Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
KIRK > SEC Filings for KIRK > Form 10-Q on 12-Dec-2013All Recent SEC Filings

Show all filings for KIRKLAND'S, INC

Form 10-Q for KIRKLAND'S, INC


12-Dec-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 décor and gifts in the United States, operating 323 stores in 35 states as of November 2, 2013. Our stores present a broad selection of distinctive merchandise, including framed art, mirrors, wall décor, candles and related items, lamps, decorative accessories, accent furniture, textiles, garden-related accessories and artificial floral


Table of Contents

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 décor 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 décor and has enabled us to develop a strong customer franchise.

During the 13-week period ended November 2, 2013, we opened 9 new stores and closed 3 stores. The following table summarizes our stores and square footage under lease:

                                                 As of            As of
                                              November 2,      October 27,
                                                  2013             2012
           Number of stores                            323              308
           Square footage                        2,387,942        2,201,060
           Average square footage per store          7,393            7,146

13-Week Period Ended November 2, 2013 Compared to the 13-Week Period Ended
October 27, 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
                                           November 2, 2013            October 27, 2012                 Change
                                            $             %             $             %             $            %
Net sales                               $ 106,134        100.0 %     $ 96,688        100.0 %     $ 9,446           9.8 %
Cost of sales                              64,999         61.2 %       62,669         64.8 %       2,330           3.7 %

Gross profit                               41,135         38.8 %       34,019         35.2 %       7,116          20.9 %
Operating expenses:
Compensation and benefits                  21,431         20.2 %       19,152         19.8 %       2,279          11.9 %
Other operating expenses                   13,961         13.2 %       12,491         12.9 %       1,470          11.8 %
Depreciation                                4,049          3.8 %        3,122          3.2 %         927          29.7 %

Total operating expenses                   39,411         37.2 %       34,765         36.0 %       4,646          13.4 %
Operating income (loss)                     1,694          1.6 %         (746 )       (0.8 %)      2,440        (327.1 %)
Interest expense, net                          70          0.1 %           70          0.1 %          -            0.0 %
Other income, net                             (58 )       (0.1 %)         (51 )       (0.1 %)         (7 )        13.7 %

Income (loss) before income taxes           1,682          1.6 %         (765 )       (0.8 %)      2,447        (319.9 %)
Income tax expense (benefit)                  674          0.6 %         (349 )       (0.4 %)      1,023        (293.1 %)

Net income (loss)                       $   1,008          0.9 %     $   (416 )       (0.4 %)    $ 1,424        (342.3 %)

Net sales. Net sales increased 9.8% to $106.1 million for the third fiscal quarter of 2013 compared to $96.7 million for the prior year period. The impact of net new store growth contributed to an increase in net sales of $5.0 million during the quarter. An increase in comparable store sales, including e-commerce sales, of 4.9%, contributed an increase over the prior year quarter of $4.4 million. Comparable store sales decreased 4.7% in the third quarter of fiscal 2012. For the third fiscal quarter of 2013, E-commerce sales were up 34% versus the prior year period accompanied by an increase in comparable store sales at brick-and-mortar stores of 3.7%. For brick-and-mortar stores, the comparable store sales increase was primarily due to an increase in the average ticket combined with a slight increase in the number of transactions. The increase in the average ticket reflected an increase in the average retail price per item, partially offset by a small decline in items per transaction. The increase in transactions resulted from an increase in conversion, partially offset by a slight decline in traffic. The E-commerce increase was driven by an increase in site visits and average order size. The merchandise categories contributing most to the comparable store sales increase were holiday, mirrors, wall décor, textiles, and housewares, partially offset by declines in art, frames, and floral.

Gross profit. Gross profit as a percentage of net sales increased to 38.8% in the third quarter of 2013 from 35.2% in the third quarter of 2012. The overall increase in gross profit margin was primarily due to a higher merchandise margin, which increased to 55.2% in the third quarter of fiscal 2013 from 52.1% in the third quarter of fiscal 2012. 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 coupled with lower inbound freight costs. Store occupancy costs and central distribution expenses as a percentage of net sales were down in the third quarter of 2013 as compared to the prior year period due to leverage from higher comparable store sales. Outbound freight costs for the same period were up slightly, primarily due to an increase in shipping costs for e-Commerce.


Table of Contents

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

Other operating expenses. Other operating expenses increased in dollars and as a percentage of net sales. This is primarily due to an approximate $1 million increase in advertising spend over the prior year quarter, as we continue to invest in and expand our branding activities. Excluding advertising expense, the remaining operating expenses decreased as a percentage of sales compared to the prior year quarter.

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 $674,000, or 40.1% of pre-tax income during the third quarter of fiscal 2013, versus a tax benefit of approximately $349,000, or 45.6% of pre-tax loss, in the prior year quarter. During the 13-week period ended October 27, 2012, the Company reversed a portion of its reserve for uncertain income tax positions for which the statute of limitations expired. This adjustment resulted in an income tax benefit of approximately $205,000.

Net income and earnings per share. As a result of the foregoing, we reported net income of $1.0 million, or $0.06 per diluted share, for the third quarter of fiscal 2013 as compared to net loss of $416,000, or ($0.02) per diluted share, for the third quarter of fiscal 2012.

39-week Period Ended November 2, 2013 Compared to the 39-week Period Ended
October 27, 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:



                                                      39-week Period Ended
                                          November 2, 2013             October 27, 2012                  Change
                                           $             %              $             %             $             %
Net sales                              $ 304,490        100.0 %     $ 285,480        100.0 %     $ 19,010           6.7 %
Cost of sales                            188,306         61.8 %       182,998         64.1 %        5,308           2.9 %

Gross profit                             116,184         38.2 %       102,482         35.9 %       13,702          13.4 %
Operating expenses:
Compensation and benefits                 61,285         20.1 %        57,181         20.0 %        4,104           7.2 %
Other operating expenses                  39,653         13.0 %        37,487         13.1 %        2,166           5.8 %
Depreciation                              11,790          3.9 %         9,342          3.3 %        2,448          26.2 %

Total operating expenses                 112,728         37.0 %       104,010         36.4 %        8,718           8.4 %
Operating income (loss)                    3,456          1.1 %        (1,528 )       (0.5 %)       4,984        (326.2 %)
Interest expense, net                        209          0.1 %           217          0.1 %           (8 )        (3.7 %)
Other income, net                           (172 )       (0.1 %)         (179 )       (0.1 %)           7          (3.9 %)

Income (loss) before income taxes          3,419          1.1 %        (1,566 )       (0.5 %)       4,985        (318.3 %)
Income tax expense (benefit)               1,215          0.4 %        (1,108 )       (0.4 %)       2,323        (209.7 %)

Net income (loss)                      $   2,204          0.7 %     $    (458 )       (0.2 %)    $  2,662        (581.2 %)

Net sales. Net sales increased 6.7% to $304.5 million for the first three quarters of fiscal 2013 compared to $285.5 million for the prior year period. The impact of net new store growth contributed an increase to net sales of $16.9 million. This increase in net sales was also attributable to an increase in comparable store sales, including e-commerce sales, of 0.8%, which aided the year-over-year increase by $2.1 million. Comparable store sales decreased 3.2% in the prior year period. For the first three quarters of fiscal 2013, E-commerce sales were up 26.6% versus the prior year period, while comparable store sales at brick-and-mortar stores were down 0.2%. 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 E-commerce increase was driven by an increase in site visits and slight increase in average order size. The merchandise categories contributing most to the comparable store sales increase were holiday, mirrors, and ornamental wall décor, and were partially offset by decreased performance in art, floral, and frames.

Gross profit. Gross profit as a percentage of net sales increased to 38.2% in the first three quarters of 2013 from 35.9% in the first three quarters of 2012. The overall increase in gross profit margin was primarily due to a higher merchandise margin, which increased to 54.6% in the first three quarters of fiscal 2013 from 52.5% in the first three quarters of fiscal 2012.


Table of Contents

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 three quarters 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 decreased as a percentage of net sales from better store-level payroll management for the first three quarters of fiscal 2013 as compared to the first three quarters of 2012. At the corporate level, the compensation and benefits ratio increased over the prior year period primarily due to increased incentive pay accruals.

Other operating expenses. Other operating expenses increased in dollars but decreased slightly as a percentage of net sales versus the prior year period. The third quarter of fiscal 2013 had approximately $1 million in increased advertising spend over the prior year quarter, as we continue to invest in and expand our branding activities.

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 $1.2 million, or 35.5% of pre-tax income during the first three quarters of fiscal 2013, versus a tax benefit of approximately $1.1 million, or 70.8% of pre-tax loss, in the prior year period. During the 13-week period ended October 27, 2012, the Company reversed a portion of its reserve for uncertain income tax positions for which the statute of limitations expired. This adjustment resulted in an income tax benefit of approximately $205,000. In addition to the activity noted in the prior year period, during the 13-week period ended July 28, 2012, the Company recorded state and federal employment tax credits totaling approximately $400,000 that related to prior year periods and in excess of previous estimates.

Net income and earnings per share. As a result of the foregoing, we reported net income of $2.2 million, or $0.13 per diluted share, for the first three quarters of fiscal 2013 as compared to net loss of $458,000, or ($0.03) per diluted share, for the first three quarters 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 used in operating activities was approximately $1.1 million for the first three quarters of fiscal 2013, compared to net cash used in operating activities of $7.4 million for the first three quarters 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 used in operations as compared to the prior year period was primarily the result of improved operating performance, a $1.5 million decrease in income taxes paid and an increase in accrued expenses, partially offset by higher inventory levels and lower accounts payable. The increase in accrued expenses is primarily attributable to $2.0 million of incentive pay accruals that were not present in the prior year period. The decrease in accounts payable is primarily due to the timing of our inventory receipt flow this year versus the prior period.

Cash flows from investing activities. Net cash used in investing activities for the first three quarters of fiscal 2013 consisted of $13.0 million in capital expenditures as compared to $25.0 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 three quarters of fiscal 2013, we opened 16 stores compared to 25 stores during the first three quarters of fiscal 2012. We expect that capital expenditures for all of fiscal 2013 will be approximately $18 to $19 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 $1.0 million for the first three quarters 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 three quarters of fiscal 2012, and primarily related to the repurchase and retirement of common stock.


Table of Contents

Revolving credit facility. On August 19, 2011, we entered into an Amended and Restated Credit Agreement (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 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.

As of November 2, 2013, we were in compliance with the covenants in the facility and there were no outstanding borrowings under the credit facility, with approximately $50.0 million available for borrowing.

At November 2, 2013, our balance of cash and cash equivalents was approximately $54.6 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 November 2, 2013 and October 27, 2012, purchases from this vendor totaled approximately $9.7 million, or 15.3% of total merchandise purchases, and $8.3 million, or 13.5% of merchandise purchases, respectively. During the 39-week periods ended November 2, 2013 and October 27, 2012, purchases from this vendor totaled approximately $23.1 million, or 14.4% of total merchandise purchases, and $19.7 million, or 12.4% of merchandise purchases, respectively. Included in cost of sales for the 13-week periods ended November 2, 2013 and October 27, 2012 were $6.4 million and $5.3 million, respectively, related to this vendor. Included in cost of sales for the 39-week periods ended November 2, 2013 and October 27, 2012 were $18.5 million and $16.9 million, respectively, related to this vendor. Payable amounts outstanding to this vendor were approximately $2.2 million and $3.7 million as of November 2, 2013 and October 27, 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 November 2, 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.


Table of Contents

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.

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.


Table of Contents
• 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 . . .
  Add KIRK to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for KIRK - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.