UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



x	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~August~~May 4, ~~2018~~

2019



¨	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ______to ______.

Commission file number: 000-49885

~~KIRKLAND’S, INC.~~Kirkland’s, Inc.

(Exact name of registrant as specified in its charter)



Tennessee	62-1287151
(State or other jurisdiction of	(IRS Employer Identification No.)
incorporation or organization)

5310 Maryland Way
Brentwood, Tennessee	37027
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (615) 872-4800

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	KIRK	NASDAQ Global Select Market

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 ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ 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	x
Non-accelerated filer	¨	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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨ NO x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, no par value - ~~15,662,989~~14,164,148 shares outstanding as of ~~September 4, 2018.~~May 22, 2019.

KIRKLAND’S, INC.

TABLE OF CONTENTS



		Page

PART I	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets (Unaudited) as of ~~August~~May 4, ~~2018,~~2019, February 3,2, 2019 and May 5, 2018 ~~and July 29, 2017~~	3
	Condensed Consolidated Statements of Operations (Unaudited) for the 13-week ~~and 26-week~~ periods ended ~~August~~May 4, ~~2018~~2019 and ~~July 29, 2017~~May 5, 2018	4
	Condensed Consolidated Statement of Shareholders’ Equity (Unaudited) for the ~~26-week period~~13-week periods ended ~~August~~May 4, 2019 and May 5, 2018	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~26-week~~13-week periods ended ~~August~~May 4, ~~2018~~2019 and ~~July 29, 2017~~May 5, 2018	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1113
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	1820
Item 4.	Controls and Procedures	1820

PART II	OTHER INFORMATION	1921
Item 1.	Legal Proceedings	1921
Item 1A.	Risk Factors	1921
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2021
Item 6.	Exhibits	2022

SIGNATURES		2123

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KIRKLAND’S, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share data)

August 4, February 3, July 29,
2018 2018 2017
ASSETS
Current assets:
Cash and cash equivalents $ 35,359
$ 80,156
$ 48,694
Inventories, net ⁽¹⁾
95,466
81,255
71,283
Prepaid expenses and other current assets ⁽¹⁾
21,053
15,988
21,565
Total current assets 151,878
177,399
141,542
Property and equipment:
    Equipment 21,025
20,835
20,091
    Furniture and fixtures 81,371
80,299
78,432
    Leasehold improvements 124,133
119,272
112,435
    Computer software and hardware 63,474
59,331
56,532
    Projects in progress 12,637
7,685
6,400
         Property and equipment, gross 302,640
287,422
273,890
    Accumulated depreciation (185,572 ) (174,383 ) (162,667 )
Property and equipment, net 117,068
113,039
111,223
Deferred income taxes 1,344
2,216
1,022
Other assets 7,248
6,543
6,026
Total assets $ 277,538
$ 299,197
$ 259,813
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 42,849
$ 45,602
$ 29,166
Accounts payable to related party vendor 6,747
7,523
4,618
Income taxes payable —
4,943
—
Accrued expenses 35,345
38,872
31,030
Total current liabilities 84,941
96,940
64,814
Deferred rent 53,080
53,303
53,384
Deferred income taxes 411
—
2,172
Other liabilities 9,049
8,193
9,674
Total liabilities 147,481
158,436
130,044
Shareholders’ equity:
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at August 4, 2018, February 3, 2018, or July 29, 2017, respectively —
—
—
Common stock, no par value; 100,000,000 shares authorized; 15,741,818; 15,977,239; and 16,011,169 shares issued and outstanding at August 4, 2018, February 3, 2018, and July 29, 2017, respectively 168,198
167,501
166,408
Accumulated deficit (38,141 ) (26,740 ) (36,639 )
Total shareholders’ equity 130,057
140,761
129,769
Total liabilities and shareholders’ equity $ 277,538
$ 299,197
$ 259,813

⁽¹⁾ ~~Refer to Note 1 for information about a reclassification of supplies inventory from inventories, net, to prepaid expenses and other current assets.~~



	May 4,			February 2,			May 5,
	2019			2019			2018
ASSETS
Current assets:
Cash and cash equivalents	$	32,523		$	57,946		$	58,242
Inventories, net	90,406			84,434			83,164
Prepaid expenses and other current assets	9,598			15,561			15,848
Total current assets	132,527			157,941			157,254
Property and equipment:
Equipment	21,562			21,425			20,935
Furniture and fixtures	81,405			81,523			80,947
Leasehold improvements	126,673			126,784			122,282
Computer software and hardware	70,622			69,444			62,342
Projects in progress	9,925			8,344			10,460
Property and equipment, gross	310,187			307,520			296,966
Accumulated depreciation	(203,861		)	(196,697		)	(180,154		)
Property and equipment, net	106,326			110,823			116,812
Operating lease right-of-use assets	225,100			—			—
Deferred income taxes	5,326			1,703			2,004
Other assets	6,144			6,681			6,531
Total assets	$	475,423		$	277,148		$	282,601
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	33,081		$	40,004		$	35,362
Accounts payable to related party vendor	9,736			8,166			7,800
Income taxes payable	701			701			4,362
Accrued expenses	23,310			37,665			35,021
Operating lease liabilities	52,090			—			—
Total current liabilities	118,918			86,536			82,545
Deferred rent	—			51,871			54,235
Operating lease liabilities	228,345			—			—
Other liabilities	8,352			7,941			8,416
Total liabilities	355,615			146,348			145,196
Shareholders’ equity:
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at May 4, 2019, February 2, 2019, or May 5, 2018, respectively	—			—			—
Common stock, no par value; 100,000,000 shares authorized; 14,224,648; 14,504,824; and 15,693,494 shares issued and outstanding at May 4, 2019, February 2, 2019, and May 5, 2018, respectively	170,105			169,477			167,999
Accumulated deficit	(50,297		)	(38,677		)	(30,594		)
Total shareholders’ equity	119,808			130,800			137,405
Total liabilities and shareholders’ equity	$	475,423		$	277,148		$	282,601

The accompanying notes are an integral part of these financial statements.

Table of Contents

KIRKLAND’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)

13-Week Period Ended 26-Week Period Ended
August 4, July 29, August 4, July 29,
2018 2017 2018 2017
Net sales $ 133,899
$ 131,683
$ 276,353
$ 264,524
Cost of sales ⁽¹⁾
86,765
80,593
172,330
160,980
Cost of sales related to merchandise purchased from related party vendor 10,336
11,004
21,913
20,610
Cost of sales 97,101
91,597
194,243
181,590
Gross profit 36,798
40,086
82,110
82,934
Operating expenses:
Compensation and benefits 26,020
25,974
53,869
52,484
Other operating expenses 17,965
18,079
35,284
35,074
Depreciation (exclusive of depreciation included in cost of sales) ⁽¹⁾
1,774
1,729
3,538
3,350
Total operating expenses 45,759
45,782
92,691
90,908
Operating loss (8,961 ) (5,696 ) (10,581 ) (7,974 )
Interest expense 66
65
131
126
Other income (270 ) (133 ) (601 ) (219 )
Loss before income taxes (8,757 ) (5,628 ) (10,111 ) (7,881 )
Income tax benefit (2,042 ) (1,856 ) (2,514 ) (2,674 )
Net loss $ (6,715 ) $ (3,772 ) $ (7,597 ) $ (5,207 )

Loss per share:
Basic $ (0.43 ) $ (0.24 ) $ (0.48 ) $ (0.33 )
Diluted $ (0.43 ) $ (0.24 ) $ (0.48 ) $ (0.33 )
Weighted average shares outstanding:
Basic 15,726
15,974
15,925
15,943
Diluted 15,726
15,974
15,925
15,943

⁽¹⁾ ~~Refer to Note 1 for information about a reclassification of supply-chain and store-related depreciation expense to cost of sales.~~



	13 Weeks Ended
	May 4,			May 5,
	2019			2018
Net sales	$	129,648		$	142,454
Cost of sales	83,456			85,565
Cost of sales related to merchandise purchased from related party vendor	9,973			11,577
Cost of sales	93,429			97,142
Gross profit	36,219			45,312
Operating expenses:
Compensation and benefits	27,056			27,849
Other operating expenses	18,134			17,319
Depreciation (exclusive of depreciation included in cost of sales)	1,839			1,764
Asset impairment	1,878			—
Total operating expenses	48,907			46,932
Operating loss	(12,688		)	(1,620		)
Interest expense	70			65
Other income	(328		)	(331		)
Loss before income taxes	(12,430		)	(1,354		)
Income tax benefit	(3,509		)	(472		)
Net loss	$	(8,921	)	$	(882	)

Loss per share:
Basic	$	(0.62	)	$	(0.06	)
Diluted	$	(0.62	)	$	(0.06	)
Weighted average shares outstanding:
Basic	14,372			15,808
Diluted	14,372			15,808

The accompanying notes are an integral part of these financial statements.

Table of Contents

KIRKLAND’S, INC.

CONDENSED CONSOLIDATED ~~STATEMENT~~STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except share data)

Common Stock Accumulated
Deficit Total
Shareholders’
Equity
Shares Amount
Balance at February 3, 2018 15,977,239
$ 167,501
$ (26,740 ) $ 140,761
Employee stock purchases 18,275
161
—
161
Exercise of stock options 167,526
23
—
23
Restricted stock issued 108,900
—
—
—
Net share settlement of stock options and restricted stock (137,478 ) (378 ) —
(378 )
Stock-based compensation expense —
891
—
891
Repurchase and retirement of common stock (392,644 ) —
(3,804 ) (3,804 )
Net loss —
—
(7,597 ) (7,597 )
Balance at August 4, 2018 15,741,818
$ 168,198
$ (38,141 ) $ 130,057



	Common Stock				Accumulated Deficit			Total Shareholders’ Equity
	Shares		Amount		Accumulated Deficit			Total Shareholders’ Equity
Balance at February 2, 2019	14,504,824		$	169,477	$	(38,677	)	$	130,800
Cumulative effect of change in accounting principle	—		—		(331		)	(331		)
Employee stock purchases	6,880		68		—			68
Stock-based compensation expense	—		560		—			560
Repurchase and retirement of common stock	(287,056	)	—		(2,368		)	(2,368		)
Net loss	—		—		(8,921		)	(8,921		)
Balance at May 4, 2019	14,224,648		$	170,105	$	(50,297	)	$	119,808



	Common Stock				Accumulated Deficit			Total Shareholders’ Equity
	Shares		Amount		Accumulated Deficit			Total Shareholders’ Equity
Balance at February 3, 2018	15,977,239		$	167,501	$	(26,740	)	$	140,761
Employee stock purchases	10,969		82		—			82
Exercise of stock options	20,834		23		—			23
Stock-based compensation expense	—		393		—			393
Repurchase and retirement of common stock	(315,548	)	—		(2,972		)	(2,972		)
Net loss	—		—		(882		)	(882		)
Balance at May 5, 2018	15,693,494		$	167,999	$	(30,594	)	$	137,405

The accompanying notes are an integral part of these financial statements.

Table of Contents

KIRKLAND’S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

26-Week Period Ended
August 4, July 29,
2018 2017
Cash flows from operating activities:
Net loss $ (7,597 ) $ (5,207 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment 14,390
13,035
Amortization of deferred rent (5,056 ) (3,744 )
Amortization of debt issue costs 27
27
Loss on disposal of property and equipment 177
120
Stock-based compensation expense 891
1,184
Deferred income taxes 1,283
1,869
Changes in assets and liabilities:
Inventories, net ⁽¹⁾
(14,211 ) 1,908
Prepaid expenses and other current assets ⁽¹⁾
(581 ) (480 )
Other noncurrent assets (732 ) (1,015 )
Accounts payable (3,067 ) (3,402 )
Accounts payable to related party vendor (776 ) (390 )
Income taxes refundable (9,427 ) (11,446 )
Accrued expenses and other current and noncurrent liabilities 2,162
6,149
Net cash used in operating activities (22,517 ) (1,392 )

Cash flows from investing activities:
Capital expenditures (18,282 ) (13,830 )
Net cash used in investing activities (18,282 ) (13,830 )

Cash flows from financing activities:
Cash used in net share settlement of stock options and restricted stock (378 ) (193 )
Proceeds received from employee stock option exercises 23
—
Employee stock purchases 161
172
Repurchase and retirement of common stock (3,804 ) —
Net cash used in financing activities (3,998 ) (21 )

Cash and cash equivalents:
Net decrease (44,797 ) (15,243 )
Beginning of the period 80,156
63,937
End of the period $ 35,359
$ 48,694

Supplemental schedule of non-cash activities:
Non-cash accruals for purchases of property and equipment $ 2,741
$ 1,037

⁽¹⁾ ~~Refer to Note 1 for information about a reclassification of supplies inventory from inventories, net, to prepaid expenses and other current assets.~~



	13 Weeks Ended
	May 4,			May 5,
	2019			2018
Cash flows from operating activities:
Net loss	$	(8,921	)	$	(882	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment	7,244			7,066
Amortization of debt issue costs	14			14
Asset impairment	1,878			—
Cumulative effect of change in accounting principle	(331		)	—
Loss on disposal of property and equipment	126			29
Stock-based compensation expense	560			393
Deferred income taxes	(3,623		)	212
Changes in assets and liabilities:
Inventories, net	(5,972		)	(1,909		)
Prepaid expenses and other current assets	935			244
Accounts payable	(7,748		)	(10,025		)
Accounts payable to related party vendor	1,570			277
Accrued expenses	(3,764		)	(4,033		)
Income taxes refundable	(13		)	(685		)
Operating lease assets and liabilities	(2,086		)	1,114
Other assets and liabilities	934			221
Net cash used in operating activities	(19,197		)	(7,964		)

Cash flows from investing activities:
Capital expenditures	(3,926		)	(11,083		)
Net cash used in investing activities	(3,926		)	(11,083		)

Cash flows from financing activities:
Proceeds received from employee stock option exercises	—			23
Employee stock purchases	68			82
Repurchase and retirement of common stock	(2,368		)	(2,972		)
Net cash used in financing activities	(2,300		)	(2,867		)

Cash and cash equivalents:
Net decrease	(25,423		)	(21,914		)
Beginning of the period	57,946			80,156
End of the period	$	32,523		$	58,242

Supplemental schedule of non-cash activities:
Non-cash accruals for purchases of property and equipment	$	2,097		$	2,212
Operating lease assets and liabilities recognized upon adoption of ASC 842	295,240			—
Increase of operating lease liabilities from new or modified leases	3,389			—

The accompanying notes are an integral part of these financial statements.

Table of Contents

KIRKLAND’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 - Description of Business and Basis of Presentation

Kirkland’s, Inc. (the “Company”) is a specialty retailer of home décor in the United States operating ~~426~~431 stores in 37 states as of ~~August~~May 4, ~~2018,~~2019, as well as an e-commerce enabled website, www.kirklands.com. The condensed 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.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and are presented in accordance with the requirements of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements. In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on ~~April 3, 2018.~~March 29, 2019.

It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than those at fiscal year-end. In addition, because of seasonality factors, the results of the Company’s operations for the 13-week ~~and 26-week periods~~period ended ~~August~~May 4, ~~2018~~2019 are not indicative of the results to be expected for any other interim period or for the entire fiscal year. The Company’s fiscal year ends on the Saturday closest to January 31, resulting in years of either 52 or 53 weeks.

The preparation of the condensed 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 condensed 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, ~~asset retirement obligations,~~ inventory reserves and self-insurance ~~reserves, income tax liabilities, stock-based compensation, employee bonus accruals, gift card breakage and contingent liabilities.~~reserves.

In the ~~fourth quarter~~first 13 weeks of fiscal ~~2017,~~2019, the Company ~~concluded that it was appropriate~~adopted lease accounting guidance as discussed in Note 10 and Note 12 to ~~classify supplies inventory in prepaid expenses and other current assets instead of inventories, net, in~~ the condensed consolidated financial statements. ~~The Company reclassified prior period amounts~~Adoption of the new lease accounting guidance had a material impact to ~~reflect this change. This~~the Company’s condensed consolidated balance sheets and related disclosures, and resulted in ~~$2.1~~the recording of additional right-of-use assets and lease liabilities of approximately $295.2 million ~~reclassified from inventories, net,~~as of the date of adoption. This guidance was applied using the optional transition method, which allowed the Company to ~~prepaid expenses and other current~~not recast comparative financial information but rather recognize a cumulative-effect adjustment to retained earnings as of the effective date in the period of adoption. An adjustment of $0.3 million was made to retained earnings as a result of right-of-use assets onthat were impaired upon the adoption of this guidance. See Note 11 to the condensed consolidated financial statements for further discussion. Consistent with the optional transition method, the financial information in the condensed consolidated balance ~~sheet as~~sheets prior to the adoption of ~~July 29, 2017,~~this new lease accounting guidance has not been adjusted and ~~$0.1 million reclassified from inventories, net,~~is therefore not comparable to ~~prepaid expense~~the current period presented. The standard did not materially impact the Company’s condensed consolidated statements of operations or cash flows. For additional information, including the required disclosures, related to the impact of adopting this standard, see Note 10 and Note 12 to the condensed consolidated financial statements.

Certain other ~~current assets~~amounts in the ~~changes in assets and liabilities~~fiscal 2018 operating activities section of the condensed consolidated ~~statements~~statement of cash flows ~~for~~have been reclassified to conform to the ~~26-week period ended July 29, 2017.~~fiscal 2019 presentation. These reclassifications had no effect on reported net loss.

~~Also, during~~The Company uses the ~~fourth quarter~~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 ~~fiscal 2017,~~goods based upon a historical breakage rate. In these circumstances, to the extent the Company ~~reclassified supply chain and store-related depreciation expense~~determines there is no requirement for remitting card balances to ~~cost~~government agencies under unclaimed property laws, such amounts are recognized in the consolidated statement of ~~sales whereas it was previously included in depreciation in its financial statements.~~ income as a component of net sales.

The ~~Company also reclassified prior period amounts to reflect this change. This reclassification increased cost of sales by approximately $4.9 million and $9.7 million~~table below sets forth selected gift card liability information (in thousands) for the ~~13-week~~periods indicated:



	May 4, 2019		February 2, 2019		May 5, 2018
Gift card liability, net of estimated breakage	$	11,962	$	13,032	$	10,460

Table of Contents

The table below sets forth selected gift card breakage and ~~26-week~~redemption information (in thousands) for the periods ~~ended July 29, 2017, respectively, with an equal and offsetting decrease to depreciation. This reclassification had no impact on net sales, operating loss, net loss or loss per share.~~indicated:



	13 Weeks Ended
	May 4, 2019		May 5, 2018
Gift card breakage revenue	$	279	$	287
Gift card redemptions recognized in the current period related to amounts included in the gift card contract liability balance as of the prior period	2,691		2,586

Note 2 - Income Taxes

An estimate of the annual effective tax rate is used at each interim period based on the facts and circumstances available at that time, while the actual effective tax rate is calculated at year-end. For the 13-week periods ended ~~August~~May 4, ~~2018~~2019 and ~~July 29, 2017,~~May 5, 2018, the Company recorded an income tax benefit of ~~23.3%~~28.2% and ~~33.0% of the loss before income taxes, respectively. For the 26-week periods ended August 4, 2018 and July 29, 2017, the Company recorded an income tax benefit of 24.9% and 33.9%~~34.9% of the loss before income taxes, respectively. The decrease in the tax rate for the 13-week ~~and 26-week periods~~period ended ~~August~~May 4, ~~2018~~2019 was primarily due to the ~~effect~~realization of discrete federal tax credits during the ~~U.S. Tax Cuts and Jobs Act,~~13-week period ended May 5, 2018, which ~~reduced~~increased the ~~U.S. federal corporate~~tax rate ~~from 35% to 21% effective as of January 1, 2018.~~in the prior year period.

~~Table of Contents~~

Note 3 - 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. Diluted loss per share reflects the potential dilution that could occur if options to purchase stock were exercised into common stock and if outstanding grants of restricted stock were vested. Stock options and restricted stock units that were not included in the computation of diluted loss per share, because to do so would have been antidilutive, were approximately ~~1.4~~1.5 million and ~~1.5~~1.4 million shares for ~~each of~~ the 13-week periods ended ~~August~~May 4, ~~2018~~2019 and ~~July 29, 2017, respectively, and 1.4 million and 1.5 million shares for each of the 26-week periods ended August 4,~~May 5, 2018, ~~and July 29, 2017,~~ respectively.

Note 4 - Fair Value of Financial Instruments

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, other current assets and accounts payable approximate fair value because of their short maturities. The Company also maintains The Executive Non-Qualified Excess Plan (the “Deferred Compensation Plan”). The Deferred Compensation Plan is funded, and the Company invests participant deferrals into trust assets, which are invested in a variety of mutual funds that are Level 1 inputs. The plan assets and plan liabilities are adjusted to fair value on a recurring basis. Deferred Compensation Plan assets and liabilities were approximately ~~$2.1 million, $2.2~~$1.8 million and $2.1 million as of ~~August~~May 4, ~~2018, February 3, 2018,~~2019 and ~~July 29, 2017,~~May 5, 2018, respectively, and were recorded in other assets and other liabilities in the condensed consolidated balance sheets.

Note 5 - Commitments and Contingencies

The Company was named as a defendant in a putative class action filed in April 2017 in the United States District Court for the Western District of Pennsylvania, Gennock v. Kirkland’s, Inc. The complaint alleges that the Company, in violation of federal law, published more than the last five digits of a credit or debit card number on customers’ receipts. The Company denies the material allegations of the complaint. On January 9, 2018, the District Court denied the Company’s motion to dismiss this matter. On January 31, 2018, the Court granted the Company’s motion to stay the proceedings in its case pending the Third Circuit’s decision in ~~Kamal v. J. Crew Group, Inc., No. 17-2345 (3d. Cir.). The~~ ~~J. Crew~~ ~~case presents the exact same standing issues as the Company’s case, but in~~ ~~J. Crew~~ ~~the defendant was granted its motion to dismiss at the trial court level. On appeal, the Third Circuit heard oral argument in the~~ ~~J. Crew~~ case on February 8, 2018, and a decision is expected this year. The Company continues to believe that the case is without merit and intends to continue to vigorously defend itself against the allegations. The matter is covered by insurance, and the Company does not believe that the case will have a material adverse effect on its consolidated financial condition, operating results or cash flows.

The Company has been 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 Federal Court, Central District of California, and trial is not yet set. The complaint alleges, on behalf of Miles and all other hourly Kirkland’s employees in California, various wage and hour violations. Kirkland’s denies the material allegations in the complaint and believes that its employment policies are generally compliant with California law. ~~The case is still relatively new, and neither party has conducted any material discovery at this time.~~To date, the parties have exchanged the court mandated initial disclosures. The Company believes the case 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 the Company’s consolidated financial condition, operating results or cash flows.

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Note 6 - Stock-Based Compensation

The Company maintains equity incentive plans under which it may grant non-qualified stock options, incentive stock options, restricted stock, restricted stock units, or stock appreciation rights to employees, non-employee directors and consultants. Compensation expense is recognized on a straight-line basis over the vesting periods of each grant. There have been no material changes in the assumptions used to compute compensation expense during the current quarter. The table below sets forth selected stock-based compensation information (in thousands, except share amounts) for the periods indicated:

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	13-Week Period Ended				26-Week Period Ended				13 Weeks Ended
	August 4, 2018		July 29, 2017		August 4, 2018		July 29, 2017		May 4, 2019		May 5, 2018
Stock-based compensation expense (included in compensation and benefits on the condensed consolidated statements of operations)	$	498	$	395	$	891	$	1,184	$	560	$	393
Stock options granted	157,700		245,000		157,700		245,000		430,493		—
Restricted stock units granted	110,900		122,500		110,900		122,500		215,245		—

Note 7 - Related Party Transactions

The Company has an agreement with a related party vendor to purchase merchandise inventory. The vendor is considered a related party for financial reporting purposes because its principal owner is the spouse of ~~one of~~ the Company’s ~~two~~ Vice ~~Presidents~~President of ~~Merchandising.~~Product Development and Trend. The table below sets forth selected results related to this vendor in dollars (in thousands) and percentages for the periods indicated:


	13-Week Period Ended						26-Week Period Ended						13 Weeks Ended
	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017			May 4, 2019			May 5, 2018
Related Party Vendor:
Purchases	$	13,086		$	12,389		$	24,522		$	24,078		$	13,400		$	11,436
Purchases as a percent of total merchandise purchases	20.1		%	22.9		%	20.3		%	22.3		%	24.1		%	20.5		%

Note 8 - Stock Repurchase Plan

On August 22, 2017, the Company announced that its Board of Directors authorized a stock repurchase plan providing for the purchase in the aggregate of up to $10 million of the Company’s outstanding common stock. This stock repurchase plan was completed during the third quarter of fiscal 2018. On September 24, 2018, the Company announced that its Board of Directors authorized a new stock repurchase plan providing for the purchase in the aggregate of up to $10 million of the Company’s outstanding common stock. Repurchases of shares will be 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 will be based on a variety of factors, including stock acquisition price, regulatory limitations and other market and economic factors. The stock repurchase plan does not require the Company to repurchase any specific number of shares, and the Company may terminate the repurchase plan at any time. As of May 4, 2019, the Company had approximately $1.3 million remaining under the current stock repurchase plan. The table below sets forth selected stock repurchase plan information (in thousands, except share amounts) for the periods indicated:

13-Week Period Ended 26-Week Period Ended
August 4, 2018 July 29, 2017 August 4, 2018 July 29, 2017
Shares repurchased and retired 77,096
—
392,644
—
Share repurchase cost $ 832
$ —
$ 3,804
$ —

~~As of August 4, 2018, the Company had approximately $5.6 million remaining under the plan.~~



	13 Weeks Ended
	May 4, 2019		May 5, 2018
Shares repurchased and retired	287,056		315,548
Share repurchase cost	$	2,368	$	2,972

Note 9 - ~~New Accounting Pronouncements~~Senior Credit Facility

~~New Accounting Pronouncements Recently Adopted~~

~~In May 2014,~~The Company is party to a Joinder and First Amendment to Amended and Restated Credit Agreement (the “Credit Agreement”) with Bank of America, N.A. as administrative agent and collateral agent, and the ~~Financial Accounting Standards Board~~lenders named therein (the ~~“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”~~“Lenders”). Under ASU 2014-09, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what it expects in exchange for the goods or services. ASU 2014-09 also requires more detailed disclosures to enable usersThe Credit Agreement includes a senior secured revolving credit facility of ~~financial statements to understand the nature, amount, timing,~~$75 million, a swingline availability of $10 million, a $25 million incremental accordion feature and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in ASU 2014-09 were effective for the Company at the beginning of its fiscal 2018 year. Companies that transitioned to this new standard could either retrospectively restate each prior reporting period or reflect the cumulative effect of initially applying the updates with an adjustment to retained earnings at thea maturity date of ~~adoption. The Company adopted this standard in~~February 2021. Borrowings under the ~~first quarter of fiscal 2018 using~~Credit Agreement bear interest at an annual rate equal to LIBOR plus a margin ranging from 125 to 175 basis points with no LIBOR floor, and the ~~modified retrospective method. The Company identified its loyalty program as~~fee paid to the area that was most affected by the new revenue recognition guidance. Additionally, the Company’s historical accounting for gift card breakage is consistent with the new revenue recognition guidance. The Company’s gift card liability, net of estimated breakage, was $10.4 million, $11.3 million and $8.6 million as of August 4, 2018, February 3, 2018 and July 29, 2017, respectively, which is included in accrued expensesLenders on the ~~condensed consolidated balance sheet. During~~unused portion of the 13-week period ended August 4, 2018, the Company recognized $2.0 million of gift card redemptions related to amounts included in the gift card contract liability balance of $10.5 million as of May 5, 2018.credit facility is 25 basis points per annum.

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~~During~~Borrowings under the ~~26-week period ended August 4, 2018,~~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 Credit Agreement may be declared immediately due and payable. The maximum availability under the facility is limited by a borrowing base formula which consists of a percentage of eligible inventory and eligible credit card receivables, less reserves.

The Company is subject to an Amended and Restated Security Agreement (the “Security Agreement”) with its Lenders. Pursuant to the Security Agreement, the Company ~~recognized $4.0 million~~pledged and granted to the administrative agent, for the benefit of ~~gift card redemptions related~~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 ~~amounts included~~secure the payment and performance of the obligations under the Credit Agreement.

As of May 4, 2019, the Company was in compliance with the covenants in the ~~gift card contract~~Credit Agreement, and there were no outstanding borrowings under the credit facility, with approximately $53.5 million available for borrowing.

Note 10 - 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 2029. Most of the retail store lease 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 variable components (e.g., real estate taxes and insurance costs) and variable non-lease components (e.g., common area maintenance). These variable payments are excluded from the calculation of the lease liability ~~balance~~and right-of-use asset. For leases where the lease and non-lease components are fixed, the Company has elected an accounting policy to account for lease and non-lease components as a single component. 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 ~~$11.3 million~~lease payments. For operating leases that commenced prior to the date of adoption of the new lease accounting guidance, the Company used the incremental borrowing rate that corresponded to the remaining lease term as of ~~February 3, 2018.~~ the date of adoption.

The ~~adoption~~Company’s classification of ~~this guidance did not have a material impact~~lease cost on the Company’s condensed consolidated ~~financial~~ statements of operations is as follows (in thousands):



	13 Weeks Ended ⁽¹⁾
	May 4, 2019
Cost of sales ⁽²⁾
Operating lease cost	$	13,588
Short-term lease cost	324
Variable lease cost	257
Total lease cost in cost of sales	$	14,169
Other operating expenses
Operating lease cost	$	730
Short-term lease cost	46
Total lease cost in other operating expenses	$	776


⁽¹⁾	Total lease cost for the 13-week period ended May 4, 2019 excludes expense for variable 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. Short-term lease cost is immaterial.


⁽²⁾	Cost of sales includes all distribution center lease costs and store occupancy-related lease cost.

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As of May 4, 2019, 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
2019 (excluding the 13 weeks ended May 4, 2019)	$	45,083
2020	62,907
2021	53,967
2022	44,890
2023	36,363
After 2023	93,196
Total lease payments ⁽¹⁾	336,406
Less: Interest	(55,971		)
Present value of lease liabilities	$	280,435

⁽¹⁾ Operating lease payments exclude $21.3 million of legally binding minimum lease payments for leases signed but not yet commenced for four new store leases and a logistics agreement with a third-party for storage, distribution and inventory management services including the lease of 200,000 square feet of distribution center space and related ~~disclosures.~~equipment.

The Company’s lease term and discount rate is as follows:



	May 4, 2019
Weighted-average remaining lease term (years)	6.5
Weighted-average discount rate	5.6	%

Cash paid for amounts included in the measurement of lease liabilities is as follows (in thousands):



	13 Weeks Ended
	May 4, 2019
Operating cash flows from operating leases	$	16,765

The Company adopted new lease accounting guidance as of the beginning of fiscal 2019 as discussed in Note 1 and Note 12, and as required, the following disclosure is provided for periods prior to adoption. As of February 2, 2019, 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
2019	$	67,354
2020	62,102
2021	53,164
2022	44,087
2023	35,606
Thereafter	91,629
Total minimum lease payments	$	353,942

Note 11 - Impairments

The Company evaluates the recoverability of the carrying amounts of long-lived 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 assets’ 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.

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In ~~May 2017,~~connection with the ~~FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope~~adoption of ~~Modification Accounting” (“ASU 2017-09”). This update provides guidance about~~the new lease accounting standard, the Company reviewed its store portfolio for possible impairment, as right-of-use assets are now included as part of the long-lived asset group that is evaluated for impairment. As a result of this review, eight stores were identified for which ~~changes~~the carrying amounts of the store assets were not expected to be recoverable. The Company recorded an adjustment to increase the ~~terms or conditions~~opening balance of ~~a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account~~accumulated deficit by approximately $0.3 million for the ~~effects~~cumulative effect of ~~a modification unless (a)~~the adoption of ASC 842 for right-of-use assets at six of the impaired stores. The Company also recorded an impairment charge totaling approximately $1.9 million for the first 13 weeks of fiscal 2019 for leasehold improvements, fixtures and equipment at eight stores, for which the carrying value exceed the fair value of these assets. In the current quarter, the Company shifted to estimating the fair value of long-lived fixed assets based on orderly liquidation value as the Company believes this method better reflects the fair value of the ~~modified award is~~assets. The Company previously used the ~~same as~~age-life method for calculating the fair value of the original award immediately before the original award is modified, (b) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified and (c) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments in ASU 2017-09 are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted, including adoption in any interim period, for public business entities for reporting periods for which financial statements have not been issued. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. The Company adopted this guidance in the first quarter of fiscal 2018. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

~~New Accounting Pronouncements Not Yet Adopted~~

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which supersedes the existing guidance for lease accounting, Leases (Topic 840) (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset for all leases. Lessor accounting remains largely unchanged. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted for all entities. A modified transition approach is required for all leases existing or entered into after the beginning of the earliest comparative period in the consolidated financial statements. The FASB has issued guidance which allows companies to record the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings. Under this transition method, companies may continue to report comparative periods under ASC 840, although they must also provide the required disclosures under ASC 840 for all periods presented under ASC 840. The Company is currently evaluating the impact of this new standard on its condensed consolidated financial statements and is anticipating a material impact on the Company’s consolidated financial statements because the Company is party to a significant number of lease contracts.

long-lived fixed assets.

Note 1012 - ~~Senior Credit Facility~~New Accounting Pronouncements

New Accounting Pronouncements Recently Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)”, which supersedes the existing guidance for lease accounting, Leases (Topic 840) (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset for both operating leases and finance leases on the balance sheet at the lease commencement date. For operating leases, the lessee would recognize a straight-line total lease expense, while for finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset. The Company currently only has operating leases. Lessor accounting remains largely unchanged, and the Company is not a lessor in any lease agreements. The guidance also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of cash flows arising from leases.

There have been multiple standard updates amending this guidance or providing corrections or improvements on issues in the guidance. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” which provides an optional transition method in addition to the existing modified retrospective transition method by allowing a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption. Under this transition method, companies may continue to report comparative periods under ASC 840, although they must also provide the required disclosures under ASC 840 for all periods presented under ASC 840. In January 2018, the FASB issued ASU 2018-01, “Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842.” This update permits an entity to elect an optional transition practical expedient to not evaluate land easements that exist or expired before the entity’s adoption of ASU 2016-02 and that were not accounted for as leases under previous lease guidance.

The Company ~~is party to a Joinder and First Amendment to Amended and Restated Credit Agreement (the “Credit Agreement”) with Bank of America, N.A.~~adopted this guidance as administrative agent and collateral agent, and the lenders named therein (the “Lenders”). The Credit Agreement includes a senior secured revolving credit facility of $75 million, a swingline availability of $10 million, a $25 million incremental accordion feature and a maturity date of February 2021. Borrowings under the Credit Agreement bear interest at an annual rate equal to LIBOR plus a margin ranging from 125 to 175 basis points with no LIBOR floor, and the fee paid to the Lenders on the unused portion of the ~~credit facility is 25 basis points per annum.~~

~~Borrowings under~~beginning of the ~~Credit Agreement are subject to certain conditions~~first 13 weeks of fiscal 2019, and ~~contain customary events~~as a part 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,that process, made the principal amount of any unpaid loans and all other obligations under the Credit Agreement may be declared immediately due and payable. The maximum availability under the facility is limited by a borrowing base formula which consists of a percentage of eligible inventory and eligible credit card receivables, less reserves.following elections:

The Company ~~is subject~~elected the optional transition method, which allows for the lessee to ~~an Amended and Restated Security Agreement (the “Security Agreement”) with its Lenders. Pursuant~~not recast comparative financial information but rather recognize a cumulative-effect adjustment to retained earnings as of the ~~Security Agreement,~~effective date in the period of adoption.

The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which, among other things, allowed the Company ~~pledged~~to carry forward its prior lease classification under ASC 840, not reassess whether expired or existing contracts contain leases and ~~granted~~not reevaluate initial direct costs for existing leases.

The Company did not elect the hindsight practical expedient for all leases.

The Company elected to make the ~~administrative agent,~~accounting policy election for short-term leases resulting in lease payments being recorded as an expense on a straight-line basis over 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~~lease term.

The majority of the Company’s ~~assets~~leases have variable non-lease components. For leases where the non-lease components are fixed, the Company has elected an accounting policy to ~~secure~~account for lease and non-lease components as a single component.

The Company elected the ~~payment and performance~~land easement practical expedient.

Adoption of the ~~obligations under~~new standard had a material impact on the ~~Credit Agreement.~~

AsCompany’s condensed consolidated balance sheets, statement of ~~August 4, 2018, the Company was in compliance with the covenants~~shareholders’ equity and related disclosures, and resulted in the ~~Credit Agreement,~~recording of additional right-of-use assets and ~~there were no outstanding borrowings under~~lease liabilities of approximately $295.2 million as of the ~~credit facility,~~date of adoption. Right-of-use assets are recorded based upon the present value of remaining operating lease liabilities adjusted for prepaid and deferred rent, including deferred construction allowances from landlords and initial direct costs. The Company also recorded an adjustment to increase the opening balance of accumulated deficit by approximately $0.3 million for the cumulative effect of the adoption of ASC 842 for right-of-use assets for stores with ~~approximately $62.4 million available for borrowing.~~

impairment

1012

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indicators at adoption. The standard did not materially impact the Company’s condensed consolidated statements of operations or cash flows.

In August 2018, the FASB issued ASU 2018-15, “Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is A Service Contract” (“ASU 2018-15”). This update clarifies the accounting treatment for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. This guidance is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The amendments may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted this guidance in the first 13 weeks of fiscal 2019 using the prospective adoption method. This guidance could have a material effect on future financial results depending on whether or not the Company implements new software as a service solutions with significant implementation costs, as they would be deferred and expensed over the term of the agreement. The adoption of this guidance did not have a material effect on the Company’s current consolidated financial statements and related disclosures.

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

Forward-Looking Statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide an understanding of our financial condition, change in financial condition, cash flow, liquidity and results of operations. The following MD&A discussion should be read in conjunction with the condensed consolidated financial statements and notes to those statements that appear elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended February ~~3, 2018,~~2, 2019, filed with the Securities and Exchange Commission on ~~April 3, 2018~~March 29, 2019 (the “Annual Report”). The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed or referred to in the forward-looking statements. Factors that could cause or contribute to any differences include, but are not limited to, those discussed under the caption “Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995” and under Part II, Item 1A - “Risk Factors”.

General

We are a specialty retailer of home décor in the United States, operating ~~426~~431 stores in 37 states as of ~~August~~May 4, ~~2018,~~2019, as well as an e-commerce enabled website, www.kirklands.com. Our stores present a broad selection of distinctive merchandise, including holiday décor, ~~framed~~furniture, art, ~~furniture,~~fragrance and accessories, ornamental wall décor, ~~fragrance and~~decorative accessories, mirrors, lamps, ~~decorative accessories,~~ textiles, ~~housewares, gifts,~~ artificial floral products, ~~frames, clocks and~~gifts, housewares, outdoor living ~~items.~~items, frames and clocks. Our stores offer an extensive assortment of holiday merchandise during seasonal periods as well as items carried throughout the year suitable for gift-giving. We provide our customers an engaging shopping experience characterized by a diverse, ever-changing merchandise selection reflecting current styles at prices which provide discernible value. This combination of ever-changing and stylish merchandise, value pricing and a stimulating online and store experience has led to our emergence as a leader in home décor and enabled us to develop a strong customer base.

Overview of 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, ~~gift card breakage revenue and~~net of returns, shipping revenue associated with e-commerce sales, ~~net of returns~~ and ~~excluding~~gift card breakage revenue and excludes sales taxes. We use comparable store sales to measure our ability to achieve sales increases from stores that have been open for at least 13 full fiscal months. Stores closed during the year are included in the comparable store sales calculation only for the full fiscal months of the year the stores were open. Relocated stores are removed from the comparable store base when the existing store closes, and the new replacement store is added into the comparable store sales calculation after 13 full fiscal months of activity. ~~The e-commerce~~E-commerce store sales, including shipping revenue, are included in consolidated comparable store sales. Increases in comparable store sales are an important factor in maintaining or increasing the profitability of existing stores.

Gross profit is the difference between net sales and cost of sales. Cost of sales has various distinct components including: product cost of sales (including inbound freight, damages and inventory shrinkage), store occupancy costs (including rent and depreciation of leasehold improvements and other property and equipment), outbound freight costs (including e-commerce shipping) and central distribution costs (including operational costs and depreciation of leasehold improvements and other property and equipment). Product and outbound freight costs are variable, while occupancy and central distribution costs are largely fixed.

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Accordingly, gross profit expressed as a percentage of net sales can be influenced by many factors including overall sales performance.

Store Growth

The following table summarizes our store openings and closings during the periods indicated:

13-Week Period Ended 26-Week Period Ended
August 4, 2018 July 29, 2017 August 4, 2018 July 29, 2017
New stores opened during the period 6
8
16
16
Stores closed during the period 5
3
8
14

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	13 Weeks Ended
	May 4, 2019	May 5, 2018
New stores opened during the period	3	10
Stores closed during the period	—	3

The following table summarizes our stores and square footage under lease:


	August 4, 2018	July 29, 2017	May 4, 2019	May 5, 2018
Number of stores	426	406	431	425
Square footage	3,372,584	3,198,651	3,429,577	3,356,548
Average square footage per store	7,917	7,878	7,957	7,898

13-Week Period Ended ~~August~~May 4, ~~2018~~2019 Compared to the 13-Week Period Ended ~~July 29, 2017~~May 5, 2018

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


	13-Week Period Ended															13 Weeks Ended
	August 4, 2018					July 29, 2017					Change					May 4, 2019					May 5, 2018					Change
	$			%		$			%		$			%		$			%		$			%		$			%
Net sales	$	133,899		100.0	%	$	131,683		100.0	%	$	2,216		1.7	%	$	129,648		100.0	%	$	142,454		100.0	%	$	(12,806	)	(9.0	)%
Cost of sales	97,101			72.5		91,597			69.6		5,504			6.0		93,429			72.1		97,142			68.2		(3,713		)	(3.8	)
Gross profit	36,798			27.5		40,086			30.4		(3,288		)	(8.2	)	36,219			27.9		45,312			31.8		(9,093		)	(20.1	)
Operating expenses:
Compensation and benefits	26,020			19.5		25,974			19.7		46			0.2		27,056			20.9		27,849			19.5		(793		)	(2.8	)
Other operating expenses	17,965			13.4		18,079			13.7		(114		)	(0.6	)	18,134			14.0		17,319			12.2		815			4.7
Depreciation (exclusive of depreciation included in cost of sales)	1,774			1.3		1,729			1.3		45			2.6		1,839			1.4		1,764			1.2		75			4.3
Asset impairment																1,878			1.4		—			—		1,878			100.0
Total operating expenses	45,759			34.2		45,782			34.7		(23		)	(0.1	)	48,907			37.7		46,932			32.9		1,975			4.2
Operating loss	(8,961		)	(6.7	)	(5,696		)	(4.3	)	(3,265		)	57.3		(12,688		)	(9.8	)	(1,620		)	(1.1	)	(11,068		)	683.2
Interest expense	66			—		65			0.1		1			1.5		70			0.1		65			—		5			7.7
Other income	(270		)	(0.2	)	(133		)	(0.1	)	(137		)	103.0		(328		)	(0.3	)	(331		)	(0.2	)	3			(0.9	)
Loss before income taxes	(8,757		)	(6.5	)	(5,628		)	(4.3	)	(3,129		)	55.6		(12,430		)	(9.6	)	(1,354		)	(0.9	)	(11,076		)	818.0
Income tax benefit	(2,042		)	(1.5	)	(1,856		)	(1.4	)	(186		)	10.0		(3,509		)	(2.7	)	(472		)	(0.3	)	(3,037		)	643.4
Net loss	$	(6,715	)	(5.0	)%	$	(3,772	)	(2.9	)%	$	(2,943	)	78.0	%	$	(8,921	)	(6.9	)%	$	(882	)	(0.6	)%	$	(8,039	)	911.5	%

Net sales. Net sales ~~increased 1.7%~~decreased 9.0% to ~~$133.9~~$129.6 million for the ~~second quarter~~first 13 weeks of fiscal ~~2018~~2019 compared to ~~$131.7~~$142.5 million for the ~~prior-year~~prior year period. ~~The~~Comparable store sales, including e-commerce sales, decreased 10.7%, or $14.6 million for the first 13 weeks of fiscal 2019 compared to the prior year period. This was partially offset by the impact of net new store growth, which contributed an increase in net sales of ~~$7.2~~$1.8 million. ~~This was partially offset by a decrease in comparable store sales, including e-commerce sales, of 3.9%, or $5.0 million for the second quarter of fiscal 2018 compared to the prior-year period.~~ Comparable store sales, including e-commerce sales, increased ~~1.2%~~1.4% in the ~~prior-year~~prior year period. For the ~~second quarter~~first 13 weeks of fiscal ~~2018,~~2019, e-commerce comparable sales increased ~~14.5%~~10.7% versus the ~~prior-year~~prior year period, while comparable store sales at brick-and-mortar stores decreased ~~6.3% versus the prior-year period.~~13.9%. For brick-and-mortar stores, the comparable store sales decrease was primarily due to a decrease in transactions ~~partially offset by an increase in~~resulting from lower store traffic and a lower average ticket. The decreased transactions resulted from a decline in traffic combined with a slight decrease in conversion. The increase in average ticket resulted from an increase in average retail price partially offset by a decrease in items per transaction. For e-commerce, comparable sales benefited from an increase in transactions due to higher website traffic, ~~while average ticket increased slightly, driven by an increase in average retail price~~ partially offset by a decrease in average ticket due to decreases in both average retail price and items per transaction. The merchandise categories contributing most to the

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comparable store sales decrease for the ~~second quarter~~first 13 weeks of fiscal ~~2018~~2019 were art, decorative accessories, ornamental wall décor, ~~mirrors,~~lamps and housewares, ~~and lamps,~~ which were partially offset by increases in floral ~~fragrance~~ and ~~accessories, and holiday.~~holiday décor.

Gross profit. Gross profit as a percentage of net sales decreased ~~290~~390 basis points from ~~30.4%~~31.8% in the ~~second quarter~~first 13 weeks of fiscal ~~2017~~2018 to ~~27.5%~~27.9% in the ~~second quarter~~first 13 weeks of fiscal ~~2018.~~2019. The overall decrease in gross profit margin was due to higher store occupancy ~~and depreciation expenses,~~costs, lower merchandise margin, higher outbound freight ~~expense~~costs and higher central distribution ~~center expenses, as well as lower merchandise margin.~~expenses. Store occupancy ~~and depreciation~~ costs increased approximately ~~190~~180 basis points as a percentage of net sales, primarily due to ~~a $1.2 million one-time out-of-period adjustment of ancillary rent payments to prepaid expenses and other current assets~~sales deleverage. Merchandise margin decreased approximately 130 basis points from 56.0% in the ~~prior-year period, as well as deleverage from negative brick-and-mortar comparable store sales.~~first 13 weeks of fiscal 2018 to 54.7% in the first 13 weeks of fiscal 2019 due to unfavorable product margin due to increased promotions, unfavorable shrink results and higher inbound freight costs, partially offset by favorable damages results. Outbound freight costs, which include e-commerce shipping, increased approximately 6050 basis points as a percentage of net sales, which was driven by ~~an increase in e-commerce~~deleverage of distribution center to store shipping ~~costs due to the further expansion of this channel, which is expected to continue.~~costs. Central distribution costs ~~including depreciation,~~ increased 2030 basis points as a percentage of net sales, primarily due to ~~the comparable~~ sales deleverage.

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Merchandise margin decreased approximately 20 basis points from 53.4% in the second quarter of fiscal 2017 to 53.2% in the second quarter of fiscal 2018 due to higher inbound freight costs driven by rate pressure and higher shrink costs due to favorable physical inventory results in the prior-year period, which was partially offset by better product margin driven by higher initial retail prices, more strategic promotional activity and the elimination of coupon stacking on our clearance category.

Compensation and benefits. Compensation and benefits as a percentage of net sales ~~decreased~~increased approximately 20140 basis points from ~~19.7% in the second quarter of fiscal 2017 to~~ 19.5% in the ~~second quarter~~first 13 weeks of fiscal 2018 ~~as a result~~to 20.9% in the first 13 weeks of ~~lower~~fiscal 2019, primarily due to sales deleverage of both store and corporate payroll ~~expense due to a higher rate of internal salary capitalization for corporate projects and lower employee benefit expenses, partially offset by higher stock compensation expense.~~expenses.

Other operating expenses. Other operating expenses as a percentage of net sales ~~decreased~~increased approximately 30180 basis points from ~~13.7%~~12.2% in the ~~second quarter~~first 13 weeks of fiscal ~~2017~~2018 to ~~13.4%~~14.0% in the ~~second~~first 13 weeks of fiscal ~~quarter of 2018.~~2019. The ~~decrease~~increase as a percentage of net sales was primarily due to ~~cost control initiatives.~~increased advertising and store repair and maintenance expenses.

Asset impairment. In connection with the adoption of the new lease accounting guidance at the beginning of fiscal 2019, we reviewed our store portfolio for possible impairment of long-lived assets. In connection with this review, we changed our method of estimating the fair value of long-lived assets. As a result of this review, eight stores were identified for which the carrying amounts of store long-lived assets were not expected to be recoverable. We recorded an impairment charge totaling approximately $1.9 million for the first 13 weeks of fiscal 2019 for leasehold improvements, fixtures and equipment at eight stores, for which the carrying value exceed the fair value of these assets.

Income tax benefit. We recorded an income tax benefit of approximately ~~$2.0~~$3.5 million, or ~~23.3%~~28.2% of the loss before income taxes during the ~~second quarter~~first 13 weeks of fiscal ~~2018,~~2019, compared to an income tax benefit of approximately ~~$1.9~~$0.5 million, or ~~33.0%~~34.9% of the loss before income taxes during the ~~prior-year quarter.~~prior year period. The decrease in the tax rate for the ~~second quarter~~first 13 weeks of fiscal ~~2018~~2019 compared to the ~~prior-year quarter~~prior year period was primarily due to the ~~effect~~realization of discrete federal tax credits during the ~~U.S. Tax Cuts and Jobs Act,~~13-week period ended May 5, 2018, which ~~reduced~~increased the ~~U.S. federal corporate~~tax rate ~~from 35% to 21% effective as of January 1, 2018.~~in the prior year period.

Net loss and loss per share. We reported a net loss of ~~$6.7~~$8.9 million, or ~~$0.43~~$0.62 per diluted share, for the ~~second quarter~~first 13 weeks of fiscal ~~2018~~2019 as compared to a net loss of ~~$3.8~~$0.9 million, or ~~$0.24~~$0.06 per diluted share, for the ~~second quarter~~first 13 weeks of fiscal ~~2017.~~ 2018.

Adjusted net loss and adjusted loss per share. To supplement our unaudited consolidated condensed financial statements presented in accordance with generally accepted accounting principles, or GAAP, we provide certain non-GAAP financial measures, including adjusted loss and adjusted diluted loss per share. These measures are not in accordance with, and are not intended as alternatives to, GAAP. 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 measures, in evaluating our operational performance.

We define adjusted net loss and adjusted diluted loss per share by adjusting the applicable GAAP measure to remove the impact of special items.

Non-GAAP 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 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.

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The following table shows a reconciliation net loss and diluted loss per share to adjusted net loss and adjusted diluted loss per share for the 13 weeks ended May 4, 2019 and May 5, 2018:



	13 Weeks Ended
	May 4, 2019			May 5, 2018
Net loss	$	(8,921	)	$	(882	)
Special Items:
CEO transition costs, net of tax	—			810
Asset impairment, net of tax	1,350			—
Adjusted net loss	$	(7,571	)	$	(72	)

Diluted loss per share	$	(0.62	)	$	(0.06	)
Adjusted diluted loss per share	$	(0.53	)	$	—

Diluted weighted average shares outstanding	14,372			15,808

Included in the reported net loss for the ~~second quarter~~first 13 weeks of fiscal 2019 are asset impairment charges of approximately $1.4 million, net of tax, which increased the net loss for the first 13 weeks of fiscal 2019 by approximately $0.09 per diluted share. Included in the reported net loss for the first 13 weeks of fiscal 2018 are severance and transition charges of approximately ~~$347,000,~~$810,000, net of tax, associated with ~~the resignation of~~ our ~~former~~ Chief Executive ~~Officer. These charges increased the net loss for the second quarter of fiscal 2018 by approximately $0.03 per diluted share.~~

~~26-Week Period Ended August 4, 2018 Compared to the 26-Week Period Ended July 29, 2017~~

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

26-Week Period Ended
August 4, 2018 July 29, 2017 Change
$ % $ % $ %
Net sales $ 276,353
100.0 % $ 264,524
100.0 % $ 11,829
4.5 %
Cost of sales 194,243
70.3
181,590
68.6
12,653
7.0
Gross profit 82,110
29.7
82,934
31.4
(824 ) (1.0 )
Operating expenses:
Compensation and benefits 53,869
19.4
52,484
19.8
1,385
2.6
Other operating expenses 35,284
12.8
35,074
13.3
210
0.6
Depreciation (exclusive of depreciation included in cost of sales) 3,538
1.3
3,350
1.3
188
5.6
Total operating expenses 92,691
33.5
90,908
34.4
1,783
2.0
Operating loss (10,581 ) (3.8 ) (7,974 ) (3.0 ) (2,607 ) 32.7
Interest expense 131
—
126
0.1
5
4.0
Other income (601 ) (0.2 ) (219 ) (0.1 ) (382 ) 174.4
Loss before income taxes (10,111 ) (3.6 ) (7,881 ) (3.0 ) (2,230 ) 28.3
Income tax benefit (2,514 ) (0.9 ) (2,674 ) (1.0 ) 160
(6.0 )
Net loss $ (7,597 ) (2.7 )% $ (5,207 ) (2.0 )% $ (2,390 ) 45.9 %

~~Net sales.~~ Net sales increased 4.5% to $276.4 million for the first half of fiscal 2018 compared to $264.5 million for the prior-year period. The impact of net new store growth contributed an increase in net sales of $15.0 million. This was partially offset by a decrease in comparable store sales, including e-commerce sales, of 1.2%, or $3.2 million for the first half of fiscal 2018 compared to the prior-year period. Comparable store sales, including e-commerce sales, decreased 1.4% in the prior-year period. For the

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first half of fiscal 2018, e-commerce comparable sales increased 25.8% versus the prior-year period, while comparable store sales at brick-and-mortar stores decreased 4.5%. For brick-and-mortar stores, the comparable store sales decrease was primarily due to a decrease in transactions partially offset by an increase in average ticket. The decreased transactions resulted primarily from a decline in traffic. The increase in average ticket resulted from an increase in average retail price partially offset by a decrease in items per transaction. For e-commerce, comparable sales benefited from an increase in transactions due to higher website traffic, while average ticket increased slightly with average retail price increases offset by decreases in items per transaction. The merchandise categories contributing most to the comparable store sales decrease for the first half of fiscal 2018 were mirrors, housewares, ornamental wall décor and lamps, which were partially offset by increases in floral, fragrances and accessories, and furniture.

~~Gross profit~~. Gross profit as a percentage of net sales decreased 170 basis points from 31.4% in the first half of fiscal 2017 to 29.7% in the first half of fiscal 2018. The overall decrease in gross profit margin was due to higher store occupancy and depreciation expenses, outbound freight and central distribution expenses, partially offset by higher merchandise margin. Store occupancy and depreciation costs decreased approximately 100 basis points as a percentage of net sales, primarily from a $1.2 million one-time out-of-period adjustment of ancillary rent payments to prepaid expenses and other current assets in the prior-year period, as well as deleverage from negative brick-and-mortar comparable store sales. Outbound freight costs, which include e-commerce shipping, increased approximately 60 basis points as a percentage of net sales, which was driven by an increase in e-commerce shipping costs due to the further expansion of this channel, which is expected to continue. Central distribution costs, including depreciation, increased 10 basis points as a percentage of net sales due to the deleverage of comparable store sales. Merchandise margin increased approximately 10 basis points from 54.5% in the first half of fiscal 2017 to 54.6% in the first half of fiscal 2018 due to higher initial retail prices, more strategic promotional activity and the elimination of coupon stacking on our clearance category, partially offset by higher inbound freight costs due to rate pressure and higher shrink costs due to favorable physical inventory results in the prior-year period.

~~Compensation and benefits.~~ Compensation and benefits as a percentage of net sales decreased approximately 40 basis points from 19.8% in the first half of fiscal 2017 to 19.4% in the first half of fiscal 2018 as a result of a higher rate of internal salary capitalization for corporate projects and lower stock-based compensation expense due to forfeitures, partially offset by severance and transition charges associated with the resignation of our former Chief Executive Officer.

~~Other operating expenses~~. Other operating expenses as a percentage of net sales decreased approximately 50 basis points from 13.3% in the first half of fiscal 2017 to 12.8% in the first half of 2018. The decrease as a percentage of net sales was primarily due to cost control initiatives and favorable self-insured workers’ compensation and general liability results.

~~Income tax benefit.~~ We recorded an income tax benefit of approximately $2.5 million, or 24.9% of the loss before income taxes during the first half of fiscal 2018, compared to an income tax benefit of approximately $2.7 million, or 33.9% of the loss before income taxes during the prior-year period. The decrease in the tax rate for the first half of fiscal 2018 compared to the prior-year period was primarily due to the effect of the U.S. Tax Cuts and Jobs Act, which reduced the U.S. federal corporate rate from 35% to 21% effective as of January 1, 2018.

~~Net loss and loss per share.~~ ~~We reported a net loss of $7.6 million, or $0.48~~ per diluted share, for the first half of fiscal 2018 as compared to a net loss of $5.2 million, or $0.33 per diluted share, for the first half of fiscal 2017. Included in the reported net loss for the first half of fiscal 2018 are severance and transition charges of approximately $1.2 million, net of tax, associated with the resignation of our former Chief Executive Officer.Officer transition. These charges increased the net loss for the first ~~half~~13 weeks of fiscal 2018 by approximately ~~$0.08~~$0.06 per diluted share.

Liquidity and Capital Resources

Our principal capital requirements are for working capital and capital expenditures. Working capital consists mainly of merchandise inventories offset by accounts payable, which typically reach their peak by the early portion of the fourth quarter of each fiscal year. Capital expenditures primarily relate to new store openings; ~~existing store expansions, remodels or relocations; and~~ purchases of equipment or information technology assets for our stores (including e-commerce), distribution facilities and corporate ~~headquarters.~~headquarters; and existing store expansions, remodels or relocations. Historically, we have funded our working capital and capital expenditure requirements with ~~internally generated~~internally-generated cash.

Cash flows from operating activities. Net cash used in operating activities was approximately ~~$22.5~~$19.2 million during the first ~~half~~13 weeks of fiscal ~~2018~~2019 as compared to net cash used in operating activities of approximately ~~$1.4~~$8.0 million for the first ~~half~~13 weeks of fiscal ~~2017.~~2018. Cash flows from operating activities depend heavily on operating performance and changes in working capital. The change in the amount of cash from operations as compared to the ~~prior-year~~prior year period was primarily due to ~~the timing of inventory purchases~~a decline in operating performance.

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~~and accrued expenses and other noncurrent liabilities. Cash used for inventory purchases increased from the prior-year period due to the earlier receipt of fall seasonal merchandise.~~

Cash flows from investing activities. Net cash used in investing activities for the first ~~half~~13 weeks of fiscal ~~2018~~2019 consisted of ~~$18.3~~$3.9 million in capital expenditures as compared to ~~$13.8~~$11.1 million in capital expenditures for the ~~prior-year~~prior year period. The table below sets forth capital expenditures by category (in thousands) for the periods indicated:



	13 Weeks Ended
	May 4, 2019		May 5, 2018
New stores	$	1,646	$	5,750
Technology and omni-channel projects	994		1,583
Distribution center and supply chain enhancements	794		554
Existing stores	414		655
Corporate	78		2,541
Total capital expenditures	$	3,926	$	11,083

The capital expenditures in the current year period related primarily to the opening of 16three new stores during the period, ~~investments in~~ information technology ~~systems, hardware lease buyouts~~system investments, and ~~investments in our existing stores~~distribution center and ~~supply-chain.~~supply chain enhancements. Capital expenditures in the ~~prior-year~~prior year period related primarily to the opening of 1610 new stores during the period, hardware lease buyouts, improvements to our supply-chain and information technology system investments and investments in our existing ~~stores, improvements to our supply chain and information technology system investments.~~stores. We expect that capital expenditures for fiscal ~~2018~~2019 will be in the range of ~~$26~~$21 to ~~$29 million, primarily~~$23 million. Over half of our fiscal 2019 expenditures are expected to

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support our omni-channel and supply chain capabilities focused on long-term revenue and profitability growth. Based on the decrease in fiscal 2019 of new store openings, capital expenditures for ~~the purpose of leasehold improvements at~~ new stores ~~and investments in supply chain and omni-channel technologies.~~are expected to be approximately $3.5 million for fiscal 2019.

Cash flows from financing activities. Net cash used in financing activities was approximately ~~$4.0~~$2.3 million for the first ~~half~~13 weeks of fiscal ~~2018 and~~2019 compared to $2.9 million for the first 13 weeks of fiscal 2018. In each fiscal year, net cash used in financing activities was primarily related to the repurchase and retirement of common stock pursuant to our stock repurchase plan, ~~and net share settlement of stock options and restricted stock,~~ slightly offset by employee stock purchases. Net cash used in financing activities was approximately $21,000 for the first half of fiscal 2017, and was related to net share settlement of stock options and restricted stock, partially offset by employee stock purchases.

Senior credit facility. We are party to the Credit Agreement with Bank of America, N.A. as administrative agent and collateral agent, and the Lenders. The Credit Agreement includes a senior secured revolving credit facility of $75 million, a swingline availability of $10 million, a $25 million incremental accordion feature and a maturity date of February 2021. Borrowings under the Credit Agreement bear interest at an annual rate equal to LIBOR plus a margin ranging from 125 to 175 basis points with no LIBOR floor, and the fee paid to the Lenders on the unused portion of the credit facility is 25 basis points per annum.

Borrowings under the 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 Credit Agreement may be declared immediately due and payable. The maximum availability under the facility is limited by a borrowing base formula which consists of a percentage of eligible inventory and eligible credit card receivables, less reserves.

We are subject to a Security Agreement with our Lenders. Pursuant to the Security Agreement, we pledged and granted to the administrative agent, for the benefit of itself and the secured parties specified therein, a lien on and security interest in all of the rights, title and interest in substantially all of our assets to secure the payment and performance of the obligations under the Credit Agreement.

As of ~~August~~May 4, ~~2018,~~2019, we were in compliance with the covenants in the Credit Agreement, and there were no outstanding borrowings under the credit facility, with approximately ~~$62.4~~$53.5 million available for borrowing.

At ~~August~~May 4, ~~2018,~~2019, our balance of cash and cash equivalents was approximately ~~$35.4~~$32.5 million. We do not anticipate any borrowings under the credit facility during fiscal ~~2018.~~2019. We believe that the combination of our cash balances and cash flow from operations will be sufficient to fund our planned capital expenditures and working capital requirements for at least the next twelve months.

Stock repurchase plan. On August 22, 2017, we announced that our Board of Directors authorized a stock repurchase plan providing for the purchase in the aggregate of up to $10 million of our outstanding common stock. This stock repurchase plan was completed during the third quarter of fiscal 2018. On September 24, 2018, the Company announced that its Board of Directors authorized a new stock repurchase plan providing for the purchase in the aggregate of up to $10 million of the Company’s outstanding common stock. Repurchases of shares will be 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 will be based on a variety of factors, including stock acquisition price, regulatory limitations and other market and economic factors. The stock repurchase plan does not require us to repurchase any specific number of shares, and we may terminate the repurchase plan at any time. As of May 4, 2019, we had approximately $1.3 million remaining under our current stock repurchase plan. The table below sets forth selected stock repurchase plan information (in thousands, except share amounts) for the periods indicated:

~~As of August 4, 2018, we had approximately $5.6 million remaining under our plan.~~



	13 Weeks Ended
	May 4, 2019		May 5, 2018
Shares repurchased and retired	287,056		315,548
Share repurchase cost	$	2,368	$	2,972

1517

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Related Party Transactions

We have an agreement with a related party vendor to purchase merchandise inventory. The vendor is considered a related party for financial reporting purposes because its principal owner is the spouse of ~~one~~our Vice President of ~~our two Vice Presidents of Merchandising.~~Product Development and Trend. The table below sets forth selected results related to this vendor in dollars (in thousands) and percentages for the periods indicated:


	13-Week Period Ended						26-Week Period Ended						13 Weeks Ended
	August 4, 2018			July 29, 2017			August 4, 2018			July 29, 2017			May 4, 2019			May 5, 2018
Related Party Vendor:
Purchases	$	13,086		$	12,389		$	24,522		$	24,078		$	13,400		$	11,436
Purchases as a percent of total merchandise purchases	20.1		%	22.9		%	20.3		%	22.3		%	24.1		%	20.5		%
Cost of sales	10,336			11,004			21,913			20,610			$	9,973		$	11,577
Payable amounts outstanding at fiscal period-end	6,747			4,618			6,747			4,618			9,736			7,800

Significant Contractual Obligations and Commercial Commitments

Construction Commitments. As of ~~August~~May 4, ~~2018,~~2019, the Company had no material commitments related to construction projects extending greater than 12 months.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies during fiscal ~~2018.~~2019 other than the change in calculation of the fair value of long-lived assets as discussed in Note 11 to the condensed consolidated financial statements. Refer to the Annual Report for a summary of our critical accounting policies.

New Accounting Pronouncements

See Note 12, New Accounting Pronouncements, to the condensed consolidated financial statements for recently adopted accounting pronouncements.

Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995

The following information is provided pursuant to the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995. Certain statements under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q are “forward-looking statements” made pursuant to these provisions. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Words such as “should,” “likely to,” “forecasts,” “strategy,” “goal,” “anticipates,” “believes,” “expects,” “estimates,” “intends,” “plans,” “projects,” and similar expressions, may identify such forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from the results projected in such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

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

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

We caution readers that the following important factors, among others, have in the past, in some cases, affected and could in the future affect our actual results of operations and cause our actual results to differ materially from the results expressed in any forward-looking statements made by us or on our behalf.

If we do not generate sufficient cash flow, we may not be able to implement our growth strategy.

If we are unable to profitably open and operate new stores at a rate that exceeds planned store closings, we may not be able to adequately execute our growth strategy, resulting in a decrease in net sales and net income.

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Our success depends upon our marketing, advertising and promotional efforts. If we are unable to implement them successfully, or if our competitors market, advertise or promote more effectively than we do, our revenue may be adversely affected.

We may not be able to successfully anticipate consumer trends, and our failure to do so may lead to loss of consumer acceptance of our products resulting in reduced net sales.

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We may not be able to successfully respond to technological change, our website could become obsolete and our financial results and conditions could be adversely affected.

Inventory loss and theft and the inability to anticipate inventory needs may result in reduced net sales.

Inability to successfully develop and maintain a relevant and reliable omni-channel experience for our customers could adversely affect our sales, results of operations and reputation.

Our results could be negatively impacted if our merchandise offering suffers a substantial impediment to its reputation due to real or perceived quality issues.

We face an extremely competitive specialty retail business market, and such competition could result in a reduction of our prices and a loss of our market share.

Weather conditions could adversely affect our sales and/or profitability by affecting consumer shopping patterns.

We are exposed to the risk of natural disasters, pandemic outbreaks, global political events, war and terrorism that could disrupt our business and result in lower sales, increased operating costs and capital expenditures.

Our performance may be affected by general economic conditions.

Our profitability is vulnerable to inflation and cost increases.

Our business is highly seasonal and our fourth quarter contributes a disproportionate amount of our net sales, net income and cash flow, and any factors negatively impacting us during our fourth quarter could reduce our net sales, net income and cash flow, leaving us with excess inventory and making it more difficult for us to finance our capital requirements.

Failure to control merchandise returns could negatively impact the business.

We may experience significant variations in our quarterly results.

Our comparable store net sales fluctuate due to a variety of factors.

Our freight costs and thus our cost of goods sold are impacted by changes in fuel prices.

New legal requirements could adversely affect our operating results.

~~The Tax Cuts and Jobs Act could have material effects on the Company.~~

Litigation may adversely affect our business, financial condition, results of operations or liquidity.

Product liability claims could adversely affect our reputation.

If we fail to protect our brand name, competitors may adopt trade names that dilute the value of our brand name.

Failure to protect the integrity and security of individually identifiable data of our customers and employees could expose us to litigation and damage our reputation; the expansion of our e-commerce Business has inherent cybersecurity risks that may result in business disruptions.

Our hardware and software systems are vulnerable to damage that could harm our business.

We depend on a number of vendors to supply our merchandise, and any delay in merchandise deliveries from certain vendors may lead to a decline in inventory which could result in a loss of net sales.

We are dependent on foreign imports for a significant portion of our merchandise, and any changes in the trading relations and conditions between the United States and the relevant foreign countries may lead to a decline in inventory resulting in a decline in net sales, or an increase in the cost of sales resulting in reduced gross profit.

Our success is highly dependent on our planning and control processes and our supply chain, and any disruption in or failure to continue to improve these processes may result in a loss of net sales and net income.

We depend on key personnel, and, if we lose the services of any member of our senior management team, ~~and are unable to replace them with qualified individuals on a timely basis,~~ we may not be able to run our business effectively.

Our charter and bylaw provisions and certain provisions of Tennessee law may make it difficult in some respects to cause a change in control of Kirkland’s and replace incumbent management.

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If we fail to maintain an effective system of internal control, we may not be able to accurately report our financial results.

The market price for our common stock might be volatile and could result in a decline in the value of your investment.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company does not utilize financial instruments for trading or other speculative purposes, nor does it utilize leveraged financial instruments. There have been no material changes in the market risk factors from those disclosed in the Company’s Form 10-K for the year ended February ~~3, 2018.~~2, 2019.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Both our ~~Acting~~ Chief Executive Officer and Interim Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15(d)-(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) have concluded that as of ~~August~~May 4, ~~2018~~2019 our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in reports filed or submitted under 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 is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Change in internal controls over financial reporting. We adopted the new lease accounting standard under ASC 842 as of February 3, 2019 (see Note 10 and Note 12). As a result, we modified internal controls over financial reporting related to ASC 842. There have been no other changes in internal controls over financial reporting identified in connection with the foregoing evaluation that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

In addition to factors set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Statement for Purposes of the ‘Safe Harbor’ Provisions of the Private Securities Litigation Reform Act of 1995,” in Part I - Item 2 of this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Annual Report on Form 10-K for the fiscal year ended February ~~3, 2018,~~2, 2019, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Shares of common stock repurchased by the Company during the ~~second quarter~~first 13 weeks of fiscal ~~2018,~~2019, ended ~~August~~May 4, ~~2018,~~2019, were as follows:

													Issuer Repurchases of Equity Securities

Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Dollar Value of Shares that May Yet be Purchased Under the Program (in 000s)		Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Maximum Dollar Value of Shares that May Yet be Purchased Under the Program (in 000s)
May 6, 2018 to June 2, 2018	54,196	$	10.52	54,196	$	5,854
June 3, 2018 to July 7, 2018	4,000	11.80		4,000	5,807
July 8, 2018 to August 4, 2018	18,900	11.42		18,900	5,591
February 3, 2019 to March 2, 2019							56,324	$	10.34	56,324	$	3,097
March 3, 2019 to April 6, 2019							126,232	9.07		126,232	1,952
April 7, 2019 to May 4, 2019							104,500	6.14		104,500	1,311
Total	77,096	$	10.80	77,096	$	5,591	287,056	$	8.25	287,056	$	1,311

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ITEM 6. EXHIBITS


(a)	Exhibits.



Exhibit No.		Description of Document
10.1+*		Letter Agreement, effective March 29, 2019, by and between Michael Cairnes and Kirkland’s, Inc. (Exhibit 10.1 to our Current Report on Form 8-K dated March 29, 2019).
10.2+*		Letter Agreement, effective March 29, 2019, by and between Nicole Strain and Kirkland’s, Inc. (Exhibit 10.2 to our Current Report on Form 8-K dated March 29, 2019).
31.1		Certification of the ~~Acting~~ Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2		Certification of the Interim Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32.1		Certification of the ~~Acting~~ Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2		Certification of the Interim Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
101		Interactive Data File (Quarterly Report on Form 10-Q, for the quarter ended ~~August~~May 4, ~~2018,~~2019, furnished in XBRL (eXtensible Business Reporting Language))

* Incorporated by reference.

+ Management contract of compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.



	KIRKLAND’S, INC.
Date: ~~September 13, 2018~~June 6, 2019	/s/ ~~Michael B. Cairnes~~Steve C. Woodward
	~~Michael B. Cairnes~~Steve C. Woodward ~~Acting~~ Chief Executive Officer
Date: ~~September 13, 2018~~June 6, 2019	/s/ Nicole A. Strain
	Nicole A. Strain Interim Chief Financial Officer

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	August 4,			February 3,			July 29,
	2018			2018			2017
ASSETS
Current assets:
Cash and cash equivalents	$	35,359		$	80,156		$	48,694
Inventories, net ⁽¹⁾	95,466			81,255			71,283
Prepaid expenses and other current assets ⁽¹⁾	21,053			15,988			21,565
Total current assets	151,878			177,399			141,542
Property and equipment:
Equipment	21,025			20,835			20,091
Furniture and fixtures	81,371			80,299			78,432
Leasehold improvements	124,133			119,272			112,435
Computer software and hardware	63,474			59,331			56,532
Projects in progress	12,637			7,685			6,400
Property and equipment, gross	302,640			287,422			273,890
Accumulated depreciation	(185,572		)	(174,383		)	(162,667		)
Property and equipment, net	117,068			113,039			111,223
Deferred income taxes	1,344			2,216			1,022
Other assets	7,248			6,543			6,026
Total assets	$	277,538		$	299,197		$	259,813
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	42,849		$	45,602		$	29,166
Accounts payable to related party vendor	6,747			7,523			4,618
Income taxes payable	—			4,943			—
Accrued expenses	35,345			38,872			31,030
Total current liabilities	84,941			96,940			64,814
Deferred rent	53,080			53,303			53,384
Deferred income taxes	411			—			2,172
Other liabilities	9,049			8,193			9,674
Total liabilities	147,481			158,436			130,044
Shareholders’ equity:
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at August 4, 2018, February 3, 2018, or July 29, 2017, respectively	—			—			—
Common stock, no par value; 100,000,000 shares authorized; 15,741,818; 15,977,239; and 16,011,169 shares issued and outstanding at August 4, 2018, February 3, 2018, and July 29, 2017, respectively	168,198			167,501			166,408
Accumulated deficit	(38,141		)	(26,740		)	(36,639		)
Total shareholders’ equity	130,057			140,761			129,769
Total liabilities and shareholders’ equity	$	277,538		$	299,197		$	259,813