Kirkland's(KIRK) - 2023 Q4 - Annual Report

Part I Business 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] 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] 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] Risk Factors 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] - 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][91] - 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][94] - 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][119] - 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][133] - 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][154][157] - 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] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[166] Properties 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] 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 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] Mine Safety Disclosures This item is not applicable to the company - Not applicable[171] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] - No dividends have been declared since fiscal 2015, and the senior credit facility restricts the ability to pay cash dividends[174] 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 This item is reserved Management's Discussion and Analysis of Financial Condition and Results of Operations 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] - 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] - 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] - 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] Quantitative and Qualitative Disclosure About Market Risk 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] - 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] Financial Statements and Supplementary Data 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 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 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] - Asset impairment charges totaled $2.1 million in fiscal 2022, compared to $0.8 million in fiscal 2021, primarily related to underperforming stores[225][339] - 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] - 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][342] - 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][333][335] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[343] Controls and Procedures 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] - Management concluded that the company's internal control over financial reporting was effective as of January 28, 2023, based on the COSO framework[346] Other Information The company reports no other information for this item - None[348] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[349] Part III Directors, Executive Officers and Corporate Governance 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] Executive Compensation 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] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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] 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 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] Principal Accounting Fees and Services 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] Part IV Exhibits and Financial Statement Schedules 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][362] Form 10-K Summary The company provides no summary for this item - None[367]