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KIRK > SEC Filings for KIRK > Form 10-Q on 12-Sep-2013All Recent SEC Filings

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Form 10-Q for KIRKLAND'S, INC


12-Sep-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

This "Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A) is intended to provide an understanding of our financial condition, change in financial condition, cash flow, liquidity and results of operations. The following MD&A discussion should be read in conjunction with the condensed consolidated financial statements and notes to those statements that appear elsewhere in this Form 10-Q and in the Company's Annual Report on Form 10-K, filed April 18, 2013. The following discussion contains forward-looking statements that reflect the Company's plans, estimates and beliefs. The Company's actual results could differ materially from those discussed or referred to in the forward-looking statements. Factors that could cause or contribute to any differences include, but are not limited to, those discussed under the caption "Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995" and under

Part II, Item 1A - "Risk Factors".

General

We are a specialty retailer of home d้cor and gifts in the United States, operating 317 stores in 35 states as of August 3, 2013. Our stores present a broad selection of distinctive merchandise, including framed art, mirrors, wall d้cor, candles and related items, lamps, decorative accessories, accent furniture, textiles, garden-related accessories and artificial floral products. Our stores also offer an extensive assortment of holiday merchandise during seasonal periods as well as items carried throughout the year suitable for gift-giving. In addition, we use innovative design and packaging to market home d้cor items as gifts. We provide our predominantly female customers an engaging shopping experience characterized by a diverse, ever-changing merchandise selection at prices which provide discernible value to the customer. Our stores offer a unique combination of style and value that has led to our emergence as a leader in home d้cor and has enabled us to develop a strong customer franchise.


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During the 13-week period ended August 3, 2013, we opened 6 new stores and closed 6 stores. The following table summarizes our stores and square footage under lease:

                                                  As of           As of
                                                August 3,       July 28,
                                                  2013            2012
            Number of stores                           317             302
            Square footage                       2,338,518       2,130,577
            Average square footage per store         7,377           7,055

13-Week Period Ended August 3, 2013 Compared to the 13-Week Period Ended
July 28, 2012

Results of operations. The table below sets forth selected results of our
operations both in dollars (in thousands) and as a percentage of net sales for
the periods indicated:



                                                      13-Week Period Ended
                                           August 3, 2013               July 28, 2012                  Change
                                           $             %             $             %             $            %
Net sales                               $ 97,123        100.0 %     $ 91,004        100.0 %     $ 6,119          6.7 %
Cost of sales                             61,480         63.3 %       61,010         67.0 %         470          0.8 %

Gross profit                              35,643         36.7 %       29,994         33.0 %       5,649         18.8 %
Operating expenses:
Compensation and benefits                 19,926         20.5 %       18,733         20.6 %       1,193          6.4 %
Other operating expenses                  12,841         13.2 %       12,008         13.2 %         833          6.9 %
Depreciation                               3,950          4.1 %        3,205          3.5 %         745         23.2 %

Total operating expenses                  36,717         37.8 %       33,946         37.3 %       2,771          8.2 %
Operating loss                            (1,074 )       (1.1 )%      (3,952 )       (4.3 )%      2,878        (72.8 )%
Interest expense, net                         72          0.1 %           67          0.1 %           5          7.5 %
Other income, net                            (53 )       (0.1 )%         (45 )       (0.0 )%         (8 )       17.8 %

Loss before income taxes                  (1,093 )       (1.1 )%      (3,974 )       (4.4 )%      2,881        (72.5 )%
Income tax benefit                          (516 )       (0.5 )%      (1,977 )       (2.2 )%      1,461        (73.9 )%

Net loss                                $   (577 )       (0.6 )%    $ (1,997 )       (2.2 )%    $ 1,420        (71.1 )%

Net sales. Net sales increased 6.7% to $97.1 million for the second fiscal quarter of 2013 compared to $91.0 million for the prior year period. The impact of net new store growth contributed an increase to net sales of $6.3 million. This increase in net sales was partially offset by a decline in comparable store sales, including e-commerce sales, of 0.2%, which offset the quarter-on-quarter increase by $175,000. Comparable store sales decreased 3.6% in the prior year period. E-commerce net sales were up 26% versus the prior year period, while comparable store sales at brick-and-mortar stores were down 1.3%. For brick-and-mortar stores, the comparable store sales decrease was primarily due to a decrease in the number of transactions, partially offset by an increase in the average ticket. The decrease in transactions resulted from a decline in traffic, partially offset by a slight increase in conversion. The increase in the average ticket reflected an increase in the average retail price per item. The merchandise categories contributing most to the comparable store sales decline were art, floral, and decorative accessories partially offset by improved performance in mirrors, lamps and ornamental wall d้cor.

Gross profit. Gross profit as a percentage of net sales increased from 33.0% in the second quarter of 2012 to 36.7% in the second quarter of 2013. The overall increase in gross profit margin was primarily due to a higher merchandise margin, which increased from 49.7% in the second quarter of fiscal 2012 to 53.4% in the second quarter of fiscal 2013. Merchandise margin is calculated as net sales minus product cost of sales (including inbound freight), inventory shrinkage, and loyalty reward program discounts. Merchandise margin excludes outbound freight, store occupancy and central distribution costs. The increase in merchandise margin was primarily the result of a reduction in promotional activity and markdowns, slightly offset by higher inbound freight costs. Store occupancy costs, outbound freight costs, and central distribution expenses as a percentage of net sales were essentially flat in the second quarter of 2013 as compared to the prior year period.

Compensation and benefits. Compensation and benefits expenses for stores increased in dollars for the second quarter of fiscal 2013 as compared to the second quarter of 2012 due to increase in the store count, but decreased as a percentage of net sales versus the prior year period as a result of better store-level payroll management. At the corporate level, the compensation and benefits ratio increased over the prior year period primarily due to increased incentive pay accruals.


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Other operating expenses. Other operating expenses increased in dollars versus the prior year period, but remained flat as a percentage of net sales. This is due primarily to a reduction in insurance claims and related costs, offset by an increase in advertising spend.

Depreciation. The increase in depreciation as a percentage of sales reflects an increase in capital expenditures in recent fiscal years and the implementation of major technology upgrades during fiscal 2012.

Income tax expense. We recorded income tax benefit of approximately $516,000, or 47.2% of pre-tax loss during the second quarter of fiscal 2013, versus a tax benefit of approximately $2.0 million, or 49.7% of pre-tax loss, in the prior year quarter.

Net income and earnings per share. As a result of the foregoing, we reported net loss of $577,000, or $0.03 per diluted share, for the second quarter of fiscal 2013 as compared to net loss of $2.0 million, or $0.11 per diluted share, for the second quarter of fiscal 2012.

26-Week Period Ended August 3, 2013 Compared to the 26-Week Period Ended
July 28, 2012

Results of operations. The table below sets forth selected results of our
operations both in dollars (in thousands) and as a percentage of net sales for
the periods indicated:



                                                    26-Week Period Ended
                                         August 3, 2013               July 28, 2012                    Change
                                         $             %              $             %             $             %
Net sales                            $ 198,356        100.0 %     $ 188,792        100.0 %     $ 9,564             5.1 %
Cost of sales                          123,307         62.2 %       120,329         63.7 %       2,978             2.5 %

Gross profit                            75,049         37.8 %        68,463         36.3 %       6,586             9.6 %
Operating expenses:
Compensation and benefits               39,854         20.1 %        38,029         20.1 %       1,825             4.8 %
Other operating expenses                25,692         13.0 %        24,996         13.2 %         696             2.8 %
Depreciation                             7,741          3.9 %         6,220          3.3 %       1,521            24.5 %

Total operating expenses                73,287         36.9 %        69,245         36.7 %       4,042             5.8 %
Operating income (loss)                  1,762          0.9 %          (782 )       (0.4 )%      2,544          (325.3 )%
Interest expense, net                      139          0.1 %           147          0.1 %          (8 )          (5.4 )%
Other income, net                         (114 )       (0.1 )%         (128 )       (0.1 )%         14           (10.9 )%

Income (loss) before income taxes        1,737          0.9 %          (801 )       (0.4 )%      2,538          (316.9 )%
Income tax expense (benefit)               541          0.3 %          (759 )       (0.4 )%      1,300          (171.3 )%

Net income (loss)                    $   1,196          0.6 %     $     (42 )       (0.0 )%    $ 1,238        (2,947.6 )%

Net sales. Net sales increased 5.1% to $198.4 million for the first half of fiscal 2013 compared to $188.8 million for the prior year period. The impact of net new store growth contributed an increase to net sales of $11.9 million. This increase in net sales was partially offset by a decline in comparable store sales, including e-commerce sales, of 1.3%, which offset the year-over-year increase by $2.3 million. Comparable store sales decreased 2.4% in the prior year period. E-commerce net sales were up 22.6% versus the prior year period, while comparable store sales at brick-and-mortar stores were down 2.2%. For brick-and-mortar stores, the comparable store sales decrease was primarily due to a decrease in number of transactions, partially offset by an increase in the average ticket. The decrease in transactions resulted from a decline in traffic, partially offset by an increase in conversion. The increase in the average ticket reflected an increase in average retail selling price coupled with a slight increase in items sold per transaction. The merchandise categories contributing most to the comparable store sales decline were art, furniture, floral and frames and were partially offset by improved performance in mirrors and lamps.

Gross profit. Gross profit as a percentage of net sales increased from 36.3% in the first half of 2012 to 37.8% in the first half of 2013. The overall increase in gross profit margin was primarily due to a higher merchandise margin, which increased from 52.7% in the first half of fiscal 2012 to 54.3% in the first half of fiscal 2013. Merchandise margin is calculated as net sales minus product cost of sales (including inbound freight), inventory shrinkage, and loyalty reward program discounts. Merchandise margin excludes outbound freight, store occupancy and central distribution costs. The increase in merchandise margin was primarily the result of a reduction in promotional activity and markdowns, slightly offset by higher inbound freight costs. Store occupancy costs, outbound freight costs, and central distribution expenses as a percentage of net sales were essentially flat in the first half of 2013 as compared to the prior year period.

Compensation and benefits.Compensation and benefits expenses for stores increased in dollars as a result of an increase in store count, but remained flat for the first half of fiscal 2013 as compared to the first half of 2012 due to better store-level payroll management. At the corporate level, the compensation and benefits ratio increased over the prior year period primarily due to increased incentive pay accruals.


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Other operating expenses. Other operating expenses increased in dollars, but decreased as a percentage of net sales versus the prior year period due primarily to a reduction in insurance claims and related costs.

Depreciation. The increase in depreciation as a percentage of sales reflects an increase in capital expenditures in recent fiscal years and the implementation of major technology upgrades during fiscal 2012.

Income tax expense. We recorded income tax expense of approximately $541,000, or 31.1% of pre-tax income during the first half of fiscal 2013, versus a tax benefit of approximately $759,000, or 94.8% of pre-tax loss, in the prior year period.

Net income and earnings per share. As a result of the foregoing, we reported net income of $1.2 million, or $0.07 per diluted share, for the first half of fiscal 2013 as compared to net loss of $42,000, or $0.00 per diluted share, for the first half of fiscal 2012.

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 early portion of the fourth 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 and 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 operating activities was approximately $2.0 million for the first half of fiscal 2013, compared to net cash used in operating activities of $2.4 million for the first half of 2012. 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 provided by operations as compared to the prior year period was primarily the result of improved operating performance and a $1.5 million decrease in income taxes paid, partially offset by higher inventory levels.

Cash flows from investing activities. Net cash used in investing activities for the first half of fiscal 2013 consisted of $6.8 million in capital expenditures as compared to $14.8 million in capital expenditures for the prior year period. The capital expenditures in both periods primarily related to new store construction and information technology assets. During the first half of fiscal 2013, we opened six stores compared to 15 stores during the first half of fiscal 2012. We expect that capital expenditures for all of fiscal 2013 will be approximately $19 to $21 million, primarily to fund the leasehold improvements of new stores, make improvements in our information technology infrastructure, and maintain our investments in existing stores and our distribution center.

Cash flows from financing activities. Net cash provided by financing activities was approximately $554,000 for the first half of fiscal 2013, and related to the exercise of employee stock options, the vesting of restricted stock units, employee stock purchases, and the related tax benefits. Net cash used in financing activities was approximately $16.4 million for the first half of fiscal 2012, and primarily related to the repurchase and retirement of common stock.

Revolving credit facility. On August 19, 2011, we entered into an Amended and Restated Credit Agreement, dated as of August 19, 2011 (the "Credit Agreement"), with Bank of America, N.A. as administrative agent and collateral agent, and the lenders named therein (the "Lenders"), replacing our prior credit agreement entered into in 2004. The Credit Agreement increased our senior secured revolving credit facility from $45 million to $50 million and extended the maturity date to August 2016. Borrowings under the facility bear interest at an annual rate equal to LIBOR plus a margin ranging from 175 to 225 basis points with no LIBOR floor. Additionally, a fee of 0.375% per annum is assessed on the unused portion of the facility.

Pursuant to the Credit Agreement, borrowings are subject to certain customary conditions and contain customary events of default, including, without limitation, failure to make payments, a cross-default to certain other debt, breaches of covenants, breaches of representations and warranties, a change in control, certain monetary judgments and bankruptcy and ERISA events. Upon any such event of default, the principal amount of any unpaid loans and all other obligations under the Credit Agreement may be declared immediately due and payable. The maximum availability under the facility is limited by a borrowing base formula which consists of a percentage of eligible inventory and eligible credit card receivables, less reserves.

Also on August 19, 2011, we entered into an Amended and Restated Security Agreement, dated as of August 19, 2011 with our Lenders. Pursuant to the Security Agreement, we pledged and granted to the administrative agent, for the benefit of itself and the secured parties specified therein, a lien on and security interest in all of the rights, title and interest in substantially all of our assets to secure the payment and performance of the obligations under the Credit Agreement.


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As of August 3, 2013, we were in compliance with the covenants in the facility and there were no outstanding borrowings under the credit facility, with approximately $35.1 million available for borrowing.

At August 3, 2013, our balance of cash and cash equivalents was approximately $63.5 million. We do not anticipate any borrowings under the credit facility during fiscal 2013. We believe that the combination of our cash balances 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.

Related Party Transactions

In July 2009, we entered into an agreement with a related party vendor to purchase merchandise inventory. The vendor is considered a related party for financial reporting purposes because its principal is the spouse of our Vice President of Merchandising. During the 13-week periods ended August 3, 2013 and July 28, 2012, purchases from this vendor totaled approximately $7.0 million, or 14% of total merchandise purchases, and $5.6 million, or 11% of merchandise purchases, respectively. During the 26-week periods ended August 3, 2013 and July 28, 2012, purchases from this vendor totaled approximately $13.4 million, or 14% of total merchandise purchases, and $11.4 million, or 12% of merchandise purchases, respectively. Included in cost of sales for the 13-week periods ended August 3, 2013 and July 28, 2012 were $6.0 million and $5.8 million, respectively, related to this vendor. Included in cost of sales for the 26-week periods ended August 3, 2013 and July 28, 2012 were $12.2 million and $11.6 million, respectively, related to this vendor. Payable amounts outstanding to this vendor were approximately $2.4 million and $1.7 million as of August 3, 2013 and July 28, 2012, respectively. Our payable terms with this vendor are consistent with the terms offered by other vendors in the ordinary course of business.

Significant Contractual Obligations and Commercial Commitments

Construction commitments

The Company had commitments for new store construction projects totaling approximately $1.2 million at August 3, 2013.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies during fiscal 2013. Refer to our Annual Report on Form 10-K for the fiscal year ended February 2, 2013, 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.

The factors listed below under the heading "Risk Factors" and in the other sections of this Form 10-Q provide examples of risks, uncertainties and events that could cause our actual results to differ materially from the expectations expressed in our forward-looking statements.

These forward-looking statements speak only as of the date of this report and, except as required by law, we undertake no obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report.


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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.

• If We Do Not Generate Sufficient Cash Flow, We May Not Be Able to Implement Our Growth Strategy.

• If We Are Unable to Profitably Open and Operate New Stores, We May Not Be Able to Adequately Execute Our Growth Strategy, Resulting in a Decrease in Net Sales and Net Income.

• Our Success Depends Upon our Marketing, Advertising and Promotional Efforts. If We are Unable to Implement Them Successfully, or if Our Competitors are More Effective Than We are, Our Revenue May Be Adversely Affected.

• 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.

• Our Results Could be Negatively Impacted if our Merchandise Offering Suffers a Substantial Impediment to its Reputation Due to Real or Perceived Quality Issues.

• 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.

• Product Liability Claims Could Adversely Affect Our Reputation.

• Weather Conditions Could Adversely Affect Our Sales and/or Profitability by Affecting Consumer Shopping Patterns.

• Our Performance May Be Affected by General Economic Conditions.

• Changes in Accounting and Tax Rules and Regulations May Adversely Affect our Operating Results.

• Our Freight Costs and thus Our Cost of Goods Sold are Impacted by Changes in Fuel Prices.

• New Legal Requirements Could Adversely Affect Our Operating Results.

• 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.

• Failure to Protect the Integrity and Security of Individually Identifiable Data of Our Customers and Employees Could Expose Us to Litigation and Damage Our Reputation; The Expansion of Our e-Commerce Business Has Inherent Cybersecurity Risks That May Result in Business Disruptions.

• 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.


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• 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.

• If We Fail to Maintain an Effective System of Internal Control, We May Not Be Able to Accurately Report Our Financial Results.

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