Kirkland’s Home 2006 Annual Report l Corporate Headquarters & Central Distribution Center Directors and Officers Directors Officers R. Wilson Orr, III Chairman of the Board of Directors General Partner, SSM Partners Carl Kirkland Founder Kirkland’s, Inc. Robert E. Alderson Chief Executive Officer Kirkland’s, Inc. Steven J. Collins Partner Advent International Corporation Gabriel Gomez Principal Advent International Corporation David M. Mussafer Managing Director Advent International Corporation Ralph T. Parks President RT Parks, Inc. Murray M. Spain President World Wide Basics, LLC Robert E. Alderson Chief Executive Officer Catherine A. David President and Chief Operating Officer Andrew P. Gallina Vice President of Marketing Michelle R. Graul Vice President of Human Resources Sharyn M. Hejcl Vice President of Merchandising and General Merchandising Manager Rob Janes Vice President of Information Services and Chief Information Officer Roland L. Mackie Senior Vice President of Real Estate and Development W. Michael Madden Vice President of Finance and Chief Financial Officer Jeff Ostler Vice President of Operations and Director of Stores Lowell E. Pugh II Vice President, General Counsel and Secretary Todd E. Smith Vice President of Finance and Controller Todd A. Weier Senior Vice President of Logistics Fellow Shareholders, Guests, and Team Members: Fiscal 2006 was a year of tremendous challenge during a period of change at Kirkland’s. Our financial results suffered as the home décor sector continued to encounter a difficult sales environment. Customer traffic declines persisted and contributed to lower comparable store sales and earnings. We faced these challeng- ing conditions with a management team in transition throughout the year, making it difficult to regain positive sales and earnings momen- tum within fiscal 2006. However, we did make progress during the year. With key hires made late in the fis- cal year and early in 2007, we believe we have assembled the team that will lead the turnaround of the business. Improved merchandising perform- ance is still our number one priority and the key to Kirkland’s returning to strong financial results. We attract a value-conscious customer who favors “traditional” styling in home décor. During fiscal 2006, we recognized our merchandise assortment was off style and trend, delivered less value, and was too narrowly-focused in col- oration and style. In response, we established a focus on three “degrees” of traditional style – formal, updated and soft – designed to broaden our appeal to a wider audience including our existing core customer base. This vision provides a framework for both our merchants and vendors to develop product that is new and dif- ferent, trend and color right, and pro- vides decorating and gift-giving ideas. While each of the three tradi- tional styles is distinctly different, the various elements work together and allow our guests to mix and match items to fit their personal taste. These changes are reflected in our stores today within three major mer- chandise sets and four secondary themes. With further refinement, we are confident that our customers will embrace this trend and style-right product as they shop for home décor at affordable prices. During fiscal 2006, our struggles in merchandising were in execution and specifically in our key item strategy – identifying great items unique to Kirkland’s that we can sell in large quantity at great prices. This strate- gy helps to create customer interest and drive sales while making a pow- erful visual statement in stores. With a focus on content and style changes, we didn’t properly exploit our his- toric value advantage. Value remains a focus for our customer, and she looks to Kirkland’s for great prices. With our merchandising department under the leadership of Sharyn Hejcl and the continued direction of Cathy David, we are optimistic about our ability to meet these challenges in execution and continue the improve- ment in merchandise content during fiscal 2007. In stores, our great opportunity is delivering an improved and exciting in-store experience through helpful and friendly interaction with our guests, making them feel welcome and helping them achieve their home decorating goals. We are committed to hiring team members who better reflect our brand and providing them sales-focused training. To lead the stores in this key part of the turn- around effort, we have recently hired Jeff Ostler as our Director of Stores. Our shift to off-mall real estate con- tinues. We are concentrating efforts to accelerate the closing of mall stores over the next two years. In doing so, we will prudently deploy our capital in opening stores in off-mall venues where our customers live and shop. The first year return on our new stores remains strong despite the merchandising execution and sector challenges we have encountered. Our off-mall stores are generating better sales volumes and have lower occu- pancy costs, resulting in better store- level profits. These stores are easier to shop and operate. Most impor- tantly, the off-mall venue is more convenient to our customers and located with desirable co-tenants for the home décor shopper. Our real estate direction is clear; however, we are moderating our growth plans for fiscal 2007 as we focus on improving execution in merchandising and Better merchandise, an stores. improved guest experience, and the right venue will combine to deliver our long-awaited turnaround. We believe the tasks are challenging, but the goal is very attainable. As a fellow shareholder, I am disappointed financial results, but with our absolutely believe in our opportunity for near-term improvement. We have completed two of the toughest components—establishing the vision and assembling the team to lead it. Better execution will lead us to better results. We look forward to reporting on our progress in the coming year. Thank you for you continued support and investment in Kirkland’s and I hope to see you soon in our stores! Sincerely, Robert Alderson Chief Executive Officer Corporate Data Corporate Headquarters Kirkland’s, Inc. 805 North Parkway Jackson, Tennessee 38305 731/668-2444 www.kirklands.com Transfer Agent and Registrar StockTrans, Inc. 44 West Lancaster Avenue Ardmore, Pennsylvania 19003 610/649-7300 Shareholders seeking information concerning stock transfers, change of address, and lost certificates should contact StockTrans directly. Independent Auditors Ernst & Young LLP Memphis, Tennessee Corporate Counsel Pepper Hamilton LLP Philadelphia, Pennsylvania Annual Report on Form 10-K A copy of the Company’s fiscal 2006 Annual Report on Form 10-K as filed with the Securities and Exchange Commission is available to shareholders by contacting the Investor Relations Department at the Company’s address above. Safe Harbor Except for historical information contained herein, the statements in this release are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward- looking statements involve known and unknown risks and uncertainties, which may cause Kirkland’s actual results to differ materially from forecasted results. Those risks and uncertainties include, among other things, the competitive environment in the home décor industry in general and in Kirkland’s specific market areas, inflation, product availability and growth opportunities, seasonal fluctuations, and economic conditions in general. Those and other risks are more fully described in Kirkland’s fil- ings with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K filed on May 2, 2007. Kirkland’s disclaims any obligation to update any such factors or to publicly announce results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. Stock Market Information The Company’s common stock is traded on the NASDAQ Globat Market under the symbol KIRK. On April 6, 2007, there were approximately 100 holders of record and 1,600 beneficial owners of the Company’s common stock. The following table sets forth, for the periods indicated, the high and low last sale prices of shares of the common stock as reported by NASDAQ: Annual Meeting The Annual Meeting of Shareholders will be held at 1:00 p.m. Central Daylight Time on June 4, 2007, at the Crescent Club, 6075 Poplar Avenue, 9th Floor, Memphis, Tennessee. Fiscal 2006: Quarter ended April 29, 2006 Quarter ended July 29, 2006 Quarter ended October 28, 2006 Quarter ended February 3, 2007 High Low $ 7.74 $ 6.88 $ 5.25 $ 5.64 $ 4.95 $ 5.05 $ 4.18 $ 4.40 Fiscal 2005: Quarter ended April 30, 2005 Quarter ended July 30, 2005 Quarter ended October 29, 2005 Quarter ended January 28, 2006 $ 11.28 $ 9.42 $ 9.93 $ 7.22 $ 9.18 $ 8.17 $ 7.05 $ 5.73 Kirkland’s 805 North Parkway Jackson, TN 38305 731/668-2444 www.kirklands.com