Kirkland's(KIRK) - 2023 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Financial Statements The unaudited condensed consolidated financial statements for the period ended July 30, 2022, show a significant deterioration in financial performance compared to the prior year, with a shift to a net loss and negative operating cash flow Condensed Consolidated Balance Sheets As of July 30, 2022, the balance sheet reflects a sharp decrease in cash, a substantial increase in inventory and debt, and a significant decline in shareholders' equity | Balance Sheet Item | July 30, 2022 ($ millions) | July 31, 2021 ($ millions) | Change | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $10.3M | $45.2M | ▼ 77.2% | | Inventories, net | $141.7M | $92.0M | ▲ 54.0% | | Total assets | $353.4M | $345.1M | ▲ 2.4% | | Revolving line of credit | $55.0M | — | ▲ N/A | | Total liabilities | $313.3M | $260.5M | ▲ 20.3% | | Total shareholders' equity | $40.1M | $84.6M | ▼ 52.6% | Condensed Consolidated Statements of Operations For the 13-week period ended July 30, 2022, the company reported a net loss of $25.7 million, driven by decreased sales and compressed gross margins, extending to a $33.6 million net loss for the 26-week period Income Statement (13-Week Period) | Income Statement (13-Week Period) | July 30, 2022 ($ millions) | July 31, 2021 ($ millions) | Change | | :--- | :--- | :--- | :--- | | Net sales | $102.1M | $114.8M | ▼ 11.1% | | Gross profit | $18.5M | $39.7M | ▼ 53.3% | | Operating (loss) income | ($21.8M) | $0.2M | ▼ 9875.8% | | Net (loss) income | ($25.7M) | $0.6M | ▼ 4206.2% | | Diluted (loss) per share | ($2.02) | $0.04 | ▼ N/A | Income Statement (26-Week Period) | Income Statement (26-Week Period) | July 30, 2022 ($ millions) | July 31, 2021 ($ millions) | Change | | :--- | :--- | :--- | :--- | | Net sales | $205.4M | $238.4M | ▼ 13.8% | | Gross profit | $46.8M | $79.9M | ▼ 41.4% | | Operating (loss) income | ($32.9M) | $2.3M | ▼ 1544.7% | | Net (loss) income | ($33.6M) | $2.3M | ▼ 1531.1% | | Diluted (loss) per share | ($2.65) | $0.15 | ▼ N/A | Condensed Consolidated Statements of Cash Flows For the 26 weeks ended July 30, 2022, net cash used in operating activities increased to $56.1 million, primarily due to net loss and increased inventory, necessitating $55 million in credit line borrowings Cash Flow (26-Week Period) | Cash Flow (26-Week Period) | July 30, 2022 ($ millions) | July 31, 2021 ($ millions) | | :--- | :--- | :--- | | Net cash used in operating activities | ($56.1M) | ($38.2M) | | Net cash used in investing activities | ($5.0M) | ($3.4M) | | Net cash provided by (used in) financing activities | $46.4M | ($13.5M) | | Net decrease in cash | ($14.7M) | ($55.1M) | - The company borrowed $55.0 million on its revolving line of credit during the first 26 weeks of fiscal 2022 to fund operations, compared to no borrowings in the same period of 2021[16] Notes to Condensed Consolidated Financial Statements The notes detail the basis of presentation, explain income tax expense despite a pre-tax loss due to a valuation allowance, and outline ongoing lawsuits and the $75 million revolving credit facility - The company operates 356 stores in 35 states as of July 30, 2022, and an e-commerce website[18] - The company recorded a full valuation allowance against its deferred tax assets as of July 30, 2022, due to uncertainty about realizing future tax benefits[34] - As of July 30, 2022, the company had $55.0 million in outstanding borrowings under its credit facility with approximately $20.0 million available, and an additional $5.0 million was borrowed after the quarter ended[49][52] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the poor performance in Q2 and H1 2022 to challenging macroeconomic conditions, leading to decreased sales, severely impacted gross margins from discounting, and tightened liquidity requiring credit facility draws Results of Operations For the 13-week period ended July 30, 2022, net sales fell 11.1% and gross profit margin plummeted to 18.1% due to discounting, resulting in a $25.7 million net loss for the quarter and $33.6 million for the half-year 13-Week Period Performance | 13-Week Period Performance | Q2 2022 | Q2 2021 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $102.1M | $114.8M | ▼ 11.1% | | Comparable Sales | -8.6% | -5.2% | N/A | | Gross Profit Margin | 18.1% | 34.6% | ▼ 1,650 bps | | Net (Loss) Income | ($25.7M) | $0.6M | N/A | - The decrease in Q2 gross profit margin was driven by a 1,070 bps drop in landed product margin (due to discounting), a 170 bps increase in store occupancy costs, a 160 bps increase in outbound freight costs, and a 150 bps increase in distribution center costs[66] 26-Week Period Performance | 26-Week Period Performance | H1 2022 | H1 2021 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $205.4M | $238.4M | ▼ 13.8% | | Comparable Sales | -12.4% | +24.6% | N/A | | Gross Profit Margin | 22.8% | 33.5% | ▼ 1,070 bps | | Net (Loss) Income | ($33.6M) | $2.3M | N/A | Liquidity and Capital Resources The company's liquidity is strained by operating losses and inventory build-up, leading to $56.1 million in negative operating cash flow and $55.0 million in credit facility borrowings, with plans to sell excess inventory - Net cash used in operating activities increased to $56.1 million in H1 2022 from $38.2 million in H1 2021, mainly due to a decline in operating performance and increased inventory levels[85] - The company borrowed $55.0 million on its revolving credit facility in H1 2022 to fund increased inventory levels resulting from lower-than-anticipated sales[84][87] - As of July 30, 2022, the company had approximately $26.3 million remaining under its current share repurchase authorization[93] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure on its $55.0 million variable-rate debt, though management expects no material impact from a 1% rate change and does not use derivatives - The company is exposed to interest rate risk due to $55.0 million in outstanding variable-rate borrowings as of July 30, 2022, with an additional $5 million borrowed subsequently[97] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of July 30, 2022, with no material changes in internal control over financial reporting - The Chief Executive Officer and Chief Financial Officer concluded that as of July 30, 2022, the company's disclosure controls and procedures were effective[100] - No changes in internal control over financial reporting occurred during the last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal controls[101] PART II OTHER INFORMATION Legal Proceedings The company is involved in several putative class action lawsuits related to customer receipts and wage/hour violations, which management believes are without merit and will not materially affect financial results - The company is a defendant in several putative class action lawsuits, including cases related to wage and hour violations in California and New York, and a case concerning credit card receipt information in Pennsylvania[39][40][41] - Management does not believe that pending legal proceedings will have a material effect on its consolidated financial condition, operating results, or cash flows[39][42] Risk Factors There have been no material changes to the company's previously disclosed risk factors in the Annual Report on Form 10-K for the fiscal year ended January 29, 2022 - There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended January 29, 2022[105] Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any common stock during the 13-week period ended July 30, 2022, with approximately $26.3 million remaining available under its share repurchase authorization - No shares of common stock were repurchased by the company during the 13-week period ended July 30, 2022[106] - As of July 30, 2022, approximately $26.3 million remained under the company's authorized share repurchase plan[106] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and Inline XBRL documents - The report includes required certifications from the Chief Executive Officer and Chief Financial Officer as exhibits[109]