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KIRK > SEC Filings for KIRK > Form 10-Q on 12-Jun-2014All Recent SEC Filings

Show all filings for KIRKLAND'S, INC

Form 10-Q for KIRKLAND'S, INC


12-Jun-2014

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 17, 2014. 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".


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General

We are a specialty retailer of home dιcor and gifts in the United States, operating 324 stores in 35 states as of May 3, 2014, as well as an e-commerce enabled website, www.kirklands.com. Our stores present a broad selection of distinctive merchandise, including wall dιcor (framed art, mirrors and other wall ornaments), lamps, decorative accessories, accent furniture, textiles, fragrance and accessories, frames, housewares, outdoor 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 dιcor items as gifts. We provide our predominantly female customers an engaging shopping experience characterized by a diverse, ever-changing merchandise selection reflecting current styles at prices which provide discernible value. This combination of ever-changing and stylish merchandise, value pricing and a stimulating store experience has led to our emergence as a leader in home dιcor and enabled us to develop a strong customer franchise.

During the 13-week period ended May 3, 2014, we opened seven new stores and closed seven stores. The following table summarizes our stores and square footage under lease:

                                                  As of           As of
                                                 May 3,          May 4,
                                                  2014            2013
            Number of stores                           324             317
            Square footage                       2,435,259       2,321,868
            Average square footage per store         7,516           7,325

13-Week Period Ended May 3, 2014 Compared to the 13-Week Period Ended May 4, 2013

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
                                             May 3, 2014                  May 4, 2013                   Change
                                            $             %              $             %             $           %
Net sales                               $ 108,255        100.0 %     $ 101,233        100.0 %     $ 7,022         6.9 %
Cost of sales                              65,653         60.6 %        61,827         61.1 %       3,826         6.2 %

Gross profit                               42,602         39.4 %        39,406         38.9 %       3,196         8.1 %
Operating expenses:
Compensation and benefits                  21,279         19.7 %        19,928         19.7 %       1,351         6.8 %
Other operating expenses                   13,664         12.6 %        12,851         12.7 %         813         6.3 %
Depreciation                                4,300          4.0 %         3,791          3.7 %         509        13.4 %

Total operating expenses                   39,243         36.3 %        36,570         36.1 %       2,673         7.3 %
Operating income                            3,359          3.1 %         2,836          2.8 %         523        18.4 %
Interest expense, net                          69          0.1 %            67          0.1 %           2         3.0 %
Other income, net                             (82 )       (0.1 %)          (61 )       (0.1 %)        (21 )      34.4 %

Income before income taxes                  3,372          3.1 %         2,830          2.8 %         542        19.2 %
Income tax expense                          1,317          1.2 %         1,057          1.0 %         260        24.6 %

Net income                              $   2,055          1.9 %     $   1,773          1.8 %     $   282        15.9 %

Net sales. Net sales increased 6.9% to $108.3 million for the first fiscal quarter of 2014 compared to $101.2 million for the prior year period. The impact of net new store growth contributed an increase to net sales of $2.3 million. An increase in comparable store sales, including e-commerce sales, of 5.0%, contributed an increase over the prior year quarter of $4.7 million. Comparable store sales decreased 2.3% in the prior year period. For the first fiscal quarter of 2014, the e-commerce business was up 37.9% 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 number of transactions, accompanied by a slight increase in the average ticket. The increase in transactions resulted from an increase in conversion, partially offset by a decrease in traffic. The increase in the average ticket reflected an increase in items sold per transaction, offset partially by a decline in average retail selling price. The merchandise categories contributing most to the comparable store sales increase were textiles, lamps, housewares and holiday. These increases were partially offset by declines in outdoor living, frames and floral.


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Gross profit. Gross profit as a percentage of net sales increased from 38.9% in the first quarter of 2013 to 39.4% in the first quarter of 2014. The overall increase in gross profit margin was primarily due to a higher merchandise margin, which increased from 55.1% in the first quarter of fiscal 2013 to 55.9% in the first quarter of fiscal 2014. Merchandise margin is calculated as net sales minus product cost of sales (including inbound freight) and inventory shrinkage. Merchandise margin excludes outbound freight, store occupancy and central distribution costs. The increase in merchandise margin was primarily the result of lower inbound freight costs, which accounted for an increase in the margin of approximately 0.5%. The increase was accompanied by a reduction in promotional activity and markdowns. Store occupancy costs as a percentage of net sales were down slightly in the first quarter of 2014 as compared to the prior year period. Outbound freight costs and central distribution expenses increased as a percentage of sales, primarily due to an increase in the e-Commerce business.

Compensation and benefits. Compensation and benefits expenses for stores decreased as a percentage of net sales for the first quarter of fiscal 2014 as compared to the first quarter of 2013 due to comparable store sales leverage. At the corporate level, the compensation and benefits ratio increased over the prior year period primarily due to increased headcount associated with our multi-channel initiatives, and severance benefits related to the departure of our former Senior Vice President of Supply Chain.

Other operating expenses. Other operating expenses decreased slightly as a percentage of sales versus the prior year period due primarily to a reduction in self-insurance expenses, partially offset by an increase in marketing expenses.

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.

Income tax expense. We recorded income tax expense of approximately $1.3 million, or 39.1% of pre-tax income during the first quarter of fiscal 2014, versus approximately $1.1 million, or 37.3% of pre-tax income, in the prior year quarter.

Net income and earnings per share. As a result of the foregoing, we reported net income of $2.1 million, or $0.12 per diluted share, for the first quarter of fiscal 2014 as compared to net income of $1.8 million, or $0.10 per diluted share, for the first quarter of fiscal 2013.

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 $221,000 for the first quarter of fiscal 2014, compared to net cash provided by operating activities of $8.6 million for the first quarter of 2013. 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 higher income tax payments and incentive bonus payouts in the first quarter of 2014, combined with decreased accounts payable, due to timing of payments.

Cash flows from investing activities. Net cash used in investing activities for the first quarter of fiscal 2014 consisted of $6.9 million in capital expenditures as compared to $2.3 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 quarter of fiscal 2014, we opened seven stores compared to one store during the


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first quarter of fiscal 2013. We expect that capital expenditures for all of fiscal 2014 will be approximately $33 to $36 million, primarily to fund the leasehold improvements of new stores, make improvements in our information technology infrastructure and multi-channel capabilities, and maintain our investments in existing stores and our distribution center.

Cash flows from financing activities. Net cash provided by financing activities was approximately $77,000 for the first quarter of fiscal 2014, and related to employee stock purchases. Net cash used in financing activities was approximately $75,000 for the first quarter of fiscal 2013, and also related to employee stock purchases.

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 May 3, 2014, we were in compliance with the covenants in the facility and there were no outstanding borrowings under the credit facility, with approximately $33.0 million available for borrowing.

At May 3, 2014, our balance of cash and cash equivalents was approximately $82.4 million. We do not anticipate any borrowings under the credit facility during fiscal 2014. 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.

Share Repurchase Authorization. On May 22, 2014, the Company announced that its Board of Directors authorized a stock repurchase plan providing for the purchase in the aggregate of up to $30 million of the Company's outstanding common stock over the next 24 months. The timing, price and volume of repurchases will be based on market conditions, relevant securities laws and other factors. The stock repurchases may be made from time to time on the open market or in privately negotiated transactions. The stock repurchase program does not require the Company to repurchase any specific number of shares, and the Company may terminate the repurchase program at any time. Subsequent to May 22, 2014, the Company has repurchased and retired approximately 14,000 shares of common stock at an aggregate cost of approximately $240,000.

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 first quarter of fiscal 2014 and 2013, purchases from this vendor totaled approximately $5.7 million, or 12% of total merchandise purchases, and $6.4 million, or 14% of merchandise


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purchases, respectively. Included in cost of sales for the first quarter of fiscal 2014 and 2013 were $5.8 million and $6.2 million, respectively, related to this vendor. Payable amounts outstanding to this vendor were approximately $1.3 million and $3.3 million as of May 3, 2014 and May 4, 2013, 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 $770,000 at May 3, 2014.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies during fiscal 2014. Refer to our Annual Report on Form 10-K for the fiscal year ended February 1, 2014, 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 at a Rate that Exceeds Planned Store Closings, 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 Market, Advertise or Promote More Effectively than We Do, 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.

• We May Not Be Able to Successfully Respond to Technological Change, Our Website Could Become Obsolete and Our Financial Results and Conditions Could be Adversely Affected.

• Inventory Loss and Theft and the Inability to Anticipate Inventory Needs may Result in Reduced Net Sales.

• Inability to Successfully Develop and Maintain a Relevant and Reliable Multichannel Experience for Our Customers Could Adversely Affect Our Sales, Results of Operations and Reputation.

• 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.

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

• We are Exposed to the Risk of Natural Disasters, Pandemic Outbreaks, Global Political Events, War and Terrorism That Could Disrupt Our Business and Result in Lower Sales, Increased Operating Costs and Capital Expenditures.

• Our Performance May be Affected by General Economic Conditions.

• Our Profitability is Vulnerable to Inflation and Cost Increases.

• Our Profitability is Vulnerable to Energy Prices.

• 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.

• Failure to Control Merchandise Returns Could Negatively Impact the Business.

• We May Experience Significant Variations in Our Quarterly Results.

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

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

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

• New Legal Requirements Could Adversely Affect Our Operating Results.

• New Regulations Related to Conflict Minerals Could Adversely Impact Our Business.

• Litigation May Adversely Affect Our Business, Financial Condition, Results of Operations or Liquidity.


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• Product Liability Claims Could Adversely Affect Our Reputation.

• If We Fail to Protect Our Brand Name, Competitors May Adopt Trade Names that Dilute the Value of Our Brand Name.

• 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.

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

• 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.

• 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.

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


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