Financial Data and Key Metrics Changes - For Q3 2023, net sales were $116.4 million, down from $131 million in the prior year quarter, reflecting a 9.2% decline in comparable sales [100][72] - Gross profit margin increased by 130 basis points to 26.3% compared to 25% in the prior year quarter, driven by a 110 basis point increase in merchandise margin to 54% [101][55] - Adjusted EBITDA was negative $3.2 million, compared to negative $1.7 million in the prior year quarter, primarily due to weaker operating performance in August and September [20][72] Business Line Data and Key Metrics Changes - The largest sales declines were in furniture, wall décor, and harvest, partially offset by gains in Decorative Accessories, which saw an 8% increase in sales [17][60] - E-commerce sales accounted for 27% of total sales, with e-commerce comparable sales down 8.5% and store comps down 9.5% [72][100] - Operating expenses decreased by $2.1 million to $37 million, or 31.7% of sales, compared to $39.1 million or 29.9% of sales in the prior year quarter [103][72] Market Data and Key Metrics Changes - Comparable sales improved sequentially from down 13% in August to down 6% in October, with a low single-digit positive sales comp recorded in November [4][105] - Traffic to stores improved from a decline of 11% in the first half of the fiscal year to down 4% in October, with positive traffic in November for the first time in 2023 [10][4] - The company experienced unprecedented early selling of holiday products during Q3, indicating a shift in consumer behavior towards seasonal items [5][60] Company Strategy and Development Direction - The company is focused on five near-term strategic initiatives aimed at returning to profitable growth, including rebalancing category mix and enhancing the omnichannel experience [9][12] - There is a renewed emphasis on seasonally relevant value home décor, with a commitment to improving operational effectiveness and cost containment [60][69] - The company plans to evaluate its entire store portfolio to enhance customer experience and localization in product and marketing strategies [68][70] Management's Comments on Operating Environment and Future Outlook - Management acknowledged ongoing macroeconomic challenges, particularly inflation affecting high-ticket categories, but expressed optimism about improvements in traffic and demand for lower-ticket items [59][3] - The company is encouraged by the sequential improvements in sales and profitability trends, with a focus on sustainable cost efficiencies [90][88] - Management remains committed to returning the company to profitability and delivering value to shareholders, with expectations for improved adjusted EBITDA in Q4 [63][107] Other Important Information - The company reduced operating expenses by approximately $10 million year-to-date compared to the same period in 2022, with expectations for further reductions in Q4 [127][72] - Inventory levels decreased by 17% year-over-year, ending the quarter with $105.2 million in inventory [76][89] - The company has reduced borrowings from $62 million at the end of Q3 to $35 million, aiming to improve liquidity and support turnaround efforts [129][72] Q&A Session Summary Question: What are the expectations for Q4 gross margin? - Management indicated that they expect gross margin to improve, entering Q4 with a stronger position due to higher initial markup and lower freight rates [133][134] Question: How is the inventory situation with larger-ticket items? - Management noted that higher-ticket items in furniture and wall décor are still present but are being managed as they transition to a more balanced assortment [116][115] Question: What changes are anticipated in the marketing budget for 2024? - The marketing budget is expected to remain flat, with a focus on reallocating funds to more successful initiatives, including the new SMS program [25][118] Question: Are there plans for additional store closures in 2024? - Management confirmed that there will be typical housekeeping closures in January, with a few planned, but no significant acceleration in closures beyond that [139][138] Question: What is the outlook for the gifting category? - The reintroduced gifting category is performing well and is expected to drive incremental sales, with plans for it to be a year-round business in 2024 [67][124]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q ☒ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended October 28, 2023 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 jurisdi ...

Kirkland's, Inc. (NASDAQ:KIRK) Q2 2023 Earnings Conference Call September 6, 2023 9:00 AM ET Company Participants Cody Cree - Director, IR Ann Joyce - Interim CEO Amy Sullivan - President and COO Mike Madden - EVP and CFO Conference Call Participants Jeremy Hamblin - Craig-Hallum Capital Group John Lawrence - Benchmark Operator Good morning everyone and thank you for participating in today's conference call to discuss Kirkland's Financial Results for the Second Quarter ended July 29th, 2023. Joining us toda ...

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 July 29, 2023 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 jurisdicti ...

Financial Data and Key Metrics Changes - For the first quarter, net sales were $96.9 million compared to $103.3 million in the prior year quarter, reflecting a 4% decline in average store count and a comparable store sales decline of 4.4% [37] - Gross profit margin declined 70 basis points to 26.7% of sales compared to 27.4% in the prior year quarter [38] - Adjusted EBITDA, excluding impairment and other minor expenses, was negative $5.8 million for the current quarter, with operating loss improving to $10.3 million versus $11.1 million in the prior year quarter [85] Business Line Data and Key Metrics Changes - E-commerce represented 27% of total sales in the quarter, down from 28% in the prior year quarter, indicating a slight channel shift with stores performing slightly better [69] - Merchandise margin increased 160 basis points to 56.8% versus 55.2% in the prior year quarter, driven by lower freight rates and product costs [70] Market Data and Key Metrics Changes - Comparable store sales were down 9% in February, followed by a decrease of 8% in March, and an increase of 6% in April, attributed to a successful promotional event [15] - Store sales results were consistent across geographic regions, with better performance in the Southeast and Florida, while the Upper Midwest and Northeast showed weaker results [15] Company Strategy and Development Direction - The company is focusing on recapturing sales and product margin by adjusting merchandise assortment to emphasize value decor under $20 and enhancing promotional strategies [6][21] - A strategic promotional calendar is being created to engage customers with seasonally relevant items at lower price points [5] - The company plans to refine its long-term vision and strategic plans to capitalize on brand potential, emphasizing value-oriented and stylish home decor [13] Management's Comments on Operating Environment and Future Outlook - Management acknowledged challenges in customer engagement and traffic trends, indicating that Q2 is viewed as a transition quarter with expectations for improvement in the back half of the year [23][45] - The company is optimistic about returning to positive adjusted EBITDA generation and creating sales momentum that can carry into 2024 [20] Other Important Information - Central distribution costs increased 100 basis points to 5.6% of sales from 4.6% in the prior year quarter due to sales deleverage [16] - The company plans to introduce more products that promote gifting and entertaining during the holiday season, addressing missed opportunities from the previous year [38] Q&A Session Summary Question: What are the traffic trends and expectations for the remainder of the year? - Management indicated that Q2 is a transition quarter with expectations for improvement in the back half of the year, driven by upcoming promotional events and changes in merchandise assortment [22][23] Question: How do you expect gross margin to play out in Q2? - Management expects gross margin to improve year-over-year, although it may be sequentially down from Q1 due to typical seasonal trends [93] Question: What changes are being made to the store portfolio? - The company is in maintenance mode regarding its store portfolio, aiming to hold store count steady while evaluating underperforming locations for potential closures [48]

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 29, 2023 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 jurisdict ...

Financial Data and Key Metrics Changes - For the fourth quarter, net sales were $162.5 million compared to $176.2 million in the prior year quarter, reflecting a 4% decline in store count and a comparable store sales decline of 6.1% [112] - Gross profit margin declined 850 basis points to 24.8% of sales, compared to 33.3% in the prior year quarter, with merchandise margin declining 420 basis points to 49.9% [113] - Adjusted loss per share was $0.09 compared to adjusted earnings per share of $0.84 in the prior year quarter [15] Business Line Data and Key Metrics Changes - Comparable store sales results were largely driven by a year-over-year traffic decline, partially offset by an increase in the average ticket [81] - E-commerce accounted for 25% of total sales in the quarter, similar to the prior year [81] - Central distribution costs increased 170 basis points to 6.3% of sales from 4.6% in the prior year quarter due to operational inefficiencies [13] Market Data and Key Metrics Changes - Sales trends in early fiscal 2023 remained challenging, with comp sales trends down in the high single-digit range [16] - The company experienced a decline in traffic trends both in-store and online [16] - The company noted that geographic areas showed no significant differences in performance during the fourth quarter [27] Company Strategy and Development Direction - The company is focusing on rebalancing its merchandise assortment with an emphasis on opening price points starting in the $20 range [108] - A strong selling culture is being promoted among store employees to drive improved conversion with the updated merchandise mix [77] - The company aims to reduce borrowings and re-establish liquidity before focusing on growth and ROI opportunities [88] Management's Comments on Operating Environment and Future Outlook - Management acknowledged the challenges faced in the macroeconomic environment but expressed confidence in the company's ability to navigate these issues and achieve long-term success [76] - The company expects to see material margin improvements starting in the first quarter of fiscal 2023 due to lower inbound freight costs [78] - Management emphasized the importance of customer data insights to drive merchandise and promotional strategies [109] Other Important Information - The company announced an extension of its existing credit agreement, increasing the line of credit to $90 million from $75 million [116] - The company generated over $40 million in operating cash flow, allowing it to repay $45 million in debt [75] - The CEO announced plans to retire at the end of May, with an interim CEO appointed to ensure a smooth transition [4] Q&A Session Summary Question: What is the expected impact of rebalancing the merchandise assortment on overall average ticket and comps? - Management indicated that they expect to see a traditional ramp-up in sales as they adjust the merchandise assortment, aiming to return comps from down high single-digits to flat or positive [20][24] Question: Were there any regional differences in same-store sales? - Management noted that there were no significant geographic differences in performance during the fourth quarter [27] Question: How is the company addressing the higher cost inventory? - Management stated that they are working to flush out higher cost inventory and expect to see improvements in merchandise margins as they move forward [131][147] Question: What strategies are being implemented to drive traffic to stores? - Management is focusing on a promotional strategy that emphasizes lower price points and effective marketing to attract customers [148][150]

[Part I](index=4&type=section&id=PART%20I) [Business](index=4&type=section&id=Item%201.%20Business) Kirkland's, Inc. operates as a U.S. specialty retailer of home décor and furnishings, focusing on omni-channel growth and infrastructure optimization, with significant seasonal sales in Q4 and merchandise sourced from Asia - As of January 28, 2023, the company operated **346 stores** across 35 states and the e-commerce site www.kirklands.com[16](index=16&type=chunk) - The business strategy centers on four key components: offering value-priced merchandise, acquiring and retaining customers, improving the omni-channel experience, and making infrastructure improvements like optimizing the store footprint[17](index=17&type=chunk) Merchandise Mix as a Percentage of Net Sales | Merchandise Category | Fiscal 2022 | Fiscal 2021 | Fiscal 2020 | | :--- | :--- | :--- | :--- | | Holiday Décor | 19% | 19% | 22% | | Furniture | 18% | 15% | 15% | | Textiles | 11% | 10% | 10% | | Ornamental Wall Décor | 8% | 10% | 10% | | Art | 8% | 8% | 7% | | Decorative Accessories | 7% | 8% | 8% | | Mirrors | 6% | 6% | 6% | | Home Fragrance | 6% | 6% | 6% | | Housewares | 5% | 5% | 5% | | Lighting | 4% | 5% | 4% | | Floral | 4% | 4% | 4% | | Outdoor | 3% | 3% | 2% | | Gift | 1% | 1% | 1% | | **Total** | **100%** | **100%** | **100%** | - In fiscal 2022, approximately **49% of merchandise** was directly sourced from foreign countries, with China accounting for **67% of total merchandise receipts**[28](index=28&type=chunk) Store Count History (Last 5 Fiscal Years) | | Fiscal 2022 | Fiscal 2021 | Fiscal 2020 | Fiscal 2019 | Fiscal 2018 | | :--- | :--- | :--- | :--- | :--- | :--- | | Stores open at beginning of period | 361 | 373 | 432 | 428 | 418 | | New store openings | 1 | 4 | — | 5 | 25 | | Permanent store closings | (16) | (16) | (59) | (1) | (15) | | **Stores open at end of period** | **346** | **361** | **373** | **432** | **428** | - The business is highly seasonal, with the fourth quarter (including Thanksgiving and Christmas) historically contributing a disproportionate amount of net sales, net income, and cash flow[65](index=65&type=chunk) [Risk Factors](index=11&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks including strategic execution failures, intense competition, supply chain vulnerabilities from foreign imports, IT security threats, liquidity constraints, macroeconomic pressures, and business seasonality - **Strategic Risks:** Failure to successfully implement strategic initiatives, such as upgrading merchandise quality, acquiring new customers, and improving the omni-channel experience, could negatively impact financial performance[74](index=74&type=chunk) - **Liquidity Risks:** Insufficient cash flow from operations could hinder strategic initiatives and the ability to fund obligations, potentially leading to increased reliance on the secured revolving credit facility and its associated restrictions[90](index=90&type=chunk)[91](index=91&type=chunk) - **Competitive Risks:** The company operates in a highly competitive retail market against larger retailers with greater resources, such as HomeGoods, Target, Amazon, and Wayfair, which could lead to price reductions and loss of market share[93](index=93&type=chunk)[94](index=94&type=chunk) - **Supply Chain Risks:** A significant portion of merchandise is imported, with **67% of fiscal 2022 purchases** manufactured in China, exposing the company to trade relations, tariffs, shipping delays, and cost increases[114](index=114&type=chunk)[119](index=119&type=chunk) - **Technology & Data Security Risks:** The business is vulnerable to IT system failures and security breaches, with potential for litigation, reputational damage, and operational disruptions from data protection failures[130](index=130&type=chunk)[133](index=133&type=chunk) - **Macroeconomic Risks:** Performance is subject to general economic conditions impacting discretionary consumer spending, with inflation, cost increases, and a weak retail environment adversely affecting sales and profitability[152](index=152&type=chunk)[154](index=154&type=chunk)[157](index=157&type=chunk) - **Seasonal Risks:** The business is highly seasonal, with the fourth quarter contributing a disproportionate amount of net sales and income, making negative factors during this period materially adverse to financial results[160](index=160&type=chunk) [Unresolved Staff Comments](index=24&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company reports no unresolved staff comments from the SEC - None[166](index=166&type=chunk) [Properties](index=24&type=section&id=Item%202.%20Properties) Kirkland's leases all of its 346 store locations, its corporate office, and its distribution facilities, with typical initial lease terms of five to 10 years and Texas having the largest store concentration - The company leases all of its store locations, with typical initial terms of **five to 10 years**[167](index=167&type=chunk) Store Count by State (Top 5) | State | Number of Stores | | :--- | :--- | | Texas | 52 | | Florida | 29 | | Georgia | 22 | | North Carolina | 20 | | Tennessee | 20 | Distribution Facility Locations (as of Jan 28, 2023) | Location | Type | Approx. Square Footage | | :--- | :--- | :--- | | Jackson, Tennessee | store and e-commerce fulfillment | 771,000 | | Lancaster, Texas | third-party operated store fulfillment | 200,000 | | Winchester, Virginia | e-commerce fulfillment | 63,000 | | North Las Vegas, Nevada | e-commerce fulfillment | 33,000 | [Legal Proceedings](index=25&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in various legal proceedings arising in the normal course of business, with specific details provided in Note 8 of the Financial Statements - For details on legal proceedings, refer to "Item 8. Financial Statements and Supplementary Data – Note 8 — Commitments and Contingencies"[170](index=170&type=chunk) [Mine Safety Disclosures](index=25&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[171](index=171&type=chunk) [Part II](index=25&type=section&id=PART%20II) [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=25&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on Nasdaq under "KIRK", with no dividends declared since fiscal 2015 due to credit facility restrictions, and **$6.3 million** in share repurchases in fiscal 2022 - The company's common stock is listed on Nasdaq under the symbol **"KIRK"**[173](index=173&type=chunk) - No dividends have been declared since fiscal 2015, and the senior credit facility restricts the ability to pay cash dividends[174](index=174&type=chunk) Fiscal 2022 Share Repurchases | Period | Total Number of Shares Repurchased | Average Price Paid per Share | Maximum Dollar Value Remaining (in thousands) | | :--- | :--- | :--- | :--- | | First Quarter | 479,966 | $13.03 | $26,304 | | Second Quarter | — | $— | $— | | Third Quarter | — | $— | $— | | Fourth Quarter | — | $— | $— | | **Total** | **479,966** | **$13.03** | **$26,304** | [Reserved](index=26&type=section&id=Item%206.%20%5BReserved%5D) This item is reserved [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In fiscal 2022, Kirkland's experienced a significant downturn, with net sales decreasing **10.6%** to **$498.8 million**, gross profit falling **36.4%** to **$119.8 million**, and an operating loss of **$42.8 million**, ending the year with **$5.2 million** cash and **$15.0 million** debt Fiscal 2022 vs. Fiscal 2021 Key Financial Results (in millions, except per share data) | Metric | Fiscal 2022 | Fiscal 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $498.8 | $558.2 | (10.6)% | | Gross Profit | $119.8 | $188.4 | (36.4)% | | Gross Margin | 24.0% | 33.8% | (980 bps) | | Operating (Loss) Income | ($42.8) | $25.3 | (268.7)% | | Net (Loss) Income | ($44.7) | $22.0 | (302.9)% | | Diluted (Loss) Earnings Per Share | ($3.52) | $1.51 | (333.1)% | - The decrease in net sales was primarily due to a consolidated comparable sales decrease of **$48.9 million**, resulting from lower traffic and conversion in stores and online, though partially offset by a higher average ticket[181](index=181&type=chunk) - Gross profit margin decreased by **980 basis points**, with approximately **550 basis points** of the decline attributed to lower merchandise margin from increased discounting and higher inbound freight costs[191](index=191&type=chunk) - Net cash used in operating activities was **$18.2 million** in fiscal 2022, an improvement from **$30.8 million** used in fiscal 2021, primarily due to working capital changes related to selling through excess inventory[204](index=204&type=chunk) - The company ended fiscal 2022 with **$5.2 million** in cash and cash equivalents and **$15.0 million** in outstanding debt under its revolving credit facility[182](index=182&type=chunk) [Quantitative and Qualitative Disclosure About Market Risk](index=35&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosure%20About%20Market%20Risk) The company faces interest rate risk from **$15.0 million** in variable-rate borrowings and market risk from price volatility in merchandise, duties, tariffs, and transportation costs - The company is exposed to interest rate risk from its variable-rate Credit Agreement, with **$15.0 million** outstanding as of January 28, 2023[232](index=232&type=chunk) - The company is subject to market risk from price volatility in merchandise, duties, tariffs, and transportation costs, which can create inflationary or deflationary pressure on product costs and affect gross margin[234](index=234&type=chunk) [Financial Statements and Supplementary Data](index=36&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements for fiscal year ended January 28, 2023, including balance sheets, statements of operations, cash flows, and accompanying notes, along with the independent auditor's report [Consolidated Financial Statements](index=39&type=section&id=Consolidated%20Financial%20Statements) The consolidated financial statements show a significant decline in financial health for fiscal 2022, with total assets decreasing to **$274.2 million**, a net loss of **$44.7 million**, and total shareholders' equity falling to **$29.8 million**, alongside reduced cash and increased debt Consolidated Balance Sheet Data (in thousands) | | Jan 28, 2023 | Jan 29, 2022 | | :--- | :--- | :--- | | Total Current Assets | $94,331 | $149,569 | | Total Assets | $274,246 | $331,189 | | Total Current Liabilities | $111,307 | $134,614 | | Total Liabilities | $244,473 | $250,063 | | Total Shareholders' Equity | $29,773 | $81,126 | Consolidated Statement of Operations Data (in thousands) | | 52 Weeks Ended Jan 28, 2023 | 52 Weeks Ended Jan 29, 2022 | | :--- | :--- | :--- | | Net Sales | $498,825 | $558,180 | | Gross Profit | $119,789 | $188,428 | | Operating (Loss) Income | ($42,751) | $25,345 | | Net (Loss) Income | ($44,694) | $22,026 | Consolidated Statement of Cash Flows Data (in thousands) | | 52 Weeks Ended Jan 28, 2023 | 52 Weeks Ended Jan 29, 2022 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | ($18,151) | ($30,785) | | Net cash used in investing activities | ($8,061) | ($7,060) | | Net cash provided by (used in) financing activities | $6,380 | ($37,489) | | Net (decrease) in cash | ($19,832) | ($75,334) | | Cash at end of year | $5,171 | $25,003 | [Notes to Consolidated Financial Statements](index=43&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail accounting policies and financial components, highlighting a **$2.1 million** asset impairment charge and a **$14.7 million** deferred tax asset valuation allowance due to continued losses, alongside details of the credit facility and legal contingencies - The company's inventory shrinkage reserve was **$1.6 million** as of January 28, 2023, up from **$1.4 million** the prior year[266](index=266&type=chunk) - Asset impairment charges totaled **$2.1 million** in fiscal 2022, compared to **$0.8 million** in fiscal 2021, primarily related to underperforming stores[225](index=225&type=chunk)[339](index=339&type=chunk) - As of January 28, 2023, the company had a deferred tax asset valuation allowance of **$14.7 million**, up from **$3.6 million** in the prior year, due to uncertainty regarding the realization of these assets given a three-year cumulative loss[306](index=306&type=chunk) - As of January 28, 2023, the company had **$15.0 million** in outstanding borrowings under its credit facility with **$41.0 million** available, which was subsequently amended and upsized to **$90.0 million** extending maturity to March 2028[312](index=312&type=chunk)[342](index=342&type=chunk) - The company is a defendant in several putative class action lawsuits alleging wage and hour violations and improper printing of credit card information on receipts[332](index=332&type=chunk)[333](index=333&type=chunk)[335](index=335&type=chunk) [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](index=57&type=section&id=Item%209.%20Changes%20in%20and%20Disagreements%20with%20Accountants%20on%20Accounting%20and%20Financial%20Disclosure) The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[343](index=343&type=chunk) [Controls and Procedures](index=57&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of January 28, 2023, with no material changes reported - Based on an evaluation as of January 28, 2023, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[344](index=344&type=chunk) - Management concluded that the company's internal control over financial reporting was effective as of January 28, 2023, based on the COSO framework[346](index=346&type=chunk) [Other Information](index=58&type=section&id=Item%209B.%20Other%20Information) The company reports no other information for this item - None[348](index=348&type=chunk) [Disclosure Regarding Foreign Jurisdictions that Prevent Inspections](index=58&type=section&id=Item%209C.%20Disclosure%20Regarding%20Foreign%20Jurisdictions%20that%20Prevent%20Inspections) This item is not applicable to the company - Not applicable[349](index=349&type=chunk) [Part III](index=58&type=section&id=PART%20III) [Directors, Executive Officers and Corporate Governance](index=58&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%20and%20Corporate%20Governance) Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive Proxy Statement for the June 21, 2023 Annual Meeting - Information required for this item is incorporated by reference from the company's Proxy Statement for the upcoming Annual Meeting of Shareholders[351](index=351&type=chunk) [Executive Compensation](index=58&type=section&id=Item%2011.%20Executive%20Compensation) Information regarding executive and director compensation is incorporated by reference from the company's definitive Proxy Statement for the June 21, 2023 Annual Meeting - Information required for this item is incorporated by reference from the "Executive Compensation" and "Board of Directors Compensation" sections of the company's Proxy Statement[353](index=353&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=58&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Security ownership information is incorporated by reference from the Proxy Statement, with **497,628** securities issuable upon exercise and **1,374,483** available for future issuance under equity plans as of January 28, 2023 - Information on security ownership is incorporated by reference from the company's Proxy Statement[354](index=354&type=chunk) Equity Compensation Plan Information (as of Jan 28, 2023) | Plan Category | Number of securities to be issued upon exercise (a) | Weighted-average exercise price (b) | Number of securities remaining available for future issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 497,628 | $11.00 | 1,374,483 | [Certain Relationships and Related Transactions, and Director Independence](index=59&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information regarding related party transactions and director independence is incorporated by reference from the company's definitive Proxy Statement for the June 21, 2023 Annual Meeting - Information required for this item is incorporated by reference from the "Related Party Transactions" and "Board Independence" sections of the company's Proxy Statement[357](index=357&type=chunk) [Principal Accounting Fees and Services](index=59&type=section&id=Item%2014.%20Principal%20Accounting%20Fees%20and%20Services) Information regarding principal accounting fees and services is incorporated by reference from the company's definitive Proxy Statement for the June 21, 2023 Annual Meeting - Information required for this item is incorporated by reference from the "Audit and Non-Audit Fees" section of the company's Proxy Statement[358](index=358&type=chunk) [Part IV](index=60&type=section&id=PART%20IV) [Exhibits and Financial Statement Schedules](index=60&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K report, noting schedules are inapplicable or included elsewhere - This section contains the list of financial statements and exhibits filed with the annual report[360](index=360&type=chunk)[362](index=362&type=chunk) [Form 10-K Summary](index=62&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company provides no summary for this item - None[367](index=367&type=chunk)

Kirkland's, Inc. (NASDAQ:KIRK) Q3 2022 Earnings Conference Call December 2, 2022 9:00 AM ET Company Participants Cody Cree - Director of IR Steven Woodward - President and CEO Mike Madden - EVP and CFO Conference Call Participants Anthony Lebiedzinski - Sidoti & Company Jeremy Hamblin - Craig-Hallum Capital Group John Lawrence - The Benchmark Company Operator Good morning, everyone, and thank you for participating in today's conference call to discuss Kirkland's financial results for the Third Quarter ende ...

```markdown PART I - FINANCIAL INFORMATION [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents Kirkland's, Inc.'s unaudited condensed consolidated financial statements, including balance sheets, statements of operations, shareholders' equity, and cash flows, along with detailed notes explaining accounting policies, significant estimates, and specific financial items for the periods ended October 29, 2022, and October 30, 2021 [Condensed Consolidated Balance Sheets (Unaudited)](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20(Unaudited)%20as%20of%20October%2029%2C%202022%2C%20January%2029%2C%202022%20and%20October%2030%2C%202021) The balance sheet shows a decrease in total assets and shareholders' equity from January 29, 2022, to October 29, 2022, primarily driven by a significant increase in the accumulated deficit and a decrease in cash and cash equivalents, alongside an increase in the revolving line of credit Condensed Consolidated Balance Sheets (Unaudited) | Metric | Oct 29, 2022 (in thousands) | Jan 29, 2022 (in thousands) | Oct 30, 2021 (in thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Cash and cash equivalents | $11,245 | $25,003 | $26,475 | | Inventories, net | $126,315 | $114,029 | $115,671 | | Total current assets | $144,686 | $149,569 | $152,316 | | Total assets | $331,574 | $331,189 | $339,883 | | Revolving line of credit | $60,000 | — | — | | Total liabilities | $298,509 | $250,063 | $264,120 | | Accumulated deficit | $(141,884) | $(94,730) | $(99,716) | | Total shareholders' equity | $33,065 | $81,126 | $75,763 | [Condensed Consolidated Statements of Operations (Unaudited)](index=4&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20(Unaudited)%20for%20the%2013-week%20and%2039-week%20periods%20ended%20October%2029%2C%202022%20and%20October%2030%2C%202021) For both the 13-week and 39-week periods ended October 29, 2022, the company reported significant net losses, a reversal from net income in the prior year periods, driven by decreased net sales, lower gross profit margins, and increased operating expenses relative to sales Condensed Consolidated Statements of Operations (Unaudited) | Metric (in thousands, except per share) | 13-Week Period Ended Oct 29, 2022 | 13-Week Period Ended Oct 30, 2021 | 39-Week Period Ended Oct 29, 2022 | 39-Week Period Ended Oct 30, 2021 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net sales | $130,962 | $143,630 | $336,348 | $381,989 | | Cost of sales | $98,275 | $93,817 | $256,844 | $252,223 | | Gross profit | $32,687 | $49,813 | $79,504 | $129,766 | | Total operating expenses | $39,347 | $40,793 | $119,059 | $118,469 | | Operating (loss) income | $(6,660) | $9,020 | $(39,555) | $11,297 | | Net (loss) income | $(7,341) | $7,229 | $(40,901) | $9,574 | | Basic (loss) earnings per share | $(0.58) | $0.54 | $(3.22) | $0.69 | | Diluted (loss) earnings per share | $(0.58) | $0.51 | $(3.22) | $0.64 | [Condensed Consolidated Statements of Shareholders' Equity (Unaudited)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Shareholders'%20Equity%20(Unaudited)%20for%20the%2039-week%20periods%20ended%20October%2029%2C%202022%20and%20October%2030%2C%202021) Shareholders' equity significantly decreased from **$81,126 thousand** at January 29, 2022, to **$33,065 thousand** at October 29, 2022, primarily due to accumulated net losses and share repurchases, despite some stock-based compensation expense Condensed Consolidated Statements of Shareholders' Equity (Unaudited) | Metric (in thousands, except share data) | Balance at Jan 29, 2022 | Balance at Oct 29, 2022 | Balance at Jan 30, 2021 | Balance at Oct 30, 2021 | | :--------------------------------------- | :---------------------- | :---------------------- | :---------------------- | :---------------------- | | Common Stock Amount | $175,856 | $174,949 | $174,391 | $175,479 | | Accumulated Deficit | $(94,730) | $(141,884) | $(79,469) | $(99,716) | | Total Shareholders' Equity | $81,126 | $33,065 | $94,922 | $75,763 | | Repurchase and retirement of common stock (39-week period ended Oct 29, 2022) | $(6,253) | N/A | N/A | N/A | | Repurchase and retirement of common stock (39-week period ended Oct 30, 2021) | N/A | N/A | N/A | $(29,821) | [Condensed Consolidated Statements of Cash Flows (Unaudited)](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20(Unaudited)%20for%20the%2039-week%20periods%20ended%20October%2029%2C%202022%20and%20October%2030%2C%202021) The company experienced a significant increase in net cash used in operating activities for the 39-week period ended October 29, 2022, primarily due to net losses and changes in working capital, leading to a substantial net decrease in cash and cash equivalents, which was partially offset by borrowings on the revolving line of credit Condensed Consolidated Statements of Cash Flows (Unaudited) | Cash Flow Activity (in thousands) | 39-Week Period Ended Oct 29, 2022 | 39-Week Period Ended Oct 30, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net (loss) income | $(40,901) | $9,574 | | Net cash used in operating activities | $(58,209) | $(38,690) | | Net cash used in investing activities | $(6,929) | $(5,118) | | Net cash provided by (used in) financing activities | $51,380 | $(30,054) | | Net decrease in cash and cash equivalents | $(13,758) | $(73,862) | | Cash and cash equivalents, end of period | $11,245 | $26,475 | - Borrowings on revolving line of credit were **$60,000 thousand** for the 39-week period ended October 29, 2022, compared to none in the prior year period[15](index=15&type=chunk) [Notes to Condensed Consolidated Financial Statements (Unaudited)](index=7&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements%20(Unaudited)) These notes provide detailed accounting policies and disclosures for Kirkland's, Inc., covering business operations, revenue recognition, income taxes, earnings per share, fair value measurements, legal contingencies, stock-based compensation, share repurchase plans, senior credit facility, new accounting pronouncements, and a subsequent event regarding debt repayment [Note 1 – Description of Business and Basis of Presentation](index=8&type=section&id=Note%201%20%E2%80%93%20Description%20of%20Business%20and%20Basis%20of%20Presentation) Kirkland's, Inc. is a specialty retailer of home décor operating **356 stores** in **35 states** and an e-commerce website. The financial statements are unaudited, prepared under GAAP for interim information, and reflect the impact of macroeconomic conditions, inflation, and seasonality - Kirkland's, Inc. operates **356 stores** in **35 states** and an e-commerce website (www.kirklands.com) as of October 29, 2022[17](index=17&type=chunk) - Macroeconomic conditions, including economic disruption, inflation, uncertainty, volatility, and the COVID-19 pandemic, have affected the Company's business operations and could significantly impact accounting estimates in subsequent periods[20](index=20&type=chunk) - The results for the interim periods are not indicative of the full fiscal year due to seasonality factors[21](index=21&type=chunk) [Note 2 – Revenue Recognition](index=8&type=section&id=Note%202%20%E2%80%93%20Revenue%20Recognition) Revenue recognition policies include sales of merchandise net of returns, shipping revenue, gift card breakage, and private label credit card program revenue. The company maintains reserves for sales returns and defers e-commerce revenue until estimated delivery. Gift card breakage is recognized using the redemption recognition method based on historical rates Note 2 – Revenue Recognition | Metric (in thousands) | Oct 29, 2022 | Jan 29, 2022 | Oct 30, 2021 | | :-------------------- | :----------- | :----------- | :----------- | | Sales returns reserve | $1,600 | $1,400 | $1,500 | | Deferred e-commerce revenue | $1,200 | $1,000 | $1,100 | | Gift card liability, net of estimated breakage | $13,658 | $14,761 | $13,201 | Note 2 – Revenue Recognition | Gift Card Breakage Revenue (in thousands) | 13-Week Period Ended Oct 29, 2022 | 13-Week Period Ended Oct 30, 2021 | 39-Week Period Ended Oct 29, 2022 | 39-Week Period Ended Oct 30, 2021 | | :---------------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Gift card breakage revenue | $189 | $200 | $582 | $611 | [Note 3 – Income Taxes](index=9&type=section&id=Note%203%20%E2%80%93%20Income%20Taxes) The company recorded minimal income tax expense for both the 13-week and 39-week periods ended October 29, 2022, primarily due to a federal net operating loss carry-forward fully offset by a valuation allowance. This contrasts with higher income tax expenses in the prior year periods when the company was profitable Note 3 – Income Taxes | Income Tax Expense (in thousands) | 13-Week Period Ended Oct 29, 2022 | 13-Week Period Ended Oct 30, 2021 | 39-Week Period Ended Oct 29, 2022 | 39-Week Period Ended Oct 30, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Income tax expense | $57 | $1,800 | $355 | $1,726 | | % of (loss) income before taxes | **0.8%** | **19.9%** | **0.9%** | **15.3%** | - The change in income taxes for the 13-week period ended October 29, 2022, was primarily due to a federal net operating loss carry-forward projected for fiscal 2022, which is fully offset by a valuation allowance[31](index=31&type=chunk) - A full valuation allowance was recorded against deferred tax assets as of October 29, 2022, and October 30, 2021[33](index=33&type=chunk) [Note 4 – (Loss) Earnings Per Share](index=10&type=section&id=Note%204%20%E2%80%93%20(Loss)%20Earnings%20Per%20Share) Basic and diluted EPS calculations are based on net income/loss and weighted average shares outstanding, with adjustments for dilutive stock equivalents. A significant number of stock options and restricted stock units were excluded from diluted EPS calculations for the current periods as they were antidilutive due to net losses - Approximately **531,000 shares** (13-week period) and **597,000 shares** (39-week period) of stock options and restricted stock units were excluded from diluted (loss) earnings per share computation for the period ended October 29, 2022, because their inclusion would have been antidilutive[34](index=34&type=chunk) [Note 5 – Fair Value Measurements](index=10&type=section&id=Note%205%20%E2%80%93%20Fair%20Value%20Measurements) The company defines fair value as an exit price in an orderly transaction and uses a three-tier hierarchy (Level 1, 2, 3) for inputs. Certain assets, like long-lived assets, are measured at fair value on a non-recurring basis using Level 2 and Level 3 inputs, including market participant rents and discounted future cash flows - Fair value is defined as the price received to sell an asset or paid to transfer a liability in an orderly transaction, using a three-tier hierarchy (Level 1: observable inputs like quoted prices; Level 2: indirectly observable inputs; Level 3: unobservable inputs)[35](index=35&type=chunk) - Long-lived assets are measured at fair value on a non-recurring basis for impairment evaluation, using Level 3 inputs (Company-specific financial forecasts) and Level 2 inputs (market participant rents, discounted future cash flows)[36](index=36&type=chunk) [Note 6 – Commitments and Contingencies](index=11&type=section&id=Note%206%20%E2%80%93%20Commitments%20and%20Contingencies) Kirkland's is currently involved in three putative class action lawsuits related to federal law violations (credit card receipt data), California wage and hour violations, and New York labor law regarding wage payment frequency. The company believes these cases are without merit and does not expect them to have a material adverse effect on its financial condition - The Company is a defendant in a putative class action, Gennock v. Kirkland's, Inc., alleging federal law violation for publishing more than five digits of credit/debit card numbers on receipts. The Company is appealing a standing ruling[37](index=37&type=chunk) - Another putative class action, Miles v. Kirkland's Stores, Inc., alleges various California wage and hour violations. The District Court denied class certification, and the Ninth Circuit granted the plaintiff's petition for appeal[38](index=38&type=chunk) - A third putative class action, Sicard v. Kirkland's Stores, Inc., alleges violation of New York Labor Law Section 191 for bi-weekly wage payments instead of within seven days. The Company plans to file a motion to dismiss[39](index=39&type=chunk) [Note 7 – Stock-Based Compensation](index=11&type=section&id=Note%207%20%E2%80%93%20Stock-Based%20Compensation) The company grants various equity incentives, recognizing compensation expense straight-line over vesting periods. Stock-based compensation expense increased for the 39-week period ended October 29, 2022, compared to the prior year, and performance-based restricted stock units (PSUs) were granted, though no shares are currently estimated to be issued for fiscal 2021 or 2022 PSUs Note 7 – Stock-Based Compensation | Stock-Based Compensation (in thousands, except share amounts) | 13-Week Period Ended Oct 29, 2022 | 13-Week Period Ended Oct 30, 2021 | 39-Week Period Ended Oct 29, 2022 | 39-Week Period Ended Oct 30, 2021 | | :---------------------------------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Stock-based compensation expense | $295 | $438 | $1,460 | $1,321 | | Restricted stock units granted | 50,000 | — | 409,800 | 152,815 | | Stock options granted | 40,000 | — | 40,000 | — | - The Company currently estimates that no shares will be issued with respect to the performance-based restricted stock units (PSUs) granted in fiscal 2021 or 2022[41](index=41&type=chunk) [Note 8 – Share Repurchase Plan](index=12&type=section&id=Note%208%20%E2%80%93%20Share%20Repurchase%20Plan) The Board of Directors authorized share repurchase plans totaling **$70 million** (**$20M**, **$20M**, **$30M**). As of October 29, 2022, approximately **$26.3 million** remained under the current plan. No shares were repurchased in the 13-week period ended October 29, 2022, but **479,966 shares** were repurchased for **$6.253 million** in the 39-week period - As of October 29, 2022, approximately **$26.3 million** remained available under the current share repurchase plan[42](index=42&type=chunk) Note 8 – Share Repurchase Plan | Share Repurchase (in thousands, except share amounts) | 13-Week Period Ended Oct 29, 2022 | 13-Week Period Ended Oct 30, 2021 | 39-Week Period Ended Oct 29, 2022 | 39-Week Period Ended Oct 30, 2021 | | :---------------------------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Shares repurchased and retired | — | 805,744 | 479,966 | 1,414,642 | | Share repurchase cost | $— | $16,457 | $6,253 | $29,821 | [Note 9 – Senior Credit Facility](index=12&type=section&id=Note%209%20%E2%80%93%20Senior%20Credit%20Facility) The company has a **$75 million** senior secured revolving credit facility, maturing in December 2024, with **$60.0 million** outstanding and **$15.0 million** available for borrowing as of October 29, 2022. The facility bears interest at LIBOR plus a margin and is secured by substantially all company assets. The company was in compliance with all covenants - The Company has a **$75 million** senior secured revolving credit facility with a maturity date of December 2024[43](index=43&type=chunk) - As of October 29, 2022, there were **$60.0 million** in outstanding borrowings and approximately **$15.0 million** available for borrowing under the Credit Agreement[46](index=46&type=chunk) - The Company was in compliance with the covenants in the Credit Agreement as of October 29, 2022[46](index=46&type=chunk) [Note 10 – New Accounting Pronouncements](index=13&type=section&id=Note%2010%20%E2%80%93%20New%20Accounting%20Pronouncements) The company does not expect the adoption of ASU 2020-04, "Reference Rate Reform," which provides optional expedients for contracts and hedging relationships affected by LIBOR cessation, to have a material impact on its financial statements - The adoption of ASU 2020-04, "Reference Rate Reform," is not expected to have a material impact on the Company's condensed consolidated financial statements and related disclosures[48](index=48&type=chunk) [Note 11 – Subsequent Event](index=13&type=section&id=Note%2011%20%E2%80%93%20Subsequent%20Event) Subsequent to the reporting period, the company repaid **$30.0 million** of its outstanding borrowings under the Credit Agreement - Subsequent to October 29, 2022, the Company repaid **$30.0 million** of outstanding borrowings on the Credit Agreement[49](index=49&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=14&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on Kirkland's financial condition and operational results for the 13-week and 39-week periods ended October 29, 2022, highlighting significant declines in sales and profitability, the impact of macroeconomic conditions, and strategies for managing liquidity and capital resources [Overview](index=14&type=section&id=Overview) Kirkland's is a specialty retailer of home furnishings with **356 stores** and an e-commerce presence, offering a curated selection of affordable home décor and inspirational design ideas - Kirkland's is a specialty retailer of home furnishings in the United States, operating **356 stores** in **35 states** and an e-commerce website (www.kirklands.com) as of October 29, 2022[53](index=53&type=chunk) - The company provides customers with a curated, affordable selection of home furnishings and inspirational design ideas[53](index=53&type=chunk) [Macroeconomic Conditions](index=14&type=section&id=Macroeconomic%20Conditions) Economic disruption, inflation, uncertainty, volatility, and the COVID-19 pandemic continue to materially impact Kirkland's business operations, including net sales, earnings, and cash flows, with the duration and extent of these impacts remaining uncertain - Economic disruption, inflation, uncertainty, volatility, and the COVID-19 pandemic have affected the Company's business operations[54](index=54&type=chunk) - The Company expects its business operations and results, including net sales, earnings, and cash flows, to continue to be materially impacted, with the duration and extent remaining uncertain[54](index=54&type=chunk) [Key Financial Measures](index=15&type=section&id=Key%20Financial%20Measures) Net sales and gross profit are primary drivers of operating performance. Gross profit margin is influenced by merchandise cost, store occupancy, and freight. Comparable sales, including e-commerce, measure sales increases/decreases from stores open over 13 months. Operating expenses, a mix of fixed and variable costs, are managed to improve profitability, with increases in comparable sales typically needed to offset rising costs - Net sales and gross profit are the most significant drivers of operating performance[57](index=57&type=chunk) - Gross profit is influenced by merchandise cost, store occupancy costs, outbound freight costs, central distribution costs, and depreciation[57](index=57&type=chunk) - Comparable sales measure sales increases and decreases from stores open for at least **13 full fiscal months**, including online sales[58](index=58&type=chunk) [Stores](index=15&type=section&id=Stores) As of October 29, 2022, Kirkland's operated **356 stores**, a decrease from **369 stores** in the prior year. The company opened **1 new store** and closed **6 stores** during the 39-week period ended October 29, 2022 Stores | Metric | Oct 29, 2022 | Oct 30, 2021 | | :---------------------- | :----------- | :----------- | | Number of stores | 356 | 369 | | Square footage | 2,855,146 | 2,956,731 | | Average square footage per store | 8,020 | 8,013 | Stores | Store Changes (39-Week Period) | Oct 29, 2022 | Oct 30, 2021 | | :----------------------------- | :----------- | :----------- | | New store openings | 1 | 2 | | Permanent store closures | 6 | 6 | | Store relocations | — | 2 | [13-Week Period Ended October 29, 2022 Compared to the 13-Week Period Ended October 30, 2021](index=16&type=section&id=13-Week%20Period%20Ended%20October%2029%2C%202022%20Compared%20to%20the%2013-Week%20Period%20Ended%20October%2030%2C%202021) For the third quarter of fiscal 2022, Kirkland's experienced a significant decline in financial performance, reporting a net loss compared to net income in the prior year, driven by an **8.8% decrease** in net sales, a **970 basis point** drop in gross profit margin due to heavy discounting and higher freight costs, and increased compensation and benefits expenses relative to sales 13-Week Period Ended October 29, 2022 Compared to the 13-Week Period Ended October 30, 2021 | Metric (in thousands, except %) | Oct 29, 2022 | Oct 30, 2021 | Change ($) | Change (%) | | :------------------------------ | :----------- | :----------- | :--------- | :--------- | | Net sales | $130,962 | $143,630 | $(12,668) | (8.8)% | | Gross profit | $32,687 | $49,813 | $(17,126) | (34.4)% | | Gross profit as % of net sales | **25.0%** | **34.7%** | N/A | (**970 bps**) | | Operating (loss) income | $(6,660) | $9,020 | $(15,680) | (173.8)% | | Net (loss) income | $(7,341) | $7,229 | $(14,570) | (201.5)% | - Comparable sales, including e-commerce, decreased **7.0%**, driven by lower traffic and conversion, partially offset by an increase in average ticket. E-commerce comparable sales decreased **8.6%**[62](index=62&type=chunk) - Merchandise margin decreased approximately **480 basis points** to **52.9%** due to heavier discounting and higher inbound freight rates. Distribution center costs increased **290 basis points** to **7.2%** of net sales due to operational inefficiencies[63](index=63&type=chunk) [39-Week Period Ended October 29, 2022 Compared to the 39-Week Period Ended October 30, 2021](index=17&type=section&id=39-Week%20Period%20Ended%20October%2029%2C%202022%20Compared%20to%20the%2039-Week%20Period%20Ended%20October%2030%2C%202021) For the first 39 weeks of fiscal 2022, Kirkland's reported a substantial net loss, a significant reversal from net income in the prior year, primarily due to an **11.9% decrease** in net sales, a **1,040 basis point** decline in gross profit margin driven by discounting and increased costs, and higher operating expenses relative to sales 39-Week Period Ended October 29, 2022 Compared to the 39-Week Period Ended October 30, 2021 | Metric (in thousands, except %) | Oct 29, 2022 | Oct 30, 2021 | Change ($) | Change (%) | | :------------------------------ | :----------- | :----------- | :--------- | :--------- | | Net sales | $336,348 | $381,989 | $(45,641) | (11.9)% | | Gross profit | $79,504 | $129,766 | $(50,262) | (38.7)% | | Gross profit as % of net sales | **23.6%** | **34.0%** | N/A | (**1,040 bps**) | | Operating (loss) income | $(39,555) | $11,297 | $(50,852) | (450.1)% | | Net (loss) income | $(40,901) | $9,574 | $(50,475) | (527.2)% | - Comparable sales, including e-commerce, decreased **10.4%**, primarily due to a decrease in traffic and conversion in stores and online. E-commerce comparable sales decreased **14.0%**[69](index=69&type=chunk) - Merchandise margin decreased approximately **600 basis points** to **52.1%** due to discounting and increased incremental inbound freight costs. Store occupancy costs increased **190 basis points** to **12.5%** of net sales due to sales deleverage[70](index=70&type=chunk) [Non-GAAP Financial Measures](index=18&type=section&id=Non-GAAP%20Financial%20Measures) The company provides non-GAAP financial measures like EBITDA, adjusted EBITDA, adjusted operating (loss) income, adjusted net (loss) income, and adjusted diluted (loss) earnings per share to supplement GAAP results. These measures are used internally and are believed to be useful for investors in evaluating operational performance, but they are not GAAP alternatives and have limitations Non-GAAP Financial Measures | Non-GAAP Metric (in thousands, except per share) | 13-Week Period Ended Oct 29, 2022 | 13-Week Period Ended Oct 30, 2021 | 39-Week Period Ended Oct 29, 2022 | 39-Week Period Ended Oct 30, 2021 | | :----------------------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Operating (loss) income | $(6,660) | $9,020 | $(39,555) | $11,297 | | EBITDA | $(2,572) | $14,069 | $(26,630) | $26,832 | | Adjusted EBITDA | $(1,661) | $14,827 | $(23,901) | $27,568 | | Adjusted operating (loss) income | $(5,749) | $9,778 | $(36,826) | $12,033 | | Adjusted net (loss) income | $(4,843) | $7,341 | $(29,243) | $9,041 | | Adjusted diluted (loss) earnings per share | $(0.38) | $0.51 | $(2.31) | $0.60 | - Non-GAAP adjustments include closed store and lease termination costs, asset impairment, stock-based compensation expense, severance charges, and tax valuation allowance[81](index=81&type=chunk) [Liquidity and Capital Resources](index=19&type=section&id=Liquidity%20and%20Capital%20Resources) Kirkland's primary capital needs are for working capital and capital expenditures, historically funded by internal cash and a revolving credit facility. In fiscal 2022, increased inventory levels led to **$60.0 million** in borrowings on the credit facility, which the company expects to reduce by selling excess inventory in Q4. As of October 29, 2022, **$11.2 million** in cash and **$15.0 million** in credit facility availability were reported, with a subsequent **$30.0 million** debt repayment - Net cash used in operating activities increased to approximately **$58.2 million** for the first 39 weeks of fiscal 2022, compared to **$38.7 million** in the prior year, mainly due to declining operating performance and changes in working capital[83](index=83&type=chunk) Liquidity and Capital Resources | Capital Expenditures by Category (in thousands) | 39-Week Period Ended Oct 29, 2022 | 39-Week Period Ended Oct 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 | - As of October 29, 2022, the Company had **$60.0 million** in outstanding borrowings under its **$75 million** senior secured revolving credit facility, with approximately **$15.0 million** available for borrowing[86](index=86&type=chunk)[89](index=89&type=chunk) - Subsequent to October 29, 2022, the Company repaid **$30.0 million** of outstanding borrowings under the Credit Agreement[89](index=89&type=chunk)[49](index=49&type=chunk) - As of October 29, 2022, approximately **$26.3 million** remained under the current share repurchase plan[91](index=91&type=chunk) [Critical Accounting Policies and Estimates](index=21&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) During the 13-week period ended July 30, 2022, the company made a change in estimate related to income taxes, reversing a tax benefit due to a projected federal net operating loss carry-forward fully offset by a valuation allowance. No other material changes to critical accounting policies or estimates occurred in the 39-week period - A change in estimate related to income taxes occurred during the 13-week period ended July 30, 2022, due to a projected federal net operating loss carry-forward for fiscal 2022, which is fully offset by a valuation allowance, leading to the reversal of a prior tax benefit[93](index=93&type=chunk) - There have been no other material changes to critical accounting policies or estimates during the 39-week period ended October 29, 2022[93](index=93&type=chunk) [New Accounting Pronouncements](index=21&type=section&id=New%20Accounting%20Pronouncements) This section refers to Note 10 for details on new accounting pronouncements not yet adopted, specifically ASU 2020-04 regarding Reference Rate Reform, which is not expected to have a material impact - Refer to Note 10 – New Accounting Pronouncements in the condensed consolidated financial statements for details on accounting pronouncements not yet adopted[94](index=94&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=21&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Kirkland's is primarily exposed to interest rate risk due to variable-rate borrowings under its **$60.0 million** outstanding Credit Agreement, which has led to increased interest expense. The company also faces risk from holding cash and cash equivalents beyond federally insured limits but does not engage in foreign exchange contracts, hedges, or other complex financial instruments - The Company is exposed to interest rate changes primarily due to **$60.0 million** in outstanding borrowings under its Credit Agreement, which bear variable rates, leading to increased interest expense[95](index=95&type=chunk) - Cash and cash equivalents are managed in various institutions at levels beyond federally insured limits, posing a risk of not recovering the full principal or diminished liquidity[96](index=96&type=chunk) - As of October 29, 2022, the Company was not engaged in foreign exchange contracts, hedges, interest rate swaps, derivatives, or other financial instruments with significant market risk[97](index=97&type=chunk) [Item 4. Controls and Procedures](index=22&type=section&id=Item%204.%20Controls%20and%20Procedures) As of October 29, 2022, the CEO and CFO concluded that Kirkland's disclosure controls and procedures were effective. There have been no material changes in internal control over financial reporting during the last fiscal quarter - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of October 29, 2022[99](index=99&type=chunk) - There have been no material changes in internal control over financial reporting during the last fiscal quarter[100](index=100&type=chunk) PART II - OTHER INFORMATION [Item 1. Legal Proceedings](index=23&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to Note 6 – Commitments and Contingencies in the financial statements for a description of the company's 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[103](index=103&type=chunk) [Item 1A. Risk Factors](index=23&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended January 29, 2022. Readers should consider these risks, along with other information, when evaluating the company - There have been no material changes to the risk factors as previously disclosed in the Annual Report on Form 10-K for the fiscal year ended January 29, 2022[104](index=104&type=chunk) - Additional risks and uncertainties not currently known or deemed immaterial may also materially adversely affect the Company's business, financial condition, and/or operating results[104](index=104&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=23&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No shares of common stock were repurchased by the company during the 13-week period ended October 29, 2022. As of that date, approximately **$26.3 million** remained available under the current share repurchase plan, which allows for purchases in the open market or negotiated transactions based on various factors - No shares of common stock were repurchased by the Company during the 13-week period ended October 29, 2022[105](index=105&type=chunk) - As of October 29, 2022, approximately **$26.3 million** remained under the current share repurchase plan[105](index=105&type=chunk) - The Board of Directors authorized share repurchase plans totaling up to **$70 million** in aggregate, allowing for purchases in the open market or negotiated transactions[106](index=106&type=chunk) [Item 6. Exhibits](index=23&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including an employment agreement, CEO and CFO certifications, and Inline XBRL documents - Exhibits include an Employment Agreement for W. Michael Madden, Certifications of the Chief Executive Officer and Chief Financial Officer (pursuant to Rule 13a-14(a) or Rule 15d-14(a) and 18 U.S.C. Section 1350), and Inline XBRL documents[107](index=107&type=chunk) SIGNATURES [SIGNATURES](index=24&type=section&id=SIGNATURES) The report is signed by Steve C. Woodward, President and Chief Executive Officer, and W. Michael Madden, Executive Vice President and Chief Financial Officer, on December 2, 2022 - The report was signed by Steve C. Woodward, President and Chief Executive Officer, and W. Michael Madden, Executive Vice President, Chief Financial Officer, on December 2, 2022[109](index=109&type=chunk) ```