net |
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Prepaid expenses and other current assets |
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Accounts payable |
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( |
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Accrued expenses |
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( |
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( |
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Income taxes receivable |
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( |
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( |
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Operating lease assets and liabilities |
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( |
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( |
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Other assets and liabilities |
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( |
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( |
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Net cash used in operating activities |
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( |
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( |
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Cash flows from investing activities: |
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Proceeds from sale of property and equipment |
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Capital expenditures |
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( |
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( |
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Net cash used in investing activities |
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( |
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( |
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Cash flows from financing activities: |
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Borrowings on revolving line of credit |
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Cash used in net share settlement of stock options and restricted stock units |
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( |
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Proceeds received from employee stock option exercises |
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Repurchase and retirement of common stock |
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( |
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( |
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Net cash provided by (used in) financing activities |
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( |
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Cash and cash equivalents: |
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Net decrease |
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( |
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( |
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Beginning of the period |
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End of the period |
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$ |
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$ |
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Supplemental schedule of non-cash activities: |
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Non-cash accruals for purchases of property and equipment |
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$ |
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$ |
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The accompanying notes are an integral part of these financial statements.
6
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”, “we”, “our”, or “us”) is a specialty retailer of home décor in the United States operating
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 and 39-week periods ended October 29, 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 $
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
7
expenses on the condensed consolidated balance sheets was approximately $
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:
|
|
October 29, 2022 |
|
|
January 29, 2022 |
|
|
October 30, 2021 |
|
|||
Gift card liability, net of estimated breakage (included in accrued expenses) |
|
$ |
|
|
$ |
|
|
$ |
|
|||
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 29, 2022 |
|
|
October 30, 2021 |
|
|
October 29, 2022 |
|
|
October 30, 2021 |
|
||||
Gift card breakage revenue (included in net sales) |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Gift card redemptions recognized in the current period related to amounts included in the gift card contract liability balance as of the prior period |
|
|
|
|
|
|
|
|
|
|
|
||||
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 $
Note 3 – Income Taxes
For the 13-week periods ended October 29, 2022 and October 30, 2021, the Company recorded income tax expense of approximately $
8
Income tax expense differs from the amount computed by applying the statutory federal income tax rate to (loss) income before income taxes.
|
|
13-Week Period Ended |
|
|
39-Week Period Ended |
|
||||||||||
|
|
October 29, |
|
|
October 30, |
|
|
October 29, |
|
|
October 30, |
|
||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Tax at federal statutory rate |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||
State income taxes, net of federal benefit |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
||
Tax credits |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
Executive compensation |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||
Stock based compensation programs |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Valuation allowance |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
||
Other |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Income tax expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
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 October 29, 2022 and October 30, 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
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.
9
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. On November 10, 2022, the Company filed its Reply Brief with the Superior Court of Pennsylvania. 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 Court has stayed the entire case pending the appeal. The Company continues to believe the case is without merit and intends to vigorously defend itself against the allegations.
The Company was named as a defendant in a putative class action filed on August 23, 2022 in the United States District Court for the Southern District of New York, Sicard v. Kirkland’s Stores, Inc. The complaint alleges, on behalf of Sicard and all other hourly store employees based in New York, that Kirkland’s violated New York Labor Law Section 191 by failing to pay him and the putative class members their wages within seven calendar days after the end of the week in which those wages were earned, rather paying wages on a bi-weekly basis. The Company believes the case is without merit and plans to file a motion to dismiss.
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.
|
|
13-Week Period Ended |
|
|
39-Week Period Ended |
|
||||||||||
|
|
October 29, 2022 |
|
|
October 30, 2021 |
|
|
October 29, 2022 |
|
|
October 30, 2021 |
|
||||
Stock-based compensation expense (included in compensation and benefits on the condensed consolidated statements of operations) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Restricted stock units granted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Stock options granted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
During the 13-week and 39-week periods ended October 29, 2022 and October 30, 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
10
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 $
|
|
13-Week Period Ended |
|
|
39-Week Period Ended |
|
||||||||||
|
|
October 29, |
|
|
October 30, |
|
|
October 29, |
|
|
October 30, |
|
||||
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
||||
Shares repurchased and retired |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Share repurchase cost |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
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 $
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 October 29, 2022, the Company was in compliance with the covenants in the Credit Agreement. Under the Credit Agreement, there were $
11
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, 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 October 29, 2022, the Company repaid $
12
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 and 39-week periods ended October 29, 2022 and October 30, 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 liquidity including cash flows from operations and the amount of borrowings under the secured revolving credit facility, the Company’s actual 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 continuing consumer impact of inflation and countermeasures, including raising interest rates, 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, increased transportation costs and potential interruptions in supply chain, distribution systems and delivery network, 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 October 29, 2022, we operated a total of 356 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
13
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, revenue earned from our private label credit card program and excludes sales taxes. Gross profit is the difference between net sales and cost of sales. Cost of sales has various distinct components, including: merchandise cost (including product cost, inbound freight expense, inventory shrink and damages), store occupancy costs, outbound freight costs (including both store and e-commerce shipping expenses), central distribution costs and depreciation of store and distribution center assets. 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.
Stores
The following table summarizes our store openings and closings during the periods indicated:
|
|
13-Week Period Ended |
|
|
39-Week Period Ended |
|
||||||||||
|
|
October 29, 2022 |
|
|
October 30, 2021 |
|
|
October 29, 2022 |
|
|
October 30, 2021 |
|
||||
New store openings |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
|
2 |
|
Permanent store closures |
|
|
1 |
|
|
|
— |
|
|
|
6 |
|
|
|
6 |
|
Store relocations |
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
2 |
|
Decrease in store units |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
(1.4 |
)% |
|
|
(1.1 |
)% |
The following table summarizes our open stores and square footage under lease as of the dates indicated:
|
|
October 29, 2022 |
|
|
October 30, 2021 |
|
||
Number of stores |
|
|
356 |
|
|
|
369 |
|
Square footage |
|
|
2,855,146 |
|
|
|
2,956,731 |
|
Average square footage per store |
|
|
8,020 |
|
|
|
8,013 |
|
14
13-Week Period Ended October 29, 2022 Compared to the 13-Week Period Ended October 30, 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 |
|
|
|
|
|
|
|
|||||||||||||||
|
|
October 29, 2022 |
|
|
October 30, 2021 |
|
|
Change |
|
|||||||||||||||
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
||||||
Net sales |
|
$ |
130,962 |
|
|
|
100.0 |
% |
|
$ |
143,630 |
|
|
|
100.0 |
% |
|
$ |
(12,668 |
) |
|
|
(8.8 |
)% |
Cost of sales |
|
|
98,275 |
|
|
|
75.0 |
|
|
|
93,817 |
|
|
|
65.3 |
|
|
|
4,458 |
|
|
|
4.8 |
|
Gross profit |
|
|
32,687 |
|
|
|
25.0 |
|
|
|
49,813 |
|
|
|
34.7 |
|
|
|
(17,126 |
) |
|
|
(34.4 |
) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Compensation and benefits |
|
|
20,794 |
|
|
|
15.9 |
|
|
|
19,549 |
|
|
|
13.6 |
|
|
|
1,245 |
|
|
|
6.4 |
|
Other operating expenses |
|
|
16,976 |
|
|
|
13.0 |
|
|
|
19,589 |
|
|
|
13.6 |
|
|
|
(2,613 |
) |
|
|
(13.3 |
) |
Depreciation (exclusive of depreciation |
|
|
1,577 |
|
|
|
1.2 |
|
|
|
1,655 |
|
|
|
1.2 |
|
|
|
(78 |
) |
|
|
(4.7 |
) |
Total operating expenses |
|
|
39,347 |
|
|
|
30.1 |
|
|
|
40,793 |
|
|
|
28.4 |
|
|
|
(1,446 |
) |
|
|
(3.5 |
) |
Operating (loss) income |
|
|
(6,660 |
) |
|
|
(5.1 |
) |
|
|
9,020 |
|
|
|
6.3 |
|
|
|
(15,680 |
) |
|
|
(173.8 |
) |
Interest expense |
|
|
704 |
|
|
|
0.6 |
|
|
|
79 |
|
|
|
0.1 |
|
|
|
625 |
|
|
|
791.1 |
|
Other income |
|
|
(80 |
) |
|
|
(0.1 |
) |
|
|
(88 |
) |
|
|
(0.1 |
) |
|
|
8 |
|
|
|
(9.1 |
) |
(Loss) income before income taxes |
|
|
(7,284 |
) |
|
|
(5.6 |
) |
|
|
9,029 |
|
|
|
6.3 |
|
|
|
(16,313 |
) |
|
|
(180.7 |
) |
Income tax expense |
|
|
57 |
|
|
|
0.0 |
|
|
|
1,800 |
|
|
|
1.3 |
|
|
|
(1,743 |
) |
|
|
(96.8 |
) |
Net (loss) income |
|
$ |
(7,341 |
) |
|
|
(5.6 |
)% |
|
$ |
7,229 |
|
|
|
5.0 |
% |
|
$ |
(14,570 |
) |
|
|
(201.5 |
)% |
Net sales. Net sales decreased 8.8% to $131.0 million for the third 13 weeks of fiscal 2022 compared to $143.6 million for the prior year period. Comparable sales, including e-commerce sales, decreased 7.0%, or $9.8 million, for the third 13 weeks of fiscal 2022 compared to the prior year period. Comparable sales, including e-commerce sales, decreased 0.7% in the prior year period. For the third 13 weeks of fiscal 2022, e-commerce comparable sales decreased 8.6% compared to the prior year period. The decreases in comparable sales are driven by lower traffic and conversion, partially offset by an increase in average ticket.
Gross profit. Gross profit as a percentage of net sales decreased 970 basis points from 34.7% in the third 13 weeks of fiscal 2021 to 25.0% in the third 13 weeks of fiscal 2022. The overall decrease in gross profit margin was due to unfavorable merchandise margin, distribution center costs, store occupancy costs and outbound freight costs, partially offset by favorable depreciation expense. Merchandise margin decreased approximately 480 basis points from 57.7% in the third 13 weeks of fiscal 2021 to 52.9% in the third 13 weeks of fiscal 2022, mainly due to heavier discounting associated with our efforts to reduce inventory levels and higher inbound freight rates. Distribution center costs increased approximately 290 basis points to 7.2% of net sales due to operational inefficiencies in our distribution centers resulting from elevated inventory levels and uneven product flows. Store occupancy costs increased approximately 130 basis points to 10.8% of net sales due to the sales deleverage on these fixed costs. Outbound freight costs, including both store and e-commerce shipping expenses, increased approximately 110 basis points to 8.0% of net sales due to additional routes deployed to move more product due to elevated inventory levels and increased shipping rates and fuel costs. Depreciation of store and distribution center assets decreased approximately 40 basis points to 1.9% of net sales in the third 13 weeks of fiscal 2022.
Compensation and benefits. Compensation and benefits as a percentage of net sales increased approximately 230 basis points from 13.6% in the third 13 weeks of fiscal 2021 to 15.9% in the third 13 weeks of fiscal 2022 primarily due to sales deleverage and increased corporate and store salaries expense mainly due to favorable adjustments in the prior year period.
Other operating expenses. Other operating expenses as a percentage of net sales decreased approximately 60 basis points from 13.6% in the third 13 weeks of fiscal 2021 to 13.0% in the third 13 weeks of fiscal 2022. The decrease as a percentage of net sales was
15
primarily related to a reduction in advertising expenses, partially offset by increased insurance expenses due to favorable insurance claims adjustments in the prior year period.
Income tax expense. We recorded income tax expense of approximately $57,000, or 0.8% of the loss before income taxes, during the third 13 weeks of fiscal 2022, compared to an income tax expense of approximately $1.8 million or 19.9% of income before income taxes, during the prior year period. The change in the tax rate for the third 13 weeks of fiscal 2022 compared to the prior period was primarily due to the federal net operating loss carryforward now projected by the Company for fiscal 2022, which is fully offset by a valuation allowance.
Net (loss) income and (loss) earnings per share. We reported net loss of $7.3 million, or $0.58 per diluted share, for the third 13 weeks of fiscal 2022 as compared to net income of $7.2 million, or $0.51 per diluted share, for the third 13 weeks of fiscal 2021.
39-Week Period Ended October 29, 2022 Compared to the 39-Week Period Ended October 30, 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:
|
|
39-Week Period Ended |
|
|
|
|
|
|
|
|||||||||||||||
|
|
October 29, 2022 |
|
|
October 30, 2021 |
|
|
Change |
|
|||||||||||||||
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
||||||
Net sales |
|
$ |
336,348 |
|
|
|
100.0 |
% |
|
$ |
381,989 |
|
|
|
100.0 |
% |
|
$ |
(45,641 |
) |
|
|
(11.9 |
)% |
Cost of sales |
|
|
256,844 |
|
|
|
76.4 |
|
|
|
252,223 |
|
|
|
66.0 |
|
|
|
4,621 |
|
|
|
1.8 |
|
Gross profit |
|
|
79,504 |
|
|
|
23.6 |
|
|
|
129,766 |
|
|
|
34.0 |
|
|
|
(50,262 |
) |
|
|
(38.7 |
) |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Compensation and benefits |
|
|
63,193 |
|
|
|
18.8 |
|
|
|
60,326 |
|
|
|
15.8 |
|
|
|
2,867 |
|
|
|
4.8 |
|
Other operating expenses |
|
|
50,996 |
|
|
|
15.2 |
|
|
|
53,245 |
|
|
|
13.9 |
|
|
|
(2,249 |
) |
|
|
(4.2 |
) |
Depreciation (exclusive of depreciation |
|
|
4,870 |
|
|
|
1.4 |
|
|
|
4,898 |
|
|
|
1.3 |
|
|
|
(28 |
) |
|
|
(0.6 |
) |
Total operating expenses |
|
|
119,059 |
|
|
|
35.4 |
|
|
|
118,469 |
|
|
|
31.0 |
|
|
|
590 |
|
|
|
0.5 |
|
Operating (loss) income |
|
|
(39,555 |
) |
|
|
(11.8 |
) |
|
|
11,297 |
|
|
|
3.0 |
|
|
|
(50,852 |
) |
|
|
(450.1 |
) |
Interest expense |
|
|
1,226 |
|
|
|
0.4 |
|
|
|
240 |
|
|
|
0.1 |
|
|
|
986 |
|
|
|
410.8 |
|
Other income |
|
|
(235 |
) |
|
|
(0.1 |
) |
|
|
(243 |
) |
|
|
(0.1 |
) |
|
|
8 |
|
|
|
(3.3 |
) |
(Loss) Income before income taxes |
|
|
(40,546 |
) |
|
|
(12.1 |
) |
|
|
11,300 |
|
|
|
3.0 |
|
|
|
(51,846 |
) |
|
|
(458.8 |
) |
Income tax expense (benefit) |
|
|
355 |
|
|
|
0.1 |
|
|
|
1,726 |
|
|
|
0.5 |
|
|
|
(1,371 |
) |
|
|
(79.4 |
) |
Net income (loss) |
|
$ |
(40,901 |
) |
|
|
(12.2 |
)% |
|
$ |
9,574 |
|
|
|
2.5 |
% |
|
$ |
(50,475 |
) |
|
|
(527.2 |
)% |
Net sales. Net sales decreased 11.9% to $336.3 million for the first 39 weeks of fiscal 2022 compared to $382.0 million for the prior year period. Comparable sales, including e-commerce sales, decreased 10.4%, or $38.5 million for the first 39 weeks of fiscal 2022 compared to the prior year period. Comparable sales, including e-commerce sales, increased 13.7% in the prior year period. For the first 39 weeks of fiscal 2022, e-commerce comparable sales decreased 14.0%. The decreases in comparable sales is primarily due to a decrease in traffic and conversion in stores and online, partially offset by an increase in average ticket.
Gross profit. Gross profit as a percentage of net sales decreased 1,040 basis points from 34.0% in the first 39 weeks of fiscal 2021 to 23.6% in the first 39 weeks of fiscal 2022. The overall decrease in gross profit margin was due to unfavorable merchandise margin, store occupancy costs, distribution center costs and outbound freight costs, partially offset by favorable depreciation expense. Merchandise margin decreased approximately 600 basis points from 58.1% in the first 39 weeks of fiscal 2021 to 52.1% in the first 39 weeks of fiscal 2022 mainly due to the impact of discounting product to drive sales and move through inventory, as well as increased incremental inbound freight costs. Store occupancy costs increased approximately 190 basis points to 12.5% of net sales due to the sales deleverage on these fixed costs. Distribution center costs increased approximately 180 basis points to 5.7% of net sales due to higher temporary labor costs and operational inefficiencies from elevated inventory levels and implementation of a new warehouse management system. Outbound freight costs, including both store and e-commerce shipping expenses, increased approximately 110 basis points to 7.8% of net sales primarily due to rate and fuel inflation and additional routes deployed to move more product. Depreciation of store and distribution center assets decreased approximately 40 basis points to 2.4% of net sales in the first 39 weeks of fiscal 2022.
Compensation and benefits. Compensation and benefits as a percentage of net sales increased approximately 300 basis points from 15.8% in the first 39 weeks of fiscal 2021 to 18.8% in the first 39 weeks of fiscal 2022 primarily due to the deleverage of higher store
16
and corporate payroll expenses due to wage increases, along with higher employee benefits expenses, partially offset by lower corporate bonus expenses.
Other operating expenses. Other operating expenses as a percentage of net sales increased approximately 130 basis points from 13.9% in the first 39 weeks of fiscal 2021 to 15.2% for the first 39 weeks of fiscal 2022. The increase as a percentage of net sales was primarily related to the decline in net sales, along with increased insurance expenses due to favorable claims adjustments in the prior year period, partially offset by reduced advertising expenses.
Income tax expense (benefit). We recorded income tax expense of approximately $355,000, or 0.9% of the loss before income taxes, during the first 39 weeks of fiscal 2022 compared to income tax expense of $1.7 million, or 15.3% of income before income taxes, during the prior year period. Income taxes for the 39-week periods ended October 29, 2022 were minimal due to valuation allowances against deferred tax assets.
Net (loss) income and (loss) earnings per share. We reported net loss of $40.9 million, or a loss of $3.22 per diluted share, for the first 39 weeks of fiscal 2022 as compared to net income of $9.6 million, or earnings of $0.64 per diluted share, for the first 39 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.
17
The following table shows a reconciliation of operating (loss) income to EBITDA, adjusted EBITDA and adjusted operating (loss) income for the 13-week and 39-week periods ended October 29, 2022 and October 30, 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 and 39-week periods ended October 29, 2022 and October 30, 2021:
|
|
13-Week Period Ended |
|
|
39-Week Period Ended |
|
||||||||||
|
|
October 29, 2022 |
|
|
October 30, 2021 |
|
|
October 29, 2022 |
|
|
October 30, 2021 |
|
||||
Operating (loss) income |
|
$ |
(6,660 |
) |
|
$ |
9,020 |
|
|
$ |
(39,555 |
) |
|
$ |
11,297 |
|
Depreciation and amortization |
|
|
4,088 |
|
|
|
5,049 |
|
|
|
12,925 |
|
|
|
15,535 |
|
EBITDA |
|
|
(2,572 |
) |
|
|
14,069 |
|
|
|
(26,630 |
) |
|
|
26,832 |
|
Non-GAAP adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Closed store and lease termination costs in cost of sales(1) |
|
|
— |
|
|
|
(126 |
) |
|
|
46 |
|
|
|
(1,632 |
) |
Asset impairment(2) |
|
|
219 |
|
|
|
444 |
|
|
|
447 |
|
|
|
754 |
|
Stock-based compensation expense(3) |
|
|
295 |
|
|
|
438 |
|
|
|
1,460 |
|
|
|
1,321 |
|
Severance charges(4) |
|
|
397 |
|
|
|
2 |
|
|
|
776 |
|
|
|
293 |
|
Total adjustments in operating expenses |
|
|
911 |
|
|
|
884 |
|
|
|
2,683 |
|
|
|
2,368 |
|
Total non-GAAP adjustments |
|
|
911 |
|
|
|
758 |
|
|
|
2,729 |
|
|
|
736 |
|
Adjusted EBITDA |
|
|
(1,661 |
) |
|
|
14,827 |
|
|
|
(23,901 |
) |
|
|
27,568 |
|
Depreciation and amortization |
|
|
4,088 |
|
|
|
5,049 |
|
|
|
12,925 |
|
|
|
15,535 |
|
Adjusted operating (loss) income |
|
$ |
(5,749 |
) |
|
$ |
9,778 |
|
|
$ |
(36,826 |
) |
|
$ |
12,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net (loss) income |
|
$ |
(7,341 |
) |
|
$ |
7,229 |
|
|
$ |
(40,901 |
) |
|
$ |
9,574 |
|
Non-GAAP adjustments, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Closed store and lease termination costs in cost of sales(1) |
|
|
— |
|
|
|
(90 |
) |
|
|
35 |
|
|
|
(1,229 |
) |
Asset impairment(2) |
|
|
167 |
|
|
|
334 |
|
|
|
344 |
|
|
|
568 |
|
Stock-based compensation expense, including tax impact(3) |
|
|
183 |
|
|
|
277 |
|
|
|
531 |
|
|
|
427 |
|
Severance charges(4) |
|
|
305 |
|
|
|
— |
|
|
|
598 |
|
|
|
220 |
|
Total adjustments in operating expenses |
|
|
655 |
|
|
|
611 |
|
|
|
1,473 |
|
|
|
1,215 |
|
Tax valuation allowance(5) |
|
|
1,843 |
|
|
|
(409 |
) |
|
|
10,150 |
|
|
|
(519 |
) |
Total non-GAAP adjustments, net of tax |
|
|
2,498 |
|
|
|
112 |
|
|
|
11,658 |
|
|
|
(533 |
) |
Adjusted net (loss) income |
|
$ |
(4,843 |
) |
|
$ |
7,341 |
|
|
$ |
(29,243 |
) |
|
$ |
9,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted (loss) earnings per share |
|
$ |
(0.58 |
) |
|
$ |
0.51 |
|
|
$ |
(3.22 |
) |
|
$ |
0.64 |
|
Adjusted diluted (loss) earnings per share |
|
$ |
(0.38 |
) |
|
$ |
0.51 |
|
|
$ |
(2.31 |
) |
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted weighted average shares outstanding |
|
|
12,754 |
|
|
|
14,268 |
|
|
|
12,686 |
|
|
|
14,953 |
|
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. In fiscal 2022, we funded our increased inventory levels with borrowings on the revolving credit facility. We expect to sell through excess inventory levels in the second half of the year during our holiday and harvest seasons, which should drive cash flow and reduce borrowings.
18
Cash flows from operating activities. Net cash used in operating activities was approximately $58.2 million and $38.7 million during the first 39 weeks of fiscal 2022 and the first 39 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 changes in working capital.
Cash flows from investing activities. Net cash used in investing activities for the first 39 weeks of fiscal 2022 consisted mainly of $7.0 million in capital expenditures as compared to $5.2 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 29, 2022 |
|
|
October 30, 2021 |
|
||
Technology and omni-channel projects |
|
$ |
3,536 |
|
|
$ |
2,328 |
|
Existing stores |
|
|
1,959 |
|
|
|
635 |
|
Distribution center and supply chain enhancements |
|
|
907 |
|
|
|
1,124 |
|
New and relocated stores |
|
|
426 |
|
|
|
772 |
|
Corporate |
|
|
136 |
|
|
|
303 |
|
Total capital expenditures |
|
$ |
6,964 |
|
|
$ |
5,162 |
|
The capital expenditures in the current year period related primarily to technology and omni-channel projects, the remodel and maintenance of existing stores, distribution center and supply chain enhancements and the opening of one new store. Capital expenditures in the prior year period related primarily to technology and omni-channel projects, and distribution center and supply chain enhancements and the opening of two new stores and two store relocations during the period.
Cash flows from financing activities. During the first 39 weeks of fiscal 2022, net cash provided by financing activities was $51.4 million, as we borrowed $60.0 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 and $2.4 million of cash used in net share settlement of stock options and restricted stock units. The increased borrowings on the revolving credit facility are due to the elevated inventory levels because of the lower than anticipated sales. As the Company sells through the existing inventory and sales increase due to the seasonality of the business, the borrowings should decrease in the fourth quarter of fiscal 2022. During the first 39 weeks of fiscal 2021, net cash used in financing activities was approximately $30.1 million primarily related to the repurchase and retirement of our common stock pursuant to our share repurchase plan of $29.8 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 October 29, 2022, we were in compliance with the covenants in the Credit Agreement. Under the Credit Agreement, there were approximately $60.0 million of outstanding borrowings and no letters of credit outstanding with approximately $15.0 million available for borrowing as of October 29, 2022. Subsequent to October 29, 2022, we repaid $30.0 million of outstanding borrowings under the Credit Agreement.
19
As of October 29, 2022, our balance of cash and cash equivalents was approximately $11.2 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 October 29, 2022, we 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 |
|
|
39-Week Period Ended |
|
||||||||||
|
|
October 29, 2022 |
|
|
October 30, 2021 |
|
|
October 29, 2022 |
|
|
October 30, 2021 |
|
||||
Shares repurchased and retired |
|
|
— |
|
|
|
805,744 |
|
|
|
479,966 |
|
|
|
1,414,642 |
|
Share repurchase cost |
|
$ |
— |
|
|
$ |
16,457 |
|
|
$ |
6,253 |
|
|
$ |
29,821 |
|
Critical Accounting Policies and Estimates
During the 13-week period ended July 30, 2022, we made a change in estimate related to income taxes due to the federal net operating loss carry-forward now projected by the Company for fiscal 2022, which caused the reversal of the tax benefit recorded in the 13-week period ended April 30, 2022. There have been no other material changes to our critical accounting policies or estimates during the 39-week period ended October 29, 2022. Refer to our Annual Report for a summary of our critical accounting policies and a discussion of the critical accounting estimates and assumptions impacting our consolidated financial statements.
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 October 29, 2022, we had $60.0 million in outstanding borrowings under our Credit Agreement. As of October 30, 2021, we had no outstanding borrowings under our Credit Agreement. We borrowed $60.0 million under our Credit Agreement during the first 39 weeks of fiscal 2022, and we had no borrowings or repayments under our Credit Agreement during the first 39 weeks of fiscal 2021. 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. As our borrowings and interest rates rise under our revolving credit facility, interest expense has increased on our condensed consolidated statements 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 October 29, 2022.
20
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 October 29, 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.
21
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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
There were no shares of common stock repurchased by the Company during the 13-week period ended October 29, 2022. As of October 29, 2022, the Company had approximately $26.3 million remaining under the current share repurchase plan.
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
Exhibit No. |
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Description of Document |
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Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) |
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Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) |
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Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 |
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Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 |
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101.INS |
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Inline XBRL Instance Document |
101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
101.CAL |
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Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
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Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
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Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104 |
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Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101) |
* |
Incorporated by reference. |
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+ |
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.
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KIRKLAND’S, INC. |
Date: December 2, 2022 |
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/s/ Steve C. Woodward |
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Steve C. Woodward President and Chief Executive Officer, and Director |
Date: December 2, 2022 |
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/s/ W. Michael Madden |
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W. Michael Madden Executive Vice President, Chief Financial Officer |
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