Kirkland's(US:KIRK)2022-12-01 16:00markdown 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)