Kirkland's(KIRK) - 2022 Q4 - Annual Report

Part I Business Kirkland's, Inc. is a U.S. home furnishings retailer transforming its brand, expanding omni-channel presence, and optimizing supply chain - As of January 29, 2022, Kirkland's operated 361 stores in 35 states and the e-commerce website www.kirklands.com[16](index=16&type=chunk) - The company is undergoing a brand transformation from an accessories retailer to a complete home furnishings retailer, focusing on higher quality, style, and larger ticket categories like furniture[17] Merchandise Sales Mix (% of Net Sales) | Merchandise Category | Fiscal 2021 | Fiscal 2020 | Fiscal 2019 | | :--- | :--- | :--- | :--- | | Holiday | 19% | 22% | 19% | | Furniture | 16% | 15% | 13% | | Textiles | 11% | 11% | 9% | | Ornamental Wall Décor | 10% | 10% | 12% | | Decorative Accessories | 9% | 9% | 10% | | Art | 8% | 7% | 8% | | Mirrors | 6% | 6% | 6% | | Home Fragrance | 6% | 6% | 6% | | Lighting | 5% | 5% | 5% | | Housewares | 5% | 4% | 4% | | Floral | 4% | 4% | 5% | | Gift | 1% | 1% | 3% | | Total | 100% | 100% | 100% | - In fiscal 2021, approximately 76% of merchandise receipts originated from China; the company plans to increase direct sourcing from manufacturers to 70% of total merchandise purchases by fiscal 2025[29] - The business is highly seasonal, with the fourth quarter, including Thanksgiving and Christmas, contributing a disproportionate amount of net sales, net income, and cash flow[66] Risk Factors The company faces significant risks including strategic execution, intense competition, supply chain disruptions, cybersecurity threats, and seasonality - Strategic risks include the potential failure to successfully implement brand transformation, grow the omni-channel experience, and profitably manage the store rationalization strategy[79][80][86] - The company is highly dependent on foreign imports, with approximately 76% of fiscal 2021 merchandise purchases manufactured in China, exposing it to risks from trade relations, tariffs, and supply chain disruptions[124][129] - The COVID-19 pandemic continues to pose a material risk, with potential impacts on consumer spending, global supply chains, store operations, and labor availability[162] - The business is highly seasonal, with the fourth quarter disproportionately affecting annual results; negative factors during this period could severely impact financial condition and leave the company with excess inventory[178] - Cybersecurity is a significant risk, as a failure to protect customer and employee data could lead to litigation, reputational damage, and business disruptions, amplified by e-commerce growth[141][144] Unresolved Staff Comments The company reports no unresolved staff comments - None[184] Properties Kirkland's leases all 361 store locations, corporate office, and distribution facilities, with a primary distribution center in Jackson, Tennessee - The company leases all of its store locations, with typical initial terms of five to 10 years[185] Store Count by State (Top 5) | State | Number of Stores | | :--- | :--- | | Texas | 52 | | Florida | 32 | | Georgia | 24 | | North Carolina | 20 | | Tennessee | 20 | Distribution Facility Locations | Location | Type | Approx. Sq. 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 This section refers to Note 8 of the Financial Statements for details on legal proceedings, including two class action lawsuits deemed immaterial - For details on legal proceedings, the report refers to Note 8 of the Financial Statements and Supplementary Data[189] Mine Safety Disclosures This section is not applicable to the company - Not applicable[190] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Kirkland's common stock trades on Nasdaq (KIRK); the company has not paid dividends since fiscal 2015 and repurchased $37.3 million in shares in fiscal 2021 - The company's common stock is listed on Nasdaq under the symbol "KIRK"[192] - No dividends have been declared since fiscal 2015, and the senior credit facility restricts the ability to pay cash dividends[194] Fiscal 2021 Share Repurchases | Metric | Value | | :--- | :--- | | Total Shares Repurchased | 1,809,321 | | Aggregate Cost | ~$37.3 million | | Average Price Paid per Share | $20.61 | | Remaining Authorization (as of Jan 29, 2022) | ~$32.6 million | Reserved This section is reserved, with previously required selected financial data omitted per regulatory amendments - Selected financial data previously required by Item 301 of Regulation S-K has been omitted per amendments to Regulation S-K[199] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal 2021, net sales grew 2.7% to $558.2 million, gross profit margin improved to 33.8%, and net income reached $22.0 million, with strategic focus on omni-channel and supply chain efficiency Fiscal 2021 vs. Fiscal 2020 Performance | Metric | Fiscal 2021 | Fiscal 2020 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $558.2M | $543.5M | +2.7% | | Comparable Sales | +5.6% | -3.8% | N/A | | Gross Profit | $188.4M | $172.8M | +9.0% | | Gross Profit Margin | 33.8% | 31.8% | +200 bps | | Operating Income | $25.4M | $8.3M | +205.8% | | Net Income | $22.0M | $16.6M | +32.4% | | Diluted EPS | $1.51 | $1.12 | +34.8% | - The increase in gross profit margin was primarily due to favorable store occupancy costs, better shrink results, and lower distribution costs, which offset a significant increase in inbound freight costs (over $30 million) and higher e-commerce shipping expenses[205][218][219] - Strategic financial goals include growing e-commerce to over 50% of total sales, increasing direct sourcing to 70% by fiscal 2025, and improving annual gross profit margin to a mid-to-high 30% range[213] - Cash and cash equivalents decreased from $100.3 million to $25.0 million, mainly due to changes in working capital (primarily increased inventory) and $37.3 million in share repurchases[206][215][236] Quantitative and Qualitative Disclosure About Market Risk The company faces interest rate risk from its variable-rate credit facility and market risk from product cost volatility due to duties, tariffs, and transportation - The company is exposed to interest rate risk from its variable-rate Credit Agreement; as of January 29, 2022, there were no outstanding borrowings, and a 1% change in interest rates would not have a material impact[266] - The company is subject to market risk from volatility in the pricing of products, services, duties, tariffs, and transportation, which can affect sales and gross margin through inflationary or deflationary pressures[268] Financial Statements and Supplementary Data This section presents the consolidated financial statements, including an unqualified audit opinion from Ernst & Young LLP, detailing financial position, operations, cash flows, and key accounting policies - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and on the effectiveness of the company's internal control over financial reporting as of January 29, 2022[274][284][285] Consolidated Balance Sheet Highlights (in thousands) | Account | Jan 29, 2022 | Jan 30, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $25,003 | $100,337 | | Inventories, net | $114,029 | $62,083 | | Total Assets | $331,189 | $387,112 | | Total Liabilities | $250,063 | $292,190 | | Total Shareholders' Equity | $81,126 | $94,922 | Consolidated Statements of Operations (in thousands) | Account | FY 2021 | FY 2020 | FY 2019 | | :--- | :--- | :--- | :--- | | Net sales | $558,180 | $543,496 | $603,880 | | Gross profit | $188,428 | $172,838 | $165,434 | | Operating income (loss) | $25,345 | $8,287 | $(53,041) | | Net income (loss) | $22,026 | $16,639 | $(53,265) | - The company recorded asset impairment charges of $0.8 million in fiscal 2021, a significant decrease from $9.4 million in fiscal 2020 and $19.2 million in fiscal 2019[398] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles, financial disclosure, or auditing scope - None[402] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of January 29, 2022, with no material changes reported - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of January 29, 2022[404] - Management concluded that the company's internal control over financial reporting was effective as of January 29, 2022, based on the COSO framework[405] Other Information The company reports no other information for this item - None[408] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This section is not applicable to the company - Not applicable[409] Part III Directors, Executive Officers and Corporate Governance This section incorporates information on directors, executive officers, and corporate governance from the company's 2022 Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's Proxy Statement for the Annual Meeting of Shareholders to be held on June 22, 2022[411] - The company's Code of Business Conduct and Ethics is available on the Investor Relations section of its website[414] Executive Compensation This section incorporates executive and director compensation information by reference from the company's 2022 Proxy Statement - Information on executive and director compensation is incorporated by reference from the Proxy Statement[415] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates security ownership information from the 2022 Proxy Statement and details equity compensation plan metrics as of January 29, 2022 - Information on security ownership is incorporated by reference from the Proxy Statement[416] Equity Compensation Plan Information as of January 29, 2022 | Plan Category | Securities to be Issued Upon Exercise (a) | Weighted-Average Exercise Price (b) | Securities Available for Future Issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 1,011,992 | $15.08 | 1,463,106 | Certain Relationships and Related Transactions, and Director Independence This section incorporates information on related party transactions and director independence by reference from the company's 2022 Proxy Statement - Information on related party transactions and director independence is incorporated by reference from the Proxy Statement[419] Principal Accounting Fees and Services This section incorporates information on principal accounting fees and services by reference from the company's 2022 Proxy Statement - Information on principal accounting fees and services is incorporated by reference from the Proxy Statement[420] Part IV Exhibits and Financial Statement Schedules This section lists financial statements included in Item 8 and provides a comprehensive list of all exhibits filed with the annual report - This section contains a list of the financial statements filed with the report and a list of all exhibits, including governance documents, material contracts, and required certifications[422][424] Form 10-K Summary The company reports no Form 10-K summary - None[430]