Kirkland's(KIRK) - 2023 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for the 13-week period ended April 30, 2022, showing a shift from net income to a net loss, driven by lower sales and increased costs, with key balance sheet changes including a significant decrease in cash, an increase in inventory, and new borrowings on the revolving line of credit Condensed Consolidated Balance Sheets As of April 30, 2022, total assets were $336.0 million, a decrease from $365.0 million a year prior, primarily driven by a significant drop in cash and cash equivalents to $5.4 million from $72.3 million, while inventories increased to $130.9 million from $76.3 million year-over-year, and total liabilities stood at $270.8 million, including $35.0 million in new borrowings on the revolving line of credit, with total shareholders' equity decreasing to $65.2 million from $95.3 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | April 30, 2022 | May 1, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $5,382 | $72,275 | | Inventories, net | $130,855 | $76,259 | | Total current assets | $147,231 | $157,279 | | Total assets | $336,016 | $365,000 | | Liabilities & Equity | | | | Accounts payable | $47,313 | $53,107 | | Revolving line of credit | $35,000 | $0 | | Total liabilities | $270,809 | $269,688 | | Total shareholders' equity | $65,207 | $95,312 | Condensed Consolidated Statements of Operations For the 13-week period ended April 30, 2022, the company reported a net loss of $7.9 million, or ($0.63) per diluted share, a significant downturn from a net income of $1.7 million, or $0.11 per diluted share, in the same period last year, driven by a 16.4% decrease in net sales to $103.3 million and a lower gross profit margin, which fell from 32.6% to 27.4% Statement of Operations Summary (in thousands, except per share data) | Metric | 13-Week Period Ended April 30, 2022 | 13-Week Period Ended May 1, 2021 | | :--- | :--- | :--- | | Net sales | $103,285 | $123,569 | | Gross profit | $28,292 | $40,255 | | Operating (loss) income | ($11,095) | $2,054 | | Net (loss) income | ($7,855) | $1,719 | | Diluted (loss) earnings per share | ($0.63) | $0.11 | Condensed Consolidated Statements of Shareholders' Equity Total shareholders' equity decreased from $81.1 million at the beginning of the period to $65.2 million at April 30, 2022, primarily due to a net loss of $7.9 million and the repurchase of common stock totaling $6.3 million - Key activities impacting shareholders' equity in the 13 weeks ended April 30, 2022, included a net loss of $7.9 million and common stock repurchases of $6.3 million[14] Condensed Consolidated Statements of Cash Flows For the 13-week period ended April 30, 2022, net cash used in operating activities was $43.6 million, a significant increase from $25.0 million in the prior-year period, mainly due to the net loss and an increase in inventory, while net cash provided by financing activities was $26.4 million, primarily from $35.0 million in borrowings on the revolving line of credit, partially offset by $6.3 million in share repurchases, resulting in cash and cash equivalents decreasing by $19.6 million during the period Cash Flow Summary (in thousands) | Cash Flow Activity | 13-Week Period Ended April 30, 2022 | 13-Week Period Ended May 1, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | ($43,631) | ($24,955) | | Net cash used in investing activities | ($2,378) | ($1,546) | | Net cash provided by (used in) financing activities | $26,388 | ($1,561) | | Net decrease in cash | ($19,621) | ($28,062) | | Cash at end of period | $5,382 | $72,275 | Notes to Condensed Consolidated Financial Statements The notes provide additional detail on the company's accounting policies and financial position, including the nature of the business as a specialty retailer with 360 stores, the impact of macroeconomic conditions, revenue recognition policies, details on legal proceedings, stock-based compensation, the share repurchase plan, and the senior credit facility, noting that economic disruption and inflation have affected business operations and could continue to do so - The company operates as a specialty retailer of home décor with 360 stores in 35 states and an e-commerce website as of April 30, 2022[17] - The company acknowledges that economic disruption, inflation, and the COVID-19 pandemic have affected business operations and that these conditions could significantly impact future accounting estimates[20] - As of April 30, 2022, the company had approximately $26.3 million remaining under its authorized share repurchase plan[40] - The company has a $75 million senior secured revolving credit facility. As of April 30, 2022, there were $35.0 million in outstanding borrowings with approximately $40.0 million available[41][44] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 16.4% decrease in net sales for Q1 2022 to a general decline in consumer discretionary spending and lower traffic, with gross profit margin falling by 520 basis points to 27.4% due to sales deleverage on fixed costs, higher freight costs, and increased inventory damages, leading to an operating loss of $11.1 million compared to a $2.1 million income in the prior year, while the company continues its store rationalization strategy aiming for an ideal count of approximately 350 stores, and liquidity was impacted by the operating loss and working capital changes, necessitating a $35.0 million draw on the revolving credit facility Results of Operations Net sales decreased 16.4% to $103.3 million, driven by a 15.8% decrease in comparable sales due to lower consumer spending and traffic, with gross profit margin contracting by 520 basis points to 27.4%, primarily from deleverage on store occupancy costs (+240 bps), lower landed product margin (-80 bps), and higher other costs of sales like damages (+130 bps), while operating expenses increased as a percentage of sales due to sales deleverage, contributing to a net loss of $7.9 million versus a net income of $1.7 million in the prior-year quarter Q1 2022 vs Q1 2021 Performance (in thousands) | Metric | Q1 2022 | Q1 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $103,285 | $123,569 | $(20,284) | (16.4)% | | Gross profit | $28,292 | $40,255 | $(11,963) | (29.7)% | | Gross Profit % | 27.4% | 32.6% | - | -520 bps | | Operating (loss) income | $(11,095) | $2,054 | $(13,149) | (640.2)% | | Net (loss) income | $(7,855) | $1,719 | $(9,574) | (557.0)% | - The decrease in gross profit margin was driven by unfavorable store occupancy costs (+240 bps), lower landed product margin (-80 bps), increased damages and shrink (+130 bps), higher distribution center costs (+50 bps), and increased outbound freight costs (+30 bps)[62] Store Rationalization The company is executing a store rationalization strategy to improve profitability by refreshing high-performing stores and closing or relocating underperforming ones, believing its ideal store count is approximately 350 stores, and in Q1 2022, the company had one permanent store closure, reducing the total store count to 360 from 370 a year ago Store Activity | Activity | 13-Week Period Ended April 30, 2022 | | :--- | :--- | | New store openings | 0 | | Permanent store closures | 1 | | Total Stores at Period End | 360 | Liquidity and Capital Resources Net cash used in operating activities increased to $43.6 million in Q1 2022 from $25.0 million in Q1 2021, driven by lower operating performance and working capital changes, with capital expenditures at $2.4 million, focused on technology and supply chain projects, and to manage liquidity, the company borrowed $35.0 million from its revolving credit facility and repurchased $6.3 million of its common stock, resulting in cash on hand of $5.4 million and $40.0 million available for borrowing as of April 30, 2022 - Net cash used in operating activities increased to $43.6 million, mainly due to a decline in operating performance and working capital changes, including a decline in accounts payable and increased inventory levels[75] - During the quarter, the company borrowed $35.0 million under its revolving credit facility and used $6.3 million to repurchase common stock[77] - Subsequent to the quarter's end, the company borrowed an additional $5.0 million under its Credit Agreement[81] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk exposure is to interest rate changes on its variable-rate senior credit facility, which had $35.0 million in outstanding borrowings as of April 30, 2022, though management states that a 1% change in interest rates would not have a material impact on results of operations at current borrowing levels, and the company does not use derivative financial instruments - The company is exposed to interest rate risk from its Credit Agreement, which had $35.0 million in outstanding borrowings at variable rates as of April 30, 2022[87] - A hypothetical 1% increase or decrease in the interest rate on borrowings would not have a material impact on the company's results of operations[87] Controls and Procedures Based on an evaluation as of April 30, 2022, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective, with no changes in internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls - Management, including the CEO and CFO, concluded that as of April 30, 2022, the company's disclosure controls and procedures were effective[90] - No material changes to internal control over financial reporting occurred during the last fiscal quarter[91] PART II - OTHER INFORMATION Legal Proceedings The company is involved in two putative class action lawsuits: Gennock v. Kirkland's, Inc., concerning allegations of printing excessive credit card information on receipts, and Miles v. Kirkland's Stores, Inc., alleging various wage and hour violations in California, with the company believing both cases are without merit and vigorously defending itself, and management does not expect these proceedings to have a material adverse effect on its financial condition - The company is a defendant in Gennock v. Kirkland's, Inc., a class action alleging improper information on customer receipts. The company is appealing a state court ruling on standing[35] - The company is a defendant in Miles v. Kirkland's Stores, Inc., a class action alleging wage and hour violations in California. A motion to certify the class was denied, but the plaintiff is appealing[36] Risk Factors No material changes have been made to the company's risk factors as previously disclosed in its Annual Report on Form 10-K for the fiscal year ended January 29, 2022, and investors are advised to consider those previously disclosed risks - No material changes have been made to the risk factors previously disclosed in the Annual Report on Form 10-K for the fiscal year ended January 29, 2022[95] Unregistered Sales of Equity Securities and Use of Proceeds During the 13-week period ended April 30, 2022, the company repurchased 479,966 shares of its common stock for a total cost of approximately $6.3 million, at an average price of $13.03 per share, and as of April 30, 2022, approximately $26.3 million remained available for future repurchases under the authorized plan Share Repurchases for 13-Week Period Ended April 30, 2022 | Metric | Value | | :--- | :--- | | Total Shares Purchased | 479,966 | | Average Price Paid per Share | $13.03 | | Total Cost (in thousands) | $6,253 | | Approx. Value Remaining Under Plan (in thousands) | $26,304 | Exhibits This section lists the exhibits filed with the Form 10-Q, which include certifications from the Chief Executive Officer and Chief Financial Officer as required by the Sarbanes-Oxley Act, as well as Inline XBRL financial data files - Exhibits filed with the report include CEO and CFO certifications pursuant to Rule 13a-14(a) and 18 U.S.C. Section 1350, along with Inline XBRL documents[98]