Stores                           Square Footage              Average Store Size
             5/2/09               5/3/08                 5/2/09          5/3/08          5/2/09       5/3/08
 Mall           83        28 %      111        34 %       394,209         540,782         4,750        4,872
 Off-Mall      209        72 %      214        66 %     1,327,674       1,350,154         6,353        6,309

 Total         292       100 %      325       100 %     1,721,883       1,890,936         5,897        5,818

13-Week Period Ended May 2, 2009 Compared to the 13-Week Period Ended May 3, 2008
Results of operations. The table below sets forth selected results of our operations in dollars and expressed as a percentage of net sales for the periods indicated (dollars in thousands):

                                            13-Week Period Ended
                                 May 2, 2009                     May 3, 2008                        Change
                              $               %               $               %               $                %
Net sales                  $ 83,320          100.0 %       $ 84,077          100.0 %           (757 )           (0.9 %)
Cost of sales                51,146           61.4 %         57,169           68.0 %         (6,023 )          (10.5 %)

Gross profit                 32,174           38.6 %         26,908           32.0 %          5,266             19.6 %

Operating expenses:
Compensation and
benefits                     16,452           19.7 %         15,942           19.0 %            510              3.2 %
Other operating
expenses                      7,886            9.5 %          9,109           10.8 %         (1,223 )          (13.4 %)
Depreciation of
property and
equipment                     3,808            4.6 %          4,682            5.6 %           (874 )          (18.7 %)

Total operating
expenses                     28,146           33.8 %         29,733           35.4 %         (1,587 )           (5.3 %)

Operating income
(loss)                        4,028            4.8 %         (2,825 )         (3.4 %)         6,853           (242.6 %)

Interest
(income) expense, net            38            0.0 %             (1 )          0.0 %             39          (3900.0 %)
Other
(income) expense, net           (71 )         (0.1 %)          (272 )         (0.3 %)           201            (73.9 %)


Income (loss) before
income taxes                  4,061            4.9 %         (2,552 )         (3.0 %)         6,613           (259.1 %)
Income tax provision            583            0.7 %              0            0.0 %            583           (100.0 %)


Net income (loss)          $  3,478            4.2 %       $ (2,552 )         (3.0 %)      $  6,030           (236.3 %)

Net sales. Net sales decreased by 0.9% to $83.3 million for the first fiscal quarter of 2009 from $84.1 million for the prior year period. The net sales decrease resulted primarily from the decrease in store count, partially offset by an increase in comparable stores sales. We opened 3 new stores during the first quarter of fiscal 2009 and 3 new stores in fiscal 2008, and we closed 10 stores during the first quarter of fiscal 2009 and 39 stores in fiscal 2008. During the first quarter of fiscal 2009, comparable store sales increased 5.2% as compared to a 4.3% increase in the prior year period. Comparable store sales in our mall store locations were up 8.2% for the first quarter, while comparable store sales for our off-mall store locations were up 4.2%. The comparable store sales increase was primarily due to a slight increase in customer traffic coupled with an increase in the average ticket. The average ticket reflected an increase in the average retail selling price offset by a slight decrease in the items per transaction. The strongest performing categories were decorative accessories, wall décor, frames and gifts.
Gross profit. Gross profit increased $5.3 million, or 19.6%, to $32.2 million for the first quarter of fiscal 2009 from $26.9 million in the prior year period. Gross profit expressed as a percentage of total revenue increased to 38.6% for the first quarter of fiscal 2009, from 32.0% in the prior year period. The increase in gross profit as a percentage of total revenue was primarily driven by improved merchandise margins which increased from 51.6% in the first quarter of fiscal 2008 to 54.6% in the first quarter of fiscal 2009. Merchandise margin is calculated as net sales minus product cost of sales and inventory shrinkage. Merchandise margin excludes outbound freight, store occupancy and central distribution costs. The increase in merchandise margin was the result of higher initial markups and fewer markdowns. Initial markups increased primarily due to significantly lower ocean freight costs. Store occupancy costs also decreased as a percentage of net sales. This decline resulted from favorable lease renewal terms, comparable store sales leverage, the closure of underperforming stores, and our continued shift to less costly but more productive off-mall real estate locations. Outbound freight costs decreased as a percentage of sales reflecting a decline in diesel costs, the shift of two markets to more efficient direct-to-store delivery methods, and leverage from the comparable store sales increase.
Compensation and benefits. At the store-level, the compensation and benefits expense ratio decreased for the first quarter of fiscal 2009 as compared to the first quarter of 2008 primarily due to the positive comparable store sales performance. At the corporate level, the compensation and benefits ratio increased for the first quarter of 2009 as compared to the first quarter of 2008 primarily due to higher bonus accruals and increased health insurance costs.
Other operating expenses. The decrease in these operating expenses as a percentage of net sales was primarily the result of the positive comparable store sales performance and the leveraging effect on the fixed components of store and corporate operating expenses.
Depreciation and amortization. The decrease in depreciation and amortization as a percentage of sales reflects the large reduction in capital expenditures during fiscal 2008, impairment charges taken in prior periods, and the decline in overall store count.
Income tax provision. We recorded income tax expense of approximately $583,000, or 14.4% of pretax income during the first quarter of fiscal 2009, versus zero tax expense recorded in the prior year quarter. Based on the first quarter results of fiscal 2009, we anticipate generating sufficient ordinary income during fiscal 2009 to allow us to reverse the remaining valuation allowance that is recorded related to our deferred tax assets. Our effective tax rate of 14.4% for the first quarter takes into account the reversal of this remaining valuation allowance, and had the impact of reducing the expense by approximately $1.0 million during the quarter. The ultimate effective rate that is recorded for fiscal 2009 will depend on our operating performance for the remaining three quarters of the year.
Net income and earnings per share. As a result of the foregoing, we reported net income of $3.5 million, or $0.17 per diluted share, for the first quarter of fiscal 2009 as compared to a net loss of $(2.6) million, or $(0.13) per share, for the first quarter of fiscal 2008.
Liquidity and Capital Resources
Our principal capital requirements are for working capital and capital expenditures. Working capital consists mainly of merchandise inventories offset by accounts payable, which typically reach their peak by the end of the

third quarter of each fiscal year. Capital expenditures primarily relate to new store openings; existing store expansions, remodels or relocations; and purchases of equipment or information technology assets for our stores, distribution facilities or corporate headquarters. Historically, we have funded our working capital and capital expenditure requirements with internally generated cash and borrowings under our credit facility.
Cash flows from operating activities. Net cash provided by (used in) operating activities was $(3.1) million and $260,000 for the first quarter of fiscal 2009 and fiscal 2008, respectively. Cash flows from operating activities depend heavily on operating performance, changes in working capital and the timing and amount of payments for income taxes. The change in the amount of cash from operations as compared to the prior year period was primarily the result of increased earnings offset by cash tax payments during the first quarter of fiscal 2009, as compared to income tax refunds received in the prior year quarter. Inventories increased approximately $332,000 during the first quarter of fiscal 2009 and 2008. Inventories averaged approximately $134,000 per store at May 2, 2009, as compared to $128,000 per store at May 3, 2008. The increase on a per-store basis is primarily due to an increase in the average square footage per store. Accounts payable increased approximately $936,000 during the first quarter of fiscal 2009 as compared to a decrease of approximately $515,000 for the prior year period. The change in accounts payable is primarily due to the timing and amount of merchandise receipt flow. We also made cash tax payments of approximately $5.6 million during the first quarter of fiscal 2009 whereas we received an income tax refund of approximately $2.0 million in the prior-year quarter.
Cash flows from investing activities. Net cash used in investing activities for the first quarter of fiscal 2009 consisted principally of $2.3 million in capital expenditures as compared to $1.2 million for the prior year period. These expenditures primarily related to new store construction and the purchase of new point-of-sale software. During the first quarter of fiscal 2009, we opened 3 stores. We expect that capital expenditures for all of fiscal 2009 will be approximately $9 to $10 million, primarily to fund the leasehold improvements of approximately 15 to 20 new stores and maintain our investments in existing stores, our distribution center and information technology infrastructure. As of May 2, 2009, we had lease commitments to eight new stores, which includes the three new stores opened during the first quarter of fiscal 2009. We anticipate that capital expenditures, including leasehold improvements and furniture and fixtures, and equipment for our new stores in fiscal 2009 will average approximately $400,000 to $430,000 per store. We also anticipate that we will receive landlord allowances in connection with the construction of our new stores in fiscal 2009. These allowances are reflected as a component of cash flows from operating activities within our consolidated statement of cash flows.
Cash flows from financing activities. Net cash provided by financing activities was approximately $35,000 and $21,000 for the first quarter of fiscal 2009 and fiscal 2008, respectively, and were related to the exercise of employee stock options as well as employee stock purchases.
Revolving credit facility. Effective October 4, 2004, we entered into a five-year senior secured revolving credit facility with a revolving loan limit of up to $45 million. On August 6, 2007, we entered into the First Amendment to Loan and Security Agreement (the "Amendment") which provided the Company with additional availability under our borrowing base through higher advance rates on eligible inventory. As a result of the amendment, the aggregate size of the overall credit facility remained unchanged at $45 million, but the term of the facility was extended two years making the new expiration date October 4, 2011. Amounts outstanding under the amended facility, other than First In Last Out ("FILO") loans, bear interest at a floating rate equal to the 60-day LIBOR rate (0.83% at May 2, 2009) plus 1.25% to 1.50% (depending on the amount of excess availability under the borrowing base). FILO loans, which apply to the first approximate $2 million borrowed at any given time, bear interest at a floating rate equal to the 60-day LIBOR rate plus 2.25% to 2.5% (depending on the amount of excess availability under the borrowing base). Additionally, we pay a quarterly fee to the bank equal to a rate of 0.2% per annum on the unused portion of the revolving line of credit. Borrowings under the facility are collateralized by substantially all of our assets and guaranteed by our subsidiaries. The maximum availability under the credit facility is limited by a borrowing base formula, which consists of a percentage of eligible inventory and receivables less reserves. The facility also contains provisions that could result in changes to the presented terms or the acceleration of maturity. Circumstances that could lead to such changes or acceleration include a material adverse change in the business or an event of default under the credit agreement. The facility has one financial covenant that requires the

Company to maintain excess availability under the borrowing base, as defined in the credit agreement, of at least $3.0 to $4.5 million depending on the size of the borrowing base, at all times.
As of May 2, 2009, we were in compliance with the covenants in the facility and there were no outstanding borrowings under the credit facility, with approximately $21.7 million available for borrowing (net of the availability block as described above).
At May 2, 2009, our balance of cash and cash equivalents was approximately $31.1 million and the borrowing availability under our facility was $21.7 million (net of the availability block as described above). We believe that the combination of our cash balances, line of credit availability and cash flow from operations will be sufficient to fund our planned capital expenditures and working capital requirements for at least the next twelve months. Off-Balance Sheet Arrangements
None.
Significant Contractual Obligations and Commercial Commitments Construction commitments
The Company had commitments for new store construction projects totaling approximately $2.0 million at May 2, 2009. Critical Accounting Policies and Estimates There have been no significant changes to our critical accounting policies during fiscal 2009. Refer to our Annual Report on Form 10-K for the fiscal year ended January 31, 2009 for a summary of our critical accounting policies. Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995 The following information is provided pursuant to the "Safe Harbor" provisions of the Private Securities Litigation Reform Act of 1995. Certain statements under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-Q are "forward-looking statements" made pursuant to these provisions. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Words such as "should," "likely to," "forecasts," "strategy," "goal," "anticipates," "believes," "expects," "estimates," "intends," "plans," "projects," and similar expressions, may identify such forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from the results projected in such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
We caution readers that the following important factors, among others, have in the past, in some cases, affected and could in the future affect our actual results of operations and cause our actual results to differ materially from the results expressed in any forward-looking statements made by us or on our behalf.
• Our Performance May Be Affected by General Economic Conditions and the Current Global Financial Crisis.

• A Prolonged Economic Downturn Could Result in Reduced Net Sales and Profitability.

• We May Not Be Able to Successfully Anticipate Consumer Trends and Our Failure to Do So May Lead to Loss of Consumer Acceptance of Our Products Resulting in Reduced Net Sales.

• The Market Price for Our Common Stock Might Be Volatile and Could Result in a Decline in the Value of Your Investment.

• Our Comparable Store Net Sales Fluctuate Due to a Variety of Factors.

• We Face an Extremely Competitive Specialty Retail Business Market, and Such Competition Could Result in a Reduction of Our Prices and a Loss of Our Market Share.

• We Depend on a Number of Vendors to Supply Our Merchandise, and Any Delay in Merchandise Deliveries from Certain Vendors May Lead to a Decline in Inventory Which Could Result in a Loss of Net Sales.

• We Are Dependent on Foreign Imports for a Significant Portion of Our Merchandise, and Any Changes in the Trading Relations and Conditions Between the United States and the Relevant Foreign Countries May Lead to a Decline in Inventory Resulting in a Decline in Net Sales, or an Increase in the Cost of Sales Resulting in Reduced Gross Profit.

• Our Success Is Highly Dependent on Our Planning and Control Processes and Our Supply Chain, and Any Disruption in or Failure to Continue to Improve These Processes May Result in a Loss of Net Sales and Net Income.

• Our Business Is Highly Seasonal and Our Fourth Quarter Contributes a Disproportionate Amount of Our Net Sales, Net Income and Cash Flow, and Any Factors Negatively Impacting Us During Our Fourth Quarter Could Reduce Our Net Sales, Net Income and Cash Flow, Leaving Us with Excess Inventory and Making It More Difficult for Us to Finance Our Capital Requirements.

• We May Experience Significant Variations in Our Quarterly Results.

• The Agreement Governing Our Debt Places Certain Reporting and Consent Requirements on Us Which May Affect Our Ability to Operate Our Business in Accordance with Our Business and Strategy.

• We Are Highly Dependent on Customer Traffic in Malls and Shopping Centers, and Any Reduction in the Overall Level of Traffic Could Reduce Our Net Sales and Increase Our Sales and Marketing Expenses.

• Our Hardware and Software Systems Are Vulnerable to Damage that Could Harm Our Business.

• We Depend on Key Personnel, and if We Lose the Services of Any Member of Our Senior Management Team, We May Not Be Able to Run Our Business Effectively.

• Our Charter and Bylaw Provisions and Certain Provisions of Tennessee Law May Make It Difficult in Some Respects to Cause a Change in Control of Kirkland's and Replace Incumbent Management.

• Concentration of Ownership among Our Existing Directors, Executive Officers, and Their Affiliates May Prevent New Investors from Influencing Significant Corporate Decisions.

• Our Ability to Use Our Net Operating Loss Carry Forwards in the Future May Be Limited, Which Could Have an Adverse Impact on Our Tax Liabilities.