UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
X
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended February 1, 2025
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 000-49885
Kirkland’s, Inc.
(Exact name of registrant as specified in its charter)
Tennessee
62-1287151
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
5310 Maryland Way, Brentwood, TN
37027
(Address of principal executive offices)
(Zip Code)
(615) 872-4800
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, no par value per share
KIRK
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
(None)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No X
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes X No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of "large accelerated filer,” "accelerated filer,” "smaller reporting company,” and "emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
Non-accelerated filer
X
Smaller reporting company
X
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to
previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive
officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No X
The aggregate market value of the common stock held by non-affiliates of the registrant as of August 2, 2024, the last business day of the registrant’s most recently completed second fiscal quarter,
was approximately $18.2 million based on the last sale price of the common stock as reported by The Nasdaq Stock Market.
As of April 21, 2025, there were 22,454,348 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2025 Annual Meeting of Shareholders of Kirkland’s, Inc. are incorporated by reference into Part III of this Form 10-K.
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TABLE OF CONTENTS
FORM 10-K
Page
Cautionary Statement Regarding Forward-Looking Statements
3
PART I
Item 1.
Business
4
Item 1A.
Risk Factors
12
Item 1B.
Unresolved Staff Comments
26
Item 1C.
Cybersecurity
26
Item 2.
Properties
27
Item 3.
Legal Proceedings
28
Item 4.
Mine Safety Disclosures
28
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
28
Item 6.
Reserved
29
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
Item 7A.
Quantitative and Qualitative Disclosure About Market Risk
39
Item 8.
Financial Statements and Supplementary Data
41
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
68
Item 9A.
Controls and Procedures
68
Item 9B.
Other Information
68
Item 9C.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
68
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
69
Item 11.
Executive Compensation
69
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
69
Item 13.
Certain Relationships and Related Transactions, and Director Independence
70
Item 14.
Principal Accounting Fees and Services
70
PART IV
Item 15.
Exhibits and Financial Statement Schedules
71
Item 16.
Form 10-K Summary
73
Signatures
74
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended February 1, 2025 ("Form 10-K”) contains forward-looking statements within the meaning of the federal securities
laws and the Private Securities Litigation Reform Act of 1995. These statements may be found throughout this Form 10-K, particularly under the headings "Business” and
"Management’s Discussion and Analysis of Financial Condition and Results of Operations,” among others. Forward-looking statements typically are identified by the use of terms
such as "anticipate,” "believe,” "expect,” "estimate,” "intend,” "plan,” "seek,” "may,” "could,” "strategy,” and similar words, although some forward-looking statements are
expressed differently. You should consider statements that contain these words carefully because they describe our expectations, plans, strategies and goals and our beliefs
concerning future business conditions, our results of operations, financial position and our business outlook or state other "forward-looking” information based on currently
available information. The factors listed in "Item 1A. Risk Factors” and in the other sections of this Form 10-K 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.
The forward-looking statements made in this Form 10-K relate only to events as of the date on which the statements are made. We undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.
The terms "Kirkland’s,” "Kirkland’s Home,” the "Company,” "we,” "us,” and "our” as used in this Form 10-K refer to Kirkland’s, Inc.
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PART I
Item 1. Business
General
We are a specialty retailer of home décor and furnishings in the United States. As of February 1, 2025, we operated a total of 317 stores in 35 states as well as an e-commerce
website, www.kirklands.com, under the Kirkland’s Home brand. We were founded in 1966, and our current parent corporation, Kirkland’s, Inc., was incorporated in 1981. We
provide our customers with an engaging shopping experience characterized by a curated, affordable selection of home décor and furnishings along with inspirational design ideas.
This combination of quality and stylish merchandise, value pricing and a stimulating in-store and online environment provides our customers with a unique brand experience.
Strategic Partnership with Beyond
We entered into a strategic partnership with Beyond, Inc. ("Beyond”) on October 21, 2024, with the purpose of enabling cohesive collaboration between the companies,
leveraging the strengths of each business to drive sustainable, profitable growth and value for all stakeholders. As part of this partnership with Beyond, we entered into a $17
million term loan credit agreement (the "Beyond Credit Agreement”), an $8 million subscription agreement (the "Beyond Subscription Agreement”), a seven-year collaboration
agreement (the "Collaboration Agreement”) and a trademark license agreement (the "Trademark License Agreement”). Proceeds of $17 million from the Beyond Credit Agreement,
in the form of an $8.5 million non-convertible term loan (the "Non-Convertible Term Loan”) and an $8.5 million convertible term loan (the "Convertible Term Loan”) were used by us
to repay our existing $12.0 million "first-in, last-out” asset-based delayed-draw term loan (the "FILO Term Loan”), including prepayment fees and transaction expenses, and to
reduce borrowings under our existing revolving credit facility. Under the Trademark License Agreement, we have the exclusive license to operate small format, neighborhood brick-
and-mortar stores and "Shops-within-a-Shop” locations under licensed Beyond-owned trademarks, which include Bed Bath & Beyond, Buy Buy Baby and Overstock, and we may
sell Bed Bath & Beyond branded merchandise in existing Kirkland’s Home stores.
The $8 million equity purchase under the Beyond Subscription Agreement and the mandatory conversion of the Convertible Term Loan with accrued interest were
approved by our shareholders at our special meeting of shareholders on February 5, 2025 (the "Special Shareholders Meeting”) in accordance with Nasdaq Listing Rules resulting
in the issuance of 8,934,465 shares of Kirkland’s common stock, no par value ("Common Stock”) to Beyond, which completed the transaction. For further discussion on the
agreements with Beyond, refer to "Item 8. Financial Statements and Supplementary Data – Note 1 — Description of Business and Significant Accounting Policies”, "Note 4 — Fair
Value Measurements”, "Note 5 — Long-Term Debt” and "Note 6 — Subscription Agreements”.
Business Strategy
Our mission is to make Kirkland’s the destination for seasonally relevant home décor, furnishings and gifts. We strive to offer on-trend, curated product assortments at a
great value. During fiscal 2024, we rebalanced our value proposition by moderating the growth in high ticket categories and maximizing our position in value home accents,
seasonal décor and gifts at amazing price points to appeal to our core customers. In fiscal 2025, we have begun strategic actions including eliminating SKUs that do not meet our
margin standards after shipping, handling and returns, expanding product categories to drive average order value and maximizing our omni-channel assets by reallocating lower
priced inventory to brick & mortar stores to maximize our Buy Online Pick-up In Store ("BOPIS”) capabilities. We are focused on engaging and growing our customer base and
extending the reach of our brand to new customers through private label distribution across our collective family of omni-channel brands. We believe the following four
components of our business strategy are key to positioning our brand and our future growth and success.
Customer. We are committed to keeping the voice of the customer at the center of our brand; and we are using our brand voice and marketing tactics to acquire, reactivate
and retain existing customers and to reach new customers through our partnership with Beyond.
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Merchandise. We are committed to being product obsessed, delivering a unique omni-channel product strategy of curated, on-trend and seasonally relevant home décor at
a great price. We will be known for "always something new” to drive demand in each quarter throughout the year.
Omni-channel experience. We will deliver a channel strategy that meets our customers whenever and wherever they want to shop while driving a path to profitability in
both stores and online. We are enhancing our e-commerce site experience and improving conversion, as well as prioritizing profitability through our collaboration with Beyond by
leveraging their expertise and partnerships. We are also shifting lower priced inventory to stores to drive average order value online. In fiscal 2025, we plan to begin leveraging our
partnership with Beyond by opening new locations or converting existing locations to Bed Bath & Beyond, Buy Buy Baby or Overstock branded stores, and we anticipate closing
approximately 15 to 20 underperforming Kirkland’s Home locations.
Operational efficiency. As a value brand, we are committed to remaining disciplined in our operational effectiveness through supply chain efficiency and performance,
technology enablement, and cost containment as we seek to return our brand to profitability and deliver sustained long-term value for our shareholders.
Merchandising
Our merchandising strategy is to offer an elevated style at an amazing value. We are passionate about our color and design direction each season, while working with our
partners around the globe to develop and source quality home décor, furnishings and gifts. We maintain a strong pricing strategy with affordable prices representing a great value
to our customers across all product categories. Our merchant team thoughtfully curates the assortment each season to ensure we maintain a healthy SKU count and a cohesive
style point of view.
Daily review of sales and product margin information helps us to maximize the productivity of successful products and categories and minimize the accumulation of slow-
moving inventory. We regularly monitor the sell-through of our merchandise; therefore, the number and make-up of our active items is continuously changing based on changes in
selling trends. The composition of our merchandise assortment is relatively consistent across our store base with an extended assortment online.
We continually strive to increase the perceived value of Kirkland’s products to our customers through our thoughtfully curated assortments and inspirational visual
presentations. Our shoppers regularly experience the satisfaction of paying noticeably less for equally well-designed products compared to those sold by other specialty retailers.
We use temporary promotions throughout the year featuring specific categories of merchandise along with select coupon discounts. We believe our great style and value-oriented
pricing strategy, coupled with an adherence to high quality standards, is an important element in establishing our distinct brand identity and solidifying our connection with our
customers.
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Our merchandise categories include holiday décor, furniture, textiles, decorative accessories, art, home fragrance, ornamental wall décor, mirrors, floral, housewares, lighting,
outdoor and gift. The following table presents the percentage of net sales contributed by our merchandise categories based on our current category structure over the last three
fiscal years:
% of Net Sales
Merchandise Category
Fiscal 2024
Fiscal 2023
Fiscal 2022
Holiday Décor
22%
20%
19%
Furniture
14
17
18
Textiles
11
11
11
Decorative Accessories
9
9
7
Art
7
8
8
Home Fragrance
7
7
7
Ornamental Wall Décor
6
6
8
Mirrors
5
6
7
Floral
5
4
4
Housewares
4
4
4
Lighting
4
4
4
Outdoor
3
3
3
Gift
3
1
0
Total
100%
100%
100%
Our visual merchandising strategy is continuously evolving to meet the vision of our assortment. We strive to inspire our customers with a mix of inspirational lifestyle
settings and impactful key item placement. Our visual merchandising team creates thoughtful, cohesive guides for our stores, utilizing fresh, creative window displays and
maximizing the productivity of our fixtures.
Buying and Inventory Management
Our buying team approves the design of all of our products, negotiates with vendors and works with our merchandise planning and allocation team to optimize merchandise
quantity and mix by category in our stores and on our website. We purchase merchandise from approximately 180 vendors, with no vendor representing more than 10% of our
purchases during fiscal 2024. Approximately 80 core vendors accounted for approximately 92% of our merchandise purchases during fiscal 2024.
Our global sourcing team manages our sourcing strategies, and it has successfully diversified our purchases from primarily Chinese vendors to suppliers in multiple
countries. In fiscal 2024 and 2023, direct sourcing accounted for approximately 49% and 47% of our merchandise purchases, respectively. We partner with three sourcing agents
that assist with sourcing activities in China, India, Southeast Asia and Europe. Our merchandise comes from numerous foreign and domestic manufacturers and importers. For
fiscal 2024, the manufacturing countries of origin for our merchandise receipts were approximately 71% China, 14% India, 6% United States, 6% Vietnam and 3% other countries.
Our strategy remains focused on continuing to diversify sourcing opportunities and minimize tariff risks. This approach enables us to gain a competitive advantage through a
streamlined and well-diversified buying network.
Our merchandise planning and allocation team manages inventory levels and the allocation between stores and e-commerce fulfillment locations to maximize sales, sell-
through and margin. Our stores are classified internally for assortment purposes based on multiple criteria including sales volume, size, location and historical performance.
Although our stores carry similar merchandise, the variety and depth of products in a given store may vary depending on the store’s classification. Where applicable, inventory
purchases and allocations are also tailored based on regional or demographic differences between stores in selected categories. On our website, we carry a larger selection of
merchandise than in our store locations, including online-exclusive items.
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Store Operations
Our stores are designed and managed to make shopping an inspiring experience and to maximize sales and operating efficiencies. Stores are strategically arranged to
provide for optimal product placement and visual display that can be changed for seasonal product and promotions. Store training is focused on increasing customer design
assistance, having a selling mindset and operational efficiency.
Store operations is managed by corporate personnel, a national sales director and 16 district managers, who have responsibility for an average of 20 stores within a
geographic district, and store managers. Store managers and assistant managers are responsible for the day-to-day operation of the store, including sales, customer service,
merchandise display, talent development and store security. A typical store operates seven days a week with an average of 8 to 16 employees, including a combination of full and
part-time employees, depending on the volume of the store and the season. Additional part-time employees are typically hired to assist with the increased traffic and sales volume
in the fourth quarter of the calendar year.
Real Estate
We are prioritizing improvement in overall profitability and developing a future state plan for infrastructure that complements our omni-channel concept and multi-brand
strategy, over store growth. In 2025, we plan, through existing store conversion or leasing new real estate, to open our first stores outside of the Kirkland’s Home brand, potentially
including Bed Bath & Beyond, Buy Buy Baby or Overstock stores. Also, we anticipate closing approximately 15 to 20 underperforming Kirkland’s Home stores in fiscal 2025, as we
execute our store profitability strategy, which is to eliminate or convert underperforming stores to improve profitability of the Company.
As of February 1, 2025, we operated 317 stores, including 274 "power” strip or "lifestyle” centers, 22 freestanding locations, 11 mall locations and 10 outlet centers.
The following table provides a history of our store openings and closings for the last five fiscal years:
Fiscal
2024
Fiscal
2023
Fiscal
2022
Fiscal
2021
Fiscal
2020
Stores open at beginning of period
330
346
361
373
432
New store openings
2
—
1
4
—
Permanent store closings
(15)
(16)
(16)
(16)
(59)
Stores open at end of period
317
330
346
361
373
Distribution and Logistics
We have a comprehensive approach to the management of our merchandise supply chain. We continuously evaluate the impact of our omni-channel strategies on our
business, and frequently implement enhancements to our supply chain infrastructure and warehouse management system to support store and e-commerce fulfillment.
Our main retail distribution center in Jackson, Tennessee services approximately 70% of our stores and a third-party operated retail fulfillment facility in Lancaster, Texas
services the other 30% of our stores. Our main Jackson, Tennessee retail distribution center also supports our e-commerce fulfillment. In 2023, we closed our North Las Vegas,
Nevada and Winchester, Virginia e-commerce order fulfillment centers to reduce fixed costs and consolidate our operations. We also have a third-party operated west coast
distribution operation, which provides for the improved flow of merchandise through our supply chain network. By virtue of this operation, we gain control of merchandise when it
enters the west coast port, which allows us to allocate and distribute inventory directly to either our Jackson, Tennessee or Lancaster, Texas distribution centers.
Our internal warehouse management system provides functionality that supports store and e-commerce fulfillment. In early fiscal 2022, we upgraded our internal warehouse
management system related to store fulfillment at our Jackson, Tennessee location.
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We currently utilize third-party carriers to transport merchandise from our Jackson, Tennessee and Lancaster, Texas distribution centers to our stores. Almost all of our
stores utilize direct, full truckload deliveries, which results in lower distribution costs and allows our field personnel to better schedule store associates for the receiving process.
Information Technology
We invest in our information technology to manage the purchase, pricing and distribution of our merchandise, improve our operating efficiencies and support omni-channel
operations. Our key management information systems include a merchandise management system, point-of-sale system, an e-commerce platform, an e-commerce order management
system, a warehouse management system, a financial system and a labor management tool. Our merchandise management system provides us with tools to manage aspects of our
merchandise assortment and integrates merchandising and inventory management applications, including inventory tracking, purchase order management, inventory allocation
and replenishment, sales audit and invoice matching, which interfaces with our warehouse management and financial system.
We continue to evaluate and improve the functionality of our systems to maximize their effectiveness as well as seek out best in class solutions to enhance operational
efficiencies. Such efforts include ongoing hardware and software evaluations, and refreshes and upgrades to support optimal software configurations and application performance.
We continue to strengthen the security of our information technology and invest in technology to support stores, e-commerce, distribution centers, omni-channel expansion and
business intelligence tools. These efforts are directed toward improving business processes, maintaining secure, efficient and stable systems, implementing new features and
enabling the continued growth and success of our business.
Marketing
Our brand positioning aligns to the evolution of our product assortment and clearly communicates our value proposition of, "Curated Design, Amazing Value.” Our
marketing communicates that Kirkland’s Home is a shopping destination that offers on trend, quality home merchandise at a value to our customers. We believe that just because
customers are practical with their time and money does not mean that their passion for their home does not run deep. Our marketing showcases our products in a casual, surprising
and approachable way that is both inspirational and attainable.
Our marketing strategy includes customer retention, as well as new customer acquisition. Our overall marketing efforts encompass various tactics including digital
marketing, paid search and social media initiatives. We manage a database of customers and communicate with them via targeted emails featuring new products, marketing events
and special offers.
We are focused on improving the customer experience through our loyalty program, K-club, and our private label credit card financing options. Our customer loyalty
program rewards customers for shopping with us, as well as interacting with Kirkland's across channels. This interaction allows us to foster stronger and lasting relationships with
our customers. The key benefits of this program include points on every purchase to redeem for valuable rewards, birthday surprises and special offers.
Our private label Kirkland’s credit card through Wells Fargo offers financing options including "6-months no interest" and "12-months no interest" financing for purchases
over $250 and $500, respectively.
Omni-Channel
Our strategy is to meet our customers whenever and wherever they want to shop by creating meaningful content that engages the customer and either converts them online
or allows them to pre-shop for an in-store purchase. We have multiple online fulfillment options, including delivery to the customer’s home directly from our warehouses or from
vendors, ship-to-store and BOPIS programs.
As part of our omni-channel profitability strategy, we are focused on eliminating SKUs that do not meet margin standards after shipping, handling and returns, strategically
expanding product categories to drive average order value and maximizing our omni-channel assets by reallocating lower priced inventory to stores. In addition, through
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collaboration with Beyond, we intend to leverage their expertise and partnerships to enhance site experience and improve conversion. Our e-commerce channel is an integral part of
our Kirkland’s Home customer journey, and we believe the actions we are taking will deliver a more profitable transaction.
Trademarks
All of our stores operate under the names "Kirkland’s”, "Kirkland’s Home”, "Kirkland’s Home Outlet”, "Kirkland’s Outlet,” and "The Kirkland Collection.”
We have registered several trademarks with the United States Patent and Trademark Office on the Principal Register that are used in connection with the Kirkland’s stores,
including KIRKLAND’S® logo design, KIRKLAND’S®, THE KIRKLAND COLLECTION®, KIRKLAND’S OUTLET®, KIRKLAND’S HOME®, MARKET AND VINE™, SIMPLE
THINGS BY KIRKLAND’S®, LOVE THE POSSIBILITIES and LOVE THE PRICE®. These trademarks have historically been important components in our merchandising and
marketing strategy. We are not aware of any claims of infringement or other challenges to our right to use our trademarks in the United States.
The Trademark License Agreement with Beyond grants us the exclusive license to operate small format, neighborhood brick-and-mortar retail stores and "Shops-within-a-
Shop” locations under licensed Beyond-owned trademarks, including Bed Bath & Beyond, Buy Buy Baby and Overstock.
Competition
The retail market for home furnishings is highly competitive. Accordingly, we compete against a diverse group of retailers, including specialty stores, department stores,
discount stores, catalog and internet-based retailers, which sell similar lines of merchandise to those carried by us. Some of our main competitors include HomeGoods, HomeSense,
Walmart, World Market, Crate & Barrel, Williams-Sonoma, Inc., Hobby Lobby, At Home, Target, Ebay, Amazon and Wayfair. We believe that the principal competitive factors
influencing our business are merchandise selection, price, customer service, visual appeal of our stores and our convenient store locations. We believe we compete effectively with
other retailers due to our experience in identifying a curated collection of quality and stylish merchandise, pricing it to be attractive to our target customer, presenting it in a
visually appealing manner and providing an engaging shopping experience.
In addition to competing for customers, we compete with other retailers for suitable store locations and qualified management personnel and sales associates. Many of our
competitors are larger and have substantially greater financial, marketing and other resources than we do. See "Item 1A. Risk Factors” of this Form 10-K, under the sub-caption
"Risks Related to Competition” for further discussion of our competitive environment.
Human Capital
Overview. We employed approximately 835 full-time and 3,175 part-time employees as of February 1, 2025. The number of our employees fluctuates with seasonal needs. We
generally experience our highest level of employment during the fourth fiscal quarter. Of our 4,010 employees, approximately 3,690 work at stores, 165 work at our distribution
centers and 155 work in corporate support functions. As of February 1, 2025, none of our employees are unionized or covered by a collective bargaining agreement. We believe
that we maintain a positive relationship with our employees.
Philosophy and culture. Our goal is to employ a highly engaged, high-performing workforce that is happy and empowered. Our people philosophy is based on creating a
workplace culture where all employees feel respected, valued and inspired. We actively engage employees in regular opportunities to feel connected to our goals and the
communities in which we operate. We position employees for success with the tools and resources they need to thrive.
Our leadership team is comprised of our Chief Executive Officer, Chief Financial Officer, two senior vice presidents and four vice presidents who, collectively, have
management responsibility for our business areas including store operations, supply chain, e-commerce, finance, legal, merchandising, human resources, marketing and information
technology. Our leadership team places significant focus and attention on matters concerning our human
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capital assets including their capability development and succession planning. Accordingly, we regularly review talent development and succession plans for each of our
functions, to identify and develop a pipeline of talent to maintain business operations. As part of our commitment to attract, retain and motivate quality employees, we created an
employee engagement committee, which is comprised of cross-functional employees who work together to advocate and implement initiatives to improve employee engagement
and satisfaction. We recruit the best people for the job regardless of race, gender, ethnicity or other protected traits, and it is our policy to fully comply with all laws applicable to
discrimination in the workplace.
Personnel recruitment and training. We believe our continued success is dependent in part on our ability to attract, retain and motivate quality employees. In particular,
our success depends on our ability to promote and recruit qualified corporate personnel, distribution center employees, district and store managers and full-time and part-time store
employees. District managers are primarily responsible for recruiting new store managers, while store managers are responsible for the hiring and training of store employees. We
constantly look for motivated and talented people to promote from within the Company, in addition to recruiting outside of Kirkland’s. All store employees are trained utilizing the
"K University” training program. Store managers train at a designated "training store” where they work directly with a qualified training store manager. District managers onboard
at our corporate office in addition to spending time with designated district manager trainers. Corporate and distribution center employees receive training at their respective
locations.
Compensation and benefits. We are committed to providing competitive pay and benefits to our employees. Corporate management, distribution center leadership, district
managers and store managers are compensated with base pay plus periodic bonuses based on performance. Store and distribution center non-management employees are
compensated on an hourly basis in addition to periodic contests and rewards. Many of our employees participate in one of our various bonus incentive programs, which provide
the opportunity to receive additional compensation based upon department or Company performance. We also provide our eligible employees the opportunity to participate in a
401(k) retirement savings plan, which includes a 100% Company match of the employee’s elective bi-weekly contributions up to 4% of eligible compensation. We share in the cost
of health insurance provided to eligible employees, and we offer our employees a discount on merchandise purchased from our stores.
Safety. Employee health and safety is continuously promoted through training and resources across our operations. We develop and administer Company-wide policies to
ensure the safety of each employee and compliance with Occupational Safety and Health Administration standards.
Environmental, Social and Governance ("ESG”)
We have made ESG a focus throughout our organization and the communities we serve. As our business evolves over time, sustainability will continue to increase in
significance as we revise and develop our stores and e-commerce operations. However, as we note in "Item 2. Properties” of this Form 10-K, we currently lease all of our properties,
so there are limited actions we can take with respect to environmental sustainability issues. Nevertheless, we seek to ensure that future changes to our stores, including any
possible real property acquisitions, are done in a socially and environmentally responsible manner. Our leadership team has worked with our ESG Steering Committee and our
Board of Directors to develop short-term and long-term ESG strategies. One of our sustainability pledges is to strengthen the local communities in which we operate, and our
various corporate giving initiatives have helped elevate our impact on these local communities.
We have an ESG section on our Investor Relations website at www.kirklands.com under "Investor and Media Relations – ESG.” The documents and materials published
there highlight our ongoing ESG initiatives. The information included in, referenced to, or otherwise accessible through our website, is not incorporated by reference in, or
considered to be part of, this Report on Form 10-K or any document unless expressly incorporated by reference therein.
Governmental Regulations
We must comply with various federal, state and local regulations, including regulations relating to consumer products and consumer protection, advertising and marketing,
labor and employment, data protection and privacy, intellectual property, the environment and taxes. In addition, we must comply with United States customs laws and
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similar laws of other countries associated with the import of our merchandise. Ensuring our compliance with these various laws and regulations, and keeping abreast of changes to
the legal and regulatory landscape present in our industry, requires us to expend considerable resources. For additional information, see Item 1A. Risk Factors under the sub-
caption "Risks Related to New Legislation, Regulation, and Litigation.”
Seasonality
We have historically experienced, and expect to continue to experience, substantial seasonal fluctuations in our net sales and operating results. We believe this is the
general pattern typical of our segment of the retail industry and expect that this pattern will continue in the future. Due to the importance of the fall selling season, which includes
Thanksgiving and Christmas, the last quarter of our fiscal year has historically contributed, and is expected to continue to contribute, a disproportionate amount of our net sales,
net income and cash flow for the entire fiscal year.
Availability of SEC Reports
We file annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K with the Securities Exchange Commission ("SEC”). The SEC maintains
a website that contains reports, proxy and information statements and other information regarding issuers, including Kirkland’s, that file electronically with the SEC. The address of
that site is http://www.sec.gov.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those documents filed by us with the SEC are available,
without charge, on our internet website, www.kirklands.com, as soon as reasonably practicable after they are filed electronically with the SEC. The information provided on our
website is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this report.
Information about our Executive Officers
The following list describes our executive officers including their name, age and principal occupations and employment during at least the past five years:
Amy E. Sullivan, 46, was promoted to President, Chief Executive Officer and Director in February 2024. Prior to her appointment, Mrs. Sullivan served as the Company’s
President and Chief Operating Officer beginning in April 2023, and as the Company’s Senior Vice President and Chief Merchandising and Stores Officer for Kirkland’s beginning in
February 2022. Prior to her appointment to Chief Merchandising and Stores Officer, Mrs. Sullivan served as Vice President of Merchandising from October 2021 to January 2022
and Divisional Merchandising Manager from March 2012 to October 2021. Prior to joining Kirkland’s, Mrs. Sullivan held several merchandising leadership roles in the fashion
industry at Lane Bryant, Lands’ End, Express, Kohl’s and JCPenney.
W. Michael Madden, 55, has been Executive Vice President and Chief Financial Officer of Kirkland’s since August 2022. Prior to joining Kirkland’s, Mr. Madden served as
Chief Financial Officer at Priam Properties, a private real estate investment firm. Prior to his role at Priam Properties, Mr. Madden spent over 18 years serving Kirkland’s Home in
various senior leadership and executive roles, where he was responsible for leading many notable initiatives and acquired extensive knowledge of all aspects of the Company’s
business.
Melody R. Jubert, 54, was promoted to Senior Vice President, Chief Transformation Officer of Kirkland’s in November 2024. Ms. Jubert joined the Company as the Senior
Vice President of Operations in November 2023. Prior to joining Kirkland’s, Ms. Jubert spent over 21 years serving Chico’s FAS, Inc., a publicly traded clothing retailer, in various
senior leadership and executive roles, ending her tenure with Chico’s FAS, Inc. as the Vice President of Community.
No family relationships exist among any of the above-listed executive officers, and there are no arrangements or understandings between any of the above-listed officers
and any other person pursuant to which they serve as an officer. All executive officers are elected to hold office for one year or until their successors are elected and qualified.
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Item 1A. Risk Factors
Investing in our common stock involves risk. You should carefully consider the risks described below and the other information contained in this report and other
filings that we make from time to time with the SEC, including our consolidated financial statements and accompanying notes before investing in our common stock. Any of the
following risks could materially and adversely affect our business, financial condition, results of operations or liquidity. These risks are not the only risks we face. Our
business, financial condition, results of operations or liquidity could also be adversely affected by additional factors that apply to all companies generally or by risks not
currently known to us or that we currently view to be immaterial. We can provide no assurance and make no representation that our risk mitigation efforts, although we
believe they are reasonable, will be successful.
Risks Related to Liquidity
Insufficient cash flows from operations could result in the substantial utilization of our secured revolving credit facility, or similar financing, which may limit our ability to
conduct certain activities.
We are dependent upon generating sufficient cash flows from operations to fund our obligations and strategic investments. We maintain a secured revolving credit facility
to enable us to acquire merchandise, to fund working capital requirements and to support standby letters of credit. Borrowings under the secured revolving credit facility are
subject to a borrowing base calculation consisting of a percentage of certain of our eligible assets and are subject to advance rates, appraisals, and commercially reasonable
reserves. Substantial utilization of the available borrowing base will result in various restrictions, including restrictions on the ability to repurchase our common stock or pay
dividends and an increase in the lender’s control over the Company’s cash accounts. Our revolving credit facility and our Beyond Credit Agreement contain a number of
affirmative and restrictive covenants that may also limit our actions. Continued negative cash flows from operations could result in increased borrowings under our revolving credit
facility to fund operational needs, increased utilization of letters of credit and greater dependence on the availability of the revolving credit facility. These actions could result in us
being subject to increased restrictions, incurring increased interest expense and increasing our leverage. See "Item 8. Financial Statements and Supplementary Data – Note 5 –
Long-Term Debt” for additional discussion.
We could be required to refinance our debt before it matures or need to obtain additional financing and there is no assurance that we will be able to refinance our debt on
acceptable terms or obtain additional financing.
Our ability to refinance each of our agreements governing our indebtedness on acceptable terms will be dependent upon a number of factors, including our degree of
leverage, our future operating performance, the value of our assets, borrowing restrictions which may be imposed by lenders and conditions in the credit markets at the time we
refinance. High interest rates may make future refinancing more difficult to obtain on favorable terms. In addition, although we have previously been successful in negotiating
amendments to our revolving credit facility and in securing additional financing, we may be unsuccessful in negotiating any further amendments or modifications to the
agreements governing our indebtedness or obtaining additional financing as we may deem necessary. To the extent we are unable to refinance our debt or obtain additional
financing on acceptable terms, we may be forced to choose from a number of unfavorable options, including agreeing to otherwise unfavorable financing terms or defaulting and
allowing our lenders to foreclose. Any one of these options could have a material adverse effect on our business, financial condition, results of operations and our ability to make
distributions to our shareholders.
Our indebtedness could adversely affect our financial flexibility and our strategic initiatives.
As of February 1, 2025, the secured revolving credit facility had $43.0 million of outstanding debt and the Beyond Credit Agreement had $17.0 million of outstanding debt.
Our level of indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due in respect of our indebtedness. Our indebtedness could have
other important consequences and effects on our business, such as increasing our vulnerability to adverse changes in general economic, industry and competitive conditions,
require us to dedicate a substantial portion of our cash flow from operations to make payments on our indebtedness, thereby reducing the availability of our cash flow to fund
working capital, capital expenditures and other general corporate purposes, limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we
operate, restrict us from executing our multi-brand strategy, make it more difficult to satisfy our financial obligations, including payments on our indebtedness, place us
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at a disadvantage compared to our competitors that have less debt and limit our ability to borrow additional funds for working capital and the execution of our business strategy.
To service our debt and pay other obligations, we will require a significant amount of cash, which may not be available to us.
Our ability to make payments on, repay or refinance our debt and any future debt we may incur, and to fund planned capital expenditures will depend largely upon our
future operating performance and our ability to generate cash from operations. Our future performance, to a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. In addition, our ability to borrow funds in the future to make payments on our debt and other obligations will
depend on the satisfaction of the covenants and financial ratios in our secured revolving credit facility and our other debt agreements, including other agreements we may enter
into in the future. Our business may not generate sufficient cash flow from operations, or we may not have future borrowings available to us under our credit facility or from other
sources in an amount sufficient to enable us to pay our debt or to fund our other liquidity needs.
If we do not generate sufficient cash flow from operations, we may not be able to implement our strategic initiatives and fund our obligations.
The ability to execute our strategic initiatives, including our financial turnaround strategy, will depend on, among other factors, the availability of adequate capital, which in
turn will depend in large part on cash flow generated by our business and the availability of equity and debt capital. The cost of improving our omni-channel capabilities including
increasing our online conversion, closing or relocating underperforming stores, remodeling existing stores and opening new stores will increase in the future compared to historical
costs. There can be no assurance that our business will generate adequate cash flow or that we will be able to obtain equity or debt capital on acceptable terms, or at all. Moreover,
our revolving credit facility contains provisions that restrict the amount of debt we may incur in the future. In addition, our liquidity position may limit our ability to negotiate or
obtain store leases on favorable terms. If we are not successful in obtaining sufficient capital, we may be unable to improve profitability online and in stores, which may adversely
affect our business strategy. There can be no assurances that we will have sufficient cash flow from operations or adequate capital to achieve our plans for improving in-store and
online profitability.
Our independent registered public accounting firm’s report for the year ended February 1, 2025 is qualified as to our ability to continue as a going concern.
Due to the uncertainty of our ability to meet our current operating and capital expenses, in our audited annual financial statements as of and for the year ended February 1,
2025, our independent registered public accounting firm included a description within our financial statements related to our ability to continue as a going concern. Our ability to
continue as a going concern is dependent on our capacity to (i) improve operating results and liquidity through improved profitability, (ii) reduce operating costs and (iii) obtain
additional financing under acceptable terms, if at all. The presence of the going concern description in our financial statements may have an adverse impact on the relationships we
are developing and plan to develop with third parties as we continue to operate our business and source our products and could make it challenging and difficult for us to raise
additional financing, all of which could have a material adverse impact on our business and prospects and result in a significant or complete loss of your investment.
Our conclusion that substantial doubt exists about our ability to continue as a going concern requires an explanatory paragraph in the report of our independent registered
public accounting firm on our accompanying financial statements for the fiscal year ended February 1, 2025, which results in a violation of affirmative covenants under our
revolving credit facility and the Beyond Credit Agreement. If we are unable to obtain a waiver from our lenders, our lenders could instruct the administrative agent under such
credit facilities to exercise available remedies including, declaring the principal of and accrued interest on all outstanding indebtedness immediately due and payable and
terminating all remaining commitments and obligations under the credit facilities. Although the lenders under our credit facilities may waive the defaults or forbear the exercise of
remedies, the lenders are not obligated to do so. Failure to obtain such waivers would have a material adverse effect on the liquidity, financial condition and results of operations
and may result in filing a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in order to implement a restructuring plan.
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Risks Related to our Strategic Partnership with Beyond
We might not be able to obtain various synergies as contemplated in the Collaboration Agreement.
Our ability to obtain the various synergies envisioned in the Collaboration Agreement is dependent on successfully identifying, developing and implementing plans and
initiatives intended to drive such synergies. If such plans and initiatives are not properly identified, developed and successfully executed, or if execution or realization of positive
synergies takes longer than expected, our financial condition and results of operations could be adversely affected. There can be no assurance that we will be able to successfully
open and operate Bed Bath & Beyond, Buy Buy Baby or Overstock retail stores under the Trademark License Agreement, which grants us the exclusive license to operate small
format, neighborhood brick-and-mortar stores under licensed Beyond-owned trademarks. If we do open and operate the stores, there can be no assurance that they will be
profitable. The success of our plans and initiatives is subject to risks and uncertainties with respect to execution, market conditions, customer acceptance and other factors that
may cause actual results, performance or achievements to differ materially, and adversely, from our plans or expected results.
In addition, our ability to successfully market our products to Beyond’s customers and to grow our customer base might not be successful. We can provide no assurance
that we can realize additional opportunities for growth and innovation through this partnership. Further, we could lose current customers because of this partnership by alienating
our current customer base, which could negatively impact our operating performance.
There might be unintended and unanticipated negative side effects related to the Beyond strategic partnership.
The strategic partnership with Beyond could have a negative impact on the Company’s business relationships, operating results and business, generally. The partnership
could divert management’s attention from ongoing Kirkland’s business operations. Also, there could be unexpected costs, charges or expenses resulting from the partnership.
Finally, there could be potential litigation relating to the strategic partnership against the Company or the Company’s directors, managers or officers, including the effects of any
outcomes related thereto. Any one of these risks could negatively impact our operating performance and liquidity.
Risks Related to Strategy and Strategy Execution
If we fail to identify, develop and successfully implement our short-term and long-term strategic initiatives, our financial performance could be negatively impacted.
Our ability to execute our brand strategy and to deliver improved financial performance is dependent on successfully identifying, developing and implementing plans and
initiatives intended to drive sustainable, increased financial performance, including, but not limited to, our efforts to improve or eliminate underperforming stores, optimize e-
commerce performance through SKU rationalization, expanding product categories with larger average order values and leveraging our collaboration with Beyond to enhance site
experience and improve conversion, expand the Kirkland’s Home name through private label distribution across our collective family of omni-channel brands and open and
profitably operate Bed Bath & Beyond, Buy Buy Baby or Overstock stores. If such plans and initiatives are not properly identified, developed and successfully executed, or if
execution or realization of positive results takes longer than expected, our financial condition and results of operations could be adversely affected. The success of our plans and
initiatives is subject to risks and uncertainties with respect to execution, market conditions and other factors that may cause actual results, performance or achievements to differ
materially, and adversely, from our plans and expected results.
If we are unable to successfully maintain, improve and grow a profitable, best-in-class omni-channel experience for our customers, it could adversely affect our sales, results
of operations and reputation.
As consumers continue to migrate online, we face pressures to stay relevant in retail’s ever-changing environment and to compete with other omni-channel retailers, online-
only retailers and retailers with only stores. We continue to invest in our omni-channel capabilities to provide a seamless and engaging shopping experience between our store
locations and our online and mobile environments. Insufficient, untimely or misguided investments in this area could significantly impact our profitability and growth and affect our
ability to attract new customers, as well as maintain our existing ones. In addition, declining customer store traffic and migration of sales from stores to digital platforms could
enhance these risks due to increased reliance on our omni-channel capabilities and could lead to restructuring and other costs that could adversely impact our results of operations
and cash flows.
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Our business has evolved from an in-store experience to interactions with customers across multiple channels including in-store, online, mobile and social media, among
others. Our customers are using computers, tablets, mobile phones and other devices to shop on our website and provide feedback and public commentary about all aspects of our
business. Omni-channel retailing is rapidly evolving, and we must keep pace with changing customer expectations and new developments and technology investments by our
competitors.
Successful operation of our e-commerce initiatives are dependent on our ability to maintain uninterrupted availability of the Company’s website and supporting
applications, adequate and accurate inventory levels of margin positive products, timely fulfillment of customer orders, accurate shipping of undamaged products at acceptable
shipping rates, and coordination of those activities within our stores when appropriate. Maintenance of our website requires substantial development and maintenance efforts, and
entails significant technical and business risks. To remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our website.
The sale of products through e-commerce is characterized by rapid technological change, the emergence of new industry standards and practices and changes in customer
requirements and preferences. Therefore, we may be required to license emerging technologies, enhance our existing website, develop new services and technology that address
the increasingly sophisticated and varied needs of our current and prospective customers, and adapt to technological advances and emerging industry and regulatory standards
and practices in a cost-effective and timely manner. Our ability to remain technologically competitive may require substantial expenditures and lead time, and our failure to do so
may harm our business and results of operations.
If we are unable to attract and retain technical employees or contract with third parties having the specialized skills needed to support our omni-channel efforts, we might
not be able to implement improvements to our customer-facing technology in a timely manner or provide a convenient and consistent experience for our customers, which could
negatively affect our operations. In addition, if www.kirklands.com and our other customer-facing technology systems do not appeal to our customers or reliably function as
designed, we may experience a loss of customer confidence, loss of sales or be exposed to fraudulent purchases, which, if significant, could adversely affect our reputation and
results of operations. Moreover, to make available our omni-channel platform, we rely on various technology systems and services, some of which are provided and managed by
third-party service providers. To the extent such third-party components do not perform or function as anticipated, such failure can significantly interfere in our ability to meet our
customers’ changing expectations.
If we are unable to profitably operate our existing stores, we may not be able to execute our business strategy, resulting in a decrease in net sales and profitability.
A key element of our strategy is to operate profitable stores, both in existing markets and in new geographic markets that we select based on customer data and
demographics. Our ability to improve, close or relocate underperforming stores and open profitable Bed Bath & Beyond, Buy Buy Baby or Overstock stores depends on a number
of factors, including the prevailing conditions in the commercial real estate market, our ability to locate favorable store sites and negotiate acceptable lease terms, and hire and train
skilled managers and personnel. There can be no assurance that we will be able to relocate and/or open stores. Furthermore, there is no assurance that existing stores will generate
the net sales levels necessary to achieve store-level profitability. Also, any stores that we open in our existing markets may draw customers away from our existing stores, resulting
in lower net sales growth compared to stores opened in new markets.
Our stores face great competition and could have lower than anticipated net sales volumes. Traffic decline to our stores could negatively impact operating results. Stores
located in areas where we are less well-known, and where we are less familiar with the target customer, may face different or additional risks and increased marketing and other
costs compared to stores operated in well-established existing markets. These factors may reduce our average store contribution and operating margins. If we are unable to
profitability operate our existing stores, close underperforming stores or convert underperforming stores to a more margin accretive brand, our net income could suffer.
Every year we decide to close certain stores based on a number of factors, including, but not limited to, excessive rent or other operating cost increases, inadequate
profitability, short term leases, or the landlord’s ability to replace us with another tenant at more favorable terms to the landlord. Store closings have the effect of reducing net
sales. We may choose to close underperforming stores before lease expiration and incur termination costs associated with those closings. If we are not able to increase online sales
at a pace that exceeds the closing of existing underperforming stores, or transfer customers from closing stores to a nearby existing store, our revenue could decrease.
If our store strategy, including negotiating lease occupancy costs with landlords, does not go as planned and/or we are unable to transfer these existing store customers to
other nearby stores or to online sales, our revenue and profitability could decrease, and results of operations could suffer.
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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, higher inventory and higher inventory markdowns.
Our success depends on our ability to anticipate and respond to changing merchandise trends and consumer demands in a timely manner. While we devote considerable
effort and resources to shape, analyze and respond to consumer preferences, consumer spending patterns and preferences cannot be predicted with certainty and can change
rapidly. Our product introductions and product improvements, along with our other marketplace initiatives, are designed to capitalize on consumer trends. In order to remain
successful, we must anticipate and react to these trends and develop new products or processes to address them. If we fail to identify and respond to emerging trends, consumer
acceptance of the merchandise in our stores and our image with our customers may be harmed, which could reduce customer traffic in our stores and materially adversely affect our
net sales.
Additionally, if we misjudge market trends, we may significantly overstock unpopular products and be forced to take significant inventory markdowns, which would have a
negative impact on our gross profit and cash flow. Conversely, shortages of items that prove popular could result in missed sales. In addition, a major shift in consumer demand
away from home décor could also have a material adverse effect on our business, results of operations and financial condition.
Our success depends upon our marketing, advertising and promotional efforts, and customer loyalty programs. 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 use marketing, promotional and loyalty programs to attract customers to our stores and to encourage purchases by our customers online. We use various media for our
promotional efforts, including customer-targeted direct mail and email communications, as well as various digital and social media initiatives. If we fail to choose the appropriate
medium for our efforts, or fail to implement and execute loyalty programs or marketing opportunities, our competitors may be able to attract some of our customers.
If our competitors increase their spending on advertising and promotions, if our advertising, media or marketing expenses increase, if our loyalty program or advertising and
promotions become less effective than those of our competitors, or if we do not adequately leverage technology and data analytic capabilities needed to generate concise
competitive insight, we could experience a material adverse effect on our results of operations. A failure to sufficiently innovate, develop customer loyalty programs, or maintain
adequate and effective advertising could inhibit our ability to maintain brand relevance and drive increased sales.
Our loyalty program offers customer incentives, which include earning points that are converted to reward dollars that can be redeemed on future purchases, in addition to
other bonus offers. If our customers do not respond positively to this program or if the program costs more than anticipated in reward redemptions, our financial results could be
adversely impacted.
Risks Related to Competition
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.
The retail market is a highly competitive market. Accordingly, we compete against a diverse group of retailers, including specialty stores, department stores, discount
stores, and catalog and internet-based retailers, which sell similar lines of merchandise to those carried by us. The substantial sales growth in the e-commerce industry within the
last decade has encouraged the entry of many new competitors, including discount retailers selling similar products at reduced prices, new business models, and an increase in
competition from established companies, many of whom are willing to spend significant funds and/or reduce pricing in order to gain market share. Our competitors, many of which
are larger and have substantially greater financial and other resources than us, include HomeGoods, HomeSense, Walmart, World Market, Crate & Barrel, Williams-Sonoma, Inc.,
Hobby Lobby, At Home, Target, Ebay, Amazon and Wayfair. Our stores and our www.kirklands.com website also compete with the ever-increasing number of internet retail
websites offering home décor merchandise. The availability of home décor merchandise from various competitors on the internet could result in increased price competition as our
customers are more readily able to comparison shop, which could reduce our sales, prices and margins and adversely affect our results of operations. Further, unanticipated
changes in pricing or other practices of our competitors, including promotional activity, such as thresholds for free shipping and rapid price fluctuation enabled by technology,
may adversely affect our performance.
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Several of our competitors have greater financial, distribution, logistics, marketing and other resources available to them, and they may also be able to adapt to changes in
customer requirements more quickly, devote greater resources to the design, sourcing, distribution, marketing and sale of their products, generate greater national brand
recognition or adopt more aggressive pricing policies. Our competitors may also be able to increase sales in their new and existing markets faster than we do by emphasizing
different distribution channels than we do.
If we are unable to overcome these potential competitive disadvantages, such factors could have an adverse effect on our business, financial condition and results of
operations.
Risks Related to 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.
Maintaining, promoting and growing our merchandise offering will depend largely on the success of our design, merchandising, and marketing efforts and our ability to
provide a consistent, high-quality customer experience. If we fail to achieve these objectives, our public image and reputation could be tarnished by negative publicity.
If our merchandise offerings do not meet applicable safety standards or customer expectations regarding safety, we could experience lost sales and increased costs and be
exposed to legal and reputational risk. All of our vendors must comply with applicable product safety laws, and we are dependent on them to ensure that the products we buy
comply with all safety standards. Events that give rise to actual, potential or perceived product safety concerns with respect to our products could expose us to government
enforcement action or private litigation and result in costly product recalls and other liabilities. In addition, negative customer perceptions regarding the safety of the products we
sell could cause our customers to seek alternative sources for their needs, resulting in lost sales. In those circumstances, it may be difficult and costly for us to regain customer
confidence.
If we fail to maintain a positive social media brand perception, it could have a negative impact on our operations, financial results and reputation.
Maintaining a good reputation is critical to our business. Social media has increased the risk that our reputation could be negatively impacted in a short amount of time. If
we are unable to quickly and effectively respond to occurrences of negative publicity through social media or otherwise, we may suffer declines in customer loyalty and traffic,
vendor relationship issues, diversion of management’s time to respond and other adverse effects, all of which could negatively impact our operations, financial results and
reputation.
If we fail to protect our brand name, competitors may adopt trade names that dilute the value of our brand name.
We may be unable or unwilling to strictly enforce our trademarks in each jurisdiction in which we do business. Also, we may not always be able to successfully enforce our
trademarks against competitors or against challenges by others. Our failure to successfully protect our trademarks could diminish the value and efficacy of our brand recognition,
harm our rebranding efforts and could cause customer confusion, which could, in turn, adversely affect our sales and profitability.
Our business could be negatively impacted by corporate citizenship and sustainability matters.
There is an increased focus from U.S. and foreign governmental and nongovernmental authorities and from certain investors, customers, consumers, employees, and other
stakeholders concerning corporate citizenship and sustainability matters. From time to time, we announce certain initiatives, including goals regarding our focus areas, which
include environmental matters, packaging and waste, responsible sourcing, social investments and inclusion and diversity. We could fail, or be perceived to fail, in our
achievement of such initiatives or goals, or we could fail in accurately reporting our progress on such initiatives and goals. Such failures could be due to changes in our business.
Moreover, the standards by which citizenship and sustainability efforts and related matters are measured are developing and evolving, and certain areas are subject to
assumptions, which could change over time. In addition, as the result of such heightened public focus on sustainability matters, we may face increased pressure to provide
expanded disclosure, make or expand commitments, set targets, or establish additional goals and take actions to meet such goals, in connection with such matters. We could also
be criticized for the scope of such initiatives or goals or perceived as not acting responsibly in connection with these matters. Any such matters, or related corporate citizenship
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and sustainability matters, could adversely affect our business, results of operations, cash flows and financial condition.
Risks Related to New Legislation, Regulation and Litigation
Existing and new legal requirements could adversely affect our operating results.
Our business is subject to numerous federal, state and local laws and regulations. We routinely incur costs in complying with these laws and regulations. We are exposed
to the risk that federal, state or local legislation may negatively impact our operations. Changes in product regulations (including changes in labeling or disclosure requirements),
federal or state wage requirements including minimum wage requirements, employee rights (including changes in the process for our employees to join a union), health care, social
welfare or entitlement programs such as health insurance, paid leave programs, or other changes in workplace regulation or tax laws could adversely impact our ability to achieve
our financial targets. Changes in other regulatory areas, such as consumer credit, privacy and information security, or environmental regulation may result in significant added
expenses or may require extensive system and operating changes that may be difficult to implement and/or could materially increase our costs of doing business. Untimely
compliance or noncompliance with applicable laws and regulations may subject us to legal risk, including government enforcement action, significant fines and penalties and class
action litigation, as well as reputational damage, which could adversely affect our results of operations.
Greenhouse gases ("GHG”) may have an adverse effect on global temperatures, weather patterns, and the frequency and severity of extreme weather and natural disasters.
Global climate change could result in certain types of natural disasters occurring more frequently or with more intense effects. Such events could make it difficult or impossible for
us to deliver products to our customers by creating delays and inefficiencies in our supply chain. Following an interruption to our business, we could require substantial recovery
time, experience significant expenditures to resume operations, and lose significant sales. Further, concern over climate change, including global warming, has led to, and we expect
will continue to lead to, legislative and regulatory initiatives directed at limiting GHG emissions around the world. If domestic or international laws or regulations were expanded to
require GHG emission reporting or reduction by us or our third-party manufacturers, or if we engage third-party contract manufacturers in countries that have existing GHG
emission reporting or reduction laws or regulations, we would need to expend financial and other resources to comply with such regulations and/or to monitor our third-party
manufacturers’ compliance with such regulations. In addition, we cannot control the actions of our third-party manufacturers or the public’s perceptions of them, nor can we
assure that these manufacturers will conduct their businesses using climate change proactive or sustainable practices. Violations of climate change laws or regulations by third
parties with whom we do business could result in negative public perception of us and/or delays in shipments and receipt of goods and could subject us to fines or other penalties,
any of which could restrict our business activities, increase our operating expenses or cause our sales to decline.
Additionally, our products are subject to regulation of, and regulatory standards set by various governmental authorities with respect to quality and safety. These
regulations and standards may change from time to time. Our inability to comply on a timely basis with regulatory requirements could result in significant fines or penalties, which
could adversely affect our reputation and sales. Issues with the quality and safety of merchandise we sell, regardless of our culpability, or customer concerns about such issues,
could result in damage to our reputation, lost sales, uninsured product liability claims or losses, merchandise recalls and increased costs.
The costs and other effects of new legal requirements or changes in existing legal requirements cannot be determined with certainty. Additional laws may directly or
indirectly affect our production, distribution, packaging, cost of raw materials or fuel, any of which could impact our business and financial results. In addition, our efforts to
comply with existing or new legislation or regulations may increase our costs.
Our business could suffer if a manufacturer fails to use acceptable labor and environmental practices.
We do not control our vendors or the manufacturers that produce the products we buy from them, nor do we control the labor and environmental practices of our vendors
and these manufacturers. The violation of labor, safety, environmental and/or other laws and standards by any of our vendors or these manufacturers, or the divergence of the
labor and environmental practices followed by any of our vendors or these manufacturers from those generally accepted as ethical in the United States, could interrupt, or
otherwise disrupt, the shipment of finished products to us or damage our reputation. Any of these, in turn, could have a material adverse effect on our reputation, financial
condition and results of operations. In that regard, most of the products we sell are manufactured overseas, primarily
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in China, which may increase the risk that the labor and environmental practices followed by the manufacturers of these products may differ from those considered acceptable in
the United States.
Product liability claims could adversely affect our reputation.
Despite our best efforts to ensure the quality and safety of the products we sell, we may be subject to product liability claims from customers or penalties from government
agencies relating to allegations that the products sold by us are misbranded, contain contaminants or impermissible ingredients, provide inadequate instructions regarding their
use or misuse, or include inadequate warnings concerning flammability or interactions with other substances. Such claims may result from tampering by unauthorized third parties,
product contamination or spoilage, including the presence of foreign objects, substances, chemicals, other agents, or residues introduced during the growing, storage, handling
and transportation phases. All of our vendors and their products must comply with applicable product and safety laws. We generally seek contractual indemnification and
insurance coverage from our suppliers. However, if we do not have adequate insurance or contractual indemnification available, such claims could have a material adverse effect on
our business, financial condition and results of operation. Our ability to obtain indemnification from foreign suppliers may be hindered by the manufacturer’s lack of understanding
of United States product liability or other laws, which may make it more likely that we be required to respond to claims or complaints from customers as if we were the manufacturer
of the products. Even with adequate insurance and indemnification, such claims could significantly damage our reputation and consumer confidence in our products. Our litigation
expenses could increase as well, which also could have a materially negative impact on our results of operations even if a product liability claim is unsuccessful or is not fully
pursued.
Litigation may adversely affect our business, financial condition, results of operations or liquidity.
Our business is subject to the risk of litigation by employees, consumers, vendors, competitors, intellectual property rights holders, shareholders, government agencies and
others through private actions, class actions, administrative proceedings, regulatory actions or other litigation means. The outcome of litigation, particularly class action lawsuits,
regulatory actions and intellectual property claims, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts,
and the magnitude of the potential loss relating to these lawsuits may remain unknown for substantial periods of time. In addition, certain of these lawsuits, if decided adversely to
us or settled by us, may result in liability material to our consolidated financial statements as a whole or may negatively affect our operating results if changes to our business
operation are required. The cost to defend future litigation may be significant. There also may be adverse publicity associated with litigation that could negatively affect customer
perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business,
financial condition, results of operations or liquidity.
Risks Associated with Vendors and Distribution
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.
In fiscal 2024, approximately 51% of our merchandise was purchased through vendors in the United States who either import merchandise from foreign countries or contract
with domestic manufacturers, while approximately 49% of our merchandise was directly sourced by us from factories in foreign countries. We are subject to the risks involved with
relying on products manufactured abroad, particularly to the extent that their effects are passed through to us by our vendors or that those risks directly apply to us. These risks
include changes in import duties, quotas, loss of "most favored nation” trading status with the United States for a particular foreign country, work stoppages, delays in shipments,
first cost price increases, freight cost increases, exchange rate fluctuations, terrorism, public health crises, war, economic uncertainties (including inflation, foreign government
regulations and political unrest), trade restrictions (including the United States imposing anti-dumping or countervailing duty orders, safeguards, remedies or compensation and
retaliation due to illegal foreign trade practices) and other factors relating to foreign trade, including costs and uncertainties associated with efforts to identify and disclose sources
of "conflict minerals” used in products that we cause to be manufactured and potential sell-through difficulties and reputational damage that may be associated with our inability
to determine that such products are classified as "DRC conflict-free.” If any of these
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or other factors were to cause a disruption of trade, from the countries in which the suppliers of our vendors or our direct suppliers are located, our inventory levels may be
reduced, or the cost of our products may increase.
We cannot predict the effect that future changes in economic or political conditions in foreign countries may have on our operations. Although we believe that we could
access alternative sources in the event of disruptions or delays in supply due to economic, political or health conditions in foreign countries, such disruptions or delays may
adversely affect our results of operations unless and until alternative supply arrangements can be made. In addition, merchandise purchased from alternative sources may be of
lesser quality or more expensive than the merchandise we currently purchase abroad.
Countries from which we or our vendors obtain these products may, from time to time, impose new or adjust prevailing quotas or other restrictions on exported products,
and the United States may impose new duties, quotas and other restrictions on imported products. This could disrupt the supply of such products to us and adversely affect our
operations. The United States Congress periodically considers other restrictions on the importation of products obtained for us. The cost of such products may increase for us if
applicable duties are raised or import quotas with respect to such products are imposed or made more restrictive.
Approximately 71% of our fiscal 2024 merchandise purchases are products manufactured in China. We have developed strategies to try to mitigate the impact of current
and potential future tariffs, including collaborative efforts with our vendor partners and raising retail prices. There can be no assurance that the imposed tariffs will not be
increased, expanded or extended, or that the issues that led the Office of the U.S. Trade Representative to impose the tariffs will be resolved. The impact of these tariffs on current
and future fiscal years could have a material adverse effect on our cost of goods sold and results of operations.
We continue to evaluate the impact of the currently effective tariffs, including potential future retaliatory tariffs, as well as other recent changes in foreign trade policy on
our supply chain, costs, sales and profitability. We are working through strategies to mitigate such impact, including working with our vendors and merchants on pricing, raising
consumer retail prices and delaying or resourcing purchases of inventory away from countries with the highest tariff rates. Delayed inventory purchases could also lead to
inventory shortages impacting the proper timing of seasonal merchandise arriving in stores or online. At this time, it is unknown how long elevated U.S. tariffs on Chinese goods
will remain in effect or whether additional tariffs on Chinese goods, or goods from other countries from which we source our products, will be imposed. The prolonged effect of
tariffs on all countries that we source our products from or the imposition of additional tariffs or other trade barriers could increase our costs in certain markets and may make it
more difficult for us to acquire, transport and sell our products in some markets or to some customers, which may result in declines in our sales, margins and operating results.
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.
Any disruption in the supply or increase in pricing of our merchandise could negatively impact our ability to achieve anticipated operating results. We purchase our
products from approximately 180 vendors with which we have no long-term purchase commitments or exclusivity contracts. We have a core group of approximately 80 vendors that
provide approximately 92% of our merchandise. No vendor provides over 10% of our merchandise purchases. Any disruption in the relationship with our core vendors could
negatively impact our ability to achieve anticipated operating results.
Historically, we have retained our vendors, and we have generally not experienced difficulty in obtaining desired merchandise from vendors on acceptable terms. However,
our arrangements with these vendors do not guarantee the availability of merchandise, establish guaranteed prices or provide for the continuation of particular pricing practices.
Our current vendors may not continue to sell products to us on current terms or at all, and we may not be able to establish relationships with new vendors to ensure delivery of
products in a timely manner or on terms acceptable to us. In addition, a period of unfavorable financial performance may make it difficult for some of our vendors to arrange for the
financing or factoring of their orders with manufacturers, which could result in our inability to obtain desired merchandise from those vendors. Our future success will depend
upon our ability to maintain our existing vendor relationships or to develop new ones, especially as it relates to former Bed Bath & Beyond vendors to supply us with national
brand products for any of our future Bed Bath & Beyond, Buy Buy Baby and Overstock stores.
We may not be able to acquire desired merchandise in sufficient quantities on terms acceptable to us in the future. Also, our business would be adversely affected if there
were delays in product shipments to us due to shipping difficulties, strikes or other difficulties at our principal transport providers or otherwise. We have from time to time
experienced delays of this nature. We are also dependent on vendors for assuring the quality of merchandise supplied to us. Our inability to acquire suitable merchandise in the
future or the loss of one or more of our vendors and our
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failure to replace any one or more of them may harm our relationship with our customers resulting in a loss of net sales.
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.
An important part of our efforts to achieve efficiencies, cost reductions and net sales growth is the continued identification and implementation of improvements to our
planning, logistical and distribution infrastructure and our supply chain, including merchandise ordering, transportation and receipt processing. In addition, recent increases in
energy prices have resulted, and are expected to continue to result, in increased merchandise and freight costs, which cannot readily be offset through higher prices because of
competitive factors.
The distribution of products to our stores and directly to our customers is coordinated through our third-party west coast bypass operation, our distribution facility in
Jackson, Tennessee and our third-party distribution center in Lancaster, Texas. We depend on the orderly operation of these receiving and distribution facilities, which rely on
adherence to shipping schedules and effective management. In 2023, we closed our North Las Vegas, Nevada and Winchester, Virginia e-commerce order fulfillment centers to
reduce fixed costs and consolidate our operations.
We make significant upgrades to our warehouse management software. If these changes or upgrades do not go smoothly or timely, then we could face significant
disruptions with our distribution process and incur excess costs related to the upgrades.
In addition, we cannot assure that events beyond our control, such as disruptions due to fire or other catastrophic events, adverse weather conditions, labor disagreements
or shipping problems, will not result in delays in the delivery of merchandise to our stores or directly to our customers. We also cannot guarantee that our insurance will be
sufficient, or that insurance proceeds will be timely paid to us, in the event that any of our distribution facilities are shut down for any reason.
Any significant disruption in the operations of our distribution facilities would have a material adverse effect on our ability to maintain proper inventory levels in our stores
and satisfy our online orders, which could result in a loss of net sales and net income.
Our freight costs and thus our cost of goods sold are impacted by changes in fuel prices.
Our freight cost is impacted by changes in fuel prices through surcharges. Fuel prices and surcharges affect freight costs with respect to both inbound freight from vendors
to our distribution centers and outbound freight from our distribution centers to our stores. Increased fuel prices or surcharges may increase freight costs and thereby increase our
cost of goods sold.
Risks Related to Technology and Data Security
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 receive and maintain certain personal information about our customers and employees in the ordinary course of business. Our use of this information is regulated at the
international, federal and state levels, as well as by certain third parties with whom we contract for such services. If our security and information systems are compromised or our
business associates fail to comply with these laws and regulations and this information is obtained by unauthorized persons or used inappropriately, it could adversely affect our
reputation, as well as operations, results of operations, and financial condition and could result in litigation or the imposition of penalties. As privacy and information security laws
and regulations change, we may incur additional costs to ensure we remain in compliance. Our business requires collection of large volumes of internal and customer data,
including credit card numbers and other personally identifiable information of our customers in various information systems and those of our service providers. The integrity and
protection of customer, employee, and company data is critical to us. If that data is inaccurate or incomplete, we or the store employees could make faulty decisions. Customers and
employees also have a high expectation that we and our service providers will adequately protect their personal information. The regulatory environment surrounding information,
security and privacy is also increasingly demanding. Our existing systems may be unable to satisfy changing regulatory requirements and employee and customer expectations, or
may require significant additional investments or time to do so. Despite implementation of various measures designed to protect our information systems and records, including
those we maintain with our service providers, we may be subject to
22
security breaches, system failures, viruses, operator error or inadvertent releases of data. A significant theft, loss, or fraudulent use of customer, employee, or company data
maintained by us or by a service provider or failure to comply with the various United States and international laws and regulations applicable to the protection of such data or
with Payment Card Industry data security standards could adversely impact our reputation and could result in remedial and other expenses, fines, or litigation. A breach in the
security of our information systems or those of our service providers could lead to an interruption in the operation of our systems, resulting in operational inefficiencies and a loss
of profits.
Certain aspects of the business, particularly our website, heavily depend on consumers entrusting personal financial information to be transmitted securely over public
networks, which increases our exposure to cybersecurity risks. We invest considerable resources in protecting the personal information of our customers but are still subject to the
risks of security breaches and cyber incidents resulting in unauthorized access to stored personal information. Any breach of our cybersecurity measures could result in violation
of privacy laws, potential litigation, and a loss of confidence in our security measures, all of which could have a negative impact on our financial results and our reputation. In
addition, a privacy breach or other type of cybercrime or cybersecurity attack could cause us to incur significant costs to restore the integrity of our system, could require the
devotion of significant management resources, and could result in significant costs in government penalties and private litigation.
Our information technology is vulnerable to obsolescence, interruption and damage that could harm our business.
We rely upon our existing information systems for operating and monitoring all major aspects of our business, including sales, warehousing, distribution, purchasing,
inventory control, merchandise planning and replenishment, as well as various financial functions. These systems and our operations are vulnerable to damage or interruption from
fire, flood and other natural disasters, power loss, computer systems failures, internet and telecommunications or data network failures, operator negligence, improper operation by
or supervision of employees, physical and electronic loss of data, misappropriation, computer viruses, malicious attacks and security breaches.
Any disruption in the operation of our information technology, the loss of employees knowledgeable about such systems or our failure to continue to effectively modify
such systems could interrupt our operations or interfere with our ability to monitor inventory or process customer transactions, which could result in reduced net sales and affect
our operations and financial performance. We also need to ensure that our systems are consistently adequate to handle our anticipated growth and are upgraded, as necessary, to
meet our needs. The cost of any such technology upgrades or enhancements could be significant. If our systems are damaged or fail to function properly, we may incur substantial
costs to repair or replace them, and may experience loss of critical data and interruptions or delays in our ability to manage inventories or process customer transactions, which
could adversely affect our results of operations.
We also rely heavily on our information technology employees. Failure to meet these staffing needs may negatively affect our ability to fulfill our technology initiatives,
while impacting our ability to maintain our existing systems. We rely on certain vendors to maintain and periodically upgrade many of these systems. The software programs
supporting many of our systems were licensed to us by independent software developers. The inability of these developers or us to continue to maintain and upgrade these
systems and software programs could disrupt or reduce the efficiency of our operations if we are unable to convert to alternate systems in an efficient and timely manner. In
addition, costs and potential problems and interruptions associated with the implementation of new or upgraded systems and technology, or with maintenance or adequate
support of existing systems, could also disrupt or reduce the efficiency of our operations.
Risks Related to Governance
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.
Our charter authorizes the issuance of "blank check” preferred stock with such designations, rights and preferences as may be determined from time to time by our Board of
Directors. Accordingly, the Board of Directors is empowered, without shareholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights
that could materially adversely affect the voting power or other rights of the holders of our common stock. Holders of our common stock do not have preemptive rights to
subscribe for a pro rata portion of any capital stock that may be issued by us. In the event of issuance, such preferred stock could be utilized, under certain circumstances, as a
method of discouraging, delaying or preventing a change in control of Kirkland’s.
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Our charter and bylaws contain certain corporate governance provisions that may make it more difficult to challenge management, deter and inhibit unsolicited changes in
control of Kirkland’s and have the effect of depriving our shareholders of an opportunity to receive a premium over the prevailing market price of our common stock in the event of
an attempted hostile takeover. First, the charter provides for a classified Board of Directors, with directors (after the expiration of the terms of the initial classified board of directors)
serving three-year terms from the year of their respective elections and being subject to removal only for cause and upon the vote of 80% of the voting power of all outstanding
capital stock entitled to vote (the "Voting Power”). Second, our charter and bylaws do not generally permit shareholders to call, or require that the Board of Directors call, a special
meeting of shareholders. The charter and bylaws also limit the business permitted to be conducted at any such special meeting. In addition, Tennessee law permits action to be
taken by the shareholders by written consent only if the action is consented to by holders of the number of shares required to authorize shareholder action and if all shareholders
entitled to vote are parties to the written consent. Third, the bylaws establish an advance notice procedure for shareholders to nominate candidates for election as directors or to
bring other business before meetings of the shareholders. Only those shareholder nominees who are nominated in accordance with this procedure are eligible for election as
directors of Kirkland’s, and only such shareholder proposals may be considered at a meeting of shareholders as have been presented to Kirkland’s in accordance with the
procedure. Finally, the charter provides that the amendment or repeal of any of the foregoing provisions of the charter mentioned previously in this paragraph requires the
affirmative vote of at least 80% of the Voting Power. In addition, the bylaws provide that the amendment or repeal by shareholders of any bylaws made by our Board of Directors
requires the affirmative vote of at least 80% of the Voting Power.
Furthermore, Kirkland’s is subject to certain provisions of Tennessee law, including certain Tennessee corporate takeover acts that are, or may be, applicable to us. These
acts, which include the Investor Protection Act, the Business Combination Act and the Tennessee Greenmail Act, seek to limit the parameters in which certain business
combinations and share exchanges occur. The charter, bylaws and Tennessee law provisions may have an anti-takeover effect, including possibly discouraging takeover attempts
that might result in a premium over the market price for our common stock.
Risks Related to Human Capital
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.
We have benefited from the leadership and performance of our senior management team. Our success will depend on our ability to retain our current senior management
members and to attract and retain qualified personnel in the future. Competition for senior management personnel is intense, and there can be no assurances that we will be able to
retain our personnel. Additionally, any failure by us to manage a successful leadership transition of an executive officer and to timely identify a qualified permanent replacement
could harm our business and have a material adverse effect on our results of operations. There can also be no assurance that a reduced or less qualified executive team can
suitably perform operational responsibilities.
Our business depends upon hiring, training and retaining qualified employees.
The success of our strategic plans is dependent on our ability to promote and recruit a sufficient number of quality employees in our stores, distribution centers and
corporate headquarters. Our workforce costs represent our largest operating expense, and our business is subject to employment laws and regulations, including requirements
related to minimum wage and benefits. In addition, the implementation of potential regulatory changes relating to overtime exemptions and benefits for certain employees under
federal and state laws could result in increased labor costs to our business and negatively impact our operating results. We cannot be assured that we can continue to hire, train
and retain qualified employees at current wage rates since we operate in a competitive labor market, and there is a risk of market increases in compensation.
The success of our store strategy depends on our ability to hire, train and retain qualified district managers, store managers and sales associates to support our stores. In
addition, the time and effort required to train and supervise a large number of new managers and associates due to seasonal hiring practices or excessive turnover may divert
resources from our existing stores and adversely affect our operating and financial performance.
We also depend on hiring qualified personnel at our distribution centers, especially during our peak season in the third and fourth quarters leading up to the holiday selling
season. Not being able to hire or find temporary qualified
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help during this season, could lead to bottlenecks in the supply chain and products not arriving timely in stores or directly to customer homes, which could negatively impact
sales.
Low unemployment rates in the United States, rising wages and competition for qualified talent could result in the failure to attract, motivate and retain personnel. This has
resulted in higher employee costs, increased attrition and significant shifts in the labor market and employee expectations. We may continue to face challenges in finding and
retaining qualified personnel, which could have an adverse effect on our results of operations, cash flows and financial condition.
Risks Related to Weather
Weather conditions could adversely affect our sales and/or profitability by affecting consumer shopping patterns.
Our operating results may be adversely affected by severe or unexpected weather conditions. Adverse weather conditions or other extreme changes in the weather,
including resulting electrical and technological failures, may disrupt our business and may adversely affect our ability to sell and distribute products. Frequent or unusual snow,
ice or rainstorms or extended periods of unseasonable temperatures in our markets could adversely affect our performance by affecting customer shopping patterns or diminishing
demand for seasonal merchandise. For example, extended periods of unseasonably warm temperatures during the winter season or cool weather during the summer season could
reduce demand for a portion of our inventory and thereby reduce our sales and profitability.
Risks Related to Macroeconomics
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 headquarters, store locations, distribution centers and warehouses, as well as certain of our vendors and customers, are located in areas that have been and could be
subject to natural disasters such as floods, hurricanes, tornadoes, fires or earthquakes. In addition, we operate in markets that may be susceptible to pandemic outbreaks, war,
terrorist acts or disruptive global political events, such as civil unrest in countries in which our vendors are located or products are manufactured. Our business may be harmed if
our ability to sell and distribute products is impacted by any such events, any of which could influence customer trends and purchases and may negatively impact our net sales,
properties or operations. Such events could result in physical damage to one or more of our properties, the temporary closure of some or all of our stores or distribution centers,
the temporary lack of an adequate work force in a market, temporary or long-term disruption in the transport of goods, delay in the delivery of goods to our distribution centers or
stores, disruption of our technology support or information systems, or fuel shortages or dramatic increases in fuel prices and shipping costs, which increase the cost of doing
business. These events also can have indirect consequences such as increases in the costs of insurance if they result in significant loss of property or other insurable damage.
Any of these factors, or a combination thereof, could adversely affect our operations.
Our performance may be affected by general economic conditions.
Our performance is subject to worldwide economic conditions and their impact on levels of discretionary consumer spending. Some of the factors that have had, and may in
the future have, an impact on discretionary consumer spending include national or global economic downturns, an increase in consumer debt (and a corresponding decrease in the
availability of affordable consumer credit), reductions in net worth based on recent severe market declines, softness in the residential real estate and mortgage markets, changes in
taxation, increases in fuel and energy prices, fluctuation in interest rates, low consumer confidence and other macroeconomic factors.
Specialty retail is a cyclical industry that is heavily dependent upon the overall level of consumer spending. Purchases of home décor and furnishings tend to be highly
correlated with cycles in consumers’ disposable income and trends in the housing market. A weak retail environment could impact customer traffic in our stores and also adversely
affect our net sales. Because of the seasonality of our business, economic downturns or increased sourcing costs during the last quarter of our fiscal year could adversely affect
us to a greater extent than if such downturns occurred at other times of the year. As purchases of home décor and furnishings may decline during recessionary periods, a
prolonged recession, including any related decrease in consumers’ disposable incomes, may have a material adverse effect on our business, financial condition and results of
operations.
Should credit markets tighten or turmoil in the financial markets develop, our ability to access funds, refinance our existing indebtedness, enter into agreements for new
indebtedness or obtain funding through the issuance of our securities would be adversely impacted.
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The impact of any such credit crisis or market turmoil on our major suppliers cannot be accurately predicted. The inability of key suppliers to access liquidity, or the
insolvency of key suppliers, could lead to their failure to deliver our merchandise. Worsening economic conditions could also result in difficulties for financial institutions
(including bank failures) and other parties with whom we do business, which could potentially impair our ability to access financing under existing arrangements or to otherwise
recover amounts as they become due under our other contractual arrangements.
Our profitability is vulnerable to inflation and cost increases.
Future increases in costs such as the cost of merchandise, shipping rates, freight costs, fuel costs and store occupancy costs may reduce our profitability. These cost
increases may be the result of inflationary pressures that could further reduce our sales or profitability. Increases in other operating costs, including changes in energy prices,
wage rates and lease and utility costs, may increase our cost of goods sold or operating expenses. Competitive pressures in our industry may have the effect of inhibiting our
ability to reflect these increased costs in the prices of our products and therefore reduce our profitability.
The market price for our common stock might be volatile and could result in a decline in the value of your investment.
The price at which our common stock trades has been and is likely to continue to be highly volatile, and such volatility could expose us to securities class action litigation.
The market price of our common stock could be subject to significant fluctuations in response to our operating results, general trends and prospects for the retail industry,
announcements by our competitors, analyst recommendations, our ability to meet or exceed analysts’ or investors’ expectations, the condition of the financial markets and other
factors. In addition, the stock market in recent years has experienced extreme price and volume fluctuations that often have been unrelated or disproportionate to the operating
performance of companies. These fluctuations, as well as general economic and market conditions, may adversely affect the market price of our common stock, notwithstanding our
actual operating performance.
Risks Related to Business and Operations
Our business is highly seasonal and our fourth quarter contributes to 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 have
sufficient working capital or to finance our capital requirements.
We have historically experienced, and expect to continue to experience, substantial seasonal fluctuations in our net sales and operating results. We believe this is the
general pattern typical of our segment of the retail industry and expect that this pattern will continue in the future. Due to the importance of the fall selling season, which includes
Thanksgiving and Christmas, the last quarter of our fiscal year has historically contributed, and is expected to continue to contribute, a disproportionate amount of our net sales,
net income and cash flow for the entire fiscal year. Any factors negatively affecting us during the last quarter of our fiscal year, including unfavorable economic or weather
conditions, could have a material adverse effect on our financial condition and results of operations, reducing our cash flow, leaving us with excess inventory and making it more
difficult for us to have sufficient working capital to continue operations during the first three quarters of the year or to finance our capital requirements.
Our quarterly results of operations may also fluctuate significantly as a result of a variety of other factors, including the timing of store closings and openings, customer
traffic changes, shifts in the timing of certain holidays and competition. Consequently, comparisons between quarters are not necessarily meaningful, and the results for any
quarter are not necessarily indicative of future results.
Inventory loss and theft and the inability to anticipate inventory needs may result in reduced net sales.
We are subject to the risk of inventory loss and theft. We have experienced inventory shrinkage in the past, and we cannot assure that incidences of inventory loss and
theft will decrease in the future or that the measures we are taking will effectively reduce the problem of inventory shrinkage. Although some level of inventory shrinkage is an
unavoidable cost of doing business, if we were to experience higher rates of inventory shrinkage or incur increased security costs to combat inventory theft, our financial
condition could be affected adversely.
Efficient inventory management is a key component of our business success and profitability. To be successful, we must maintain sufficient inventory levels to meet our
customers’ demands without allowing those levels to increase
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to such an extent that the costs to store and hold the goods unduly impacts our financial results. If our buying decisions do not accurately predict customer trends or purchasing
actions, we may have to take unanticipated markdowns to dispose of the excess inventory, which also can adversely impact our financial results. Though we attempt to reduce
these risks, we cannot assure you that we will be successful in our inventory management, which may negatively impact our cash flows and results of operations.
Failure to control merchandise returns could negatively impact the business.
We have established a provision for estimated merchandise returns based upon historical experience and other known factors. If actual returns are greater than those
projected by management, additional reductions of revenue could be recorded in the future. Also, to the extent that returned merchandise is damaged, we may not receive full retail
value from the resale of the returned merchandise. Introductions of new merchandise, changes in merchandise mix, associate selling behavior, merchandise quality issues, changes
to our return policy, e-commerce return behavior, changes in consumer confidence, or other competitive and general economic conditions may cause actual returns to exceed the
provision for estimated merchandise returns. An increase in merchandise returns that exceeds our current provision could negatively impact the business and financial results.
Item 1B. Unresolved Staff Comments
None.
Item 1C. Cybersecurity
The Company depends on the confidentiality, integrity and availability of information systems and data. We have systems and processes in place to assess, identify and
manage cybersecurity incidents and those systems and processes are integrated into our overall risk management system.
Internal and third-party risks are reviewed, monitored and managed by the Company's IT ISC2, SANS, CompTIA certified security partners and external expert consultants.
The Company annually engages third-party experts to assess the effectiveness of system and network security. Periodically, an external independent consultancy team conducts a
comprehensive review of the Company's cybersecurity program using the National Institute of Standards and Technology Cybersecurity Framework. Additionally, the Company is
assessed annually by an independent third party for compliance with the PCI-DSS standard, for which the Company receives an attestation of compliance.
The Company’s security awareness program seeks to create a culture of shared responsibility for the security of sensitive data and systems. There is required annual
security training and quarterly phishing campaigns for team members with access to Company email. Annually, members of the IT department are required to take IT specific
training, and store employees take operations and security training. A third-party led social engineering campaign that targets Kirkland’s employees is carried out on an annual
basis. Key performance indicators and periodic testing of training materials ensure the program’s effectiveness.
The Company’s process for identifying and managing first and third-party risks from cybersecurity threats includes proactive threat hunting, continuous monitoring of the
Company’s systems and network for cybersecurity events, and regular testing of the Company’s Security Incident Response Plan, Business Continuity Plan and Disaster
Recovery Plan. An external managed security services provider and an industry-leading security tool continuously monitors, detects, and responds to the Company’s systems and
network for cybersecurity threats. The Company’s IT security partners evaluate the escalated threats, and if necessary, take steps to contain and recover from pervasive threats in
accordance with the Company’s Security Incident Response Plan. A third-party with extensive experience in incident response and forensics is on retainer to assist with incidents.
The Incident Response Plan includes reporting and escalation procedures to inform the Company’s executives, the Audit Committee, and full Board of Directors, as appropriate, to
enable them to carry out their oversight responsibilities, and to ensure timely compliance with applicable reporting rules. The Company’s Incident Response Plan and Disaster
Recovery Plan include procedures for business recovery and are tested at least annually. The Company also maintains a cyber insurance policy that provides coverage for material
IT security incidents.
No risks from cybersecurity threats have materially affected, nor has the Company identified any specific risks from known cybersecurity threats that are reasonably likely
to materially affect, the Company, including our business
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strategy, results of operations or financial condition. Please see "Item 1A. Risk Factors — Risks Related to Technology and Data Security” for additional discussion of
cybersecurity risks applicable to the Company.
Management Responsibilities
Our cybersecurity program is managed by our Senior Director of Information Technology ("Technology Senior Director”). Our Technology Senior Director has 21 years of
experience in information technology and cybersecurity, having been at the Company since 2003. The Technology Senior Director, along with the Company’s IT security partners,
is responsible for reducing cybersecurity risk by maintaining a proactive security posture aligned with current threats, detecting cybersecurity events, responding quickly and
building procedures to rapidly recover, if needed.
Board Responsibilities
On behalf of the Board of Directors, the Audit Committee provides oversight of the Company’s management of cybersecurity risk. The Audit Committee quarterly reviews
the Company’s cybersecurity risks, incidents, audits, assessments, crisis readiness, awareness activities and compliance with cybersecurity and privacy laws and regulations. The
Company’s Technology Senior Director briefs the Audit Committee quarterly on active and emerging cybersecurity threats and efforts to strengthen the Company’s defenses
against these threats.
Item 2. Properties
We lease all of our store locations and expect to continue our practice of leasing rather than owning stores. Our leases typically provide for initial five- to 10-year initial
terms, many with the ability for us (or the landlord) to terminate the lease at specified points during the term if net sales at the leased premises do not reach a certain annual level.
Many of our leases provide for payment of percentage rent (i.e., a percentage of net sales in excess of a specified level), and the rate of increase in key ancillary charges is generally
capped.
As current leases expire, we believe we have the option to obtain favorable lease renewals for present store locations or obtain new leases for equivalent or better locations
in the same general area. To date, we have not experienced unusual difficulty in either renewing or extending leases for existing locations or securing leases for suitable locations
for new stores.
The following table indicates the states where our stores are located and the number of stores within each state as of February 1, 2025:
State
Number of Stores
State
Number of Stores
Texas
49 Mississippi
6
Florida
22 Oklahoma
6
Georgia
21 New Jersey
5
North Carolina
19 Arkansas
5
Tennessee
19 Wisconsin
5
California
16 Delaware
4
Alabama
13 Kansas
4
Pennsylvania
12 Minnesota
4
Indiana
11 Iowa
3
Michigan
10 Colorado
3
South Carolina
10 Maryland
2
Ohio
9 New York
2
Illinois
9 North Dakota
2
Missouri
9 Nebraska
2
Louisiana
9 Nevada
1
Virginia
8 West Virginia
1
Kentucky
8 South Dakota
1
Arizona
7 Total
317
28
We lease all of our distribution locations. The following is a list of distribution locations including the approximate square footage as of February 1, 2025:
Distribution Facility Locations
Type
Approximate Square Footage
Jackson, Tennessee
store and e-commerce fulfillment
771,000
Lancaster, Texas
third-party operated store fulfillment
200,000
We closed our North Las Vegas, Nevada e-commerce fulfillment operation in March 2023 and our Winchester, Virginia e-commerce fulfillment operation in September 2023.
We consolidated all e-commerce fulfillment into our Jackson, Tennessee distribution facility.
We also lease approximately 49,000 square feet of office space in Brentwood, Tennessee.
Item 3. Legal Proceedings
See "Item 8. Financial Statements and Supplementary Data – Note 10 — Commitments and Contingencies” for further discussion.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on Nasdaq under the symbol "KIRK”. We commenced trading on Nasdaq on July 11, 2002. On April 21, 2025, there were approximately 38
holders of record and approximately 11,913 beneficial owners of our common stock.
Dividend Policy
There have been no dividends declared on any class of our common stock since fiscal 2015. Our senior credit facility and the Beyond Credit Agreement restrict our ability to
pay cash dividends. See "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” for discussion of
our senior credit facility and the Beyond Credit Agreement. Future cash dividends, if any, will be determined by our Board of Directors and will be based upon our earnings, capital
requirements, financial condition, debt covenants and other factors deemed relevant by our Board of Directors.
Issuer Repurchases of Equity Securities
On January 6, 2022, the Company announced that the Board of Directors authorized a share repurchase plan providing for the purchase in the aggregate of up to $30.0
million of the Company’s outstanding common stock. Repurchases of shares are made in accordance with applicable securities laws and may be made from time to time in the open
market or by negotiated transactions. The amount and timing of repurchases are based on a variety of factors, including stock price, regulatory limitations and other market and
economic factors. The share repurchase plan does not require us to repurchase any specific number of shares, and we may terminate the repurchase plan at any time. In fiscal 2024
and fiscal 2023, we did not repurchase any shares of common stock under our share repurchase plan. As of February 1, 2025, we had approximately $26.3 million remaining under
the share repurchase plan.
29
Item 6. Reserved
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is intended to provide the reader with information that will assist in understanding the significant factors affecting our consolidated
operating results, financial condition, liquidity and capital resources during the two-year period ended February 1, 2025 (our fiscal years 2024 and 2023). Our fiscal year is
comprised of the 52 or 53-week period ending on the Saturday closest to January 31. Accordingly, fiscal 2024 represented the 52 weeks ended on February 1, 2025, and fiscal 2023
represented the 53 weeks ended on February 3, 2024. For a comparison of our results of operations for the 53-week period ended February 3, 2024, compared to the 52-week period
ended January 28, 2023, see "Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the
fiscal year ended February 3, 2024, filed with the SEC on March 29, 2024. This discussion should be read with our consolidated financial statements and related notes included
elsewhere in this Form 10-K.
A number of the matters and subject areas discussed in "Management’s Discussion and Analysis of Financial Condition and Results of Operations”, "Business” and
elsewhere in this Form 10-K are not limited to historical or current facts and deal with potential future circumstances and developments and are, accordingly, "forward-looking
statements.” You are cautioned that such forward-looking statements, which may be identified by words such as "anticipate,” "believe,” "expect,” "estimate,” "intend,” "plan,”
"seek,” "may,” "could,” "strategy,” and similar expressions, are only predictions and that actual events or results may differ materially.
Overview
We are a specialty retailer of home décor and furnishings in the United States. As of February 1, 2025, we operated a total of 317 stores in 35 states as well as an e-commerce
website, www.kirklands.com, under the Kirkland’s Home brand. We provide our customers with an engaging shopping experience characterized by a curated, affordable selection
of home décor and furnishings along with inspirational design ideas. This combination of quality and stylish merchandise, value pricing and a stimulating in-store and online
environment provides our customers with a unique brand experience.
Strategic Partnership with Beyond
On October 21, 2024, we entered into a strategic partnership with Beyond, with the purpose of enabling cohesive collaboration between the Companies, leveraging the
strengths of each business to drive sustainable, profitable growth and value for all stakeholders. As part of this partnership with Beyond, we entered into the Beyond Credit
Agreement, Beyond Subscription Agreement, Collaboration Agreement and Trademark License Agreement. Proceeds of $17 million from the Beyond Credit Agreement, in the form
of an $8.5 million Non-Convertible Term Loan and $8.5 million Convertible Term Loan were used by us to repay our existing FILO Term Loan, including prepayment fees and
transaction expenses, and to reduce borrowings under our existing revolving credit facility. Under the Trademark License Agreement, we have the exclusive license to operate small
format, neighborhood brick-and-mortar stores and "Shops-within-a-Shop” locations under licensed Beyond-owned trademarks, which include Bed Bath & Beyond, Buy Buy Baby
and Overstock, and we may sell Bed Bath & Beyond branded merchandise in existing Kirkland’s Home stores.
The $8 million equity purchase under the Beyond Subscription Agreement and the mandatory conversion of the Convertible Term Loan with accrued interest were both
approved by our shareholders at our Special Shareholders Meeting on February 5, 2025, in accordance with Nasdaq Listing Rules resulting in the issuance of 8,934,465 shares of
Kirkland’s Common Stock to Beyond, which completed the transaction. For further discussion on the agreements with Beyond, refer to " Item 8. Financial Statements and
Supplementary Data – Note 1 — Description of Business and Significant Accounting Policies”, "Note 4 — Fair Value Measures”, "Note 5 — Long-Term Debt” and "Note 6 —
Subscription Agreements”.
30
Challenging Macroeconomic Conditions
The macroeconomic environment in which we operate remains uncertain as a result of numerous factors, including inflationary pressures, high interest rates, declines in
consumer spending behavior, tariffs and aggressive promotional activity. These negative macroeconomic factors have impacted our business, results of operations, cash flows
and liquidity levels over the last several fiscal years. They have also made it difficult to execute our strategic initiatives. See "Liquidity and Capital Resources” for additional
information regarding our plans to mitigate these factors.
For additional information regarding risks related to macroeconomics, liquidity and strategy and strategy execution, see "Item 1A. Risk Factors”.
Executive Summary
In fiscal 2024, we opened two stores and closed 15 stores. In fiscal 2023, we relocated one store and closed 16 stores. E-commerce sales, including shipping revenue, were
23.5% and 25.8% of net sales in fiscal 2024 and fiscal 2023, respectively.
Our net sales for fiscal 2024 decreased by 5.8% to $441.4 million from $468.7 million in fiscal 2023. The net sales decrease of $27.3 million in fiscal 2024 was primarily due to a
non-comparable sales decrease of $18.1 million, primarily related to store closures and one less week in fiscal 2024 and a consolidated comparable sales decrease of $9.2 million.
Comparable sales decreased mainly due to a decrease in average ticket in stores and online and e-commerce traffic, partially offset by an increase in store traffic and conversion. On
a 52-week comparison, consolidated comparable same-store sales, which includes e-commerce sales, decreased 2.0% for fiscal 2024. For fiscal 2024, gross profit decreased 3.9% to
$122.0 million from $127.0 million for fiscal 2023. Gross profit as a percentage of net sales improved 50 basis points to 27.6% of net sales for fiscal 2024 from 27.1% in fiscal 2023,
which included approximately 40 basis points of decreased merchandise margin. We had an operating loss of $14.0 million in fiscal 2024 compared to an operating loss of $24.4
million in fiscal 2023, an improvement of $10.4 million, driven by lower operating costs, partially offset by the decline in gross profit. For fiscal 2024, net loss was $23.1 million, or
$1.77 per diluted share, compared to a net loss of $27.8 million, or $2.16 per diluted share, in fiscal 2023.
We continue to monitor our liquidity position very closely as we focus on turning around our financial results by concentrating on our business strategy and obtaining
additional debt or equity financing. We ended fiscal 2024 with $3.8 million in cash and cash equivalents with $43.0 million of outstanding debt under our $90.0 million senior
secured revolving credit facility and $17.0 million in debt to Beyond. Our senior secured revolving credit facility is limited by a borrowing base formula, which consists of a
percentage of eligible inventory and eligible credit card receivables, less reserves and an excess required availability covenant, which limits the borrowing base formula by the
greater of 10% of the borrowing base formula or $5.0 million or $8.0 million depending on our actual EBITDA results relative to plan. As of May 2, 2025, we had approximately
$29,000 available for borrowing, after the minimum required excess availability covenant under the revolving credit facility.
Key Financial Measures
Net sales and gross profit are the most significant drivers of our operating performance. Net sales consists of all merchandise sales to customers, net of returns, shipping
revenue associated with e-commerce sales, gift card breakage revenue, revenue earned from our private label credit card program and excludes sales taxes. Gross profit is the
difference between net sales and cost of sales. Cost of sales has five distinct components: merchandise cost (including product costs, inbound freight expenses, inventory shrink
and damages), store occupancy costs, outbound freight costs (including both store and e-commerce shipping expenses), central distribution costs and depreciation of store and
distribution center assets. Merchandise and outbound freight costs are variable, while occupancy and central distribution costs are largely fixed. Accordingly, gross profit
expressed as a percentage of net sales can be influenced by many factors including overall sales performance.
We use comparable sales to measure sales increases and decreases from stores that have been open for at least 13 full fiscal months, including our online sales. We remove
closed stores from our comparable sales calculation the day after the stores close. Relocated stores remain in our comparable sales calculation. E-commerce sales, including
31
shipping revenue, are included in comparable sales. Increases in comparable sales are an important factor in maintaining or increasing our profitability. For fiscal 2024, comparable
sales were measured on a 52-week basis shifted to remove the first week of fiscal 2023 given the 53-week period in fiscal 2023.
Operating expenses, including the costs of operating our stores and corporate headquarters, are also an important component of our operating performance. Compensation
and benefits comprise the majority of our operating expenses. Operating expenses contain fixed and variable costs, and managing the operating expense ratio (operating expenses
expressed as a percentage of net sales) is an important focus of management as we seek to increase our overall profitability. Operating expenses include cash costs as well as non-
cash costs, such as depreciation and amortization associated with omni-channel technology, corporate property and equipment, and impairment of long-lived assets. Because
many operating expenses are fixed costs, and because operating costs tend to rise over time, increases in comparable sales typically are necessary to prevent meaningful increases
in the operating expense ratio. Operating expenses can also include certain costs that are of a one-time or non-recurring nature. While these costs must be considered to fully
understand our operating performance, we typically identify such costs separately where significant in the consolidated statements of operations so that we can evaluate
comparable expense data across different periods.
Store Strategy
We are prioritizing improvement in overall profitability and developing a future state plan for infrastructure that complements our omni-channel concept and multi-brand
strategy, over store growth. We, through existing store conversions or leasing new real estate, anticipate opening our first stores outside of the Kirkland’s Home brand in 2025,
potentially including Bed Bath & Beyond, Buy Buy Baby or Overstock stores. Also, we anticipate closing approximately 15 to 20 underperforming Kirkland’s Home stores in fiscal
2025, as we execute our store profitability strategy, which is to eliminate or convert underperforming stores to improve our profitability.
The following table summarizes store information for the periods indicated:
52 Weeks Ended
53 Weeks Ended
February 1, 2025
February 3, 2024
New store openings
2
—
Permanent store closings
15
16
Store relocations
—
1
Decrease in store units
(3.9)%
(4.6)%
Decrease in store square footage
(3.8)%
(4.0)%
The following table summarizes store information as of February 1, 2025 and February 3, 2024:
As of
February 1,
2025
As of
February 3,
2024
Number of stores
317
330
Square footage
2,575,094
2,677,439
Average square footage per store
8,123
8,113
Cash Flow
Our cash and cash equivalents were $3.8 million at February 1, 2025 and February 3, 2024, mainly reflecting our strategy to keep cash and cash equivalents at low levels in
order to minimize the amount of borrowings on our credit agreements. Our objective is to finance our operating activities for fiscal 2025 with borrowings available under our existing
credit agreements, cash flows from operations, including reduced operating expenses, and new financing opportunities, if necessary. See further discussion under Liquidity and
Capital Resources related to our going concern assessment. We anticipate minimal uses of cash from investing activities in fiscal 2025. Due to the seasonal nature of our product
flow and our borrowing capacity being limited by a percentage of eligible inventory and eligible credit card receivables, less reserves and an excess required availability covenant,
we anticipate a very disciplined approach to cash flow management throughout fiscal 2025, as we execute our financial turnaround strategy.
32
Fiscal 2024 Compared to Fiscal 2023
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:
Fiscal 2024
Fiscal 2023
Change
$
%
$
%
$
%
Net sales
$
441,360
100.0% $
468,690
100.0% $
(27,330)
(5.8)%
Cost of sales
319,354
72.4
341,700
72.9
(22,346)
(6.5)
Gross profit
122,006
27.6
126,990
27.1
(4,984)
(3.9)
Operating expenses:
Compensation and benefits
77,722
17.6
82,152
17.5
(4,430)
(5.4)
Other operating expenses
54,699
12.4
62,863
13.4
(8,164)
(13.0)
Depreciation (exclusive of depreciation included in cost of
sales)
3,509
0.8
4,522
1.0
(1,013)
(22.4)
Asset impairment
109
—
1,867
0.4
(1,758)
(94.2)
Operating loss
(14,033)
(3.2)
(24,414)
(5.2)
10,381
(42.5)
Interest expense
5,949
1.3
3,317
0.7
2,632
79.3
Loss on extinguishment of debt
3,338
0.8
—
0.0
3,338
100.0
Other income
(504)
(0.1)
(499)
(0.1)
(5)
1.0
Loss before income taxes
(22,816)
(5.2)
(27,232)
(5.8)
4,416
(16.2)
Income tax expense
316
—
519
0.1
(203)
(39.1)
Net loss
$
(23,132)
(5.2)% $
(27,751)
(5.9)% $
4,619
(16.6)%
Net sales. Net sales decreased 5.8% to $441.4 million in fiscal 2024 compared to $468.7 million in fiscal 2023. The net sales decrease of $27.3 million in fiscal 2024 was
primarily due to a non-comparable sales decrease of $18.1 million, primarily related to store closures and one less week in fiscal 2024 and a consolidated comparable sales decrease
of $9.2 million. Comparable sales decreased mainly due to a decrease in consolidated average ticket and e-commerce traffic, partially offset by an increase in store traffic and
conversion. On a 52-week basis, comparable store sales increased 1.9% and comparable e-commerce sales decreased 12.9%, for a consolidated comparable sales decrease of 2.0%.
In fiscal 2024, e-commerce sales were 23.5% of our net sales. Merchandise categories performing below prior period levels include furniture, mirrors, wall décor and art, while gift,
holiday, fragrance and floral performed above prior period levels.
Gross profit. Gross profit as a percentage of net sales improved 50 basis points from 27.1% in fiscal 2023 to 27.6% in fiscal 2024. The overall improvement in gross profit
margin was due to favorable outbound freight costs, distribution center costs and depreciation expense, partially offset by unfavorable store occupancy expense and lower
merchandise margin. Outbound freight costs, including both store and e-commerce shipping expenses, decreased approximately 90 basis points to 6.7% of net sales primarily due
to a reduction in routes to the stores at a lower rate per shipment and the decline in shipping expense related to the decrease in e-commerce sales. Distribution center costs
decreased approximately 40 basis points to 5.1% of net sales due to increased efficiency and a smooth inventory flow, which led to lower compensation and benefits costs, and
lower fixed costs due to the closure of two e-commerce fulfillment locations in the prior year period. Depreciation of store and distribution center assets decreased approximately 20
basis points to 1.4% of net sales in fiscal 2024 due to certain assets becoming fully depreciated. Store occupancy costs increased approximately 60 basis points to 12.9% of net
sales due to the sales deleverage on these fixed costs. Merchandise margin decreased approximately 40 basis points from 54.1% in fiscal 2023 to 53.7% in fiscal 2024 mainly due to
increased promotional activity to drive sales, and to a lesser extent, higher inbound freight costs.
Compensation and benefits. Compensation and benefits as a percentage of net sales increased approximately 10 basis points from 17.5% in fiscal 2023 to 17.6% in fiscal
2024, primarily due to the deleverage of store payroll expenses, partially offset by a reduction in corporate compensation costs.
Other operating expenses. Other operating expenses as a percentage of net sales decreased approximately 100 basis points from 13.4% in fiscal 2023 to 12.4% in fiscal 2024.
The decrease as a percentage of net sales was primarily
33
related to a reduction in advertising expenses and a state tax refund received due to a recent change in state tax law that offset operating expenses in fiscal 2024, partially offset by
increased consulting costs for strategic advisory services.
Loss on extinguishment of debt. Loss on extinguishment of debt, related to the payoff of our FILO Term Loan, was $3.3 million in fiscal 2024, of which $2.6 million was
related to a prepayment penalty and the remainder was for the write-off of the remaining unamortized debt issuance costs.
Income tax expense. We recorded income tax expense of $0.3 million, or (1.4)% of the loss before income taxes, during fiscal 2024 compared to income tax expense of $0.5
million, or (1.9)% of the loss before income taxes, during the prior year period. We have a full valuation allowance against all deferred tax assets including federal and state net
operating loss carry-forwards. Income tax expense in both periods is primarily related to current state income tax expense. See "Item 8. Financial Statements and Supplementary
Data – Note 3 — Income Taxes” for further discussion.
Net loss and loss per share. As a result of the foregoing, we reported net loss of $23.1 million, or $1.77 per diluted share, for fiscal 2024 compared to net loss of $27.8 million,
or $2.16 per diluted share, for fiscal 2023.
Non-GAAP Financial Measures
To supplement our audited consolidated financial statements presented in accordance with U.S. generally accepted accounting principles ("GAAP”), we provide certain
non-GAAP financial measures, including EBITDA, adjusted EBITDA, adjusted operating loss, adjusted net loss and adjusted diluted loss per share. These measures are not in
accordance with, and are not intended as alternatives to, GAAP financial measures. We use these non-GAAP financial measures internally in analyzing our financial results and
believe that they provide useful information to analysts and investors, as a supplement to GAAP financial measures, in evaluating our operational performance.
We define EBITDA as net loss before income tax expense, interest expense, loss on extinguishment of debt, other income and depreciation. Adjusted EBITDA is defined as
EBITDA adjusted to remove asset impairment, stock-based compensation expense, due to the non-cash nature of this expense, severance charges, as it fluctuates based on the
needs of the business and does not represent a normal recurring operating expense, and any financing related legal or professional fees that, due to their nature, did not qualify for
capitalization as deferred debt or equity issuance costs.
Adjusted operating loss is defined as operating loss adjusted for asset impairment, stock-based compensation expense, severance charges and financing related legal or
professional fees not qualifying for capitalization. We define adjusted net loss as net loss adjusted for loss on extinguishment of debt, asset impairment, stock-based compensation
expense, severance charges, financing related legal or professional fees not qualifying for capitalization and the related tax adjustments. We define adjusted loss per diluted share
as adjusted net loss divided by weighted average diluted share count.
Non-GAAP financial measures are intended to provide additional information only and do not have any standard meanings prescribed by GAAP. Use of these terms may
differ from similar measures reported by other companies. Each non-GAAP financial measure has its limitations as an analytical tool, and you should not consider them in isolation
or as a substitute for analysis of the Company’s results as reported under GAAP.
34
The following table shows a reconciliation of net loss to EBITDA and adjusted EBITDA (in thousands) for the 52 weeks ended February 1, 2025 and the 53 weeks ended
February 3, 2024:
52 Weeks Ended
53 Weeks Ended
February 1, 2025
February 3, 2024
Net loss
$
(23,132) $
(27,751)
Income tax expense
316
519
Interest expense
5,949
3,317
Loss on extinguishment of debt
3,338
—
Other income
(504)
(499)
Depreciation
9,745
11,980
EBITDA
(4,288)
(12,434)
Adjustments:
Asset impairment
109
1,867
Stock-based compensation expense
1,042
1,186
Beyond transaction costs not qualifying for capitalization
425
—
Severance charges
448
995
Total adjustments
2,024
4,048
Adjusted EBITDA
$
(2,264) $
(8,386)
The following table shows a reconciliation of operating loss to adjusted operating loss (in thousands) for the 52 weeks ended February 1, 2025 and the 53 weeks ended
February 3, 2024:
52 Weeks Ended
53 Weeks Ended
February 1, 2025
February 3, 2024
Operating loss
$
(14,033) $
(24,414)
Adjustments:
Asset impairment
109
1,867
Stock-based compensation expense
1,042
1,186
Beyond transaction costs not subject to capitalization
425
—
Severance charges
448
995
Total adjustments
2,024
4,048
Adjusted operating loss
$
(12,009) $
(20,366)
(1)
(2)
(3)
(4)
(5)
(2)
(3)
(4)
(5)
35
The following table shows a reconciliation of net loss and diluted loss per share to adjusted net loss and adjusted diluted loss per share (in thousands, except per share
data) for the 52 weeks ended February 1, 2025 and the 53 weeks ended February 3, 2024:
52 Weeks Ended
53 Weeks Ended
February 1, 2025
February 3, 2024
Net loss
$
(23,132)
$
(27,751)
Adjustments:
Loss on extinguishment of debt
3,338
—
Asset impairment
109
1,867
Stock-based compensation expense
1,042
1,186
Beyond transaction costs not subject to capitalization
425
—
Severance charges
448
995
Total adjustments
5,362
4,048
Tax benefit of adjustments
(2)
(6)
Total adjustments, net of tax
5,360
4,042
Adjusted net loss
$
(17,772)
$
(23,709)
Diluted loss per share
$
(1.77)
$
(2.16)
Adjusted diluted loss per share
$
(1.36)
$
(1.84)
Diluted weighted average shares outstanding
13,068
12,871
(1)Loss on extinguishment of debt includes expenses related to the extinguishment of the FILO Term Loan including a $2.6 million prepayment penalty and the write off of the
remaining unamortized debt issuance costs.
(2)Asset impairment charges are related to property and equipment, software costs and cloud computing implementation costs.
(3)Stock-based compensation expense includes amounts expensed related to equity incentive plans.
(4)Consulting and legal fees incurred relating to the Company’s transaction with Beyond that, due to their nature, did not qualify for capitalization as deferred debt or equity
issuance costs. Given the magnitude and scope of this strategic transaction, the Company considers the incremental consulting and legal fees incurred not reflective of the
ongoing costs to operate its business.
(5)Severance charges include expenses related to severance agreements and permanent store closure compensation costs.
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 existing store maintenance, refreshes and
remodels, technology and omni-channel projects, and new or relocated stores. Historically, we have funded our working capital and capital expenditure requirements with internally
generated cash and borrowings under our asset-based revolving credit facility.
In fiscal 2023, we entered into the FILO Term Loan to provide additional liquidity, as internally generated cash and borrowings under our existing asset-based revolving
credit facility did not provide enough liquidity to effectively execute our financial turnaround strategy in fiscal 2024. Throughout fiscal 2024, we implemented expense reductions to
streamline our cost structure and improve our liquidity profile. The cost-savings initiatives included a reduction in corporate overhead, store payroll, marketing and third-party
technology expenses. On October 21, 2024, we entered into the Beyond Credit Agreement and Beyond Subscription Agreement. As part of this partnership, Beyond invested $25
million in us through a combined debt and equity transaction. Proceeds of $17 million from the Beyond Credit Agreement were used by us to repay our FILO Term Loan, including
prepayment fees and transaction expenses, and to reduce borrowings under our existing revolving credit facility. The $8 million equity purchase under the Beyond Subscription
Agreement and the mandatory conversion of the $8.5 million Beyond Convertible Term Loan with accrued interest into Common Stock at a price of $1.85 per share were both
approved by Kirkland's shareholders at
(1)
(2)
(3)
(4)
(5)
36
the Company’s Special Shareholders Meeting on February 5, 2025, in accordance with Nasdaq Listing Rules resulting in the issuance of 8,934,465 shares of Common Stock to
Beyond, which completed the transaction.
Our going concern assessment includes the preparation of cash flow forecasts considering the completed financing transactions, annualized savings from the cost-savings
initiatives and the impact on profitability and cash flow from operations related to both the current elevated tariffs, especially the 145% tariff rate on Chinese goods, and the
likelihood of challenging macroeconomic conditions that further constrain consumer demand, and these factors collectively suggest insufficient liquidity in the near-term. We are
currently in active discussions to finalize a commitment for an additional $5.0 million from Beyond as an expansion of the existing Beyond Credit Agreement, but as the transaction
has not yet been finalized, it cannot be considered as part of the going concern assessment and by itself is insufficient to support near-term liquidity needs given the current tariff
policy. Due to these uncertainties and the consequences they may have on the projected cash flow in the near-term, there is substantial doubt about our ability to continue as a
going concern for a period of at least 12 months from the date of issuance of the consolidated financial statements.
As of February 1, 2025, we were in compliance with the financial covenants in the revolving credit facility and the Beyond Credit Agreement. However, our conclusion that
substantial doubt exists about our ability to continue as a going concern requires an explanatory paragraph in the report of our independent registered public accounting firm on
our accompanying financial statements for the fiscal year ended February 1, 2025, which results in a violation of affirmative covenants under the revolving credit facility and the
Beyond Credit Agreement. If we are unable to obtain a waiver from our lenders, our lenders could instruct the administrative agent under such credit facilities to exercise available
remedies including, declaring the principal of and accrued interest on all outstanding indebtedness immediately due and payable and terminating all remaining commitments and
obligations under the credit facilities. Although the lenders under the credit facilities may waive the defaults or forebear the exercise of remedies, the lenders are not obligated to do
so. We are currently seeking waivers under both facilities. No assurances can be given as to when or if we will succeed in obtaining the waivers. As such, we have classified the
outstanding borrowings under these agreements as current on the consolidated balance sheet as of February 1, 2025, except for the Convertible Term Loan that converted to
equity on February 5, 2025.
The accompanying consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles applicable to a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the accompanying consolidated financial statements do not
include any adjustments or charges that might be necessary should we be unable to continue as a going concern, such as charges related to impairment of our assets, the
recoverability and classification of assets or the amounts and classification of liabilities or other similar adjustments.
Cash flows from operating activities. Net cash used in operating activities was $19.3 million in fiscal 2024 compared to $14.5 million in fiscal 2023. Cash flows from operating
activities depends heavily on operating performance and changes in working capital. The increase in the amount of cash flows used in operations in fiscal 2024 compared to fiscal
2023 was primarily due to rising inventory levels during fiscal 2024 compared to decreasing inventory levels in fiscal 2023, partially offset by two less rent payments in fiscal 2024
compared to fiscal 2023, due to the 53rd week in fiscal 2023, and improved operating performance. In fiscal 2023, we were managing inventory to end at a lower level due to the
closing of our e-commerce distribution centers in North Las Vegas, Nevada and Winchester, Virginia and our decline in store count. In fiscal 2024, we ended the year with higher
than anticipated inventory levels due to lower sales in the back half of the year and fluctuations in receipt timing.
Cash flows from investing activities. Net cash used in investing activities was approximately $2.4 million and $4.6 million for fiscal 2024 and 2023, respectively.
37
The table below sets forth capital expenditures by category (in thousands) for the periods indicated:
52 Weeks Ended February 1,
2025
53 Weeks Ended February 3,
2024
Existing store refreshes, remodels and maintenance
$
1,552
$
1,671
Technology and omni-channel projects
461
1,896
New and relocated stores
366
829
Corporate
10
269
Distribution center and supply chain enhancements
1
114
Total capital expenditures
$
2,390
$
4,779
The capital expenditures in fiscal 2024 and fiscal 2023 related primarily to technology and omni-channel projects, existing store refreshes, remodels and maintenance and
new and relocated stores. We expect minimal capital expenditures in fiscal 2025 mainly related to the store activity around the opening or conversion of existing stores to new Bed
Bath & Beyond, Buy Buy Baby or Overstock stores and existing store maintenance.
Cash flows from financing activities. Net cash provided by financing activities was $21.6 million and $17.7 million in fiscal 2024 and 2023, respectively. During fiscal 2024,
we borrowed $17.0 million under our Beyond Credit Agreement and borrowed a net $9.0 million under our revolving credit facility, partially offset by prepayment penalties
payments of $2.6 million and $1.7 million of debt and equity issuance cost payments. During fiscal 2023, we borrowed a net $19.0 million under our revolving credit facility, partially
offset by $1.2 million of debt issuance cost payments.
Long-term debt. The following table summarizes our outstanding debt as of the dates indicated (in thousands):
February 1, 2025
February 3, 2024
Revolving line of credit
$
43,000 $
34,000
Non-Convertible Term Loan
8,500
—
Convertible Term Loan
8,500
—
Collaboration Agreement fees
3,995
—
Total outstanding borrowings
63,995
34,000
Less: unamortized debt discount and issuance costs
(4,793)
—
Total debt
59,202
34,000
Less: current portion of long-term debt
(49,199)
—
Long-term debt, net
$
10,003 $
34,000
For additional information about our long-term debt see "Item 8. Financial Statements and Supplementary Data – Note 5 — Long-Term Debt” and "Note 15 — Subsequent
Events” in the consolidated financial statements.
Subscription agreements. See "Item 8. Financial Statements and Supplementary Data – Note 6 — Subscription Agreements” in the consolidated financial statements for a
description of the Subscription Agreements.
Share repurchase plans. See "Item 8. Financial Statements and Supplementary Data – Note 13 — Share Repurchase Plans” in the consolidated financial statements for a
description of our share repurchase plan.
Seasonality and Quarterly Results
We have historically experienced, and expect to continue to experience, substantial seasonal fluctuations in our net sales and operating results. We believe this is the
general pattern typical of our segment of the retail industry and expect that this pattern will continue in the future. Our quarterly results of operations may also fluctuate
significantly as a result of a variety of other factors, including the timing of store closings and openings, customer traffic changes, shifts in the timing of certain holidays and
competition. Consequently, comparisons between quarters are not necessarily meaningful, and the results for any quarter are not necessarily indicative of future results.
38
Our strongest sales period is the fourth quarter of our fiscal year when we generally realize a disproportionate amount of our net sales and a substantial majority of our
operating and net income. In anticipation of the increased sales activity during the fourth quarter of our fiscal year, we purchase large amounts of inventory and hire temporary
employees for our stores. Our operating performance could suffer if net sales were below seasonal norms during the fourth quarter of our fiscal year.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and the results of our operations are based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates that affect the reported
amounts contained in the financial statements and related disclosures. We base our estimates on historical experience and on various other assumptions, which are believed to be
reasonable under the circumstances. Actual results may differ from these estimates. Our critical accounting policies are discussed in the notes to our consolidated financial
statements. Certain judgments and estimates utilized in implementing these accounting policies are likewise discussed in the notes to our consolidated financial statements. The
following discussion aggregates the various critical accounting policies addressed throughout the financial statements, the judgments and uncertainties affecting the application
of these policies and the likelihood that materially different amounts would be reported under varying conditions and assumptions.
Inventory valuation — Our inventory is stated at the lower of cost or net realizable value, net of reserves and allowances, with cost determined using the average cost
method, with average cost approximating current cost. Inventory cost consists of the direct cost of merchandise including freight. The carrying value of our inventory is affected
by reserves for shrinkage, damages and obsolescence.
We estimate as a percentage of sales the amount of inventory shrinkage that has occurred between the most recently completed physical inventory count and the end of
the financial reporting period based upon historical physical inventory count results. Management adjusts these estimates based on changes, if any, in the trends yielded by our
physical inventory counts, which occur during the fiscal year. Historically, the variation between our recorded estimates and observed results has been insignificant, and although
possible, significant future variation is not expected. If our estimated shrinkage reserve varied by 10% from the amount recorded, the carrying value of inventory would have
changed approximately $157,000 as of February 1, 2025.
We also evaluate the cost of our inventory by category and class of merchandise in relation to the estimated sales price. This evaluation is performed to ensure that we do
not carry inventory at a value in excess of the amount we expect to realize upon the sale of the merchandise. Our reserves for excess and obsolete inventory reduce merchandise
inventory to the lower of cost or net realizable value based upon our historical experience of selling goods below cost. Historically, the variation between our estimates to account
for excess and obsolete inventory and actual results has been insignificant. As of February 1, 2025, our reserve for excess and obsolete inventory was approximately $829,000.
Impairment of long-lived assets — We evaluate the recoverability of the carrying amounts of long-lived assets, including lease right-of-use assets, whenever events or
changes in circumstances indicate that the carrying values may not be recoverable. This review includes the evaluation of individual underperforming retail stores and assessing
the recoverability of the carrying value of the assets related to the stores. Future cash flows are projected for the remaining lease life. If the estimated future cash flows are less
than the carrying value of the assets, we record an impairment charge equal to the difference between the asset group’s fair value and carrying value. The fair value is estimated
using a discounted cash flow approach considering such factors as future sales levels, gross margins, changes in rent and other expenses as well as the overall operating
environment specific to that store. The amount of the impairment charge is allocated proportionately to all assets in the asset group with no asset written down below its individual
fair value. We estimate the individual fair value of long-lived fixed assets based on orderly liquidation value and the individual fair value of lease right-of-use assets based on
market participant rents. Our asset impairment charges were $109,000 and $1.9 million for fiscal 2024 and 2023, respectively.
Insurance reserves — Workers’ compensation and general liability insurance programs are predominately self-insured. It is our policy to record a self-insurance liability
using estimates of claims incurred but not yet reported or paid, based on historical claims experience and actuarial methods. The assumptions made by management in
39
estimating our self-insurance reserves include consideration of historical cost experience and judgments about the present and expected levels of cost per claim. As we obtain
additional information and refine our methods regarding the assumptions and estimates we use to recognize liabilities incurred, we will adjust our reserves accordingly. As of
February 1, 2025 and February 3, 2024, our self-insurance reserve estimates, net of estimated stop-loss insurance receivables, related to workers’ compensation and general liability
insurance programs were $3.8 million and $4.2 million, respectively.
Actuarial methods are used to develop estimates of the future ultimate claim costs based on the claims incurred as of the balance sheet dates. Management believes that the
various assumptions developed and actuarial methods used to determine our self-insurance reserves are reasonable and provide meaningful data and information that management
uses to make its best estimate of our exposure to these risks. Arriving at these estimates, however, requires a significant amount of subjective judgment by management; and, as a
result, these estimates are uncertain, and our actual exposure may be different from our estimates. For example, changes in our assumptions about health care costs, the severity of
accidents, the average size of claims and other factors could cause actual claim costs to vary materially from our assumptions and estimates, causing our reserves to be
understated or overstated. For instance, a 10% change in our self-insurance liabilities would have affected pre-tax loss by approximately $385,000 for fiscal 2024.
Income taxes — Deferred tax assets and liabilities are recognized based on the differences between the financial statement and the tax law treatment of certain items.
Realization of certain components of deferred tax assets is dependent upon the occurrence of future events. We record valuation allowances to reduce our deferred tax assets to
the amount we believe is more likely than not to be realized. These valuation allowances can be impacted by changes in tax laws, changes to statutory tax rates, and future taxable
income levels and are based on our judgment, estimates and assumptions regarding those future events. In the event we were to determine that we would not be able to realize all
or a portion of the net deferred tax assets in the future, we would increase the valuation allowance through a charge to income tax expense in the period that such determination is
made. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future, in excess of the net carrying amounts, then we would decrease the
recorded valuation allowance through a decrease to income tax expense in the period that such determination is made. Due to changes in facts and circumstances and the estimates
and judgments that are involved in determining the proper valuation allowance, differences between actual events and prior estimates and judgments could result in adjustments to
this valuation allowance. As of February 1, 2025 and February 3, 2024, we have a full valuation allowance against deferred tax assets, as we have a three-year cumulative loss
before income taxes.
Our income tax returns are subject to audit by local, state and federal tax authorities, which include questions regarding our tax filing positions including the timing and
amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the tax exposures associated with our filing positions, we record reserves for
probable exposures. We adjust our tax contingencies reserve and income tax provision in the period in which actual results of a settlement with tax authorities differ from our
established reserve, the statute of limitations expires for the relevant tax authority to examine the tax position or when more information becomes available. Our tax contingencies
reserve contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various filing positions
and whether or not the minimum requirements for recognition of tax benefits have been met. We do not believe that there is a reasonable likelihood that there will be a material
change in the reserves established for tax benefits not recognized. Although we believe our judgments and estimates are reasonable, actual results could differ, and we may be
exposed to losses or gains that could be material. We have no unrecognized tax benefit reserve as of February 1, 2025.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Risk
We are exposed to interest rate changes, primarily as a result of borrowings under our long-term debt agreements, as discussed in "Item 8. Financial Statements and
Supplementary Data – Note 5 — Long-Term Debt,” in the notes to the consolidated financial statements, which bear interest based on variable rates.
40
We manage cash and cash equivalents in various institutions at levels beyond federally insured limits per institution, and we may purchase investments not guaranteed by
the FDIC. Accordingly, there is a risk that we will not recover the full principal of our investments or that their liquidity may be diminished.
We were not engaged in any foreign exchange contracts, hedges, interest rate swaps, derivatives or other similar financial instruments as of February 1, 2025.
Purchase Price Volatility
Although we cannot determine the full effect of inflation and deflation on our operations, we believe our sales and results of operations are affected by both. We are
subject to market risk with respect to the pricing of certain products and services, as well as duties, tariffs, diesel fuel and transportation services. Therefore, we may experience
both inflationary and deflationary pressure on product costs, which may affect consumer demand and, as a result, sales and gross margin. Our strategy is to reduce or mitigate the
effect of purchase price volatility by taking advantage of economies of scale from increased volume of purchases, adjusting retail prices and selectively buying from the most
competitive vendors without sacrificing quality.
41
Item 8. Financial Statements and Supplementary Data
The financial statements and schedules set forth below are filed on the indicated pages as part of this annual report on Form 10-K.
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm (PCAOB ID: 42)
42
Consolidated Balance Sheets as of February 1, 2025 and February 3, 2024
44
Consolidated Statements of Operations for the 52 Weeks Ended February 1, 2025, the 53 Weeks Ended February 3, 2024 and the 52 Weeks Ended January 28, 2023
45
Consolidated Statements of Shareholders’ (Deficit) Equity for the 52 Weeks Ended February 1, 2025, the 53 Weeks Ended February 3, 2024 and the 52 Weeks
Ended January 28, 2023
46
Consolidated Statements of Cash Flows for the 52 Weeks Ended February 1, 2025, the 53 Weeks Ended February 3, 2024 and the 52 Weeks Ended January 28, 2023
47
Notes to Consolidated Financial Statements
48
42
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Kirkland’s, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Kirkland’s, Inc. (the Company) as of February 1, 2025 and February 3, 2024, the related consolidated statements
of operations, shareholders’ (deficit) equity and cash flows for each of the three fiscal years in the period ended February 1, 2025, and the related notes (collectively referred to as
the "consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at
February 1, 2025 and February 3, 2024, and the results of its operations and its cash flows for each of the three fiscal years in the period ended February 1, 2025, in conformity with
U.S. generally accepted accounting principles.
The Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from operations, has a working capital deficiency, and has stated that substantial doubt exists about the Company’s ability
to continue as a going concern. Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 1. The
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect
to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to
the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex
judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
43
Estimate of Self-Insurance Reserves
Description of the Matter
At February 1, 2025, the Company’s reserves for self-insurance risks was $4.2 million, net of estimated stop-loss insurance receivables. As
discussed in Note 1 of the consolidated financial statements, the Company retains a significant portion of risk for loss exposure for claims.
Accordingly, provisions are recorded based upon periodic estimates of such losses, as determined by management. The future cost for the
claims exposure is estimated using actuarial methods that consider assumptions for a number of factors including, but not limited to,
historical claims experience and loss development factors.
Auditing management’s estimate of certain self-insurance reserves was complex and judgmental due to the significant assumptions and
judgments required by management to project the exposure for incurred claims that remain unresolved, including those which have been
incurred but not yet reported to the Company.
How We Addressed the Matter in
Our Audit
To test the Company’s estimate of certain self-insurance reserves, we performed audit procedures that included, among others, assessing
the actuarial valuation methodologies utilized by management, testing the significant assumptions described above, testing the related
underlying data used by the Company in its evaluation for completeness and accuracy, and testing the mathematical accuracy of the
calculations. Our audit procedures also included, among others, comparing the significant assumptions used by management to industry
accepted actuarial assumptions and reassessing the accuracy of management’s historical estimates utilized in prior period evaluations. We
involved our actuarial valuation specialists to assist in assessing the valuation methodologies and significant assumptions noted above
and to develop an independent range of estimates for certain self-insurance reserves which we then compared to management’s estimates.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2006.
Nashville, Tennessee
May 2, 2025
44
KIRKLAND’S, INC.
CONSOLIDATED BALANCE SHEETS
February 1,
2025
February 3,
2024
(In thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents
$
3,820 $
3,805
Inventories, net
81,899
74,090
Prepaid expenses and other current assets
5,585
7,614
Total current assets
91,304
85,509
Property and equipment:
Equipment
18,905
19,144
Furniture and fixtures
61,354
63,823
Leasehold improvements
97,635
100,393
Computer software and hardware
78,847
78,580
Projects in progress
287
647
Property and equipment, gross
257,028
262,587
Accumulated depreciation
(234,966)
(232,882)
Property and equipment, net
22,062
29,705
Operating lease right-of-use assets
121,229
126,725
Other assets
7,593
8,634
Total assets
$
242,188 $
250,573
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Accounts payable
$
43,935 $
46,010
Accrued expenses and other liabilities
20,183
23,163
Operating lease liabilities
39,355
40,018
Current debt, net
49,199
—
Total current liabilities
152,672
109,191
Operating lease liabilities
95,085
99,772
Long-term debt, net
10,003
34,000
Other liabilities
3,445
4,486
Total liabilities
261,205
247,449
Commitments and contingencies (Note 10)
—
—
Shareholders’ (deficit) equity:
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at February 1, 2025, and
February 3, 2024
—
—
Common stock, no par value, 100,000,000 shares authorized; 13,117,942 and 12,926,022 shares issued and outstanding
at February 1, 2025, and February 3, 2024, respectively
177,543
176,552
Accumulated deficit
(196,560)
(173,428)
Total shareholders’ (deficit) equity
(19,017)
3,124
Total liabilities and shareholders’ (deficit) equity
$
242,188 $
250,573
The accompanying notes are an integral part of these consolidated financial statements.
45
KIRKLAND’S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
52 Weeks Ended
February 1, 2025
53 Weeks Ended
February 3, 2024
52 Weeks Ended
January 28, 2023
(In thousands, except per share data)
Net sales
$
441,360 $
468,690 $
498,825
Cost of sales
319,354
341,700
379,036
Gross profit
122,006
126,990
119,789
Operating expenses:
Compensation and benefits
77,722
82,152
85,231
Other operating expenses
54,699
62,863
69,183
Depreciation (exclusive of depreciation included in cost of sales)
3,509
4,522
6,055
Asset impairment
109
1,867
2,071
Total operating expenses
136,039
151,404
162,540
Operating loss
(14,033)
(24,414)
(42,751)
Interest expense
5,949
3,317
1,735
Loss on extinguishment of debt
3,338
—
—
Other income
(504)
(499)
(335)
Loss before income taxes
(22,816)
(27,232)
(44,151)
Income tax expense
316
519
543
Net loss
$
(23,132) $
(27,751) $
(44,694)
Loss per share:
Basic
$
(1.77) $
(2.16) $
(3.52)
Diluted
$
(1.77) $
(2.16) $
(3.52)
Weighted average shares outstanding:
Basic
13,068
12,871
12,703
Diluted
13,068
12,871
12,703
The accompanying notes are an integral part of these consolidated financial statements.
46
KIRKLAND’S, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ (DEFICIT) EQUITY
Common Stock
Accumulated
Deficit
Total
Shareholders’
(Deficit) Equity
Shares
Amount
(In thousands, except share data)
Balance at January 29, 2022
12,631,347 $
175,856 $
(94,730) $
81,126
Exercise of stock options
2,705
16
—
16
Restricted stock issued
826,423
—
—
—
Net share settlement of stock options and restricted stock units
(226,141)
(2,383)
—
(2,383)
Stock-based compensation expense
—
1,961
—
1,961
Repurchase and retirement of common stock
(479,966)
—
(6,253)
(6,253)
Net loss
—
—
(44,694)
(44,694)
Balance at January 28, 2023
12,754,368
175,450
(145,677)
29,773
Restricted stock issued
202,967
—
—
—
Net share settlement of restricted stock units
(31,313)
(84)
—
(84)
Stock-based compensation expense
—
1,186
—
1,186
Net loss
—
—
(27,751)
(27,751)
Balance at February 3, 2024
12,926,022
176,552
(173,428)
3,124
Restricted stock issued
215,591
—
—
—
Net share settlement of restricted stock units
(23,671)
(51)
—
(51)
Stock-based compensation expense
—
1,042
—
1,042
Net loss
—
—
(23,132)
(23,132)
Balance at February 1, 2025
13,117,942 $
177,543 $
(196,560) $
(19,017)
The accompanying notes are an integral part of these consolidated financial statements.
47
KIRKLAND’S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
52 Weeks Ended
February 1, 2025
53 Weeks Ended
February 3, 2024
52 Weeks Ended
January 28, 2023
(In thousands)
Cash flows from operating activities:
Net loss
$
(23,132) $
(27,751) $
(44,694)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment
9,745
11,980
16,522
Amortization of debt issuance costs and original issue discount costs
898
124
91
Asset impairment
109
1,867
2,071
Loss on disposal of property and equipment
17
9
185
Stock-based compensation expense
1,042
1,186
1,961
Loss on extinguishment of debt
3,338
—
—
Changes in assets and liabilities:
Inventories, net
(7,809)
9,981
29,958
Prepaid expenses and other current assets
2,018
(2,525)
5,448
Accounts payable
(1,886)
2,186
(18,192)
Accrued expenses and other liabilities
(2,500)
(3,146)
(4,742)
Operating lease assets and liabilities
100
(8,585)
(6,269)
Other assets and liabilities
(1,191)
198
(490)
Net cash used in operating activities
(19,251)
(14,476)
(18,151)
Cash flows from investing activities:
Proceeds from sale of property and equipment
38
148
59
Capital expenditures
(2,390)
(4,779)
(8,120)
Net cash used in investing activities
(2,352)
(4,631)
(8,061)
Cash flows from financing activities:
Borrowings on revolving line of credit
45,100
64,000
60,000
Repayments on revolving line of credit
(36,100)
(45,000)
(45,000)
Borrowings on FILO term loan
10,000
—
—
Repayments on FILO term loan
(10,000)
—
—
Payment of prepayment penalties on extinguishment of debt
(2,638)
—
—
Proceeds from Beyond transaction
17,000
—
—
Payments of debt and equity issuance costs
(1,693)
(1,175)
—
Cash used in net share settlement of stock options and restricted stock units
(51)
(84)
(2,383)
Proceeds received from employee stock option exercises
—
—
16
Repurchase and retirement of common stock
—
—
(6,253)
Net cash provided by financing activities
21,618
17,741
6,380
Cash and cash equivalents:
Net increase (decrease)
15
(1,366)
(19,832)
Beginning of the year
3,805
5,171
25,003
End of the year
$
3,820 $
3,805 $
5,171
Supplemental cash flow information:
Interest paid
$
4,795 $
3,290 $
1,413
Income taxes paid
335
561
2,070
Supplemental schedule of non-cash activities:
Non-cash accruals for purchases of property and equipment
$
369 $
504 $
699
Non-cash accruals for debt issuance costs
534
1,180
—
Increase in operating lease liabilities from new or modified leases
29,289
28,563
47,203
The accompanying notes are an integral part of these consolidated financial statements.
48
KIRKLAND’S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Description of Business and Significant Accounting Policies
Nature of business — Kirkland’s is a specialty retailer of home décor and furnishings in the United States operating 317 stores in 35 states as of February 1, 2025, as well as
an e-commerce website, www.kirklands.com, under the Kirkland’s Home brand.
Principles of consolidation — The consolidated financial statements of the Company include the accounts of Kirkland’s, Inc. and its wholly-owned subsidiaries Kirkland’s
Stores, Inc., Kirkland’s DC, Inc. and Kirkland’s Texas, LLC. Significant intercompany accounts and transactions have been eliminated.
Use of estimates — The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ
from the estimates and assumptions used.
Changes in estimates are recognized in the period when new information becomes available to management. Areas where the nature of the estimate makes it reasonably
possible that actual results could materially differ from amounts estimated include, but are not limited to, impairment assessments on long-lived assets, inventory reserves, self-
insurance reserves and deferred tax asset valuation allowances.
Fiscal year — The Company’s fiscal year is comprised of the 52 or 53-week period ending on the Saturday closest to January 31. Accordingly, fiscal 2024, 2023 and 2022
represented the 52 weeks ended on February 1, 2025, the 53 weeks ended on February 3, 2024 and the 52 weeks ended on January 28, 2023, respectively.
Reclassifications — Certain amounts in the Company’s footnotes have been reclassified to conform to the current period presentation.
Strategic partnership with Beyond — The Company entered into a strategic partnership with Beyond on October 21, 2024, with the purpose of enabling cohesive
collaboration between the companies, leveraging the strengths of each business to drive sustainable profitable growth and value for all stakeholders. As part of this partnership
with Beyond, the companies entered into the Beyond Credit Agreement, Beyond Subscription Agreement, Collaboration Agreement and Trademark License Agreement. Proceeds
of $17 million from the Beyond Credit Agreement, in the form of an $8.5 million Non-Convertible Term Loan and an $8.5 million Convertible Term Loan were used by Kirkland's to
repay its existing FILO Term Loan, including prepayment fees and transaction expenses, and to reduce borrowings under Kirkland's existing revolving credit facility. Under the
Trademark License Agreement, we have the exclusive license to operate small format, neighborhood brick-and-mortar stores and "Shops-within-a-Shop” locations under licensed
Beyond-owned trademarks, which include Bed Bath & Beyond, Buy Buy Baby and Overstock, and we may sell Bed Bath & Beyond branded merchandise in existing Kirkland’s
Home stores.
The $8 million equity purchase under the Beyond Subscription Agreement and the mandatory conversion of the Convertible Term Loan with accrued interest were both
approved by Kirkland's shareholders at the Company’s Special Meeting of Shareholders on February 5, 2025 in accordance with Nasdaq Listing Rules resulting in the issuance of
8,934,465 shares of Common Stock to Beyond, which completed the transaction. For further discussion on the agreements with Beyond, refer to "Note 4 — Fair Value
Measurements”, "Note 5 — Long-Term Debt” and "Note 6 — Subscription Agreements”.
Collaboration Agreement fees — Under the terms of the Collaboration Agreement, the Company gave Beyond the right to receive a percentage of future revenues
generated by Kirkland’s over the life of the Collaboration Agreement. The sale of a percentage of Kirkland’s future revenue to Beyond has been accounted for as debt financing,
as the Company has significant continuing involvement in the generation of the related cash flows. As a result, the Company recorded a portion of the $17 million Beyond Credit
Agreement proceeds from these fees as debt, which
49
will be accreted in interest expense using the effective interest rate method over the life of the arrangement. The debt was initially recorded at its fair value, net of allocated discount
and deferred costs.
The liability and the related interest expense for these fees are based on the Company’s current estimates of future payments expected to be made over the life of the
Collaboration Agreement. The Company will periodically assess the expected payments using internal projections. To the extent our future estimates of payments are greater or
less than previous estimates, the Company will prospectively recognize related non-cash interest expense. For further discussion refer to "Note 4 — Fair Value Measurements” and
"Note 5 — Long-Term Debt”.
Trademark License Agreement — The Trademark License Agreement with Beyond grants Kirkland’s the exclusive license to operate small format, neighborhood brick-and-
mortar retail stores and "Shops-within-a-Shop” locations under licensed Beyond-owned trademarks. Kirkland’s will pay royalty fees as a percentage of net store sales generated
under the Bed Bath & Beyond, Buy Buy Baby or Overstock banners during the term of the Collaboration Agreement with that rate increasing as a percentage of net sales after the
Collaboration Agreement has terminated, if the locations are still operating. There is also a fixed guaranteed minimum royalty fee during the term of the Collaboration Agreement
that takes effect after the opening of the first Bed Bath & Beyond retail store. There were no royalty fees during fiscal year 2024.
Going concern assessment and management’s plans— The Company’s revenues, results of operations and cash flows have been materially adversely impacted by
strategic and macroeconomic factors during the last several fiscal years. The persistently challenging home furnishings retail environment, including reduced consumer spending
in the category and increased price sensitivity, has significantly impacted the Company’s performance and liquidity levels. Operating loss and negative cash flows from operations
continue to reduce the Company’s liquidity levels. For fiscal year 2024, the Company reported a net loss of $23.1 million and net cash used in operating activities of $19.3 million
compared to a net loss of $27.8 million and net cash used in operating activities of $14.5 million in the prior year period. Further, as of May 2, 2025, the Company had approximately
$29,000 available for borrowing, after the minimum required excess availability covenant under the revolving credit facility; however, the Company is currently in active discussions
to finalize a commitment for an additional $5.0 million from Beyond as an expansion of the existing Beyond Credit Agreement.
When conditions and events, in the aggregate, raise substantial doubt about an entity’s ability to continue as a going concern, management evaluates the mitigating effect
of its plans to determine if it is probable that the plans will be effectively implemented within the assessment period and, when implemented, will mitigate the relevant conditions
and events to alleviate substantial doubt. The Company’s plans are focused on improving its operating results and liquidity through sales growth, cost reductions and additional
financing. Throughout fiscal 2024, the Company implemented expense reductions to streamline its cost structure and improve its liquidity profile. The Company believes these
actions are necessary as part of improving its profitability and liquidity trajectory, while minimizing any disruption to the Company’s focus on its strategic initiatives and the
overall customer experience. The cost-savings initiatives included a reduction in corporate overhead, store payroll, marketing and third-party technology expenses. In addition,
through the strategic partnership with Beyond, the Company received proceeds of $17 million from the Beyond Credit Agreement, which were used by the Company to repay the
outstanding balance on the FILO Term Loan, to pay prepayment fees and transaction expenses, and to reduce borrowings under its existing revolving credit facility. The $8 million
equity purchase under the Beyond Subscription Agreement and the mandatory conversion of the Convertible Term Loan were both approved at the Special Shareholders Meeting
on February 5, 2025.
The Company's going concern assessment includes the preparation of cash flow forecasts considering the completed financing transactions, annualized savings from the
cost-savings initiatives and the impact on profitability and cash flow from operations related to both the current elevated tariffs, especially the 145% tariff rate on Chinese goods,
and the likelihood of challenging macroeconomic conditions that further constrain consumer demand, and these factors collectively suggest insufficient liquidity in the near-term.
The Company is currently in active discussions to finalize a commitment for an additional $5.0 million from Beyond as an expansion of the existing Beyond Credit Agreement, but
as the transaction has not yet been finalized, it cannot be considered as part of the going concern assessment and by itself is insufficient to support near-term liquidity needs
given the current tariff policy. Due to these uncertainties and the consequences they may have on the projected cash flow in the near-term, there is substantial doubt about the
Company’s ability to continue as a going concern for a period of at least 12 months from the date of issuance of the consolidated financial statements.
50
As of February 1, 2025, the Company was in compliance with the financial covenants in the revolving credit facility and the Beyond Credit Agreement. However, the
Company’s conclusion that substantial doubt exists about its ability to continue as a going concern requires an explanatory paragraph in the report of the independent registered
public accounting firm on the Company’s accompanying financial statements for the fiscal year ended February 1, 2025, which results in a violation of affirmative covenants under
the revolving credit facility and the Beyond Credit Agreement. If the Company is unable to obtain a waiver from its lenders, the lenders could instruct the administrative agent
under such credit facilities to exercise available remedies including, declaring the principal of and accrued interest on all outstanding indebtedness immediately due and payable
and terminating all remaining commitments and obligations under the credit facilities. Although the lenders under the credit facilities may waive the defaults or forebear the exercise
of remedies, the lenders are not obligated to do so. The Company is currently seeking waivers under both facilities. No assurances can be given as to when or if the Company will
succeed in obtaining the waivers. As such, the Company has classified the outstanding borrowings under these agreements as current on the consolidated balance sheet as of
February 1, 2025, except for the Convertible Term Loan that converted to equity on February 5, 2025.
The accompanying consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles applicable to a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the accompanying consolidated financial statements do not
include any adjustments or charges that might be necessary should the Company be unable to continue as a going concern, such as charges related to impairment of the
Company’s assets, the recoverability and classification of assets or the amounts and classification of liabilities or other similar adjustments.
Cash and cash equivalents — The Company classifies highly liquid investments with initial maturities of three months or less, as cash and cash equivalents. Cash and cash
equivalents consist of cash on deposit in banks and payments due from banks for customer credit cards, as they generally settle within 24-48 hours.
Inventory — The Company’s inventory is stated at the lower of cost or net realizable value, net of reserves and allowances, with cost determined using the average cost
method, with average cost approximating current cost. Inventory cost consists of the direct cost of merchandise including freight. The carrying value of our inventory is affected
by reserves for shrinkage, damages and obsolescence.
The Company incurs various types of warehousing, transportation and delivery costs in connection with inventory purchases and distribution. Such costs are included as
a component of the overall cost of inventories and recognized as a component of cost of sales as the related inventory is sold. As of February 1, 2025 and February 3, 2024, there
were $5.6 million and $5.7 million, respectively, of distribution center costs included in inventory on the consolidated balance sheets.
The Company estimates as a percentage of sales the amount of inventory shrinkage that has occurred between the most recently completed physical inventory count and
the end of the financial reporting period based upon historical physical inventory count results. The Company adjusts these estimates based on changes, if any, in the trends
yielded by its physical inventory counts, which occur during the fiscal year. The reserve for estimated inventory shrinkage was $1.6 million and $2.1 million as of February 1, 2025
and February 3, 2024, respectively.
The Company estimates a reserve for unknown damaged inventory based on historical damage data. Management adjusts these estimates based on any changes in actual
damage results. The reserve for estimated damaged inventory was approximately $711,000 and $775,000 as of February 1, 2025 and February 3, 2024, respectively.
The Company also evaluates the cost of inventory by category and class of merchandise in relation to the estimated sales price. This evaluation is performed to ensure that
inventory is not carried at a value in excess of the amount expected to be realized upon the sale of the merchandise. As of February 1, 2025 and February 3, 2024, the reserve for
excess and obsolescence was approximately $829,000 and $929,000, respectively.
The Company receives various payments and allowances from vendors, including rebates and other credits. The amounts received are subject to the terms of vendor
agreements, which generally do not state an expiration date, but are subject to ongoing negotiations that may be impacted in the future based on changes in market conditions and
51
changes in the profitability, quality or sell-through of the related merchandise. For all such vendor allowances, the Company records the vendor funds as a reduction of
inventories. As the related inventory is sold, such allowances and credits are recognized as a reduction to cost of sales.
Prepaid expenses and other current assets — The Company recognizes assets for expenses paid but not yet incurred, as well as other items such as miscellaneous
receivables. As of February 1, 2025 and February 3, 2024, prepaid expenses and other current assets on the consolidated balance sheets included receivables of approximately $2.0
million and $2.6 million, respectively.
Property and equipment — Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed on a straight-line basis over the estimated
useful lives of the respective assets. Furniture, fixtures and equipment are generally depreciated over five years. Leasehold improvements are amortized over the shorter of the
useful life of the asset or the expected lease term, typically ranging from five to 10 years. Maintenance and repairs are expensed as incurred, and improvements are capitalized.
Gains or losses on the disposition of fixed assets are recorded upon disposal of the related asset.
Cost of internal use software — The Company capitalizes the cost of computer software developed or obtained for internal use. Capitalized computer software costs
consist primarily of payroll-related and consulting costs incurred during the application development stage. The Company expenses costs related to preliminary project
assessments, research and development, re-engineering, training and application maintenance as they are incurred. Capitalized software costs are amortized on a straight-line basis
over an estimated life of three to 10 years. For fiscal years 2024, 2023 and 2022, the Company recorded approximately $3.8 million, $4.8 million and $6.4 million, respectively, for
depreciation of capitalized software. The net book value of these assets totaled $7.9 million and $11.3 million at the end of fiscal years 2024 and 2023, respectively. Property and
equipment included capitalized computer software currently under development of approximately $37,000 and $49,000 as of February 1, 2025 and February 3, 2024, respectively.
Asset retirement obligations — The Company recognizes a liability for the fair value of required asset retirement obligations ("ARO”) when such obligations are incurred.
The Company’s AROs are primarily associated with leasehold improvements, which, at the end of a lease, the Company is contractually obligated to remove in order to comply
with the lease agreement. At the inception of a lease with such conditions, the Company records an ARO liability and a corresponding capital asset in an amount equal to the
estimated fair value of the obligation. The liability is estimated based on various assumptions requiring management’s judgment and is accreted to its projected future value over
time. The capitalized asset is depreciated using the convention for depreciation of leasehold improvement assets. Upon satisfaction of the ARO conditions, any difference between
the recorded ARO liability and the actual retirement costs incurred is recognized as an operating gain or loss in the consolidated statements of operations. As of February 1, 2025
and February 3, 2024, the liability for asset retirement obligations was approximately $640,000 and $663,000, respectively, and the asset was approximately $72,000 and $86,000,
respectively.
Leases — Operating lease assets and liabilities are recognized at the lease commencement date. Operating lease liabilities represent the present value of future lease
payments. Operating lease assets represent the Company’s right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued
lease payments, initial direct costs, lease incentives, and impairment, if any, of operating lease assets. To determine the present value of lease payments not yet paid at lease
commencement or modification, the Company uses the collateralized incremental borrowing rate corresponding to the reasonably certain lease term. The Company estimates its
collateralized incremental borrowing rate based upon a synthetic credit rating and yield curve analysis. See "Note 7 — Leases” for further discussion.
Impairment of long-lived assets — The Company evaluates the recoverability of the carrying amounts of long-lived assets, including lease right-of-use assets, when events
or changes in circumstances dictate that their carrying values may not be recoverable. This review includes the evaluation of individual underperforming retail stores and
assessing the recoverability of the carrying value of the assets related to the stores. Future cash flows are projected for the remaining lease life. If the estimated future cash flows
are less than the carrying value of the assets, the Company records an impairment charge equal to the difference between the asset group’s fair value and carrying value. The fair
value is estimated using a discounted cash flow approach considering such factors as future sales levels, gross margins, changes in rent and other expenses as well as the overall
operating environment specific to that store. The amount of
52
the impairment charge is allocated proportionately to all assets in the asset group, with no asset written down below its individual fair value. The Company estimates the individual
fair value of long-lived fixed assets based on orderly liquidation value and the individual fair value of lease right-of-use assets based on market participant rents. See "Note 11 —
Impairment” for further discussion.
Insurance reserves — Workers’ compensation, general liability and employee medical insurance programs are predominately self-insured. It is the Company’s policy to
record a self-insurance liability using estimates of claims incurred but not yet reported or paid, based on historical claims experience and actuarial methods. Actual results can vary
from estimates for many reasons, including, changes in our assumptions about health care costs, the severity of accidents, the average size of claims and other factors. The
Company monitors its claims experience in light of these factors and revises its estimates of insurance reserves accordingly. The level of insurance reserves may increase or
decrease as a result of these changing circumstances or trends. As of February 1, 2025 and February 3, 2024, the Company’s self-insurance reserve estimates, net of estimated
stop-loss insurance receivables, related to workers’ compensation and general liability were $3.8 million and $4.2 million, respectively. As of February 1, 2025 and February 3, 2024,
the Company’s self-insurance reserve estimates, net of estimated stop-loss insurance receivables, related to employee medical insurance were approximately $392,000 and $456,000,
respectively.
Net sales — The Company recognizes revenue at the time of sale of merchandise to customers in its stores. E-commerce revenue is recorded at the estimated time of
delivery to the customer. Net sales includes the sale of merchandise, net of returns, shipping revenue, gift card breakage revenue and revenue earned from our private label credit
card program and excludes sales taxes.
Sales returns reserve — The Company reduces net sales and estimates a liability for sales returns based on historical return trends, and the Company believes that its
estimate for sales returns is an accurate reflection of future returns associated with past sales. However, as with any estimate, return activity may vary from estimated amounts. The
Company had a liability of approximately $1.0 million and $1.5 million reserved for sales returns at February 1, 2025 and February 3, 2024, respectively, included in accrued expenses
and other liabilities on the consolidated balance sheets. The related sales return reserve products recovery asset included in prepaid expenses and other current assets on the
consolidated balance sheets was approximately $517,000 and $710,000 at February 1, 2025 and February 3, 2024, respectively.
Deferred e-commerce revenue — E-commerce revenue is deferred until the customer takes possession of the merchandise and the sale is complete, as the Company
receives payment before completion of its customer obligations. Deferred revenue related to e-commerce orders that have been shipped but not estimated to be received by
customers included in accrued expenses and other liabilities on the consolidated balance sheets was approximately $607,000 and $750,000 at February 1, 2025 and February 3, 2024,
respectively. The related contract assets, reflected in inventory on the consolidated balance sheets, totaled approximately $330,000 and $387,000 at February 1, 2025 and February
3, 2024, respectively. E-commerce shipping expenses are accounted for as fulfillment costs and are included in the consolidated statements of operations as a component of cost of
sales.
Gift cards — Gift card sales are recognized as revenue when tendered for payment. While the Company honors all gift cards presented for payment, the Company
determines the likelihood of redemption to be remote for certain gift card balances due to long periods of inactivity. The Company uses the redemption recognition method to
account for breakage for unused gift card amounts where breakage is recognized as gift cards are redeemed for the purchase of goods based upon a historical breakage rate. In
these circumstances, to the extent the Company determines there is no requirement for remitting unredeemed card balances to government agencies under unclaimed property laws,
such amounts are recognized in the consolidated statements of operations as a component of net sales.
The table below sets forth selected gift card liability information (in thousands) for the periods indicated:
February 1,
2025
February 3,
2024
January 28,
2023
Gift card liability, net of estimated breakage (included in accrued expenses and other liabilities)
$
10,673 $
12,008 $
14,077
53
The table below sets forth selected gift card breakage and redemption information (in thousands) for the periods indicated:
52 Weeks Ended
February 1, 2025
53 Weeks Ended
February 3, 2024
52 Weeks Ended
January 28, 2023
Gift card breakage revenue (included in net sales)
$
1,120 $
2,195 $
1,419
Gift card redemptions recognized in the current period related to amounts included in the gift
card contract liability balance as of the prior period
3,962
4,800
5,321
Customer loyalty program — The Company has established a loyalty program called the K-club, whereby members receive access to coupons, birthday rewards, monthly
sweepstakes, sneak peeks, exclusive deals and more. The Company’s loyalty program offers points to members on qualifying purchases that are converted into certificates that
may be redeemed on future purchases. This customer option is a material right and, accordingly, represents a separate performance obligation to the customer. The allocated
consideration for the points earned by loyalty program members is deferred based on the standalone selling price of the points and recorded within accrued expenses and other
liabilities on the consolidated balance sheet. The measurement of standalone selling prices takes into consideration the estimated points that will be converted to certificates and
certificates that are expected to be redeemed, based on historical redemption patterns. This measurement is applied to the Company’s portfolio of performance obligations for
points earned, as all obligations have similar economic characteristics. The Company believes the impact to its consolidated financial statements would not be materially different if
this measurement was applied to each individual performance obligation. Revenue is recognized for these performance obligations at a point in time when certificates are redeemed
by the customer. These obligations generally relate to contracts with terms less than one year, as points generally expire on a rolling 12-month basis and certificates generally
expire within two months from issuance. The related loyalty program deferred revenue included in accrued expenses and other liabilities on the consolidated balance sheets was
approximately $1.5 million and $1.4 million as of February 1, 2025 and February 3, 2024, respectively.
Private label credit card — The Company has a private label credit card program for its customers. Each private label credit card bears the logo for the Kirkland’s brand
and can only be used at the Company’s store locations and e-commerce channel. The card program is operated and managed by a third-party bank, Wells Fargo, that assumes all
of the losses associated with non-payment by the private label card holders and a portion of any fraudulent usage of the accounts.
Pursuant to the private-label credit card program, the Company receives cash incentives in exchange for promised services, such as licensing our brand names and
marketing the credit card program to customers. The Company can receive incentive payments for the achievement of certain private label credit card volumes and is also
reimbursed for certain costs associated with the private label credit card. Funds received related to the Company’s private label credit card program are recorded as net sales in the
consolidated statements of operations. Services promised under these agreements are separate performance obligations. Revenue is recognized as the Company fulfills its
performance obligations throughout the contract term.
Cost of sales — Cost of sales includes the cost of product purchased from vendors, inbound freight, receiving costs, inspection costs, warehousing costs, outbound
freight, inventory damage and shrinkage, payroll and overhead associated with our distribution facility and its network, store occupancy costs and depreciation of leasehold
improvements, equipment, and other property in the stores and distribution centers. Distribution facility costs, excluding depreciation, included in cost of sales were approximately
$22.4 million, $25.9 million and $29.5 million for fiscal 2024, 2023 and 2022, respectively.
Compensation and benefits — Compensation and benefits includes all store and corporate office salaries, wages and incentive pay as well as stock compensation,
employee health benefits, 401(k) plan benefits, social security and unemployment taxes.
Stock-based compensation — Stock-based compensation includes expenses associated with restricted stock unit grants, stock option grants, and other transactions under
the Company’s stock plans. The Company recognizes compensation expense for its stock-based payments based on the fair value of the awards on the grant date. The
54
expense is recorded on a straight-line basis over the vesting period within compensation and benefits in the consolidated statements of operations. See "Note 8 — Stock-Based
Compensation” for further discussion.
Other operating expenses — Other operating expenses consist of such items as advertising, credit card processing costs, bank fees, utilities, professional fees, software
maintenance costs, supplies, workers’ compensation and general liability insurance, trash removal, maintenance and repairs, travel and various other store and corporate expenses.
Advertising expenses — Advertising costs are expensed in the period in which the related activity first takes place. These expenses include costs associated with specific
marketing campaigns, direct mail, email communications, paid search, digital advertising, social media, public relations and in-store signage. Total advertising expense was $9.5
million, $13.6 million and $18.3 million for fiscal 2024, 2023 and 2022, respectively. Prepaid advertising costs were approximately $37,000 and $7,000 as of February 1, 2025 and
February 3, 2024, respectively.
Income taxes — Deferred tax assets and liabilities are recognized based on the differences between the financial statement and the tax law treatment of certain items.
Realization of certain components of deferred tax assets is dependent upon the occurrence of future events. The Company records valuation allowances to reduce its deferred tax
assets to the amount it believes is more likely than not to be realized. These valuation allowances can be impacted by changes in tax laws, changes to statutory tax rates, and future
taxable income levels and are based on the Company’s judgment, estimates and assumptions regarding those future events. In the event the Company was to determine that it
would not be able to realize all or a portion of the net deferred tax assets in the future, the Company would increase the valuation allowance through a charge to income tax expense
in the period that such determination is made. Conversely, if the Company was to determine that it would be able to realize its deferred tax assets in the future, in excess of the net
carrying amounts, the Company would decrease the recorded valuation allowance through a decrease to income tax expense in the period that such determination is made. As of
February 1, 2025 and February 3, 2024, the Company has a full valuation allowance against deferred tax assets, as the Company has a three-year cumulative loss before income
taxes.
The Company provides for uncertain tax positions and the related interest and penalties, if any, based upon management’s assessment of whether a tax benefit is more
likely than not to be sustained upon examination by tax authorities. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax
expense. To the extent the Company prevails in matters for which a liability for an unrecognized tax benefit is established or is required to pay amounts in excess of the liability, the
Company’s effective tax rate in a given financial statement period may be affected.
The Company’s income tax returns are subject to audit by local, state and federal tax authorities, and the Company is typically engaged in various tax examinations at any
given time. Tax contingencies often arise due to uncertainty or differing interpretations of the application of tax rules throughout the various jurisdictions in which the Company
operates. The contingencies are influenced by items such as tax audits, changes in tax laws, litigation, appeals and experience with previous similar tax positions. The Company
regularly reviews its tax reserves for these items and assesses the adequacy of the amount recorded. The Company evaluates potential exposures associated with its various tax
filings by estimating a liability for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of
available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The
second step requires estimation and measurement of the tax benefit as the largest amount that is more than 50% likely to be recognized upon settlement. See "Note 3 — Income
Taxes” for further discussion.
Sales and use taxes — Governmental authorities assess sales and use taxes on the sale and purchase of goods and services. The Company excludes taxes collected from
customers in its reported net sales results. Such amounts are reflected as accrued expenses until remitted to the taxing authorities.
Concentrations of risk — The Company has risk of geographic concentration with respect to the sourcing of its inventory purchases. Approximately 71% of the
Company’s inventory purchases in fiscal 2024 were from China.
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. The Company’s cash balances are
primarily on deposit at high credit quality financial institutions.
55
Fair value measurements — Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction
between market participants on the measurement date. The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers
include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly
or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of their short maturities. The revolving line
of credit approximates fair value due to the one, three or six-month interest terms. The Company also has a non-depleting collateral trust with the Company’s workers’
compensation and general liability insurance provider named as beneficiary. The assets in this trust are invested in financial instruments that would fall within Level 1 of the fair
value hierarchy, and the assets were approximately $4.8 million and $4.6 million as of February 1, 2025 and February 3, 2024, respectively, and are included in other assets on the
consolidated balance sheets.
See "Note 4 — Fair Value Measurements” for discussion regarding the fair value of the Company’s long-term debt instruments and certain assets measured at fair value on
a non-recurring basis.
Loss per share — Basic loss per share is computed by dividing net loss by the weighted average number of shares outstanding during each period presented. Diluted loss
per share is computed by dividing net loss by the weighted average number of shares outstanding plus the dilutive effect of stock equivalents outstanding during the applicable
periods using the treasury stock method and shares issuable upon conversion of convertible notes payable. Diluted loss per share reflects the potential dilution that could occur if
options to purchase stock were exercised into common stock, if outstanding grants of restricted stock were vested and if the incremental shares issuable upon conversion of the
currently convertible portion of the convertible notes were issued. Stock options, restricted stock units and the currently convertible portion of the convertible notes that were not
included in the computation of diluted earnings per share, because to do so would have been antidilutive, were approximately 1,703,000 shares, 689,000 shares and 571,000 shares
for fiscal 2024, 2023 and 2022, respectively.
Comprehensive loss — Comprehensive loss does not differ from the consolidated net loss presented in the consolidated statements of operations.
Note 2 — Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities are comprised of the following (in thousands):
February 1,
2025
February 3,
2024
Gift cards
$
10,673 $
12,008
Workers’ compensation and general liability reserves
1,981
2,062
Salaries and wages
1,616
1,952
Loyalty program deferred revenue
1,493
1,412
Sales taxes
1,131
1,543
Sales returns reserve
1,046
1,549
Deferred e-commerce revenue
607
750
Employee medical insurance reserves
392
456
Other
1,244
1,431
$
20,183 $
23,163
56
Note 3 — Income Taxes
The Company’s income tax expense is computed based on the federal statutory rates and the state statutory rates, net of related federal benefit. The Company’s provision
for income taxes consists of the following (in thousands):
52 Weeks Ended
February 1, 2025
53 Weeks Ended
February 3, 2024
52 Weeks Ended
January 28, 2023
Current tax expense (benefit):
Federal
$
— $
46 $
(153)
State
316
473
696
Income tax expense
$
316 $
519 $
543
Income tax expense differs from the amount computed by applying the statutory federal income tax rate to loss before income taxes. A reconciliation of income tax expense
at the statutory federal income tax rate to the amount provided is as follows (in thousands):
52 Weeks Ended
February 1, 2025
53 Weeks Ended
February 3, 2024
52 Weeks Ended
January 28, 2023
Tax at federal statutory rate
$
(4,791) $
(5,719) $
(9,272)
State income taxes, net of federal benefit
(133)
(293)
(798)
Tax credits
(87)
(107)
(79)
Executive compensation
—
(23)
886
Stock based compensation programs
111
209
(1,296)
Valuation allowance
5,205
6,399
11,134
Other
11
53
(32)
Income tax expense
$
316 $
519 $
543
57
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes and are included as part of other assets on the consolidated balance sheets. Significant components of the Company’s deferred tax assets
and liabilities are as follows (in thousands):
February 1,
2025
February 3,
2024
Deferred tax assets:
Operating lease liabilities
$
33,865 $
36,406
Accruals
1,741
2,090
Inventory valuation
343
277
Federal and state tax credit carryforwards
206
192
Federal and state net operating loss carryforwards
18,433
15,794
Other
5,770
3,989
Total deferred tax assets
60,358
58,748
Valuation allowance for deferred tax assets
(26,302)
(21,206)
Net deferred tax assets
34,056
37,542
Deferred tax liabilities:
Property and equipment
(2,939)
(4,653)
Operating lease right-of-use assets
(30,574)
(32,194)
Prepaid assets
(543)
(695)
Total deferred tax liabilities
(34,056)
(37,542)
Net deferred tax assets
$
— $
—
As of February 1, 2025, the Company has a $73.1 million federal net operating loss carry-forward and $56.5 million of state net operating loss carry-forwards available to
offset future taxable income. The federal net operating loss carry-forward does not expire and the state net operating loss carry-forwards expire in years 2038 through 2043. As of
February 1, 2025, the Company has a federal tax credit carry-forward of approximately $184,000 that expires in years 2044 and 2045 and state tax credit carry-forwards of
approximately $28,000 that expire in 2025.
Future utilization of the deferred tax assets is evaluated by the Company, and any valuation allowance is adjusted accordingly. The Company has a full valuation allowance
against its deferred tax assets due to uncertainty regarding their realization. Accordingly, the Company has established a valuation allowance of $26.3 million and $21.2 million with
respect to deferred tax assets as of February 1, 2025 and February 3, 2024, respectively. Adjustments could be required in the future if the Company estimates that the amount of
deferred tax assets to be realized is more or less than the net amount the Company has recorded. Any change in the valuation allowance would have the effect of increasing or
decreasing the income tax provision based on the nature of the deferred tax asset deemed realizable in the period in which such a determination is made.
The Company and one or more of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. The Company is no longer
subject to U.S. federal income tax examinations by authorities for years prior to 2021. With few exceptions, the Company is no longer subject to state and local income tax
examinations for years prior to 2019. The Company is not currently engaged in any U.S. federal, state or local income tax examinations.
The Company had no unrecognized tax benefits as of February 1, 2025 and February 3, 2024. The Company accrues interest on unrecognized tax benefits as a component of
income tax expense. Penalties, if incurred, would be recognized as a component of income tax expense. The Company had no amounts accrued for the payment of interest and
penalties associated with unrecognized tax benefits as of February 1, 2025 and February 3, 2024.
58
Note 4 — Fair Value Measurements
Fair value of the Non-Convertible Term Loan, the Convertible Term Loan and the Collaboration Agreement fees, which were entered into on October 21, 2024, are
determined on a non-recurring basis, which results are summarized as follows (in thousands):
February 1, 2025
Fair Value Hierarchy
Carrying Value
Fair Value
Non-Convertible Term Loan
Level 2
$
5,531
$
7,980
Convertible Term Loan
Level 2
6,676
7,003
Collaboration Agreement fees
Level 3
3,995
5,439
(1) See "Note 5 — Long-Term Debt” for further discussion of the carrying values, which is shown on a net basis herein of unamortized debt discount and issuance costs.
(2) The fair value was estimated using available market information for debt instruments with similar maturities and credit risk.
(3) The fair value estimate uses the Company’s estimated future revenue projections over the term of the Collaboration Agreement discounted using current market rates for debt
investments with similar maturities and credit risk.
The Company measures certain assets at fair value on a non-recurring basis, including the evaluation of long-lived assets for impairment using Company-specific
assumptions, including forecasts of projected financial information that would fall within Level 3 of the fair value hierarchy. The Company uses market participant rents (Level 2
input) to calculate the fair value of right-of-use assets and discounted future cash flows of the asset or asset group using a discount rate that approximates the cost of capital of a
market participant (Level 2 input) to quantify fair value for other long-lived assets. See "Note 11 — Impairment” for further discussion.
Note 5 — Long-Term Debt
Long-term debt, net consisted of the following (in thousands):
February 1, 2025
February 3, 2024
Revolving line of credit
$
43,000 $
34,000
Non-Convertible Term Loan
8,500
—
Convertible Term Loan
8,500
—
Collaboration Agreement fees
3,995
—
Total outstanding borrowings
63,995
34,000
Less: unamortized debt discount and issuance costs
(4,793)
—
Total debt
59,202
34,000
Less: current portion of long-term debt
(49,199)
—
Long-term debt, net
$
10,003 $
34,000
Revolving Line of Credit
On March 31, 2023, the Company entered into a Third Amended and Restated Credit Agreement (the "2023 Credit Agreement”) with Bank of America, N.A., as
administrative agent and collateral agent, and lender. The 2023 Credit Agreement amended the previous Second Amended and Restated Credit Agreement (the "2019 Credit
Agreement”) from a $75.0 million senior secured revolving credit facility to a $90.0 million senior secured revolving credit facility. The 2023 Credit Agreement contains substantially
similar terms and conditions as the 2019 Credit Agreement including a swingline availability of $10.0 million, a $25.0 million incremental accordion feature and extended its maturity
date to March 2028. The fee paid to the lenders on the unused portion of the 2023 Credit Agreement is 25 basis points when usage is greater than 50% of the facility amount;
otherwise, the fee on the unused portion is 37.5 basis points per annum.
On January 25, 2024, the Company entered into a First Amendment to the 2023 Credit Agreement that increased the advance rate and allowed the Company to enter into the
FILO Term Loan (defined below) agreement. Subsequent
(1)
(2)
(2)
(3)
59
to January 25, 2024, advances under the 2023 Credit Agreement accrue interest at an annual rate equal to the Secured Overnight Financing Rate ("SOFR”) plus a margin of 275
basis points with no SOFR floor. Upon the demonstration that the Company’s fixed charge coverage ratio is greater than 1.0 to 1.0 on a trailing twelve-month basis, the interest rate
permanently decreases on the 2023 Credit Agreement to SOFR plus a margin of 225 basis points. Prior to January 25, 2024, advances under the 2023 Credit Agreement accrued
interest at an annual rate equal to SOFR plus a margin ranging from 200 to 250 basis points with no SOFR floor. On October 21, 2024, the Company entered into a Second
Amendment to the 2023 Credit Agreement to permit the Beyond Credit Agreement and the Beyond Subscription Agreement and to modify the borrowing base calculation and the
minimum excess availability covenant. The interest rate and expiration date provisions of the First Amendment to the 2023 Credit Agreement remained unchanged.
The Company is subject to a Third Amended and Restated Security Agreement ("Security Agreement”) with its lenders. Pursuant to the Security Agreement, the Company
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 the Company’s assets to secure the payment and performance of the obligations under the 2023 Credit Agreement.
The maximum availability under the 2023 Credit Agreement is limited by a borrowing base formula, which consists of a percentage of eligible inventory and eligible credit
card receivables, less reserves and an excess required availability covenant, which limits the borrowing base formula by the greater of 10% of the combined borrowing base formula
or $8.0 million. As of February 1, 2025, there were no letters of credit outstanding under the 2023 Credit Agreement. As of February 1, 2025, the Company had approximately $4.3
million available for borrowing under the 2023 Credit Agreement, after the minimum required excess availability covenant. Availability under the 2023 Credit Agreement fluctuates
largely based on eligible inventory levels, and as eligible inventory increases in the second and third fiscal quarters in support of the Company’s back-half sales plans, the
Company’s borrowing capacity increases correspondingly.
FILO Term Loan
On January 25, 2024, the Company entered into the FILO Term Loan with Gordon Brothers Group, via an affiliate entity, 1903P Loan Agent, LLC, as administrative agent and
lender. The indebtedness under the FILO Term Loan was subordinated in most respects to the 2023 Credit Agreement. The FILO Term Loan had a maturity date of March 2028,
coterminous with the 2023 Credit Agreement. The interest rate of the FILO Term Loan was one-month term SOFR, plus a margin of 9.50%. The Company borrowed $10.0 million
under the FILO Term Loan during fiscal 2024.
Proceeds from the Beyond Credit Agreement were used by the Company to repay and terminate the FILO Term Loan on October 21, 2024. The Company paid $12.6 million,
which consisted of $10.0 million of debt principal and $2.6 million of prepayment penalties. The Company recorded a loss on extinguishment of debt related to the termination of the
FILO Term Loan of $3.3 million during fiscal year 2024, of which $2.6 million was for the prepayment penalty and the remainder was related to the write-off of unamortized debt
issuance costs.
Beyond Credit Agreement
On October 21, 2024, the Company entered into the Beyond Credit Agreement with Beyond, as administrative agent and lender. The Beyond Credit Agreement consists of
an $8.5 million Convertible Term Loan that is mandatorily convertible into Common Stock at a price of $1.85 per share for a total of 4,594,594 shares upon the approval of Kirkland’s
shareholders and an $8.5 million Non-Convertible Term Loan that is non-convertible. The maturity date on the Non-Convertible Term Loan is September 30, 2028. Beyond can elect
to convert a portion of the Convertible Term Loan into shares of Kirkland’s Common Stock prior to shareholder approval up to a cap of 2,609,215 shares. The indebtedness under
the Beyond Credit Agreement is subordinated to the 2023 Credit Agreement and is not subject to a borrowing base calculation. The Beyond Credit Agreement accrues interest at
an annual rate equal to SOFR plus a margin of 275 basis points with no SOFR floor. See "Note 15 — Subsequent Events” for further discussion.
60
Collaboration Agreement Fees
The Company entered into the Collaboration Agreement with Beyond, which outlines the parties’ intentions to collaborate on numerous operating arrangements. Under the
Collaboration Agreement, Kirkland’s will pay Beyond a quarterly collaboration fee equal to 0.25% of Kirkland’s quarterly retail and e-commerce revenue starting in the first quarter
of fiscal 2025 and continuing for the remaining seven-year term of the Collaboration Agreement. This fee will extend an additional two years beyond the Collaboration Agreement if
the Beyond Credit Agreement is still outstanding as of the expiration or termination of the Collaboration Agreement. Kirkland’s will also pay to Beyond an incentive fee equal to
1.5% of Kirkland’s incremental growth in e-commerce revenue during the term of the Collaboration Agreement.
As payments are remitted to Beyond from the Company, the balance of the liability related to the sale of a percentage of future revenue will be repaid over the life of the
Collaboration Agreement. In order to determine the amortization of the liability, the Company is required to estimate the total amount of future payments to Beyond over the life of
the Collaboration Agreement. The $3.8 million initial liability will be accreted to the total of the payments as interest expense over the life of the Collaboration Agreement. At
execution, the estimate of this total interest expense resulted in an effective annual interest rate of approximately 19.6%. This estimate contains significant assumptions that impact
both the amount recorded at execution and the interest expense that will be recognized over the Collaboration Agreement period. The Company will periodically assess the
estimated payments to Beyond and to the extent the amount or timing of such fees is materially different than the original estimates, an adjustment will be recorded prospectively to
increase or decrease interest expense. The main factor that could materially affect the amount of the payments is changes in the Company’s estimated retail and e-commerce
revenue.
General Terms and Conditions
Borrowings under the 2023 Credit Agreement and the Beyond Credit Agreement are subject to certain 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 2023 Credit
Agreement and the Beyond Credit Agreement may be declared immediately due and payable. As of February 1, 2025, the Company was in compliance with the financial covenants
in the 2023 Credit Agreement and the Beyond Credit Agreement. However, the Company’s conclusion that substantial doubt exists about the Company’s ability to continue as a
going concern requires an explanatory paragraph in the report of its independent registered public accounting firm on the Company’s accompanying financial statements for the
fiscal year ended February 1, 2025, which results in a violation of affirmative covenants under the 2023 Credit Agreement and the Beyond Credit Agreement. As such, the Company
has classified the outstanding borrowings under these agreements as current on the consolidated balance sheet as of February 1, 2025, except for the Convertible Term Loan that
converted to equity on February 5, 2025. See "Note 15 — Subsequent Events” for further discussion.
Scheduled maturities of debt are as follows (in thousands):
Scheduled Maturities
2025
$
52,240
2026
1,154
2027
1,154
2028
9,655
2029
1,155
Thereafter
2,268
Total scheduled maturities
67,626
Less: unamortized debt discount and issuance costs
(4,793)
Less: present value of collaboration agreement fees
(3,631)
Total debt
$
59,202
61
Note 6 — Subscription Agreements
On October 21, 2024, the Company and Beyond entered into the Beyond Subscription Agreement, pursuant to which, upon the approval of Kirkland’s shareholders at the
Special Shareholders Meeting, Beyond will purchase $8 million of Common Stock at a price of $1.85 per share for a total of 4,324,324 shares. If the $8 million equity purchase under
the Beyond Subscription Agreement and the mandatory conversion of the Convertible Term Loan are both approved at the Special Shareholders Meeting, the Company will
receive additional proceeds of $8 million, and the Convertible Term Loan with accrued interest will convert to equity. See "Note 15 — Subsequent Events” for further discussion.
On October 18, 2024, the Company and Consensus Securities LLC ("Consensus”), the Company’s financial advisor, entered into a subscription agreement (the "Consensus
Subscription Agreement”), pursuant to which, upon the completion of the Beyond transaction, the Company will issue 310,135 shares of Common Stock to Consensus, as a partial
payment of a success fee earned by Consensus in connection with the Beyond transaction. The shares of Common Stock will be calculated based on a price of $1.85 per share in
lieu of a payment of $537,750 towards the success fee. See "Note 15 — Subsequent Events” for further discussion.
Note 7 — Leases
The Company leases retail store facilities, corporate office space, warehouse facilities and certain vehicles and equipment under operating leases with terms generally
ranging up to 10 years and expiring at various dates through fiscal 2034. Most of the retail store agreements include an initial term with renewal options and provide for minimum
fixed rental payments. The Company does not include lease renewal options in the lease term for calculations of its right-of-use assets and liabilities until it is reasonably certain
that the Company plans to renew these leases. A few retail store lease agreements have only variable lease payments based on a percentage of sales, while other store leases
contain contingent rentals based on sales performance in excess of specified minimums in addition to minimum fixed rentals.
The majority of the Company’s leases have monthly fixed rent with additional costs that are not components of the lease (e.g., real estate taxes and insurance costs) and
non-lease components (e.g., common area maintenance) either of which can be variable or fixed. These additional non-lease components are excluded from the calculation of the
lease liability and right-of-use asset. The Company’s leases do not provide an implicit rate, so the incremental borrowing rate, based on the information available at commencement
or modification date, is used in determining the present value of lease payments. The Company has elected not to recognize leases with an original term of one year or less on the
consolidated balance sheets.
The Company's classification of lease cost on the Company's consolidated statements of operations is as follows (in thousands):
52 Week Period Ended
53 Week Period Ended
52 Week Period Ended
February 1, 2025
February 3, 2024
January 28, 2023
Cost of sales
Operating lease cost
$
45,373 $
46,066 $
44,960
Short-term lease cost
743
1,308
2,662
Variable lease cost
1,067
1,226
1,367
Total lease cost in cost of sales
47,183
48,600
48,989
Other operating expenses
Operating lease cost
1,201
1,651
1,657
Short-term lease cost
63
66
67
Total lease cost in other operating expenses
1,264
1,717
1,724
Total lease cost
$
48,447 $
50,317 $
50,713
(1)Total lease cost excludes expense for non-lease components including common area maintenance and excludes costs that are not a component of the lease including real estate taxes, insurance, sales
taxes and utilities for the Company’s leases.
(2)Cost of sales includes all distribution center lease costs and store occupancy-related lease costs.
(1)
(1)
(1)
(2)
62
As of February 1, 2025, future minimum payments, by year and in the aggregate, under all operating leases with initial terms of one year or more consist of the following (in
thousands):
Operating
Leases
2025
$
48,944
2026
40,655
2027
29,994
2028
19,900
2029
11,613
Thereafter
11,433
Total lease payments
162,539
Less: interest
(28,099)
Present value of lease liabilities
$
134,440
The Company’s lease term and discount rate is as follows:
February 1, 2025
Weighted-average remaining lease term (years)
4.3
Weighted-average discount rate
9.4%
Cash paid for amounts included in the measurement of lease liabilities is as follows (in thousands):
52 Weeks Ended
February 1, 2025
53 Weeks Ended
February 3, 2024
52 Weeks Ended
January 28, 2023
Operating cash flows from operating leases
$
46,122 $
55,805 $
49,125
Note 8 — Stock-Based Compensation
Stock-based compensation — Stock-based compensation includes restricted stock unit grants, stock option grants and other transactions under the Company’s equity
plans. Total stock-based compensation expense is included as a component of compensation and benefits on the consolidated statements of operations and was approximately
$1.0 million, $1.2 million and $2.0 million for fiscal years 2024, 2023 and 2022, respectively.
On June 4, 2013, the Company adopted the Kirkland’s, Inc. Amended and Restated 2002 Equity Incentive Plan (the "2002 Plan”), replacing the plan adopted in July 2002.
The 2002 Plan provides for the award of restricted stock, restricted stock units ("RSUs”), performance-based awards, incentive stock options, non-qualified stock options and
stock appreciation rights with respect to shares of the Company’s common stock to employees, directors, consultants and other individuals who perform services for the
Company. The 2002 Plan is authorized to provide awards for up to a maximum of 5,500,000 shares of common stock.
As of February 1, 2025, options to purchase 441,309 shares of common stock were outstanding under the 2002 Plan at exercise prices ranging from $2.95 to $25.52 per share.
As of February 1, 2025, there were 517,151 RSUs outstanding under the 2002 Plan with fair value grant prices ranging from $1.68 to $11.26 per share. The number of shares reserved
for future stock-based grants under the 2002 Plan was 1,548,047 at February 1, 2025.
Restricted stock units — The Company grants restricted stock units for a fixed number of shares to various employees and directors. The restriction is removed when the
shares vest and shares of common stock are given to the employee or director. The RSUs granted to directors become 100% vested on the first anniversary of the grant date. The
RSUs granted to employees in fiscal 2022, 2023 and 2024 vest 33% annually on the anniversary of the grant date over three years, except for one grant to the CEO in fiscal 2024,
which vests 50% on the second anniversary of the grant date and 50% on the third anniversary of the grant date, one grant to the interim CEO in fiscal 2023, which
63
vested 100% on the first anniversary of the grant date, and one grant to the CFO in fiscal 2022, which vests 100% on the third anniversary of the grant date. The fair values of the
RSUs are equal to the closing price of the Company’s common stock on the date of the grant. Compensation expense related to RSUs is recognized ratably over the requisite
service period. The Company accounts for forfeiture of RSUs as they occur. As of February 1, 2025, there was approximately $784,000 of unrecognized compensation expense
related to RSUs, which is expected to be recognized over a weighted average period of 0.9 years.
RSU activity for the fiscal year ended February 1, 2025, was as follows:
Shares
Weighted Average
Grant Date
Fair Value
Non-Vested at February 3, 2024
397,682 $
4.07
Granted
402,585
2.29
Vested
(215,591)
4.23
Forfeited
(67,525)
2.89
Non-Vested at February 1, 2025
517,151 $
2.77
Other information related to RSU activity during fiscal 2024, 2023 and 2022 is as follows:
52 Weeks Ended
February 1, 2025
53 Weeks Ended
February 3, 2024
52 Weeks Ended
January 28, 2023
Weighted average grant date fair value of RSUs (per share)
$
2.29 $
2.83 $
8.35
Total fair value of restricted stock units vested (in thousands)
$
455 $
560 $
8,596
Stock options — The Company allows for the settlement of vested stock options on a net share basis ("net share settled stock options”) or on a gross basis with the holder
providing cash to cover the option exercise price and the minimum statutory tax withholdings. With net share settled stock options, the employee does not surrender any cash or
shares upon exercise. Rather, the Company withholds the number of shares to cover the option exercise price and the minimum statutory tax withholding obligations from the
shares that would otherwise be issued upon exercise. The settlement of vested stock options on a net share basis results in fewer shares issued by the Company. Options issued
to employees under the 2002 Plan have maximum contractual terms of 10 years. Options granted in fiscal 2022, 2023 and 2024 vest 33% annually on the anniversary of the grant date
over three years, except for one grant to the CEO in fiscal 2024, which vests 50% on the second anniversary of the grant date and 50% on the third anniversary of the grant date
and one grant to the interim CEO in fiscal 2023, which vested 100% on the first anniversary of the grant date.
Stock option activity for the fiscal year ended February 1, 2025 was as follows:
Number of
Options
Weighted
Average
Exercise Price
Weighted Average
Remaining Contractual
Term (in years)
Aggregate Intrinsic
Value (in thousands)
Balance at February 3, 2024
259,222 $
5.49
Options granted
228,126
3.40
Options forfeited
(46,039)
5.13
Balance at February 1, 2025
441,309 $
4.45
8.1 $
—
Options Exercisable As of:
February 1, 2025
146,743 $
6.34
6.7 $
—
The aggregate intrinsic values in the table above represent the total difference between the Company’s closing stock price at year-end and the option exercise price,
multiplied by the number of in-the-money options at fiscal year-end. As of February 1, 2025, there were no outstanding in-the-money options. The fair value of each option is
recorded as compensation expense on a straight-line basis over the applicable vesting period. At February 1, 2025, unrecognized stock compensation expense related to the
unvested portion of outstanding stock options was approximately $389,000, which is expected to be recognized over a weighted average period of 1.0 years.
64
Other information related to option activity during fiscal 2024, 2023 and 2022 is as follows:
52 Weeks Ended
February 1, 2025
53 Weeks Ended
February 3, 2024
52 Weeks Ended
January 28, 2023
Weighted average grant date fair value of options granted (per share)
$
1.82 $
2.06 $
3.11
Total fair value of stock options vested (in thousands)
$
235 $
57 $
49
Intrinsic value of stock options exercised (in thousands)
$
— $
— $
8
The Company has estimated the fair value of all stock option awards as of the date of the grant by applying the Black-Scholes option pricing model. The application of this
valuation model involves assumptions that are judgmental and highly subjective in the determination of compensation expense. The Company granted 228,126 stock options in
2024, 237,675 stock options in fiscal 2023 and 40,000 stock options in fiscal 2022. The weighted averages for key assumptions used in determining the fair value of options granted
in fiscal 2024, 2023 and 2022, and a summary of the methodology applied to develop each assumption are as follows:
52 Weeks Ended
February 1, 2025
53 Weeks Ended February
3, 2024
52 Weeks Ended
January 28, 2023
Expected price volatility
93.5%
92.4%
91.4%
Risk-free interest rate
4.1%
3.3%
3.4%
Expected life
6 years
6 years
6 years
Dividend yield
0%
0%
0%
Expected price volatility — The expected price volatility is a measure of the amount by which the stock price has fluctuated or is expected to fluctuate. The Company uses
actual historical changes in the market value of its stock to calculate the volatility assumption as it is management’s belief that this is the best indicator of future volatility. The
Company calculates daily market value changes using the historical volatility of returns for the six years prior to the grant. An increase in the expected volatility will increase
compensation expense.
Risk-free interest rate — The risk-free interest rate is the U.S. Treasury rate for the week of the grant having a term equal to the expected life of the option. An increase in
the risk-free interest rate will increase compensation expense.
Expected life — The expected life is the period of time over which the options granted are expected to remain outstanding. The Company uses the "simplified” method
found in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 to estimate the expected life of stock option grants. Options granted have a maximum term of
10 years. An increase in the expected life will increase compensation expense.
Forfeitures — The Company accounts for forfeitures of options as they occur. An increase in forfeitures will decrease compensation expense.
Note 9 — Retirement Benefit Plan
401(k) savings plan — The Company maintains a defined contribution 401(k) employee benefit plan, which provides retirement benefits for eligible employees. The
Company matches 100% of the employee’s elective contributions up to 4% of eligible compensation. The Company’s matching contributions were approximately $1.0 million in
fiscal 2024 and $1.1 million in both fiscal 2023 and 2022. The Company has the option to make additional contributions to the 401(k) employee benefit plan on behalf of covered
employees; however, no such contributions were made in fiscal 2024, 2023 or 2022.
Note 10 — Commitments and Contingencies
The Company was named as a defendant in a putative class action filed in May 2018 in the Superior Court of California, Miles v. Kirkland’s Stores, Inc. The case has been
removed to United States District Court for the Central District of California. The complaint alleges, on behalf of Miles and all other hourly Kirkland’s employees in
65
California, various wage and hour violations and seeks unpaid wages, statutory and civil penalties, monetary damages and injunctive relief. Kirkland’s denies the material
allegations in the complaint and believes that its employment policies are generally compliant with California law. On March 22, 2022, the District Court denied the plaintiff’s motion
to certify in its entirety, and on May 26, 2022, the Ninth Circuit granted the plaintiff’s petition for permission to appeal. The appeal was argued before the Ninth Circuit on
November 13, 2023, and on January 8, 2024, the Court issued its opinion affirming the District Court in part and reversing in part. The Ninth Circuit affirmed the denial of
certification as to the subclasses related to the security bag check and reversed as to the rest break claim. The Ninth Circuit did not find that there is liability nor that the rest break
claim is certified. On February 28, 2025, the District Court dismissed this case in its entirety, without prejudice. The Company continues to believe the case is without merit and if
the matter is refiled, the Company intends to vigorously defend itself against the allegations.
The Company was named as a defendant in a putative class action filed in August 2022 in the United States District Court for the Southern District of New York, Sicard v.
Kirkland’s Stores, Inc. The complaint alleges, on behalf of Sicard and all other hourly store employees based in New York, that Kirkland’s violated New York Labor Law Section 191
by failing to pay him and the putative class members their wages within seven calendar days after the end of the week in which those wages were earned, rather paying wages on a
bi-weekly basis. Plaintiff claims the putative class is entitled to recover from the Company the amount of their untimely paid wages as liquidated damages, reasonable attorneys’
fees and costs. The Company believes the case is without merit and intends to vigorously defend itself against the allegations.
On June 12, 2024, the Company was sued in Federal Court in Memphis by Rugs America Corp. for allegedly breaching a 2019 letter of understanding between the parties
regarding the display and sale of Rugs America rugs in the Company’s stores. Rugs America claims that the Company, among other things, displayed non-Rugs America rugs on
its rug fixtures in violation of the understanding and is asking for $5 million in damages. The Company maintains that the term of the understanding was for only two years, expiring
in 2021, and believes that it was in compliance during the two-year term. The Company has moved the Court for permission to assert a counterclaim against Rugs America arising
out of Rugs America’s refusal to retrieve the rug racks from Kirkland’s stores. The alleged damages, if the counterclaim is permitted, are $1.5 million in compensatory damages and
$3 million in punitive damages. After discovery is completed, the Company intends to file a motion for summary judgment, asking the Court to dismiss Rugs America’s claims
before trial. The Company believes Rugs America’s claim is without merit and intends to vigorously defend itself against the allegations.
The Company is also party to other pending legal proceedings and claims that arise in the normal course of business. Although the outcome of such proceedings and
claims cannot be determined with certainty, the Company’s management is of the opinion that it is unlikely that such proceedings and any claims in excess of insurance coverage
will have a material effect on its consolidated financial condition, operating results or cash flows.
Note 11 — Impairment
The table below sets forth impairment information (in thousands, except store counts) for the periods indicated:
52 Weeks Ended
February 1, 2025
53 Weeks Ended
February 3, 2024
52 Weeks Ended
January 28, 2023
Impairment of leasehold improvements, fixtures and equipment at stores
$
109 $
648 $
1,776
Impairment of software projects
—
676
215
Impairment of software as a service implementation costs
—
324
—
Impairment of e-commerce distribution center fixtures
—
95
80
Impairment of other long-lived assets
—
124
—
Total impairment
$
109 $
1,867 $
2,071
Number of stores with leasehold improvements, fixtures and equipment impairment
4
7
15
66
Note 12 — Segment Information
The Company conducts its business activities and reports financial results as one operating segment and one reportable segment, which includes the Company’s store
locations and e-commerce operations. Due to its integrated omni-channel strategy, the Company views e-commerce sales as an extension of its physical store locations. The
Company’s chief operating decision maker ("CODM”) is its President and Chief Executive Officer. The CODM assesses performance based on net loss as reported on the
Company’s consolidated statements of operations. The CODM considers net income (loss) on a monthly basis when assessing performance of the segment. The significant
expense categories regularly provided to the CODM are consistent with the categories included on the consolidated statements of operations. The measure of segment assets is
reported on the Company’s consolidated balance sheets as total assets. The accounting policies for the Company’s single segment are the same as those described in the
Summary of Significant Accounting Policies included in "Note 1 — Description of Business and Significant Accounting Policies”.
Note 13 — Share Repurchase Plans
On September 2, 2021 and January 6, 2022, the Company announced that its Board of Directors authorized a share repurchase plan providing for the purchase in the
aggregate of up to $20.0 million and $30.0 million, respectively, of the Company’s outstanding common stock. Repurchases of shares are made in accordance with applicable
securities laws and may be made from time to time in the open market or by negotiated transactions. The amount and timing of repurchases are based on a variety of factors,
including stock price, regulatory limitations and other market and economic factors. The share repurchase plans do not require the Company to repurchase any specific number of
shares, and the Company may terminate the share repurchase plans at any time. As of February 1, 2025, the Company had approximately $26.3 million remaining under the January
6, 2022 share repurchase plan.
The table below sets forth selected share repurchase plan information (in thousands, except share amounts) for the periods indicated:
52 Weeks Ended
February 1, 2025
53 Weeks Ended
February 3, 2024
52 Weeks Ended
January 28, 2023
Shares repurchased and retired
—
—
479,966
Share repurchase cost
$
— $
— $
6,253
Note 14 — New Accounting Pronouncements
New Accounting Pronouncements Recently Adopted
In November 2023, the Financial Accounting Standard Board ("FASB”) issued Accounting Standards Update ("ASU”) 2023-07, "Segment Reporting (Topic 280) -
Improvements to Reportable Segment Disclosures.” The amendment in the ASU is intended to improve reportable segment disclosure requirements primarily through enhanced
disclosures about significant segment expenses. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal
years beginning after December 15, 2024, and should be applied on a retrospective basis to all periods presented. The Company adopted this guidance during fiscal 2024. While the
adoption of this guidance did not have a material impact on the Company’s consolidated financial statements, it has resulted in incremental disclosures. See "Note 12 — Segment
Information” for further discussion.
New Accounting Pronouncements Not Yet Adopted
In December 2023, the FASB issued ASU 2023-09, "Income Taxes (Topic 740) - Improvements to Income Tax Disclosures.” The ASU requires that an entity disclose specific
categories in the effective tax rate reconciliation as well as provide additional information for reconciling items that meet a quantitative threshold. Further, the ASU requires certain
disclosures of state versus federal income tax expense and taxes paid. The amendments in this ASU are required to be adopted for fiscal years beginning after December 15, 2024.
Early adoption is permitted for annual financial statements that have not yet been issued. The amendments should be applied on a prospective basis although
67
retrospective application is permitted. The Company is currently evaluating the impact of adoption on its financial disclosures.
In November 2024, the FASB issued ASU 2024-03, "Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures” which requires entities to
disclose more detailed information about certain costs and expenses presented in the income statement, including inventory purchases, employee compensation, selling expenses
and depreciation. This ASU is effective for annual reporting periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027. Early
adoption is permitted. The Company is currently evaluating the impact of adoption to determine the impact it may have on its financial disclosures.
Note 15 — Subsequent Events
On February 5, 2025, the Company held a Special Shareholders Meeting during which the shareholders approved the issuance of shares of Common Stock to Beyond,
pursuant to Nasdaq Listing Rules 5635(b) and 5635(d). Following the approval of the shareholders, the $8.5 million Convertible Term Loan with accrued interest converted to
4,610,141 shares of Common Stock at a price of $1.85 per share. Additionally, Beyond purchased $8 million of Common Stock at a price of $1.85 per share for a total of 4,324,324
shares. As of February 5, 2025, Beyond owned 8,934,465 shares of Common Stock which was approximately 40% of Kirkland’s outstanding common stock. Beyond is considered a
related party due to the significant influence they have over the Company.
In addition, pursuant to the Consensus Subscription Agreement and in connection with the Special Shareholders Meeting on February 5, 2025, the Company issued 310,135
shares of Common Stock to Consensus as partial payment of a success fee earned by Consensus in connection with the completion of the Beyond transaction.
The Company’s shareholders, in connection with the Special Shareholders Meeting on February 5, 2025, also approved an amendment to the Company’s Amended and
Restated Charter (the "Charter Amendment”) which decreases the number of authorized shares of Common Stock from 100,000,000 to 80,000,000 and decreases the number of
authorized shares of capital stock from 110,000,000 to 90,000,000. The Charter Amendment does not provide for any decrease in the number of authorized shares of the Company’s
preferred stock, which remains at 10,000,000 shares. The Charter Amendment became effective upon fling with the Secretary of State of the State of Tennessee on February 5, 2025.
Subsequent to February 1, 2025, the Company dissolved the non-depleting collateral trust with the Company’s workers’ compensation and general liability insurance
provider and the Company received cash from the trust for the then outstanding balance. The Company posted a $4.3 million letter of credit under the 2023 Credit Agreement for
the benefit of the Company’s workers’ compensation and general liability insurance provider in lieu of the trust.
Subsequent to February 1, 2025, the Company repaid a net $4.1 million under the 2023 Credit Agreement and issued letters of credit totaling $5.1 million. As of May 2, 2025,
the Company had approximately $29,000 available for borrowing, after the minimum required excess availability covenant under the 2023 Credit Agreement.
Subsequent to the closing of the Beyond Subscription Agreement on February 5, 2025 and through May 31, 2025, the Company’s borrowing base calculation pursuant to
the 2023 Credit Agreement is limited by the greater of 10% of the borrowing base formula or $5.0 million. Subsequent to May 31, 2025, if the Company’s consolidated EBITDA for
the immediately preceding trailing three month period is at least 85% of the Company’s projected consolidated EBITDA, the borrowing base is limited by the greater of 10% of the
borrowing base formula or $5.0 million, if not, it is limited by the greater of 10% of the borrowing base formula or $8.0 million.
As of February 1, 2025, the Company was in compliance with the financial covenants in the 2023 Credit Agreement and the Beyond Credit Agreement. However, the
Company’s conclusion that substantial doubt exists about the Company’s ability to continue as a going concern requires an explanatory paragraph in the report of its independent
registered public accounting firm on the Company’s accompanying financial statements for the fiscal year ended February 1, 2025, which results in a violation of affirmative
covenants under the 2023 Credit Agreement and the Beyond Credit Agreement. If the Company is unable to obtain a waiver from its lenders, the lenders could instruct the
administrative agent under such credit facilities to exercise available remedies including, declaring the principal of
68
and accrued interest on all outstanding indebtedness immediately due and payable and terminating all remaining commitments and obligations under the credit facilities. Although
the lenders under the credit facilities may waive the defaults or forebear the exercise of remedies, the lenders are not obligated to do so. The Company is currently seeking waivers
under both facilities. No assurances can be given as to when or if the Company will succeed in obtaining the waivers. As such, the Company has classified the outstanding
borrowings under these agreements as current on the consolidated balance sheet as of February 1, 2025, except for the Convertible Term Loan that converted to equity on
February 5, 2025.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established and maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file
or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of
February 1, 2025. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of
February 1, 2025.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a and 15d-15(f) under the Exchange
Act). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the
effectiveness of our internal control over financial reporting as of February 1, 2025 based on the Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this evaluation, our management concluded that our internal control over financial reporting
was effective as of February 1, 2025.
Changes in Internal Control Over Financial Reporting
There have been no changes in internal controls over financial reporting during our last fiscal quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item 9B. Other Information
None of our directors or officers adopted or terminated a Rule 10b5-1 trading arrangement during the quarter ended February 1, 2025.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information concerning directors, appearing under the caption "Board of Directors and Executive Officers” in our Proxy Statement, to be filed with the SEC in connection
with our 2025 Annual Meeting of Shareholders, which we expect to file with the SEC within 120 days after the end of our 2024 fiscal year (the "Proxy Statement”); information
concerning executive officers, appearing under the caption "Item 1. Business — Information about our Executive Officers” in Part I of this Form 10-K; information concerning our
nominating and audit committees, appearing under the caption "Information About the Board of Directors and Corporate Governance” in our Proxy Statement; and information
under the caption "Other Matters — Delinquent Section 16(a) Reports” in the Proxy Statement are incorporated herein by reference in response to this Item 10.
The Board of Directors has adopted a Code of Business Conduct and Ethics applicable to our directors, officers and employees, including our Chief Executive Officer and
Chief Financial Officer, which has been posted on the "Investor Relations” section of our website at https://ir.kirklands.com/profiles/investor/Governance.asp. We intend to satisfy
the amendment and waiver disclosure requirements under applicable securities regulations by posting any amendments of, or waivers to, the Code of Business Conduct and Ethics
on our website.
The Company has insider trading policies and procedures that govern the purchase, sale and other dispositions of its securities by directors, officers and employees. We
believe these policies and procedures are reasonably designed to promote compliance with insider trading law, rules and regulations and applicable listing standards. A copy of
our insider trading policy is filed with this Annual Report on Form 10-K as Exhibit 19.1.
Item 11. Executive Compensation
The information contained in the sections titled "Executive Compensation” and "Information About the Board of Directors and Corporate Governance — Board of Directors
Compensation” in the Proxy Statement is incorporated herein by reference in response to this Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information contained in the following section of the Proxy Statement is incorporated herein by reference in response to this Item 12: the section titled "Security
Ownership of Kirkland’s — Security Ownership of Certain Beneficial Owners and Management”, with respect to security ownership of certain beneficial owners and management.
The following table provides information regarding the number of securities already issued and those remaining available for issuance under our equity compensation
plans as of February 1, 2025:
Plan Category
Number of securities to be issued
upon exercise of outstanding
options, warrants and rights
Weighted-average exercise
price
of outstanding options,
warrants and rights
Number of securities remaining
available for future issuance under
equity
compensation plans (excluding
securities reflected in column (a)
(a)
(b)
(c)
Equity compensation plans approved by security holders:
Equity Incentive Plan
958,460 $
4.45
1,548,047
Equity compensation plans not approved by security holders
—
—
—
Total
958,460 $
4.45
1,548,047
(1)The 958,460 securities to be issued includes 441,309 outstanding stock options and 517,151 unvested restricted stock units under the 2002 Plan. The weighted average exercise price excludes restricted
stock units, which have a weighted average exercise price of zero.
(1)
70
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information contained in the section titled "Related Party Transactions” in the Proxy Statement is incorporated herein by reference in response to this Item 13.
The information contained in the section titled "Information About the Board of Directors and Corporate Governance — Board Independence” in the Proxy Statement is
incorporated herein by reference in response to this Item 13.
Item 14. Principal Accounting Fees and Services
The information contained in the section titled "Other Matters — Audit and Non-Audit Fees” in the Proxy Statement is incorporated herein by reference in response to this
Item 14.
71
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Financial Statements
The financial statements set forth below are filed on the indicated pages as part of this annual report on Form 10-K.
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm (PCAOB ID: 42)
42
Consolidated Balance Sheets as of February 1, 2025 and February 3, 2024
44
Consolidated Statements of Operations for the 52 Weeks Ended February 1, 2025, the 53 Weeks Ended February 3, 2024 and the 52 Weeks Ended January 28, 2023
45
Consolidated Statements of Shareholders’ (Deficit) Equity for the 52 Weeks Ended February 1, 2025, the 53 Weeks Ended February 3, 2024 and the 52 Weeks Ended
January 28, 2023
46
Consolidated Statements of Cash Flows for the 52 Weeks Ended February 1, 2025, the 53 Weeks Ended February 3, 2024 and the 52 Weeks Ended January 28, 2023
47
Notes to Consolidated Financial Statements
48
(b) Exhibits
The following is a list of exhibits filed as part of this annual report on Form 10-K. For exhibits incorporated by reference, the location of the exhibit in the Company’s
previous filing is indicated in parentheses.
Exhibit
Number
Description
3.1*
—
Amended and Restated Charter of Kirkland’s, Inc. (Exhibit 3.1 to our Quarterly Report on Form 10-Q for the quarter ended August 1, 2015 filed on September
10, 2015)
3.2*
Articles of Amendment to the Amended and Restated Charter of Kirkland’s, Inc. (Exhibit 3.1 to our Current Report on Form 8-K filed on February 5, 2025)
3.3*
—
Amended and Restated Bylaws of Kirkland’s, Inc. (Exhibit 3.2 to our Current Report on Form 8-K filed on March 31, 2006)
4.1*
—
Form of Specimen Stock Certificate (Exhibit 4.1 to Amendment No. 1 to our registration statement on Form S-1 filed on June 5, 2002, Registration No. 333-
86746)
4.2*
—
Description of the Registrant’s Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (Exhibit 4.2 to the Company’s Annual
Report on Form 10-K for the year ended January 29, 2022 filed on March 25, 2022)
10.1+*
—
Form of Non-Qualified Stock Option Award Agreement for Director Grants (Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended October
30, 2004 filed on December 14, 2004)
10.2*
—
Kirkland’s Inc. Amended and Restated 2002 Equity Incentive Plan (incorporated by reference to Appendix B to Kirkland’s Inc.’s Definitive Proxy Statement
on Schedule 14A, filed on May 10, 2024)
10.3+*
—Form of Restricted Stock Unit Agreement (Exhibit 10.3 to our Current Report on Form 8-K filed on September 24, 2018)
10.4*
—Logistics Services Agreement dated March 23, 2019, by and between Kirkland’s, Inc. and National Distribution Centers, LLC (Exhibit 10.20 to the Company’s
Current Report on Form 10-K for the year ended February 2, 2019 filed on March 29, 2019)
10.5*
—Second Amended and Restated Security Agreement dated as of December 6, 2019, by and among Kirkland’s Inc., the other borrowers and guarantors party
hereto from time to time and Bank of America, N.A., as Agent (Exhibit 10.2 to our Current Report on Form 8-K filed on December 11, 2019)
72
Exhibit
Number
Description
10.6+*
—Employment Agreement, effective August 8, 2022, by and between W. Michael Madden and Kirkland’s Inc. (Exhibit 10.1 to our Current Report on Form 8-K
filed on August 9, 2022)
10.7+*
—Form of Employment Agreement dated January 19, 2024 between Amy E. Sullivan and Kirkland’s Inc. (Exhibit 10.1 to our Current Report on Form 8-K filed on
January 19, 2024)
10.8*
—Term Loan Credit Agreement dated as of January 25, 2024, by and among Kirkland’s, Inc., the borrowers and guarantors named therein, 1903P Loan Agent,
LLC, as administrative agent, and the lenders named therein (Exhibit 10.1 to our Current Report on Form 8-K filed on January 26, 2024)
10.9*
—Term Loan Credit Agreement dated as of October 21, 2024, by and between Kirkland’s Stores, Inc., as Lead Borrower, the Borrowers named therein, the
Guarantors named therein, Beyond, Inc., as Administrative Agent and Collateral Agent and the Lenders party thereto (Exhibit 10.1 to our Current Report on
Form 8-K filed on October 21, 2024).
10.10*
—Subscription Agreement, dated as of October 21, 2024, by and between Kirkland’s, Inc. and Beyond, Inc. (Exhibit 10.2 to our Current Report on Form 8-K filed
on October 21, 2024).
10.11*
—Investor Rights Agreement, dated as of October 21, 2024, by and between Kirkland’s, Inc. and Beyond, Inc. (Exhibit 10.3 to our Current Report on Form 8-K
filed on October 21, 2024).
10.12*
—Collaboration Agreement dated as of October 21, 2024, by and between Kirkland’s, Inc. and Beyond, Inc. (Exhibit 10.4 to our Current Report on Form 8-K filed
on October 21, 2024).
10.13*
—Trademark License Agreement, dated as of October 21, 2024, by and between Kirkland’s, Inc. and Beyond, Inc. (Exhibit 10.5 to our Current Report on Form 8-
K filed on October 21, 2024).
10.14*
—Third Amended and Restated Credit Agreement, as amended by the First and Second Amendments, dated as of October 21, 2024, by and between Kirkland’s
Stores, Inc., as Lead Borrower, the Borrowers named therein, the Guarantors named therein, Bank of America, N.A. as Administrative Agent and Collateral
Agent, and the Lenders party thereto (Exhibit 10.6 to our Current Report on Form 8-K filed on October 21, 2024).
10.15*
—Subscription Agreement, dated as of October 18, 2024, by and between Kirkland’s, Inc. and Consensus Securities LLC (Exhibit 10.4 to our Current Report on
Form 8-K filed on February 5, 2025).
19.1**
—Kirkland’s, Inc. Insider Trading Policy Statement on Dealing with Company Information, Including Inside Information and Securities Insider Trading and
Conflicts of Interest – Directors, Executive Officers, Senior Management and Accounting and Finance Personnel.
21.1**
—Subsidiaries of Kirkland’s, Inc.
23.1**
—Consent of Ernst & Young LLP
31.1**
—Certification of the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2**
—Certification of the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1†
—Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2†
—Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
97.1*
—Kirkland’s Inc. Nasdaq Executive Compensation Recoupment Policy (Exhibit 97.1 to the Company’s Annual Report on Form 10-K for the year ended February
3, 2024 filed on March 29, 2024).
101.INS
—Inline XBRL Instance Document
101.SCH
—Inline XBRL Taxonomy Extension Schema Document
101.CAL
—Inline XBRL Taxonomy Extension Calculation Linkbase Document
73
Exhibit
Number
Description
101.DEF
—Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
—Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
—Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
—The cover page for the Company’s Annual Report on Form 10-K for the year ended February 1, 2025, has been formatted in Inline XBRL and contained in
Exhibit 101
*
Incorporated by reference.
**
Filed herewith.
†
Furnished herewith.
+
Management contract of compensatory plan or arrangement.
(c) Financial Statement Schedules
Financial statement schedules are not included because they are inapplicable or not required, or because the required information is included in the consolidated financial
statements or notes thereto, included in "Item 8. Financial Statements and Supplementary Data” of this Annual Report.
Item 16. Form 10-K Summary
None.
74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KIRKLAND’S, INC.
By:
/S/ Amy E. Sullivan
Amy E. Sullivan
President, Chief Executive Officer and Director
Date: May 2, 2025
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the
capacities and on the dates indicated.
Signature
Title
Date
/S/ Amy E. Sullivan
President, Chief Executive Officer and Director
May 2, 2025
Amy E. Sullivan
(Principal Executive Officer)
/S/ W. Michael Madden
Executive Vice President and
Chief Financial Officer
May 2, 2025
W. Michael Madden
(Principal Financial and Accounting Officer)
/S/ Ann E. Joyce
Director
May 2, 2025
Ann E. Joyce
/S/ Susan S. Lanigan
Director
May 2, 2025
Susan S. Lanigan
/S/ Charlie Pleas, III
Director
May 2, 2025
Charlie Pleas, III
/S/ Chris L. Shimojima
Director
May 2, 2025
Chris L. Shimojima
/S/ Jill A. Soltau
Director
May 2, 2025
Jill A. Soltau
Exhibit 19.1
KIRKLAND’S, INC.
INSIDER TRADING POLICY STATEMENT ON DEALING WITH COMPANY INFORMATION, INCLUDING INSIDE INFORMATION AND SECURITIES
INSIDER TRADING AND CONFLICTS OF INTEREST – DIRECTORS, EXECUTIVE OFFICERS, SENIOR MANAGEMENT AND ACCOUNTING AND
FINANCE PERSONNEL
In the course of conducting the business of Kirkland’s, Inc. (the “Company”), you may at times have information about the Company or another entity
that generally is not available to the public. Because of your relationship with the Company, you have certain responsibilities under the federal securities laws of the United
States regarding insider information and the trading of the Company’s securities and to the Company with respect to business conduct and conflicts of interest. This Insider
Trading Policy Statement on Dealing with Company Information, including Inside Information and Securities Insider Trading and Conflicts of Interest – Directors, Executive
Officers, Senior Management and Accounting and Finance Personnel (this “Policy Statement”) is intended to explain your obligations to the Company and under the law. For
purposes of this Policy Statement, the term “Compliance Officers” means the Company’s Chief Financial Officer and the Company’s Vice President of Finance.
I.APPLICATION OF POLICY
This Policy Statement applies to all members of the Company’s Board of Directors, all of the Company’s executive officers (as specified in the Company’s filings with the United
States Securities and Exchange Commission (the “SEC”)), all Company employees designated from time to time as senior managers, all Company employees involved in the
accounting or finance function, regardless of where their regular place of business is and such other persons as the Board of Directors may designate. The Company has
separate policy statements that apply to all other Company employees.
II.INSIDE INFORMATION
A.What is Inside Information?
“Inside” information is material information about the Company that is not available to the public. Information generally becomes available to the public
after it has been disclosed by the Company or third parties in a press release or other public statement, including any filing with the SEC. Public dissemination usually
contemplates some period of delay after release of the information in order for outside investors to evaluate the news. Generally, information regarding simple matters, such as
earnings results, will be deemed to have been adequately disseminated and absorbed by the marketplace under the timetable established by the policy set forth below. When
more complex matters, such as a prospective acquisition, alliance transaction or disposition are announced, it may be necessary to allow additional time for the information to be
evaluated by investors. In all cases, if you desire to trade the Company’s
2
securities and specific guidelines have not been posted, you should consult with one of the Compliance Officers regarding a suitable waiting period before trading.
B.What is Material Information?
Information generally is considered “material” if its disclosure to the public would be reasonably likely to affect (i) investors’ decisions to buy or sell
the securities of the Company, or (ii) the market price of the securities. Some examples of material information include the following: (a) important financial information such
monthly or quarterly sales, sales trend, profit margin or earnings information; (b) a merger or acquisition involving the Company;
(c) pending regulatory action; (d) major litigation; (e) the public or private sale of additional securities of the Company; (f) a tender offer by the Company for another company’s
securities or for the Company’s securities by a third party; (g) major management changes, (h) a major contract, and (i) significant information regarding introduction of a new
product, products under developments or store openings. Obviously what is material information cannot be enumerated with precision, since there are many gray areas and
varying circumstances. The determination of whether information was material is almost always made after the fact when the effect on the market can be quantified. Therefore,
any trading is risky. When doubt exists, the information should be presumed to be material. If you are unsure whether information of which you are aware is material or
nonpublic, you should consult with one of the Company’s Compliance Officers prior to trading.
Material information not yet ripe for public disclosure may often exist within the Company. For example, during the early stages of discussions
regarding a significant acquisition or disposition, the information about the discussions may be too tentative or premature to require, or even permit, public announcement by
the Company. On the other hand, that same information may be highly material. If you have access to material information, you may be precluded from trading in the Company’s
securities. If you have access to material inside information and have doubts about your ability to trade in securities, you should refrain from trading until you seek and obtain
clearance from one of the Compliance Officers.
The principles discussed in this Policy Statement also apply to inside information obtained in the course of your employment about another public
corporation, such as a customer or a corporation with which the Company is involved in a transaction. If you obtain material nonpublic information about another public
company, you should refrain from trading in the securities of that company until the material information has been publicly disseminated.
C.Reasons for Maintaining Confidentiality.
The federal securities laws of the United States strictly prohibit any person who obtains material inside information and has a duty not to disclose it
from using such information in connection with the purchase and sale of securities. These laws also prohibit any directors, executive officers, senior managers and anyone else
subject to this Policy Statement from “tipping” material nonpublic information, which means disclosing the information to friends, family members, business contacts or others
under circumstances that suggest that you were trying to help them make a profit or avoid a loss. It does not matter how that information has been obtained, whether in the
course of employment, from friends, relatives, acquaintances or strangers, or from overhearing the conversations of others. Congress in the United States
3
enacted this prohibition because the integrity of the securities markets would be seriously undermined if the “deck were stacked” against persons not privy to such
information. Your failure to maintain the confidentiality of material nonpublic information about the Company could greatly harm the Company’s ability to conduct business. In
addition, you could be exposed to significant penalties and legal action.
D.Safeguarding Material Information and Policy on Non-Disclosure.
During the period that material information relating to the Company or its business is unavailable to the general public, it must be kept in strict
confidence. Accordingly, such information should be discussed only with persons who have a “need to know” and should be confined to as small a group as possible. The
utmost care and circumspection must be exercised at all times. Therefore, conversations in public places, such as elevators, restaurants and airplanes, should be limited to
matters that do not involve information of a sensitive or confidential nature.
To assure that Company confidences are protected to the maximum extent possible, no individual other than specifically authorized personnel may
release material information to the public or respond to inquiries from the media, analysts or others outside the Company unless you have been specifically asked to do so in a
particular instance by the Chief Financial Officer or Chief Executive Officer. In addition, the SEC’s Regulation FD provides that the mere communication, either intentionally or
unintentionally, of material inside information regarding the Company to certain enumerated persons (generally consisting of securities market professionals or holders of the
Company’s securities) by individuals acting on behalf of the Company (i.e., senior officials and persons who regularly communicate with market professionals or with security
holders) may subject both you and the Company to SEC administrative action, whether or not anyone trades on the basis of that information.
To provide for consistency in external communications, and to provide a suitable level of assurance that confidential information is not inadvertently
disclosed outside the Company, no employee, officer or director, unless previously authorized by the Chief Financial Officer or Chief Executive Officer, may communicate about
the Company or its business or operations with any shareholder, the financial press, investment or research analysts, stockbrokers, investors, and the like without one of the
Company’s Compliance Officers present in person or by telephone. The Chief Financial Officer or Chief Executive Officer shall be excepted from the above requirement and may
engage in unaccompanied conversation.
This prohibition on communications also applies to responding to inquiries about the Company from shareholders, the financial press, investment and
research analysts, stockbrokers, investors and the like. As discussed below, the communication of material inside information may subject you and the Company to civil or
criminal liability for “tipping” or to SEC administrative action pursuant to Regulation FD. Consequently, it is imperative that, unless you are specifically exempted by this policy
or authorized by the Chief Financial Officer or the Chief Executive Officer to respond to certain inquiries, all such inquiries be directed to one of the Company’s Compliance
Officers.
If you realize that you have communicated material inside information regarding the Company without the proper Company authorization, either
intentionally or unintentionally,
4
or think that you might have communicated such information, regardless as to whom the communication was made, you must immediately notify one of the Compliance Officers
of such communication.
Additionally, all persons with access to nonpublic information should (i) ensure any documents reflecting such information are maintained in a secure
location, (ii) exercise extreme care not to discuss such information in public places where it is possible that the information can be overheard, such as in elevators, restaurants
and public transportation, (iii) not disclose any information concerning the Company in e-mail correspondence or any attachments to an e-mail, except where the recipient needs
to know the information for legitimate, Company-related reasons, and (iv) be careful so as to not otherwise make available to others material inside information regarding the
Company. Pursuant to Regulation FD, reckless behavior by Company employees that leads to the leaking of material inside information about the Company may subject both
the Company and the reckless individual to SEC administrative action. Consequently, if anyone becomes aware of a leak of nonpublic information, whether inadvertent or
otherwise, the person should report it immediately to one of the Company’s Compliance Officers.
II. INSIDER TRADING OF SECURITIES
“Insider Trading” has been a top enforcement priority of the SEC and the Department of Justice in recent years. Criminal prosecution and the imposition
of fines and/or imprisonment is common.
Anyone who violates the insider trading prohibitions contained in applicable securities laws is subject to potential civil damages and criminal penalties
in the United States. The civil damages for violation of insider trading prohibitions contained in United States federal securities laws, for example, can consist of disgorgement
of profits and a fine of up to three times the profit gained or the loss avoided. In addition, United States federal securities laws may impose criminal penalties that include
monetary fines that can be as much as $5,000,000 and 20 years imprisonment for each violation.
In addition, the SEC can seek a civil penalty against a company as a “controlling person” that fails to take appropriate steps to prevent illegal trading.
The SEC can also seek a civil penalty against directors and supervisory personnel as “controlling persons” who fail to take appropriate steps to prevent illegal trading.
Although the Securities Act of 1934, as amended (the “1934 Act”) does not define a “controlling person,” its legislative history suggests that directors, officers and certain
managerial personnel could become controlling persons subject to liability if they knew of, or recklessly disregarded, a likely insider trading violation by an employee under
their control. A successful action by the SEC under this provision could result in a civil fine of $1,000,000 or three times the profit gained or the loss avoided, whichever is
greater. Criminal penalties can also be imposed under United States federal securities laws, and can be as much as $5,000,000 and 20 years imprisonment for each violation.
In addition to the possible imposition of civil damages and criminal penalties on violators and their controlling persons, any appearance of impropriety
could not only damage the Company’s reputation for integrity and ethical conduct but also impair investor confidence in the Company.
5
If a director, executive officer, member of the senior management or anyone else subject to this Policy Statement violates this Policy Statement, the
Company can impose sanctions, including dismissal for cause. Even if the SEC does not prosecute a case, involvement in an investigation (by the SEC or the Company) can
tarnish the insider’s reputation and damage his or her career.
Any person who has supervisory authority over any Company personnel must promptly report to one of the Company’s Compliance Officers any
trading in the Company’s securities by Company personnel or disclosure of material “nonpublic” information by Company personnel which he or she has reason to believe may
violate this Policy Statement or the securities laws of any jurisdiction, including, for example, the United States.
IV.Restrictions on Trading and Tipping
In light of the Company’s responsibilities under the federal securities laws of the United States, the Company has adopted the following policies
regarding your trading in securities:
A.No Trades while in Possession of Material Nonpublic Information. Directors, executive officers, senior managers and anyone else subject to this
Policy Statement may not buy or sell securities of the Company or any other publicly traded company while in possession of material nonpublic information, except under the
circumstances and guidelines discussed in Section III below. Neither you nor any person affiliated with you (which generally includes family members or persons sharing your
house at a time when you are in possession of material nonpublic information and business entities in which you are a director, officer or significant stockholder) may buy or
sell securities or engage in any other action to take advantage of, or pass on to others, nonpublic material information, except under the circumstances and guidelines discussed
in Section III below. This rule applies both to securities purchases (to make a profit based on good news) and securities sales (to avoid a loss based on bad news) regardless of
how or from whom the material nonpublic information has been obtained. This prohibition extends not only to transactions involving Company securities but also transactions
involving securities of other companies with which the Company has a relationship. This policy applies to any Company securities, including common stock and call or put
options for any Company securities.
B.No Trades unless Pre-Cleared with one of the Compliance Officers. As a means of enforcing the policies discussed in this Policy Statement,
directors, executive officers, senior managers and anyone else subject to this Policy Statement may not buy or sell securities of the Company without prior consultation with
and approval by one of the Company’s Compliance Officers. This prior consultation and approval requirement also applies to any person affiliated with such covered individual
(which generally includes family members and business entities in which such director, officer or employee is a director, officer or significant stockholder).
C.No Trades Outside of Window Periods. Except under the circumstances and guidelines discussed in Section V below, directors, executive officers
senior managers and anyone else subject to this Policy Statement should plan to trade in the Company’s securities only during the period commencing on the second business
day following the release of the
6
Company’s annual and quarterly earnings and continuing until the end of the second month of each fiscal quarter, and even then only provided that they are not otherwise in
possession of material nonpublic information regarding the Company. Because insiders are especially likely to receive regular nonpublic information regarding the operations of
the Company, trading in this “window period” can help ensure that trading is not based on material information that is not available to the public. The request for pre-clearance
should be in the Form of Exhibit I attached hereto.
D.No Disclosure of Material Nonpublic Information. Directors, executive officers, senior managers, and anyone else subject to this Policy Statement
may not communicate material nonpublic information to other persons prior to its public disclosure and dissemination by an authorized representative of the Company. Persons
at the Company who come into possession of material nonpublic information must not communicate that information to other persons prior to its public disclosure and
dissemination. There is, therefore, a need to exercise care when speaking with other Company personnel who do not have a “need to know” and when communicating with
family, friends and other persons not associated with the Company. To avoid even the appearance of impropriety, it is wise to refrain from discussing the Company’s business
or prospects or making recommendations about buying or selling the securities of the Company or other entities with which the Company has a relationship. This concept of
unlawful tipping includes passing on such information to friends, family members or acquaintances under circumstances that suggest that you were trying to help them make a
profit or avoid a loss.
E.Report Securities Transactions on the Date of the Transaction. Directors and executive officers of the Company must report purchases and sales of
securities to one of the Company’s Compliance Officers. Such reporting will enable the Company to prepare an insider report that may be required to be filed with the SEC and
any other applicable securities regulators. Accordingly, all directors and executive officers must, by the end of the business day on which any transaction involving Company
securities takes place (i.e. the trade date, not the subsequent settlement date) report all transactions made by themselves, any family members living in the same household and
entities in which they have a 5% or more ownership interest in the Company’s securities to one of the Company’s Compliance Officers. The report should be in the form of
Exhibit II attached hereto. Note that this reporting requirement does not obviate the need for preclearance of the transaction in accordance with paragraph B above.
F.Application to Former or Retired Insiders. The Company’s Policy Statement and the legal prohibition on insider trading in any security while in
possession of material nonpublic information obtained while in the employment of or conducting any business or activity on behalf of the Company applies to all former or
retired directors, executive officers and senior management of the Company and anyone else subject to this Policy Statement.
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V.CERTAIN EXCEPTIONS TO TRADING RESTRICTIONS
A.Stock Option Exercises. The trading restrictions (including the window-period, pre-clearance, and other restrictions discussed in Section IV above) (the “Trading
Restrictions”) do not apply to the exercise of an employee stock option, even where the insider is in possession of inside information. The Trading Restrictions do apply,
however, to any sale of Company securities as part of a broker-assisted cashless exercise of an option or any other market sale for the purpose of generating the cash needed to
pay the exercise price of an option.
B.Employee Stock Purchase Plan. The Trading Restrictions do not apply to pre- arranged periodic purchases of Company securities under the Company’s
Employee Stock Purchase Plan, even where the insider is in possession of inside information. The Trading Restrictions do apply, however, to an election to participate in the
plan or to increase or decrease the level of participation in the plan. The restrictions also apply to the sale of Company securities purchased pursuant to the plan.
C.Margin Accounts and Pledges. Securities held in a margin account may be sold by the broker without the customer’s consent if the customer fails to meet a
margin call. Similarly, securities pledged (or hypothecated) as collateral for a loan may be sold in foreclosure if the borrower defaults on the loan. Because a margin sale or
foreclosure sale may occur at a time when the pledgor is aware of material nonpublic information or otherwise is not permitted to trade in Company securities, such margin sales
or foreclosure sales could result in liability for illegal insider trading. Accordingly, directors, executive officers, senior management and anyone else subject to this Policy
Statement are prohibited from holding Company securities in a margin account or pledging Company securities as collateral for a loan. An exception to this prohibition may be
granted where a person wishes to pledge Company securities as collateral for a loan (not including margin debt) and clearly demonstrates the financial capacity to repay the
loan without resort to the pledged securities. Any person who wishes to pledge Company securities as collateral for a loan must submit a request for approval to one of the
Company’s Compliance Officers at least two weeks prior to the proposed execution of documents evidencing the proposed pledge.
D.Prearranged Trading Programs
Rule 10b5-1 under the 1934 Act establishes a safe harbor protecting officers and directors from insider trading liability for transactions made pursuant to
a previously-established contract, plan or instruction. The rule presents an opportunity for “insiders” e.g., directors, executive officers, senior management members and
anyone else subject to this Policy Statement, to establish arrangements to sell or purchase the Company’s securities, even during the restriction periods imposed by the
Company’s insider trading policy, and even though the insider coincidentally possesses material nonpublic information at the time of the trade. An insider’s prearranged
trading program may include the use of limit orders, discretionary accounts, blind trusts, pre-scheduled stock option exercise and sale, pre-arranged trading instructions, and
other brokerage or third party arrangements. However, there are considerable restrictions associated with arrangements complying with the Rule and that all plans,
arrangements or instructions must be approved by one of the Company’s Compliance Officers. The Trading Restrictions do not apply to transactions of Company securities
under a Rule 10b5-1
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prearranged trading program, where such program has been approved by one of the Company’s Compliance Officers and otherwise complies with the requirements described
below.
1.Prerequisites for a Prearranged Trading Program. First, the prearranged trading program must satisfy the general requirements of Rule 10b5-1. The
arrangement must be documented, bona fide and established at a time when the insiders did not possess material nonpublic information. Additionally, the program must specify
the price, amount and date of trades or provide a formula or other mechanism to be followed for each purchase or sale to be effected pursuant to the program. Once purchases
or sales commence pursuant to a program, you may not modify or terminate the program except at a time when you are not in possession of material nonpublic information, and
any such modification or termination must be approved by one of the Company’s Compliance Officers.
Secondly, it is essential to recognize that Rule 10b5-1 provides only an “affirmative defense,” which must be raised and proven in the event of an
insider-trading lawsuit. The rule does not prevent the SEC or a public shareholder from bringing a lawsuit. Further, Rule 10b5-1 does not prevent the media from writing about
the sales made by an insider.
The Company does not want to impede all sales of Company stock by insiders. However, in order to reduce the risk of litigation and bad press, and to
preserve the Company’s reputation and that of its employees, the Company is adopting procedural requirements that are essentially an extension of the Company’s current
procedure for transactions dealing in Company stock, contained in other sections of this insider trading policy.
In determining whether to approve any prearranged trading program, the Company’s Compliance Officers will consider the following:
(a)Review the Proposed Arrangement: To assure that the arrangement will not expose the Company or a particular insider to unnecessary liabilities.
(b)Add Additional Safeguards: At the time you enter into an arrangement (or at any time that you wish to terminate or modify a prior instruction or
program), you must not be in possession of material nonpublic information about the Company. If material nonpublic information exists, even if you do not have a full
appreciation of such information, the Company’s Compliance Officers may require that you wait until such information has been disclosed. It may also be advisable that there
be an interval between establishment of the program and the first transaction.
(c)Public Disclosure: The Company will consider in each case whether public announcement of a trading program should be made via the appropriate
media outlet, including disclosures required by Regulation FD. In addition, a statement may be included in the appropriate SEC filings, such as Form 4 and Form 144, indicating
that the trades are being made pursuant to a pre-existing arrangement.
(d)Other Legal Concerns: The Company’s Compliance Officers may establish a procedure with whomever is handling the trades made under your
established arrangement to ensure:
(1)Prompt filings of SEC Form 4 after transactions take place (for persons subject to Section 16 of the 1934 Act). Failure to make a timely
filing may result in an unwanted proxy statement disclosure of filing violations by the insider;
(2)Compliance with Rule 144, promulgated under the Securities Act of 1933 (the “1933 Act”), at the time of any sale (for persons subject to
Rule 144); and
(3)Cessation of any sales during pooling lock-up periods in the event of a merger or acquisition, or during other periods when a lock-up is
imposed on insiders.
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Notwithstanding any such procedures, compliance with Section 16, Rule 144, any other applicable securities law, or any lock-up period remains your obligation.
2.Structuring the Prearranged Trading Program. A prearranged trading program, properly structured, can be a more convenient and safe way to
insulate insiders from potential insider trading liability than the alternative system of restriction periods and other restrictions described elsewhere in this policy.
The prearranged trading program must, at a minimum:
(a)Be in writing;
(b)Be entered into in good faith and not as part of a scheme to evade the Company’s prearranged trading program or applicable United States federal
securities law; and
(c)Either:
(1)Expressly specify the number of shares or dollar value of securities to be purchased or sold (“Amounts”); the market price (on a
particular day), limit price, or particular dollar price of securities to be purchased or sold (“Prices”); and the specific day of the year on which a market order is to be executed, or
a day or days of the year on which a limit order is in force (“Dates”);
(2)Provide a formula, algorithm, or computer program for determining the Amounts, Prices and Dates; or
(3)Prohibit the individual submitting the Prearranged Trading Program from exercising any subsequent influence over how, when, or
whether to effect purchases or sales and, additionally, prohibit any other person exercising influence over purchases or sales pursuant to the Prearranged Trading Program from
being aware of material nonpublic information when doing so.
3.Benefits of a Prearranged Trading Program. With a prearranged trading program, for example, it becomes clearer to the investing public (and
potential plaintiffs) that your trades are part of a pre-established plan and are not being prompted by your knowledge of current developments within the Company, or your
feelings about the Company’s prospects. Prearranged trades triggered by the guidelines of a preexisting trading program would also
10
reduce the strength of a suit claiming that the Company had a particular motive to manipulate earnings or disclosures in connection with an insider’s trade.
4.Stock Options as Part of a Prearranged Trading Program. A prearranged program could include instructions for periodic exercise/same-day sales of
your stock options which could be conditioned on a minimum stock price established by the insider’s instructions. The insider could condition the sales on a variety of factors,
for example, sales could be limited to the number of shares necessary to cover the option exercise price and taxes dues.
C.Discretionary Accounts. True discretionary accounts or other arrangements where a trustee or broker has complete authority over trades should satisfy Rule
10b5-1, provided that the trustee/broker is not aware of material nonpublic information upon the creation of the arrangement and, further, that the insider does not exercise
subsequent influence over trades. Examples of workable arrangements might include blind trusts, good-till-cancelled orders, and limit orders. The Company would not be
inclined to approve such an arrangement where the broker has a close relationship with the insider, thus creating the appearance of impropriety that could undermine the
affirmative defense in the event of litigation.
D.Pledging Company Stock as Security. In the event of a margin maintenance call where a broker seeks to liquidate collateral, such sales would be attributable to
the insider under Section 16 and Rule 144, if applicable. While a margin sale by such broker may be attributable to the executive under Rule 10b-5, the pledge arrangement may
fall within the Rule 10b5-1 safe harbor, provided that, at the time of the pledge, the executive irrevocably instructs the broker to sell the shares in the event of a margin call,
without substituting other collateral. Nonetheless, the SEC’s treatment of such sales remains undetermined. Although the SEC has been asked to clarify its position, any
pledges of Company stock will be subject to pre-clearance by one of the Company’s Compliance Officers and will be approved on a case-by-case basis.
Exhibit 21.1
SUBSIDIARIES OF KIRKLAND’S, INC.
Subsidiaries
Jurisdiction of Corporation or Organization
Kirkland’s DC, Inc.
Tennessee
Kirkland’s Stores, Inc.
Tennessee
Kirkland’s Texas, LLC
Tennessee
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 333-100157) of Kirkland’s, Inc. pertaining to the 1996 Executive and Non-Qualified Stock Option Plan, the 2002 Equity Incentive
Plan, the Employee Stock Purchase Plan, and certain outstanding stock options,
(2) Registration Statement (Form S-8 No. 333-189285) of Kirkland’s, Inc. pertaining to the Amended and Restated 2002 Equity Incentive Plan,
(3) Registration Statement (Form S-8 No. 333-232225) of Kirkland's, Inc. pertaining to the Amended and Restated 2002 Equity Incentive Plan; and
(4) Registration Statement (Form S-8 No. 333-281953) of Kirkland's, Inc. pertaining to the Amended and Restated 2002 Equity Incentive Plan;
of our report dated May 2, 2025, with respect to the consolidated financial statements of Kirkland’s, Inc. included in this Annual Report (Form 10-K) of Kirkland’s, Inc. for the fiscal
year ended February 1, 2025.
/s/ Ernst & Young LLP
May 2, 2025
Nashville, Tennessee
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Amy E. Sullivan, certify that:
1. I have reviewed this Annual Report on Form 10-K of Kirkland’s, Inc. (“registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
/s/ Amy E. Sullivan
Amy E. Sullivan
President, Chief Executive Officer and Director
Date: May 2, 2025
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, W. Michael Madden, certify that:
1. I have reviewed this Annual Report on Form 10-K of Kirkland’s, Inc. (“registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during
the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
/s/ W. Michael Madden
W. Michael Madden
Executive Vice President and Chief Financial Officer
Date: May 2, 2025
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
In connection with the Annual Report of Kirkland’s, Inc. (the “Company”) on Form 10-K for the fiscal year ended February 1, 2025 as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), I, Amy E. Sullivan, President, Chief Executive Officer and Director of the Company, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Amy E. Sullivan
Amy E. Sullivan
President, Chief Executive Officer and Director
May 2, 2025
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
In connection with the Annual Report of Kirkland’s, Inc. (the “Company”) on Form 10-K for the fiscal year ended February 1, 2025 as filed with the Securities and Exchange
Commission on the date hereof (the “Report”), I, W. Michael Madden, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ W. Michael Madden
W. Michael Madden
Executive Vice President and Chief Financial Officer
May 2, 2025