UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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| |
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended NovemberAugust 3, 2018
2019
or
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| |
¨
| 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| | | | | |
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 - 14,858,23513,890,218 shares outstanding as of November 27, 2018.August 21, 2019.
KIRKLAND’S, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KIRKLAND’S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
|
| | | | | | | | | | | |
| November 3, | | February 3, | | October 28, |
| 2018 | | 2018 | | 2017 |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | $ | 23,837 |
| | $ | 80,156 |
| | $ | 27,885 |
|
Inventories, net (1) | 113,759 |
| | 81,255 |
| | 104,741 |
|
Prepaid expenses and other current assets (1) | 23,314 |
| | 15,988 |
| | 25,644 |
|
Total current assets | 160,910 |
| | 177,399 |
| | 158,270 |
|
Property and equipment: | | | | | |
Equipment | 21,878 |
| | 20,835 |
| | 20,618 |
|
Furniture and fixtures | 82,361 |
| | 80,299 |
| | 79,481 |
|
Leasehold improvements | 126,843 |
| | 119,272 |
| | 116,251 |
|
Computer software and hardware | 67,911 |
| | 59,331 |
| | 57,683 |
|
Projects in progress | 8,899 |
| | 7,685 |
| | 9,046 |
|
Property and equipment, gross | 307,892 |
| | 287,422 |
| | 283,079 |
|
Accumulated depreciation | (192,617 | ) | | (174,383 | ) | | (167,952 | ) |
Property and equipment, net | 115,275 |
| | 113,039 |
| | 115,127 |
|
Deferred income taxes | 1,255 |
| | 2,216 |
| | 968 |
|
Other assets | 7,201 |
| | 6,543 |
| | 6,552 |
|
Total assets | $ | 284,641 |
| | $ | 299,197 |
| | $ | 280,917 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | |
Current liabilities: | | | | | |
Accounts payable | $ | 55,001 |
| | $ | 45,602 |
| | $ | 44,030 |
|
Accounts payable to related party vendor | 11,261 |
| | 7,523 |
| | 7,671 |
|
Income taxes payable | — |
| | 4,943 |
| | — |
|
Accrued expenses | 34,466 |
| | 38,872 |
| | 34,699 |
|
Total current liabilities | 100,728 |
| | 96,940 |
| | 86,400 |
|
Deferred rent | 53,944 |
| | 53,303 |
| | 54,196 |
|
Deferred income taxes | 27 |
| | — |
| | 2,561 |
|
Other liabilities | 8,692 |
| | 8,193 |
| | 9,916 |
|
Total liabilities | 163,391 |
| | 158,436 |
| | 153,073 |
|
Shareholders’ equity: | | | | | |
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at November 3, 2018, February 3, 2018, or October 28, 2017, respectively | — |
| | — |
| | — |
|
Common stock, no par value; 100,000,000 shares authorized; 15,063,439; 15,977,239; and 16,002,387 shares issued and outstanding at November 3, 2018, February 3, 2018, and October 28, 2017, respectively | 168,725 |
| | 167,501 |
| | 167,063 |
|
Accumulated deficit | (47,475 | ) | | (26,740 | ) | | (39,219 | ) |
Total shareholders’ equity | 121,250 |
| | 140,761 |
| | 127,844 |
|
Total liabilities and shareholders’ equity | $ | 284,641 |
| | $ | 299,197 |
| | $ | 280,917 |
|
(1) Refer to Note 1 for information about a reclassification of supplies inventory from inventories, net, to prepaid expenses and other current assets. |
| | | | | | | | | | | |
| August 3, | | February 2, | | August 4, |
| 2019 | | 2019 | | 2018 |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | $ | 14,650 |
| | $ | 57,946 |
| | $ | 35,359 |
|
Inventories, net | 108,233 |
| | 84,434 |
| | 95,466 |
|
Prepaid expenses and other current assets | 8,662 |
| | 15,561 |
| | 21,053 |
|
Total current assets | 131,545 |
| | 157,941 |
| | 151,878 |
|
Property and equipment: | | | | | |
Equipment | 21,575 |
| | 21,425 |
| | 21,025 |
|
Furniture and fixtures | 81,184 |
| | 81,523 |
| | 81,371 |
|
Leasehold improvements | 126,812 |
| | 126,784 |
| | 124,133 |
|
Computer software and hardware | 72,121 |
| | 69,444 |
| | 63,474 |
|
Projects in progress | 10,791 |
| | 8,344 |
| | 12,637 |
|
Property and equipment, gross | 312,483 |
| | 307,520 |
| | 302,640 |
|
Accumulated depreciation | (209,917 | ) | | (196,697 | ) | | (185,572 | ) |
Property and equipment, net | 102,566 |
| | 110,823 |
| | 117,068 |
|
Operating lease right-of-use assets | 219,648 |
| | — |
| | — |
|
Deferred income taxes | 9,010 |
| | 1,703 |
| | 1,344 |
|
Other assets | 6,229 |
| | 6,681 |
| | 7,248 |
|
Total assets | $ | 468,998 |
| | $ | 277,148 |
| | $ | 277,538 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | |
Current liabilities: | | | | | |
Accounts payable | $ | 60,537 |
| | $ | 40,004 |
| | $ | 42,849 |
|
Accounts payable to related party vendor | — |
| | 8,166 |
| | 6,747 |
|
Income taxes payable | — |
| | 701 |
| | — |
|
Accrued expenses | 24,646 |
| | 37,665 |
| | 35,345 |
|
Operating lease liabilities | 53,561 |
| | — |
| | — |
|
Total current liabilities | 138,744 |
| | 86,536 |
| | 84,941 |
|
Deferred rent | — |
| | 51,871 |
| | 53,080 |
|
Operating lease liabilities | 218,700 |
| | — |
| | — |
|
Deferred income taxes | — |
| | — |
| | 411 |
|
Other liabilities | 9,148 |
| | 7,941 |
| | 9,049 |
|
Total liabilities | 366,592 |
| | 146,348 |
| | 147,481 |
|
Shareholders’ equity: | | | | | |
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at August 3, 2019, February 2, 2019, or August 4, 2018, respectively | — |
| | — |
| | — |
|
Common stock, no par value; 100,000,000 shares authorized; 13,961,029; 14,504,824; and 15,741,818 shares issued and outstanding at August 3, 2019, February 2, 2019, and August 4, 2018, respectively | 170,869 |
| | 169,477 |
| | 168,198 |
|
Accumulated deficit | (68,463 | ) | | (38,677 | ) | | (38,141 | ) |
Total shareholders’ equity | 102,406 |
| | 130,800 |
| | 130,057 |
|
Total liabilities and shareholders’ equity | $ | 468,998 |
| | $ | 277,148 |
| | $ | 277,538 |
|
The accompanying notes are an integral part of these financial statements.
KIRKLAND’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
|
| | | | | | | | | | | | | | | |
| 13-Week Period Ended | | 39-Week Period Ended |
| November 3, | | October 28, | | November 3, | | October 28, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net sales | $ | 154,571 |
| | $ | 144,979 |
| | $ | 430,924 |
| | $ | 409,503 |
|
Cost of sales (1) | 95,289 |
| | 87,840 |
| | 267,619 |
| | 248,820 |
|
Cost of sales related to merchandise purchased from related party vendor | 12,629 |
| | 11,668 |
| | 34,542 |
| | 32,278 |
|
Cost of sales | 107,918 |
| | 99,508 |
| | 302,161 |
| | 281,098 |
|
Gross profit | 46,653 |
| | 45,471 |
| | 128,763 |
| | 128,405 |
|
Operating expenses: | | | | | | | |
Compensation and benefits | 29,621 |
| | 28,072 |
| | 83,490 |
| | 80,556 |
|
Other operating expenses | 18,783 |
| | 19,427 |
| | 54,067 |
| | 54,501 |
|
Depreciation (exclusive of depreciation included in cost of sales) (1) | 1,867 |
| | 1,739 |
| | 5,405 |
| | 5,089 |
|
Total operating expenses | 50,271 |
| | 49,238 |
| | 142,962 |
| | 140,146 |
|
Operating loss | (3,618 | ) | | (3,767 | ) | | (14,199 | ) | | (11,741 | ) |
Interest expense | 69 |
| | 69 |
| | 200 |
| | 195 |
|
Other income | (224 | ) | | (229 | ) | | (825 | ) | | (448 | ) |
Loss before income taxes | (3,463 | ) | | (3,607 | ) | | (13,574 | ) | | (11,488 | ) |
Income tax benefit | (683 | ) | | (1,245 | ) | | (3,197 | ) | | (3,919 | ) |
Net loss | $ | (2,780 | ) | | $ | (2,362 | ) | | $ | (10,377 | ) | | $ | (7,569 | ) |
| | | | | | | |
Loss per share: | | | | | | | |
Basic | $ | (0.18 | ) | | $ | (0.15 | ) | | $ | (0.66 | ) | | $ | (0.48 | ) |
Diluted | $ | (0.18 | ) | | $ | (0.15 | ) | | $ | (0.66 | ) | | $ | (0.48 | ) |
Weighted average shares outstanding: | | | | | | | |
Basic | 15,486 |
| | 16,013 |
| | 15,673 |
| | 15,932 |
|
Diluted | 15,486 |
| | 16,013 |
| | 15,673 |
| | 15,932 |
|
(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 | | 26 Weeks Ended |
| August 3, | | August 4, | | August 3, | | August 4, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net sales | $ | 119,885 |
| | $ | 133,899 |
| | $ | 249,533 |
| | $ | 276,353 |
|
Cost of sales | 88,536 |
| | 86,765 |
| | 171,992 |
| | 172,330 |
|
Cost of sales related to merchandise purchased from related party vendor | 4,776 |
| | 10,336 |
| | 14,749 |
| | 21,913 |
|
Cost of sales | 93,312 |
| | 97,101 |
| | 186,741 |
| | 194,243 |
|
Gross profit | 26,573 |
| | 36,798 |
| | 62,792 |
| | 82,110 |
|
Operating expenses: | | | | | | | |
Compensation and benefits | 27,162 |
| | 26,020 |
| | 54,218 |
| | 53,869 |
|
Other operating expenses | 16,656 |
| | 17,965 |
| | 34,790 |
| | 35,284 |
|
Depreciation (exclusive of depreciation included in cost of sales) | 1,736 |
| | 1,774 |
| | 3,575 |
| | 3,538 |
|
Asset impairment | 1,981 |
| | — |
| | 3,859 |
| | — |
|
Total operating expenses | 47,535 |
| | 45,759 |
| | 96,442 |
| | 92,691 |
|
Operating loss | (20,962 | ) | | (8,961 | ) | | (33,650 | ) | | (10,581 | ) |
Interest expense | 68 |
| | 66 |
| | 138 |
| | 131 |
|
Other income | (226 | ) | | (270 | ) | | (554 | ) | | (601 | ) |
Loss before income taxes | (20,804 | ) | | (8,757 | ) | | (33,234 | ) | | (10,111 | ) |
Income tax benefit | (3,684 | ) | | (2,042 | ) | | (7,193 | ) | | (2,514 | ) |
Net loss | $ | (17,120 | ) | | $ | (6,715 | ) | | $ | (26,041 | ) | | $ | (7,597 | ) |
| | | | | | | |
Loss per share: | | | | | | | |
Basic | $ | (1.21 | ) | | $ | (0.43 | ) | | $ | (1.83 | ) | | $ | (0.48 | ) |
Diluted | $ | (1.21 | ) | | $ | (0.43 | ) | | $ | (1.83 | ) | | $ | (0.48 | ) |
Weighted average shares outstanding: | | | | | | | |
Basic | 14,110 |
| | 15,726 |
| | 14,241 |
| | 15,925 |
|
Diluted | 14,110 |
| | 15,726 |
| | 14,241 |
| | 15,925 |
|
The accompanying notes are an integral part of these financial statements.
KIRKLAND’S, INC.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except share data)
| | | Common Stock | | Accumulated Deficit | | Total Shareholders’ Equity | Common Stock | | Accumulated Deficit | | Total Shareholders’ Equity |
| Shares | | Amount | | Shares | | Amount | |
Balance at February 3, 2018 | 15,977,239 |
| | $ | 167,501 |
| | $ | (26,740 | ) | | $ | 140,761 |
| |
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 | 28,246 |
| | 238 |
| | — |
| | 238 |
| 6,880 |
| | 68 |
| | — |
| | 68 |
|
Exercise of stock options | 177,526 |
| | 23 |
| | — |
| | 23 |
| |
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 |
|
Employee stock purchases | | 22,354 |
| | 77 |
| | — |
| | 77 |
|
Restricted stock issued | 108,900 |
| | — |
| | — |
| | — |
| 70,725 |
| | — |
| | — |
| | — |
|
Net share settlement of stock options and restricted stock | (146,355 | ) | | (378 | ) | | — |
| | (378 | ) | (10,792 | ) | | (44 | ) | | — |
| | (44 | ) |
Stock-based compensation expense | — |
| | 1,341 |
| | — |
| | 1,341 |
| — |
| | 731 |
| | — |
| | 731 |
|
Repurchase and retirement of common stock | (1,082,117 | ) | | — |
| | (10,358 | ) | | (10,358 | ) | (345,906 | ) | | — |
| | (1,046 | ) | | (1,046 | ) |
Net loss | — |
| | — |
| | (10,377 | ) | | (10,377 | ) | — |
| | — |
| | (17,120 | ) | | (17,120 | ) |
Balance at November 3, 2018 | 15,063,439 |
| | $ | 168,725 |
| | $ | (47,475 | ) | | $ | 121,250 |
| |
Balance at August 3, 2019 | | 13,961,029 |
| | $ | 170,869 |
| | $ | (68,463 | ) | | $ | 102,406 |
|
|
| | | | | | | | | | | | | | |
| 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 | 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 |
|
Employee stock purchases | 7,306 |
| | 79 |
| | — |
| | 79 |
|
Exercise of stock options | 146,692 |
| | — |
| | — |
| | — |
|
Restricted stock issued | 108,900 |
| | — |
| | — |
| | — |
|
Net share settlement of stock options and restricted stock | (137,478 | ) | | (378 | ) | | — |
| | (378 | ) |
Stock-based compensation expense | — |
| | 498 |
| | — |
| | 498 |
|
Repurchase and retirement of common stock | (77,096 | ) | | — |
| | (832 | ) | | (832 | ) |
Net loss | — |
| | — |
| | (6,715 | ) | | (6,715 | ) |
Balance at August 4, 2018 | 15,741,818 |
| | $ | 168,198 |
| | $ | (38,141 | ) | | $ | 130,057 |
|
The accompanying notes are an integral part of these financial statements.
KIRKLAND’S, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
|
| | | | | | | |
| 39-Week Period Ended |
| November 3, | | October 28, |
| 2018 | | 2017 |
Cash flows from operating activities: | | | |
Net loss | $ | (10,377 | ) | | $ | (7,569 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Depreciation of property and equipment | 21,992 |
| | 19,841 |
|
Amortization of deferred rent | (6,826 | ) | | (5,784 | ) |
Amortization of debt issue costs | 41 |
| | 40 |
|
Loss on disposal of property and equipment | 340 |
| | 157 |
|
Stock-based compensation expense | 1,341 |
| | 1,766 |
|
Deferred income taxes | 988 |
| | 2,312 |
|
Changes in assets and liabilities: | | | |
Inventories, net (1) | (32,504 | ) | | (31,550 | ) |
Prepaid expenses and other current assets (1) | (2,318 | ) | | (2,396 | ) |
Other noncurrent assets | (699 | ) | | (1,554 | ) |
Accounts payable | 9,856 |
| | 10,502 |
|
Accounts payable to related party vendor | 3,738 |
| | 2,663 |
|
Income taxes refundable | (9,951 | ) | | (13,609 | ) |
Accrued expenses and other current and noncurrent liabilities | 3,560 |
| | 12,912 |
|
Net cash used in operating activities | (20,819 | ) | | (12,269 | ) |
| | | |
Cash flows from investing activities: | | | |
Capital expenditures | (25,025 | ) | | (23,617 | ) |
Net cash used in investing activities | (25,025 | ) | | (23,617 | ) |
| | | |
Cash flows from financing activities: | | | |
Cash used in net share settlement of stock options and restricted stock | (378 | ) | | (201 | ) |
Proceeds received from employee stock option exercises | 23 |
| | — |
|
Employee stock purchases | 238 |
| | 253 |
|
Repurchase and retirement of common stock | (10,358 | ) | | (218 | ) |
Net cash used in financing activities | (10,475 | ) | | (166 | ) |
| | | |
Cash and cash equivalents: | | | |
Net decrease | (56,319 | ) | | (36,052 | ) |
Beginning of the period | 80,156 |
| | 63,937 |
|
End of the period | $ | 23,837 |
| | $ | 27,885 |
|
| | | |
Supplemental schedule of non-cash activities: | | | |
Non-cash accruals for purchases of property and equipment | $ | 1,970 |
| | $ | 1,997 |
|
(1) Refer to Note 1 for information about a reclassification of supplies inventory from inventories, net, to prepaid expenses and other current assets.
|
| | | | | | | |
| 26 Weeks Ended |
| August 3, | | August 4, |
| 2019 | | 2018 |
Cash flows from operating activities: | | | |
Net loss | $ | (26,041 | ) | | $ | (7,597 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | |
Depreciation of property and equipment | 14,295 |
| | 14,390 |
|
Amortization of debt issue costs | 27 |
| | 27 |
|
Asset impairment | 3,859 |
| | — |
|
Cumulative effect of change in accounting principle | (331 | ) | | — |
|
Loss on disposal of property and equipment | 139 |
| | 177 |
|
Stock-based compensation expense | 1,291 |
| | 891 |
|
Deferred income taxes | (7,307 | ) | | 1,283 |
|
Changes in assets and liabilities: | | | |
Inventories, net | (23,799 | ) | | (14,211 | ) |
Prepaid expenses and other current assets | 2,116 |
| | (581 | ) |
Accounts payable | 19,438 |
| | (3,067 | ) |
Accounts payable to related party vendor | (8,166 | ) | | (776 | ) |
Accrued expenses | (2,428 | ) | | (3,527 | ) |
Income taxes refundable | (959 | ) | | (9,427 | ) |
Operating lease assets and liabilities | (4,295 | ) | | (223 | ) |
Other assets and liabilities | 635 |
| | 124 |
|
Net cash used in operating activities | (31,526 | ) | | (22,517 | ) |
| | | |
Cash flows from investing activities: | | | |
Capital expenditures | (8,457 | ) | | (18,282 | ) |
Net cash used in investing activities | (8,457 | ) | | (18,282 | ) |
| | | |
Cash flows from financing activities: | | | |
Cash used in net share settlement of stock options and restricted stock | (44 | ) | | (378 | ) |
Proceeds received from employee stock option exercises | — |
| | 23 |
|
Employee stock purchases | 145 |
| | 161 |
|
Repurchase and retirement of common stock | (3,414 | ) | | (3,804 | ) |
Net cash used in financing activities | (3,313 | ) | | (3,998 | ) |
| | | |
Cash and cash equivalents: | | | |
Net decrease | (43,296 | ) | | (44,797 | ) |
Beginning of the period | 57,946 |
| | 80,156 |
|
End of the period | $ | 14,650 |
| | $ | 35,359 |
|
| | | |
Supplemental schedule of non-cash activities: | | | |
Non-cash accruals for purchases of property and equipment | $ | 2,367 |
| | $ | 2,741 |
|
Operating lease assets and liabilities recognized upon adoption of ASC 842 | 295,240 |
| | — |
|
Increase of operating lease liabilities from new or modified leases | 16,518 |
| | — |
|
The accompanying notes are an integral part of these financial statements.
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 432431 stores in 37 states as of NovemberAugust 3, 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 39-week26-week periods ended NovemberAugust 3, 20182019 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 quarterbeginning of fiscal 2017,2019, the Company concluded that it was appropriateadopted 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 amountsAdoption of the new lease accounting guidance had a material impact to reflect this change. Thisthe Company’s condensed consolidated balance sheets and related disclosures, and resulted in $2.6the 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 currentnot 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 assheets prior to the adoption of October 28, 2017,this new lease accounting guidance has not been adjusted and $0.3 million reclassified from inventories, net,is therefore not comparable to prepaid expensethe 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 assetsamounts in the changes in assets and liabilitiesfiscal 2018 operating activities section of the condensed consolidated statementsstatement of cash flows forhave been reclassified to conform to the 39-week period ended October 28, 2017.fiscal 2019 presentation. These reclassifications had no effect on reported net loss.
Also, duringThe Company uses the fourth quarterredemption 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 expensedetermines there is no requirement for remitting card balances to costgovernment 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 $5.1 million and $14.8 milliontable below sets forth selected gift card liability information (in thousands) for the 13-week and 39-week periods ended October 28, 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:
For the 13-week and 39-week periods ended November 3, 2018, the Company recorded an unfavorable $0.7 million one-time out-of-period adjustment related to revised straight-line rent calculations to cost of sales from deferred rent. For the 39-week period ended October 28, 2017, the Company recorded a favorable $1.2 million one-time out-of-period adjustment of ancillary rent payments to prepaid expenses and other current assets from cost of sales. |
| | | | | | | | | | | |
| August 3, 2019 | | February 2, 2019 | | August 4, 2018 |
Gift card liability, net of estimated breakage | $ | 11,705 |
| | $ | 13,032 |
| | $ | 10,384 |
|
The table below sets forth selected gift card breakage and redemption information (in thousands) for the periods indicated:
|
| | | | | | | | | | | | | | | |
| 13-Week Period Ended | | 26-Week Period Ended |
| August 3, 2019 | | August 4, 2018 | | August 3, 2019 | | August 4, 2018 |
Gift card breakage revenue | $ | 252 |
| | $ | 265 |
| | $ | 531 |
| | $ | 552 |
|
Gift card redemptions recognized in the current period related to amounts included in the gift card contract liability balance as of the prior period | 2,130 |
| | 2,047 |
| | 4,210 |
| | 3,966 |
|
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 NovemberAugust 3, 20182019 and October 28, 2017,August 4, 2018, the Company recorded an income tax benefit of 19.7%17.7% and 34.5%23.3% of the loss before income taxes, respectively. For the 39-week26-week periods ended NovemberAugust 3, 20182019 and October 28, 2017,August 4, 2018, the Company recorded an income tax benefit of 23.6%21.6% and 34.1%24.9% of the loss before income taxes, respectively. The decrease in the tax rate for the 13-week and 39-week26-week periods ended NovemberAugust 3, 20182019 was primarily due to the effectrealization 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, which was partially offset by additional taxdiscrete shortfall expense related to stock compensation activity.forfeitures and vesting of restricted stock.
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 1.21.7 million and 1.61.4 million shares for each of the 13-week periods ended NovemberAugust 3, 20182019 and October 28, 2017,August 4, 2018, respectively, and 1.31.6 million and 1.51.4 million shares for each of the 39-week26-week periods ended NovemberAugust 3, 20182019 and October 28, 2017,August 4, 2018, respectively.
Note 4 - Fair Value of Financial InstrumentsMeasurements
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$1.7 million, $2.2$1.9 million and $2.2$2.1 million as of NovemberAugust 3, 2018,2019, February 3,2, 2019 and August 4, 2018, and October 28, 2017, respectively, and were recorded in other assets and other liabilities in the condensed consolidated balance sheets.
The Company measures certain assets at fair value on a non-recurring basis including the evaluation of long-lived assets for impairment using Company-specific assumptions which would fall within Level 3 of the fair value hierarchy. The Company uses market participant rents to calculate the fair value of right-of-use assets and discounted future cash flows of the asset or asset group using a discount rate that approximates the cost of capital of a market participant to quantify fair value for other long-lived assets. See Note 11 to the condensed consolidated financial statements for further discussion.
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 parties have tentatively agreed to an early mediation with minimal exchange of discovery. To date, the parties have exchanged the court mandated initial disclosures, and the Court has issued a notice of intent to issue a scheduling order on January 10, 2019.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.
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.year. The table below sets forth selected stock-based compensation information (in thousands, except share amounts) for the periods indicated:
| |
| 13-Week Period Ended | 39-Week Period Ended | 13-Week Period Ended | | 26-Week Period Ended |
November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | August 3, 2019 | | August 4, 2018 | | August 3, 2019 | | August 4, 2018 |
Stock-based compensation expense (included in compensation and benefits on the condensed consolidated statements of operations) | $ | 450 |
| $ | 582 |
| $ | 1,341 |
| $ | 1,766 |
| $ | 731 |
| | $ | 498 |
| | $ | 1,291 |
| | $ | 891 |
|
Stock options granted | — |
| — |
| 157,700 |
| 245,000 |
| — |
| | 157,700 |
| | 430,493 |
| | 157,700 |
|
Restricted stock units granted | 132,834 |
| 2,000 |
| 243,734 |
| 148,500 |
| 243,472 |
| | 110,900 |
| | 458,717 |
| | 110,900 |
|
Note 7 - Related Party Transactions
The Company hashad an agreement with a related party vendor to purchase merchandise inventory. The vendor iswas considered a related party for financial reporting purposes because its principal owner is the spouse of the Company’s former Vice President of Merchandising.Product Development and Trend. As of June 14, 2019, the vendor is no longer a related party. The table below sets forth selected results related to this vendor, for the time period that the vendor was a related party, in dollars (in thousands) and percentages for the periods indicated:
| | | 13-Week Period Ended | | 39-Week Period Ended | 13-Week Period Ended | | 26-Week Period Ended |
| November 3, 2018 | | October 28, 2017 | | November 3, 2018 | | October 28, 2017 | August 3, 2019 | | August 4, 2018 | | August 3, 2019 | | August 4, 2018 |
Related Party Vendor: | | | | | | | | | | | | | | |
Purchases | $ | 17,444 |
| | $ | 17,684 |
| | $ | 41,966 |
| | $ | 41,743 |
| $ | 6,177 |
| | $ | 13,086 |
| | $ | 19,577 |
| | $ | 24,522 |
|
Purchases as a percent of total merchandise purchases | 22.5 | % | | 20.4 | % | | 21.1 | % | | 21.5 | % | 9.2 | % | | 20.1 | % | | 16.0 | % | | 20.3 | % |
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 August 3, 2019, the Company had approximately $0.3 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 | | 39-Week Period Ended |
| November 3, 2018 | | October 28, 2017 | | November 3, 2018 | | October 28, 2017 |
Shares repurchased and retired | 689,473 |
| | 18,901 |
| | 1,082,117 |
| | 18,901 |
|
Share repurchase cost | $ | 6,554 |
| | $ | 218 |
| | $ | 10,358 |
| | $ | 218 |
|
As of November 3, 2018, the Company had approximately $9.0 million remaining under the new stock repurchase plan. |
| | | | | | | | | | | | | | | |
| 13-Week Period Ended | | 26-Week Period Ended |
| August 3, 2019 | | August 4, 2018 | | August 3, 2019 | | August 4, 2018 |
Shares repurchased and retired | 345,906 |
| | 77,096 |
| | 632,962 |
| | 392,644 |
|
Share repurchase cost | $ | 1,046 |
| | $ | 832 |
| | $ | 3,414 |
| | $ | 3,804 |
|
Note 9 - New Accounting PronouncementsSenior Credit Facility
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 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.
New Accounting Pronouncements Recently AdoptedBorrowings 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.
In May 2014,The Company is subject to an Amended and Restated Security Agreement (the “Security Agreement”) with its Lenders. Pursuant to the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). Under ASU 2014-09, an entity will recognize revenue when it transfers promised goods or servicesSecurity Agreement, the Company pledged and granted to customers in an amount that reflects what it expects in exchangethe administrative agent, for the goods or services. ASU 2014-09 also requires more detailed disclosuresbenefit of itself and the secured parties specified therein, a lien on and security interest in all of the rights, title and interest in substantially all of the Company’s assets to enable userssecure the payment and performance of financial statements to understand the nature, amount, timing, and uncertaintyobligations under the Credit Agreement.
As of revenue and cash flows arising from contracts with customers. The amendments in ASU 2014-09 were effective forAugust 3, 2019, the Company was in compliance with the covenants in the Credit Agreement, and there were no outstanding borrowings under the credit facility, with approximately $72.5 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 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 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 the date of adoption.
The Company’s classification of lease cost on the Company’s condensed consolidated statements of operations is as follows (in thousands):
|
| | | | | | | |
| 13 Week Period Ended (1) | | 26-Week Period Ended (1) |
| August 3, 2019 | | August 3, 2019 |
Cost of sales (2) |
| | |
Operating lease cost | $ | 13,474 |
| | $ | 27,062 |
|
Short-term lease cost | 384 |
| | 708 |
|
Variable lease cost | 260 |
| | 517 |
|
Total lease cost in cost of sales | $ | 14,118 |
| | $ | 28,287 |
|
Other operating expenses |
| | |
Operating lease cost | $ | 730 |
| | $ | 1,460 |
|
Short-term lease cost | 42 |
| | 88 |
|
Total lease cost in other operating expenses | $ | 772 |
| | $ | 1,548 |
|
| |
(1) | Total lease cost for the 13-week and 26-week periods ended August 3, 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. |
| |
(2) | Cost of sales includes all distribution center lease costs and store occupancy-related lease cost. |
As of August 3, 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 26 weeks ended August 3, 2019) | $ | 28,946 |
|
2020 | 65,264 |
|
2021 | 56,366 |
|
2022 | 46,709 |
|
2023 | 38,245 |
|
After 2023 | 85,770 |
|
Total lease payments (1) | 321,300 |
|
Less: Interest | (49,039 | ) |
Present value of lease liabilities | $ | 272,261 |
|
(1) Operating lease payments exclude $7.6 million of legally binding minimum lease payments for leases signed but not yet commenced for four new store leases.
The Company’s lease term and discount rate is as follows:
|
| | |
| August 3, 2019 |
Weighted-average remaining lease term (years) | 6.1 |
|
Weighted-average discount rate | 5.6 | % |
Cash paid for amounts included in the measurement of lease liabilities is as follows (in thousands):
|
| | | | | | | |
| 13-Week Period Ended | | 26-Week Period Ended |
| August 3, 2019 | | August 3, 2019 |
Operating cash flows from operating leases | $ | 16,152 |
| | $ | 32,917 |
|
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.
In connection with the adoption of 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 the carrying amounts of the store assets were not expected to be recoverable. In the first 13 weeks of fiscal 2018 year. Companies that transitioned2019, the Company recorded an adjustment to this new standard could either retrospectively restate each prior reporting period or reflectincrease the opening balance of accumulated deficit by approximately $0.3 million for the cumulative effect of initially applying the updates with an adjustment to retained earningsadoption of ASC 842 for right-of-use assets at six of the date of adoption. The Company adopted this standard in the first quarter of fiscal 2018 using the modified retrospective method. The Company identified its loyalty program as 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 $10.3 million, $11.3 million and $8.5 million as of November 3, 2018, February 3, 2018 and October 28, 2017, respectively, which is included in accrued expenses on the condensed consolidated balance sheet.impaired stores. During the 13-week period ended NovemberAugust 3, 2018,2019, the Company recognized $1.8recorded an impairment charge of approximately $0.5 million of gift card redemptions related to amounts included in the gift card contract liability balance of $10.4for right-of-use assets at two impaired stores. The Company also recorded an impairment charge totaling approximately $1.5 million as of August 4, 2018. During the 39-week period ended November 3, 2018, the Company recognized $5.0and $3.4 million of gift card redemptions related to amounts included in the gift card contract liability balance of $11.3 million as of February 3, 2018. The adoption of this guidance did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”). This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless (a)13-week and 26-week periods ended August 3, 2019, respectively, for leasehold improvements, fixtures and equipment at three stores and eleven stores, respectively, for which the carrying value exceed the fair value of the modified award is the same as 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
these assets. 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. 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. These new leasing standards are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted for all entities. The Company intends to adopt this guidance in the first quarter of fiscal 2019, using the optional transitionCompany shifted to estimating the fair value of long-lived fixed assets based on orderly liquidation value as the Company believes this method provided by ASU 2018-11.better reflects the fair value of the assets. The Company is currently evaluatingpreviously used the impactage-life method for calculating the fair value 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 FacilityNew 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 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,currently only has operating leases. Lessor accounting remains largely unchanged, and the lenders named therein (the “Lenders”).Company is not a lessor in any lease agreements. The Credit Agreement includes a senior secured revolving credit facilityguidance also requires certain qualitative and quantitative disclosures about the amount, timing and uncertainty of $75 million, a swingline availability of $10 million, a $25 million incremental accordion feature and a maturity date of February 2021. Borrowings undercash flows arising from leases.
There have been multiple standard updates amending this guidance or providing corrections or improvements on issues in the Credit Agreement bear interest atguidance. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842): Targeted Improvements,” which provides an annual rate equal to LIBOR plus a margin ranging from 125 to 175 basis points with no LIBOR floor, and the fee paidoptional transition method in addition to the Lenders onexisting modified retrospective transition method by allowing a cumulative effect adjustment to the unused portionopening balance of retained earnings in the credit facility is 25 basis points per annum.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
BorrowingsExpedient 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 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.previous lease guidance.
The Company is subjectadopted this guidance as of the beginning of the first 13 weeks of fiscal 2019, and as a part of that process, made the following elections:
The Company elected the optional transition method, which allows for the lessee to an Amended and Restated Security Agreement (the “Security Agreement”) with its Lenders. Pursuantnot 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 pledgedto carry forward its prior lease classification under ASC 840, not reassess whether expired or existing contracts contain leases and grantednot 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, for which the benefit of itself andCompany does not recognize right-of-use assets or lease liabilities, resulting in lease payments being recorded as an expense on a straight-line basis over the secured parties specified therein, a lien on and security interest in all of the rights, title and interest in substantially alllease term.
The majority of the Company’s assetsleases have variable non-lease components. For leases where the non-lease components are fixed, the Company has elected an accounting policy to secureaccount for lease and non-lease components as a single component.
The Company elected the payment and performanceland easement practical expedient.
Adoption of the obligations undernew standard had a material impact on the Credit Agreement.Company’s condensed consolidated balance sheets, statement of shareholders’ equity and related disclosures, and resulted in the recording of additional right-of-use assets and lease liabilities of approximately $295.2 million as of the 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 impairment indicators at adoption. The standard did not materially impact the Company’s condensed consolidated statements of operations or cash flows.
As of November 3,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 was in compliance with the covenantsadopted this guidance in the Credit Agreement,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 there were no outstanding borrowings underexpensed over the credit facility, with approximately $75.0 million available for borrowing.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.
Subsequent to August 3, 2019, the Company borrowed $10 million under its senior secured revolving credit facility.
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, 2018March 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 432431 stores in 37 states as of NovemberAugust 3, 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, framedfurniture, art, furniture,fragrance and accessories, ornamental wall décor, fragrance anddecorative accessories, mirrors, lamps, decorative accessories, textiles, housewares, gifts, artificial floral products, frames, clocks andgifts, 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 leaderkey player in home décor and enabled us to develop a strongloyal 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 andnet of returns, shipping revenue associated with e-commerce sales, net of returns and excludinggift card breakage revenue and excludes sales taxes. We use comparable store sales to measure our ability to achieve sales increases or decreases 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-commerceE-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. 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 | | 39-Week Period Ended |
| November 3, 2018 | | October 28, 2017 | | November 3, 2018 | | October 28, 2017 |
New stores opened during the period | 6 |
| | 10 |
| | 22 |
| | 26 |
|
Stores closed during the period | — |
| | 1 |
| | 8 |
| | 15 |
|
|
| | | | | | | | | | | |
| 13-Week Period Ended | | 26-Week Period Ended |
| August 3, 2019 | | August 4, 2018 | | August 3, 2019 | | August 4, 2018 |
New stores opened during the period | 1 |
| | 6 |
| | 4 |
| | 16 |
|
Stores closed during the period | 1 |
| | 5 |
| | 1 |
| | 8 |
|
The following table summarizes our stores and square footage under lease:
| | | November 3, 2018 | | October 28, 2017 | August 3, 2019 | | August 4, 2018 |
Number of stores | 432 |
| | 415 |
| 431 |
| | 426 |
|
Square footage | 3,420,097 |
| | 3,275,638 |
| 3,430,072 |
| | 3,372,584 |
|
Average square footage per store | 7,917 |
| | 7,893 |
| 7,958 |
| | 7,917 |
|
13-Week Period Ended NovemberAugust 3, 20182019 Compared to the 13-Week Period Ended October 28, 2017August 4, 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-Week Period Ended | | |
| November 3, 2018 | | October 28, 2017 | | Change | August 3, 2019 | | August 4, 2018 | | Change |
| $ | | % | | $ | | % | | $ | | % | $ | | % | | $ | | % | | $ | | % |
Net sales | $ | 154,571 |
| | 100.0 | % | | $ | 144,979 |
| | 100.0 | % | | $ | 9,592 |
| | 6.6 | % | $ | 119,885 |
| | 100.0 | % | | $ | 133,899 |
| | 100.0 | % | | $ | (14,014 | ) | | (10.5 | )% |
Cost of sales | 107,918 |
| | 69.8 |
| | 99,508 |
| | 68.6 |
| | 8,410 |
| | 8.5 |
| 93,312 |
| | 77.8 |
| | 97,101 |
| | 72.5 |
| | (3,789 | ) | | (3.9 | ) |
Gross profit | 46,653 |
| | 30.2 |
| | 45,471 |
| | 31.4 |
| | 1,182 |
| | 2.6 |
| 26,573 |
| | 22.2 |
| | 36,798 |
| | 27.5 |
| | (10,225 | ) | | (27.8 | ) |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | |
Compensation and benefits | 29,621 |
| | 19.2 |
| | 28,072 |
| | 19.4 |
| | 1,549 |
| | 5.5 |
| 27,162 |
| | 22.7 |
| | 26,020 |
| | 19.5 |
| | 1,142 |
| | 4.4 |
|
Other operating expenses | 18,783 |
| | 12.1 |
| | 19,427 |
| | 13.4 |
| | (644 | ) | | (3.3 | ) | 16,656 |
| | 13.9 |
| | 17,965 |
| | 13.4 |
| | (1,309 | ) | | (7.3 | ) |
Depreciation (exclusive of depreciation included in cost of sales) | 1,867 |
| | 1.2 |
| | 1,739 |
| | 1.2 |
| | 128 |
| | 7.4 |
| 1,736 |
| | 1.4 |
| | 1,774 |
| | 1.3 |
| | (38 | ) | | (2.1 | ) |
Asset impairment | | 1,981 |
| | 1.7 |
| | — |
| | — |
| | 1,981 |
| | 100.0 |
|
Total operating expenses | 50,271 |
| | 32.5 |
| | 49,238 |
| | 34.0 |
| | 1,033 |
| | 2.1 |
| 47,535 |
| | 39.7 |
| | 45,759 |
| | 34.2 |
| | 1,776 |
| | 3.9 |
|
Operating loss | (3,618 | ) | | (2.3 | ) | | (3,767 | ) | | (2.6 | ) | | 149 |
| | (4.0 | ) | (20,962 | ) | | (17.5 | ) | | (8,961 | ) | | (6.7 | ) | | (12,001 | ) | | 133.9 |
|
Interest expense | 69 |
| | — |
| | 69 |
| | — |
| | — |
| | — |
| 68 |
| | 0.1 |
| | 66 |
| | 0.1 |
| | 2 |
| | 3.0 |
|
Other income | (224 | ) | | (0.1 | ) | | (229 | ) | | (0.1 | ) | | 5 |
| | (2.2 | ) | (226 | ) | | (0.2 | ) | | (270 | ) | | (0.2 | ) | | 44 |
| | (16.3 | ) |
Loss before income taxes | (3,463 | ) | | (2.2 | ) | | (3,607 | ) | | (2.5 | ) | | 144 |
| | (4.0 | ) | (20,804 | ) | | (17.4 | ) | | (8,757 | ) | | (6.5 | ) | | (12,047 | ) | | 137.6 |
|
Income tax benefit | (683 | ) | | (0.4 | ) | | (1,245 | ) | | (0.9 | ) | | 562 |
| | (45.1 | ) | (3,684 | ) | | (3.1 | ) | | (2,042 | ) | | (1.5 | ) | | (1,642 | ) | | 80.4 |
|
Net loss | $ | (2,780 | ) | | (1.8 | )% | | $ | (2,362 | ) | | (1.6 | )% | | $ | (418 | ) | | 17.7 | % | $ | (17,120 | ) | | (14.3 | )% | | $ | (6,715 | ) | | (5.0 | )% | | $ | (10,405 | ) | | 155.0 | % |
Net sales. Net sales increased 6.6%decreased 10.5% to $154.6$119.9 million for the third quartersecond 13 weeks of fiscal 20182019 compared to $145.0$133.9 million for the prior-yearprior year period. TheComparable store sales, including e-commerce sales, decreased 11.2%, or $14.5 million for the second 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 $7.6$0.5 million. This was in addition to an increase in comparable store sales, including e-commerce sales, of 1.4%, or $2.0 million for the third quarter of fiscal 2018 compared to the prior-year period. Comparable store sales, including e-commerce sales, increased 0.7%decreased 3.9% in the prior-yearprior year period. For the third quartersecond 13 weeks of fiscal 2018,2019, e-commerce comparable sales increased 22.9% versus the prior-year period,21.5%, while comparable store sales at brick-and-mortar stores decreased 1.2% versus the prior-year period.16.1%. For brick-and-mortar stores, the comparable store sales decrease was primarily due to a decrease in transactionsstore traffic and a decline in the average ticket, which was partially offset by an increaseimprovement in average ticket. The decreased transactions resulted from a decline in traffic partially offset by an increase in conversion. The increase in average ticket resulted from an increase in average retail price. For e-commerce, comparable sales benefited from an increase in transactions due to higher website traffic while average ticket decreased slightly, driven primarilyand conversion, partially offset by a decrease in average ticket due to decreases in both average retail price and items per transaction coupled with a slight decrease in average retail price.transaction. The merchandise categories contributing most to the comparable store sales increasedecrease for the third quartersecond 13 weeks of fiscal 20182019 were holiday, fragranceornamental wall décor, art, decorative accessories, and accessories, textiles, and floral,lamps, which were partially offset by decreasesincreases in art, mirrorsfloral and lamps.outdoor living.
Gross profit. Gross profit as a percentage of net sales decreased 120530 basis points from 31.4%27.5% in the third quartersecond 13 weeks of fiscal 20172018 to 30.2%22.2% in the third quartersecond 13 weeks of fiscal 2018.2019. The overall decrease in gross profit margin was due to higher store occupancy and depreciationcosts, higher central distribution expenses, lower merchandise margin and higher outbound freight expense, partially offset by lower distribution center expenses.costs. Store occupancy and depreciation costs increased approximately 80240 basis points as a percentage of net sales, primarily due to an unfavorable $0.7 million one-time out-of-period adjustmentsales deleverage. Central distribution costs increased 150 basis points as a percentage of net sales, primarily due to deferred renta change in the current period, in addition toprocess of estimating when warehousing costs are expensed, as well as sales deleverage. Merchandise margin decreased approximately 30130 basis points from 55.7%53.2% in the third quarter of fiscal 2017 to 55.4% in the third quartersecond 13 weeks of fiscal 2018 to 51.9% in the second 13 weeks of fiscal 2019 because of unfavorable product margin due to higher inbound freight costs driven by rate pressureincreased promotions and slightly lower product margin driven by increased promotional activity,unfavorable damages results, partially offset by lowerfavorable shrink costs.results. Outbound freight costs, which include e-commerce shipping, increased approximately 2010 basis points as a percentage of net sales, which was driven by an increase in e-
commercedistribution center to store shipping costs due to the further expansion of this channel. Central distribution costs, including depreciation, decreased 10 basis points as a percentage of net sales.costs.
Compensation and benefits. Compensation and benefits as a percentage of net sales decreasedincreased approximately 20320 basis points from 19.4%19.5% in the third quarter of fiscal 2017 to 19.2% in the third quartersecond 13 weeks of fiscal 2018 to 22.7% in the second 13 weeks of fiscal 2019, primarily due to sales deleverage of both store and corporate payroll expenses, as a resultwell as corporate severance agreements and higher executive stock compensation expense.
Other operating expenses. Other operating expenses as a percentage of net sales decreasedincreased approximately 13050 basis points from 13.4% in the third quartersecond 13 weeks of fiscal 20172018 to 12.1%13.9% in the thirdsecond 13 weeks of fiscal quarter of 2018.2019. The decreaseincrease as a percentage of net sales was primarily due to cost control initiativessales deleverage.
Asset impairment. For the second 13 weeks of fiscal 2019, we recorded an impairment charge of approximately $0.5 million for right-of-use assets at two impaired stores and favorable self-insured workers’ compensationan impairment charge of approximately $1.5 million for leasehold improvements, fixtures and general liability claims trends.equipment at three stores, for which the carrying value exceed the fair value of these assets.
Income tax benefit. We recorded an income tax benefit of approximately $0.7$3.7 million, or 19.7%17.7% of the loss before income taxes during the third quartersecond 13 weeks of fiscal 2018,2019, compared to an income tax benefit of approximately $1.2$2.0 million, or 34.5%23.3% of the loss before income taxes during the prior-year quarter.prior year period. The decrease in the tax rate for the third quartersecond 13 weeks of fiscal 20182019 compared to the prior-year quarterprior year period was primarily due to the effectrealization 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, which was partially offset by additional taxdiscrete shortfall expense related to stock compensation activity.forfeitures and vesting of restricted stock.
Net loss and loss per share. We reported a net loss of $2.8$17.1 million, or $0.18$1.21 per diluted share, for the third quartersecond 13 weeks of fiscal 20182019 as compared to a net loss of $2.4$6.7 million, or $0.15$0.43 per diluted share, for the third quartersecond 13 weeks of fiscal 2017. Included in the reported net loss for the third quarter of fiscal 2018 are severance and other charges of approximately $755,000, net of tax, associated with the transition of our Chief Executive Officers. These charges increased the net loss for the third quarter of fiscal 2018 by approximately $0.05 per diluted share.2018.
39-Week26-Week Period Ended NovemberAugust 3, 20182019 Compared to the 39-Week26-Week Period Ended October 28, 2017August 4, 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:
| | | 39-Week Period Ended | | | 26-Week Period Ended | | |
| November 3, 2018 | | October 28, 2017 | | Change | August 3, 2019 | | August 4, 2018 | | Change |
| $ | | % | | $ | | % | | $ | | % | $ | | % | | $ | | % | | $ | | % |
Net sales | $ | 430,924 |
| | 100.0 | % | | $ | 409,503 |
| | 100.0 | % | | $ | 21,421 |
| | 5.2 | % | $ | 249,533 |
| | 100.0 | % | | $ | 276,353 |
| | 100.0 | % | | $ | (26,820 | ) | | (9.7 | )% |
Cost of sales | 302,161 |
| | 70.1 |
| | 281,098 |
| | 68.6 |
| | 21,063 |
| | 7.5 |
| |
Cost of sales (exclusive of depreciation as shown below) | | 186,741 |
| | 74.8 |
| | 194,243 |
| | 70.3 |
| | (7,502 | ) | | (3.9 | ) |
Gross profit | 128,763 |
| | 29.9 |
| | 128,405 |
| | 31.4 |
| | 358 |
| | 0.3 |
| 62,792 |
| | 25.2 |
| | 82,110 |
| | 29.7 |
| | (19,318 | ) | | (23.5 | ) |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | |
Compensation and benefits | 83,490 |
| | 19.4 |
| | 80,556 |
| | 19.7 |
| | 2,934 |
| | 3.6 |
| 54,218 |
| | 21.7 |
| | 53,869 |
| | 19.4 |
| | 349 |
| | 0.6 |
|
Other operating expenses | 54,067 |
| | 12.5 |
| | 54,501 |
| | 13.3 |
| | (434 | ) | | (0.8 | ) | 34,790 |
| | 14.0 |
| | 35,284 |
| | 12.8 |
| | (494 | ) | | (1.4 | ) |
Depreciation (exclusive of depreciation included in cost of sales) | 5,405 |
| | 1.3 |
| | 5,089 |
| | 1.3 |
| | 316 |
| | 6.2 |
| |
Depreciation | | 3,575 |
| | 1.4 |
| | 3,538 |
| | 1.3 |
| | 37 |
| | 1.0 |
|
Asset impairment | | 3,859 |
| | 1.6 |
| | — |
| | — |
| | 3,859 |
| | 100.0 |
|
Total operating expenses | 142,962 |
| | 33.2 |
| | 140,146 |
| | 34.3 |
| | 2,816 |
| | 2.0 |
| 96,442 |
| | 38.7 |
| | 92,691 |
| | 33.5 |
| | 3,751 |
| | 4.0 |
|
Operating loss | (14,199 | ) | | (3.3 | ) | | (11,741 | ) | | (2.9 | ) | | (2,458 | ) | | 20.9 |
| (33,650 | ) | | (13.5 | ) | | (10,581 | ) | | (3.8 | ) | | (23,069 | ) | | 218.0 |
|
Interest expense | 200 |
| | — |
| | 195 |
| | — |
| | 5 |
| | 2.6 |
| 138 |
| | 0.1 |
| | 131 |
| | — |
| | 7 |
| | 5.3 |
|
Other income | (825 | ) | | (0.2 | ) | | (448 | ) | | (0.1 | ) | | (377 | ) | | 84.2 |
| (554 | ) | | (0.2 | ) | | (601 | ) | | (0.2 | ) | | 47 |
| | (7.8 | ) |
Loss before income taxes | (13,574 | ) | | (3.1 | ) | | (11,488 | ) | | (2.8 | ) | | (2,086 | ) | | 18.2 |
| (33,234 | ) | | (13.3 | ) | | (10,111 | ) | | (3.6 | ) | | (23,123 | ) | | 228.7 |
|
Income tax benefit | (3,197 | ) | | (0.7 | ) | | (3,919 | ) | | (1.0 | ) | | 722 |
| | (18.4 | ) | (7,193 | ) | | (2.9 | ) | | (2,514 | ) | | (0.9 | ) | | (4,679 | ) | | 186.1 |
|
Net loss | $ | (10,377 | ) | | (2.4 | )% | | $ | (7,569 | ) | | (1.8 | )% | | $ | (2,808 | ) | | 37.1 | % | $ | (26,041 | ) | | (10.4 | )% | | $ | (7,597 | ) | | (2.7 | )% | | $ | (18,444 | ) | | 242.8 | % |
Net sales. Net sales increased 5.2%decreased 9.7% to $430.9$249.5 million for the first nine months26 weeks of fiscal 20182019 compared to $409.5$276.4 million for the prior-year period. The impact of net new store growth contributed an increase in net sales of $22.6 million. This was partially offset by a decrease in comparable store sales, including e-commerce sales, of 0.3%, or $1.1 million for the first nine months of fiscal 2018 compared to the prior-yearprior year period. Comparable store sales, including e-commerce sales, decreased 0.6%10.9%, or $29.2 million for the first 26 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 $2.3 million. Comparable store sales, including e-commerce sales, decreased 1.2% in the prior-yearprior year period. For the first nine months26 weeks of fiscal 2018,2019, e-commerce comparable sales increased 24.8% versus the prior-year period,
15.9%, while comparable store sales at brick-and-mortar stores decreased 3.3%15.0%. For brick-and-mortar stores, the comparable store sales decrease was primarily due to a decrease in transactionsstore traffic and a decline in the average ticket, which was partially offset by an increaseimprovement 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.conversion. For e-commerce, comparable sales benefited from an increase in transactionswebsite traffic and conversion, partially offset by a decrease in average ticket due to higher website traffic.decreases in both average retail price and items per transaction. The merchandise categories contributing most to the comparable store sales decrease for the first nine months26 weeks of fiscal 20182019 were mirrors, ornamental wall décor, art, decorative accessories and textiles,lamps, which were partially offset by increases in outdoor living, holiday and floral.
Gross profit. Gross profit as a percentage of net sales decreased 150450 basis points from 31.4%29.7% in the first nine months26 weeks of fiscal 20172018 to 29.9%25.2% in the first nine months26 weeks of fiscal 2018.2019. The overall decrease in gross profit margin was due to higherthe deleverage of store occupancy and depreciationcosts, lower merchandise margin, higher central distribution expenses and higher outbound freight charges, as well as slightly lower merchandise margin.costs. Store occupancy and depreciation costs increased approximately 200 basis points as a percentage of net sales, primarily due to sales deleverage. Merchandise margin decreased approximately 130 basis points from 54.6% in the first 26 weeks of fiscal 2018 to 53.3% in the first 26 weeks of fiscal 2019 due to unfavorable product margin due to increased promotions and higher inbound freight costs. Central distribution costs increased 90 basis points as a percentage of net sales, primarily due to a favorable $1.2 million one-time out-of-period adjustment of ancillary rent paymentschange in the prior-year period and an unfavorable $0.7 million one-time out-of-period adjustment to deferred rent in the current period,process of estimating when warehousing costs are expensed, as well as deleverage from negative comparable store sales.sales deleverage. Outbound freight costs, which include e-commerce shipping, increased approximately 5030 basis points as a percentage of net sales, which was driven by an increase in e-commercedeleverage of distribution center to store shipping costs due to the further expansion of this channel. Merchandise margin decreased approximately 10 basis points from 55.0% in the first nine months of fiscal 2017 to 54.9% in the first nine months of fiscal 2018 due to higher inbound freight costs driven by rate pressure, partially offset by better product margin, as well as lower damages. Central distribution costs, including depreciation, remained relatively flat as a percentage of net sales compared to the prior-year period.costs.
Compensation and benefits. Compensation and benefits as a percentage of net sales decreasedincreased approximately 30230 basis points from 19.7% in the first nine months of fiscal 2017 to 19.4% in the first nine months26 weeks of fiscal 2018 as a resultto 21.7% in the first 26 weeks of lower stock-based compensation expensefiscal 2019, primarily due to forfeitures, lowersales deleverage of both store and corporate payroll expense and a higher rate of internal salary capitalization for corporate projects, partially offset by charges associated with the transition of our Chief Executive Officers.expenses.
Other operating expenses. Other operating expenses as a percentage of net sales decreasedincreased approximately 80120 basis points from 13.3%12.8% in the first nine months26 weeks of fiscal 20172018 to 12.5%14.0% in the first nine months26 weeks of 2018.fiscal 2019. The decreaseincrease as a percentage of net sales was primarily due to cost control initiativessales deleverage and favorable self-insured workers’ compensationincreased advertising expenses.
Asset impairment. For the first 26 weeks of fiscal 2019, we recorded an impairment charge of approximately $0.5 million for right-of-use assets at two impaired stores and general liability claims trends.an impairment charge of approximately $3.4 million at 11 stores for the first 26 weeks of fiscal 2019 for leasehold improvements, fixtures and equipment, for which the carrying value exceed the fair value of these assets.
Income tax benefit. We recorded an income tax benefit of approximately $3.2$7.2 million, or 23.6%21.6% of the loss before income taxes during the first nine months26 weeks of fiscal 2018,2019, compared to an income tax benefit of approximately $3.9$2.5 million, or 34.1%24.9% of the loss before income taxes during the prior-yearprior year period. The decrease in the tax rate for the first nine months26 weeks of fiscal 20182019 compared to the prior-yearprior year period was primarily due to the effectrealization 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, which was partially offset by additional taxdiscrete shortfall expense related to stock compensation activity.forfeitures and vesting of restricted stock.
Net loss and loss per share. We reported a net loss of $10.4$26.0 million, or $0.66$1.83 per diluted share, for the first nine months26 weeks of fiscal 20182019 as compared to a net loss of $7.6 million, or $0.48 per diluted share, for the first nine months26 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.
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 and 26 weeks ended August 3, 2019 and August 4, 2018:
|
| | | | | | | | | | | | | | | |
| 13-Week Period Ended | | 26-Week Period Ended |
| August 3, 2019 | | August 4, 2018 | | August 3, 2019 | | August 4, 2018 |
Net loss | $ | (17,120 | ) | | $ | (6,715 | ) | | $ | (26,041 | ) | | $ | (7,597 | ) |
Special Items: | | | | | | | |
CEO transition costs, net of tax | — |
| | 344 |
| | — |
| | 1,154 |
|
Severance charges, net of tax | 631 |
| | — |
| | 813 |
| | — |
|
Asset impairment, net of tax | 1,628 |
| | — |
| | 2,978 |
| | — |
|
Total special items, net of tax | $ | 2,259 |
| | $ | 344 |
| | $ | 3,791 |
| | $ | 1,154 |
|
Adjusted net loss | $ | (14,861 | ) | | $ | (6,371 | ) | | $ | (22,250 | ) | | $ | (6,443 | ) |
| | | | | | | |
Diluted loss per share | $ | (1.21 | ) | | $ | (0.43 | ) | | $ | (1.83 | ) | | $ | (0.48 | ) |
Adjusted diluted loss per share | $ | (1.05 | ) | | $ | (0.41 | ) | | $ | (1.56 | ) | | $ | (0.40 | ) |
| | | | | | | |
Diluted weighted average shares outstanding | 14,110 |
| | 15,726 |
| | 14,241 |
| | 15,925 |
|
Included in the reported net loss for the second 13 weeks of fiscal 2019 are asset impairment charges of approximately $1.6 million and severance charges of approximately $0.6 million, net of tax, which increased the net loss for the second 13 weeks of fiscal 2019 by approximately $0.16 per diluted share. Included in the reported net loss for the second 13 weeks of fiscal 2018 are severance and transition charges of approximately $0.3 million, net of tax, associated with our Chief Executive Officer transition. These charges increased the net loss for the second 13 weeks of fiscal 2018 by approximately $0.02 per diluted share.
Included in the reported net loss for the first nine months26 weeks of fiscal 2019 are asset impairment charges of approximately $3.0 million and severance charges of approximately $0.8 million, net of tax, which increased the net loss for the first 26 weeks of fiscal 2019 by approximately $0.27 per diluted share. Included in the reported net loss for the first 26 weeks of fiscal 2018 are severance and othertransition charges of approximately $1.9$1.2 million, net of tax, associated with the transition of our Chief Executive Officers.Officer transition. These charges increased the net loss for the first nine months26 weeks of fiscal 2018 by approximately $0.12$0.08 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 generatedinternally-generated cash.
Cash flows from operating activities. Net cash used in operating activities was approximately $20.8$31.5 million during the first nine months26 weeks of fiscal 20182019 as compared to net cash used in operating activities of approximately $12.3$22.5 million for the first nine months26 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-yearprior year period was primarily due to timing of accrued expenses and other noncurrent liabilities and a decline in operating performance.performance and an increase in inventories, partially offset by an increase in accounts payable.
Cash flows from investing activities. Net cash used in investing activities for the first nine months26 weeks of fiscal 20182019 consisted of $25.0$8.5 million in capital expenditures as compared to $23.6$18.3 million in capital expenditures for the prior-yearprior year period. The table below sets forth capital expenditures by category (in thousands) for the periods indicated:
|
| | | | | | | |
| 26-Week Period Ended |
| August 3, 2019 | | August 4, 2018 |
Distribution center and supply chain enhancements | $ | 2,293 |
| | $ | 1,262 |
|
Existing stores | 2,232 |
| | 1,814 |
|
New stores | 1,978 |
| | 9,233 |
|
Technology and omni-channel projects | 1,863 |
| | 3,390 |
|
Corporate | 91 |
| | 2,583 |
|
Total capital expenditures | $ | 8,457 |
| | $ | 18,282 |
|
The capital expenditures in the current year period related primarily to distribution center and supply chain enhancements, improvements to existing stores, the opening of 22four new stores during the period investments inand information technology systems, investments in our existing stores, hardware lease buyouts and improvements to our supply-chain.system investments. Capital expenditures in the prior-yearprior year period related primarily to the opening of 26sixteen new stores during the period, improvements to our supply chain and information technology systems, andsystem investments, corporate hardware lease buyouts, investments in our existing stores. We expect that capital expenditures for fiscal 2018 will be in the range of $29 to $31 million, primarily for the purpose of leasehold improvements at new stores and investments in supply chain and omni-channel technologies.improvements to our supply-chain.
Cash flows from financing activities. Net cash used in financing activities was approximately $10.5$3.3 million for the first nine months26 weeks of fiscal 2018 and2019 compared to $4.0 million for the first 26 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. Net cash used in financing activities was approximately $166,000 for the first nine months of fiscal 2017 and was 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, partiallyslightly 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 NovemberAugust 3, 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 $75.0$72.5 million available for borrowing. Subsequent to August 3, 2019, we borrowed $10 million on the senior secured revolving credit facility.
At NovemberAugust 3, 2018,2019, our balance of cash and cash equivalents was approximately $23.8$14.7 million. We do not anticipate any borrowings under the credit facility during fiscal 2018. We believe that the combination of our cash balances, availability under our Credit Agreement 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 August 3, 2019, we had approximately $0.3 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:
|
| | | | | | | | | | | | | | | |
| 13-Week Period Ended | | 39-Week Period Ended |
| November 3, 2018 | | October 28, 2017 | | November 3, 2018 | | October 28, 2017 |
Shares repurchased and retired | 689,473 |
| | 18,901 |
| | 1,082,117 |
| | 18,901 |
|
Share repurchase cost | $ | 6,554 |
| | $ | 218 |
| | $ | 10,358 |
| | $ | 218 |
|
As of November 3, 2018, we had approximately $9.0 million remaining under our new stock repurchase plan.
|
| | | | | | | | | | | | | | | |
| 13-Week Period Ended | | 26-Week Period Ended |
| August 3, 2019 | | August 4, 2018 | | August 3, 2019 | | August 4, 2018 |
Shares repurchased and retired | 345,906 |
| | 77,096 |
| | 632,962 |
| | 392,644 |
|
Share repurchase cost | $ | 1,046 |
| | $ | 832 |
| | $ | 3,414 |
| | $ | 3,804 |
|
Related Party Transactions
We havehad an agreement with a related party vendor to purchase merchandise inventory. The vendor iswas considered a related party for financial reporting purposes because its principal owner iswas the spouse of our former Vice President of Merchandising.Product Development and Trend. As of June 14, 2019, the vendor is no longer a related party. The table below sets forth selected results related to this vendor, for the time period that the vendor was a related party, in dollars (in thousands) and percentages for the periods indicated:
| | | 13-Week Period Ended | | 39-Week Period Ended | 13-Week Period Ended | | 26-Week Period Ended |
| November 3, 2018 | | October 28, 2017 | | November 3, 2018 | | October 28, 2017 | August 3, 2019 | | August 4, 2018 | | August 3, 2019 | | August 4, 2018 |
Related Party Vendor: | | | | | | | | | | | | | | |
Purchases | $ | 17,444 |
| | $ | 17,684 |
| | $ | 41,966 |
| | $ | 41,743 |
| $ | 6,177 |
| | $ | 13,086 |
| | $ | 19,577 |
| | $ | 24,522 |
|
Purchases as a percent of total merchandise purchases | 22.5 | % | | 20.4 | % | | 21.1 | % | | 21.5 | % | 9.2 | % | | 20.1 | % | | 16.0 | % | | 20.3 | % |
Cost of sales | 12,629 |
| | 11,668 |
| | 34,542 |
| | 32,278 |
| $ | 4,776 |
| | $ | 10,336 |
| | $ | 14,749 |
| | $ | 21,913 |
|
Payable amounts outstanding at fiscal period-end | 11,261 |
| | 7,671 |
| | 11,261 |
| | 7,671 |
| — |
| | 6,747 |
| | — |
| | 6,747 |
|
Significant Contractual Obligations and Commercial Commitments
Construction Commitments. As of NovemberAugust 3, 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.
Our success depends upon our marketing, advertising and promotional efforts. If we are unable to implement them successfully, or if our competitors market, advertise or promote more effectively than we do, our revenue may be adversely affected.
We may not be able to successfully anticipate consumer trends, and our failure to do so may lead to loss of consumer acceptance of our products resulting in reduced net sales.
We may not be able to successfully respond to technological change, our website could become obsolete and our financial results and conditions could be adversely affected.
Inventory loss and theft and the inability to anticipate inventory needs may result in reduced net sales.
Inability to successfully develop and maintain a relevant and reliable 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.
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.
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 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 NovemberAugust 3, 20182019 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. There have been no 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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 parties have tentatively agreed to an early mediation with minimal exchange of discovery. To date, the parties have exchanged the court mandated initial disclosures, and the Court has issued a notice of intent to issue a scheduling order on January 10, 2019.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.
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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Repurchases of Equity Securities
Shares of common stock repurchased by the Company during the third quarter of fiscal 2018,13 weeks ended NovemberAugust 3, 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 Programs | Maximum Dollar Value of Shares that May Yet be Purchased Under the Programs (in 000s) |
August 5, 2018 to September 1, 2018 | 58,409 |
| $ | 9.88 |
| 58,409 |
| $ | 5,014 |
|
September 2, 2018 to October 6, 2018 | 327,582 |
| 9.44 |
| 327,582 |
| 11,921 |
|
October 7, 2018 to November 3, 2018 | 303,482 |
| 9.50 |
| 303,482 |
| 9,037 |
|
Total | 689,473 |
| $ | 9.51 |
| 689,473 |
| $ | 9,037 |
|
|
| | | | | | | | | | |
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) |
May 5, 2019 to June 1, 2019 | 104,407 |
| $ | 4.95 |
| 104,407 |
| $ | 794 |
|
June 2, 2019 to July 6, 2019 | 131,548 |
| 2.55 |
| 131,548 |
| 458 |
|
July 7, 2019 to August 3, 2019 | 109,951 |
| 1.76 |
| 109,951 |
| 265 |
|
Total | 345,906 |
| $ | 3.02 |
| 345,906 |
| $ | 265 |
|
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.
ITEM 6. EXHIBITS
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Exhibit No. | | Description of Document |
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101 | | Interactive Data File (Quarterly Report on Form 10-Q, for the quarter ended NovemberAugust 3, 2018,2019, furnished in XBRL (eXtensible Business Reporting Language)) |
* Incorporated by reference.
+ Management contract of compensatory plan or arrangement.
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.
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| KIRKLAND’S, INC. |
Date: December 6, 2018September 5, 2019 | /s/ Steve C. Woodward |
| Steve C. Woodward Chief Executive Officer
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Date: December 6, 2018September 5, 2019 | /s/ Nicole A. Strain |
| Nicole A. Strain Interim Chief Financial Officer
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