UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



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

For the quarterly period ended ~~November~~August 3, ~~2018~~

2019



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

For the transition period from ______to ______.

Commission file number: 000-49885

~~KIRKLAND’S, INC.~~Kirkland’s, Inc.

(Exact name of registrant as specified in its charter)



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

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

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

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock	KIRK	NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES x NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See ~~the~~ definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	¨	Accelerated filer	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 - ~~14,858,235~~13,890,218 shares outstanding as of ~~November 27, 2018.~~August 21, 2019.

KIRKLAND’S, INC.

TABLE OF CONTENTS



		Page

PART I	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets (Unaudited) as of ~~November~~August 3, ~~2018,~~2019, February 3,2, 2019 and August 4, 2018 ~~and October 28, 2017~~	3
	Condensed Consolidated Statements of Operations (Unaudited) for the 13-week and ~~39-week~~26-week periods ended ~~November~~August 3, ~~2018~~2019 and ~~October 28, 2017~~August 4, 2018	4
	Condensed Consolidated Statement of Shareholders’ Equity (Unaudited) for the ~~39-week period~~13-week and 26-week periods ended ~~November~~August 3, 2019 and August 4, 2018	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~39-week~~26-week periods ended ~~November~~August 3, ~~2018~~2019 and ~~October 28, 2017~~August 4, 2018	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1213
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	1922
Item 4.	Controls and Procedures	1922

PART II	OTHER INFORMATION	2023
Item 1.	Legal Proceedings	2023
Item 1A.	Risk Factors	2023
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2123
Item 6.	Exhibits	2124

SIGNATURES		2225

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.

Table of Contents

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.

Table of Contents

KIRKLAND’S, INC.

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

(in thousands, except share data)


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

Table of Contents

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.

Table of Contents

KIRKLAND’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 - Description of Business and Basis of Presentation

Kirkland’s, Inc. (the “Company”) is a specialty retailer of home décor in the United States operating ~~432~~431 stores in 37 states as of ~~November~~August 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-week~~26-week periods ended ~~November~~August 3, ~~2018~~2019 are not indicative of the results to be expected for any other interim period or for the entire fiscal year. The Company’s fiscal year ends on the Saturday closest to January 31, resulting in years of either 52 or 53 weeks.

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from the estimates and assumptions used.

Changes in estimates are recognized in the period when new information becomes available to management. Areas where the nature of the estimate makes it reasonably possible that actual results could materially differ from amounts estimated include, but are not limited to, impairment assessments on long-lived assets, ~~asset retirement obligations,~~ inventory reserves and self-insurance ~~reserves, income tax liabilities, stock-based compensation, employee bonus accruals, gift card breakage and contingent liabilities.~~reserves.

In the ~~fourth quarter~~beginning of fiscal ~~2017,~~2019, the Company ~~concluded that it was appropriate~~adopted lease accounting guidance as discussed in Note 10 and Note 12 to ~~classify supplies inventory in prepaid expenses and other current assets instead of inventories, net, in~~ the condensed consolidated financial statements. ~~The Company reclassified prior period amounts~~Adoption of the new lease accounting guidance had a material impact to ~~reflect this change. This~~the Company’s condensed consolidated balance sheets and related disclosures, and resulted in ~~$2.6~~the recording of additional right-of-use assets and lease liabilities of approximately $295.2 million ~~reclassified from inventories, net,~~as of the date of adoption. This guidance was applied using the optional transition method, which allowed the Company to ~~prepaid expenses and other current~~not recast comparative financial information but rather recognize a cumulative-effect adjustment to retained earnings as of the effective date in the period of adoption. An adjustment of $0.3 million was made to retained earnings as a result of right-of-use assets onthat were impaired upon the adoption of this guidance. See Note 11 to the condensed consolidated financial statements for further discussion. Consistent with the optional transition method, the financial information in the condensed consolidated balance ~~sheet as~~sheets prior to the adoption of ~~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 expense~~the current period presented. The standard did not materially impact the Company’s condensed consolidated statements of operations or cash flows. For additional information, including the required disclosures, related to the impact of adopting this standard, see Note 10 and Note 12 to the condensed consolidated financial statements.

Certain other ~~current assets~~amounts in the ~~changes in assets and liabilities~~fiscal 2018 operating activities section of the condensed consolidated ~~statements~~statement of cash flows ~~for~~have been reclassified to conform to the ~~39-week period ended October 28, 2017.~~fiscal 2019 presentation. These reclassifications had no effect on reported net loss.

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

The ~~Company also reclassified prior period amounts to reflect this change. This reclassification increased cost of sales by approximately $5.1 million and $14.8 million~~table 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

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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 ~~November~~August 3, ~~2018~~2019 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-week~~26-week periods ended ~~November~~August 3, ~~2018~~2019 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-week~~26-week periods ended ~~November~~August 3, ~~2018~~2019 was primarily due to the ~~effect~~realization 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 tax~~discrete 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 ~~1.2~~1.7 million and ~~1.6~~1.4 million shares for ~~each of~~ the 13-week periods ended ~~November~~August 3, ~~2018~~2019 and ~~October 28, 2017,~~August 4, 2018, respectively, and ~~1.3~~1.6 million and ~~1.5~~1.4 million shares for ~~each of~~ the ~~39-week~~26-week periods ended ~~November~~August 3, ~~2018~~2019 and ~~October 28, 2017,~~August 4, 2018, respectively.

Note 4 - Fair Value ~~of Financial Instruments~~Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. The carrying amounts of cash and cash equivalents, accounts receivable, 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 ~~November~~August 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.

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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.

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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 ~~has~~had 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

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Note 9 - ~~New Accounting Pronouncements~~Senior 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 Adopted~~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.

~~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 exchange~~the administrative agent, for the ~~goods or services. ASU 2014-09 also requires more detailed disclosures~~benefit of itself and the secured parties specified therein, a lien on and security interest in all of the rights, title and interest in substantially all of the Company’s assets to ~~enable users~~secure the payment and performance of ~~financial statements to understand~~ the ~~nature, amount, timing, and uncertainty~~obligations under the Credit Agreement.

As of ~~revenue and cash flows arising from contracts with customers. The amendments in ASU 2014-09 were effective for~~August 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.

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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

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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 transitioned~~2019, the Company recorded an adjustment to ~~this new standard could either retrospectively restate each prior reporting period or reflect~~increase 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 earnings~~adoption 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 ~~November~~August 3, ~~2018,~~2019, the Company ~~recognized $1.8~~recorded an impairment charge of approximately $0.5 million ~~of gift card redemptions related to amounts included in the gift card contract liability balance of $10.4~~for 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 $5.0~~and $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 transition~~Company 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 evaluating~~previously used the ~~impact~~age-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 Facility~~New Accounting Pronouncements

New Accounting Pronouncements Recently Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)”, which supersedes the existing guidance for lease accounting, Leases (Topic 840) (“ASU 2016-02”). ASU 2016-02 requires lessees to recognize a lease liability and a right-of-use asset for both operating leases and finance leases on the balance sheet at the lease commencement date. For operating leases, the lessee would recognize a straight-line total lease expense, while for finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset. The Company ~~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 facility~~guidance 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 under~~cash 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 at~~guidance. 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 paid~~optional transition method in addition to the ~~Lenders on~~existing modified retrospective transition method by allowing a cumulative effect adjustment to the ~~unused portion~~opening 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

1012

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~~Borrowings~~Expedient for Transition to Topic 842.” This update permits an entity to elect an optional transition practical expedient to not evaluate land easements that exist or expired before the entity’s adoption of ASU 2016-02 and that were not accounted for as leases under 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 subject~~adopted 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. Pursuant~~not recast comparative financial information but rather recognize a cumulative-effect adjustment to retained earnings as of the ~~Security Agreement,~~effective date in the period of adoption.

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

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

The Company elected to make the ~~administrative agent,~~accounting policy election for short-term leases, for which the ~~benefit of itself and~~Company 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 all~~lease term.

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

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

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

~~Table of Contents~~Note 13 - Subsequent Events

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, 2018~~March 29, 2019 (the “Annual Report”). The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could

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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 ~~432~~431 stores in 37 states as of ~~November~~August 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, ~~framed~~furniture, art, ~~furniture,~~fragrance and accessories, ornamental wall décor, ~~fragrance and~~decorative accessories, mirrors, lamps, ~~decorative accessories,~~ textiles, ~~housewares, gifts,~~ artificial floral products, ~~frames, clocks and~~gifts, housewares, outdoor living ~~items.~~items, frames and clocks. Our stores offer an extensive assortment of holiday merchandise during seasonal periods as well as items carried throughout the year suitable for gift-giving. We provide our customers an engaging shopping experience characterized by a diverse, ever-changing merchandise selection reflecting current styles at prices which provide discernible value. This combination of ever-changing and stylish merchandise, value pricing and a stimulating online and store experience has led to our emergence as a ~~leader~~key player in home décor and enabled us to develop a ~~strong~~loyal customer base.

Overview of Key Financial Measures

Net sales and gross profit are the most significant drivers of our operating performance. Net sales consists of all merchandise sales to customers, ~~gift card breakage revenue and~~net of returns, shipping revenue associated with e-commerce sales, ~~net of returns~~ and ~~excluding~~gift card breakage revenue and excludes sales taxes. We use comparable store sales to measure ~~our ability to achieve~~ sales increases 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-commerce~~E-commerce store sales, including shipping revenue, are included in consolidated comparable store sales. Increases in comparable store sales are an important factor in maintaining or increasing the profitability of existing stores.

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

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	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

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13-Week Period Ended ~~November~~August 3, ~~2018~~2019 Compared to the 13-Week Period Ended ~~October 28, 2017~~August 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 quarter~~second 13 weeks of fiscal ~~2018~~2019 compared to ~~$145.0~~$133.9 million for the ~~prior-year~~prior year period. ~~The~~Comparable 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-year~~prior year period. For the ~~third quarter~~second 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 ~~transactions~~store traffic and a decline in the average ticket, which was partially offset by an ~~increase~~improvement 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 primarily~~and 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 ~~increase~~decrease for the ~~third quarter~~second 13 weeks of fiscal ~~2018~~2019 were ~~holiday, fragrance~~ornamental wall décor, art, decorative accessories, and ~~accessories, textiles, and floral,~~lamps, which were partially offset by ~~decreases~~increases in ~~art, mirrors~~floral and ~~lamps.~~outdoor living.

Gross profit. Gross profit as a percentage of net sales decreased ~~120~~530 basis points from ~~31.4%~~27.5% in the ~~third quarter~~second 13 weeks of fiscal ~~2017~~2018 to ~~30.2%~~22.2% in the ~~third quarter~~second 13 weeks of fiscal ~~2018.~~2019. The overall decrease in gross profit margin was due to higher store occupancy ~~and depreciation~~costs, 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 adjustment~~sales deleverage. Central distribution costs increased 150 basis points as a percentage of net sales, primarily due to ~~deferred rent~~a change in the ~~current period, in addition to~~process 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 quarter~~second 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 pressure~~increased promotions and ~~slightly lower product margin driven by increased promotional activity,~~unfavorable damages results, partially offset by ~~lower~~favorable 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-~~

~~Table~~deleverage of ~~Contents~~

~~commerce~~distribution 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 ~~decreased~~increased approximately 20320 basis points from ~~19.4%~~19.5% in the ~~third quarter of fiscal 2017 to 19.2% in the third quarter~~second 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 result~~well as corporate severance agreements and higher executive stock compensation expense.

Table of ~~lower corporate and store payroll and employee benefit expenses, partially offset by charges associated with the transition of our Chief Executive Officers.~~Contents

Other operating expenses. Other operating expenses as a percentage of net sales ~~decreased~~increased approximately ~~130~~50 basis points from 13.4% in the ~~third quarter~~second 13 weeks of fiscal ~~2017~~2018 to ~~12.1%~~13.9% in the ~~third~~second 13 weeks of fiscal ~~quarter of 2018.~~2019. The ~~decrease~~increase as a percentage of net sales was primarily due to ~~cost control initiatives~~sales 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’ compensation~~an 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 quarter~~second 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 quarter~~second 13 weeks of fiscal ~~2018~~2019 compared to the ~~prior-year quarter~~prior year period was primarily due to the ~~effect~~realization 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 tax~~discrete 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 quarter~~second 13 weeks of fiscal ~~2018~~2019 as compared to a net loss of ~~$2.4~~$6.7 million, or ~~$0.15~~$0.43 per diluted share, for the ~~third quarter~~second 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-Week~~26-Week Period Ended ~~November~~August 3, ~~2018~~2019 Compared to the ~~39-Week~~26-Week Period Ended ~~October 28, 2017~~August 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 months~~26 weeks of fiscal ~~2018~~2019 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-year~~prior year period. For the first ~~nine months~~26 weeks of fiscal ~~2018,~~2019, e-commerce comparable sales increased ~~24.8% versus the prior-year period,~~

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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 ~~transactions~~store traffic and a decline in the average ticket, which was partially offset by an ~~increase~~improvement 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 ~~transactions~~website 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 months~~26 weeks of fiscal ~~2018~~2019 were ~~mirrors,~~ ornamental wall décor, art, decorative accessories and ~~textiles,~~lamps, which were partially offset by increases in ~~outdoor living, holiday and~~ floral.

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Gross profit. Gross profit as a percentage of net sales decreased ~~150~~450 basis points from ~~31.4%~~29.7% in the first ~~nine months~~26 weeks of fiscal ~~2017~~2018 to ~~29.9%~~25.2% in the first ~~nine months~~26 weeks of fiscal ~~2018.~~2019. The overall decrease in gross profit margin was due to ~~higher~~the deleverage of store occupancy ~~and depreciation~~costs, 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 payments~~change 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-commerce~~deleverage 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 ~~decreased~~increased approximately 30230 basis points from ~~19.7% in the first nine months of fiscal 2017 to~~ 19.4% in the first ~~nine months~~26 weeks of fiscal 2018 ~~as a result~~to 21.7% in the first 26 weeks of ~~lower stock-based compensation expense~~fiscal 2019, primarily due to ~~forfeitures, lower~~sales 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 ~~decreased~~increased approximately 80120 basis points from ~~13.3%~~12.8% in the first ~~nine months~~26 weeks of fiscal ~~2017~~2018 to ~~12.5%~~14.0% in the first ~~nine months~~26 weeks of ~~2018.~~fiscal 2019. The ~~decrease~~increase as a percentage of net sales was primarily due to ~~cost control initiatives~~sales deleverage and ~~favorable self-insured workers’ compensation~~increased 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 months~~26 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-year~~prior year period. The decrease in the tax rate for the first ~~nine months~~26 weeks of fiscal ~~2018~~2019 compared to the ~~prior-year~~prior year period was primarily due to the ~~effect~~realization 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 tax~~discrete 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 months~~26 weeks of fiscal ~~2018~~2019 as compared to a net loss of $7.6 million, or $0.48 per diluted share, for the first ~~nine months~~26 weeks of fiscal ~~2017.~~ 2018.

Adjusted net loss and adjusted loss per share. To supplement our unaudited consolidated condensed financial statements presented in accordance with generally accepted accounting principles, or GAAP, we provide certain non-GAAP financial measures, including adjusted loss and adjusted diluted loss per share. These measures are not in accordance with, and are not intended as alternatives to, GAAP. We use these non-GAAP financial measures internally in analyzing our financial results and believe that they provide useful information to analysts and investors, as a supplement to GAAP measures, in evaluating our operational performance.

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

Non-GAAP measures are intended to provide additional information only and do not have any standard meanings prescribed by GAAP. Use of these terms may differ from similar measures reported by other companies. Each non-GAAP measure has its limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of the Company’s results as reported under GAAP.

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The following table shows a reconciliation net loss and diluted loss per share to adjusted net loss and adjusted diluted loss per share for the 13 weeks 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 months~~26 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 ~~other~~transition 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 months~~26 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 generated~~internally-generated cash.

Cash flows from operating activities. Net cash used in operating activities was approximately ~~$20.8~~$31.5 million during the first ~~nine months~~26 weeks of fiscal ~~2018~~2019 as compared to ~~net cash used in operating activities of~~ approximately ~~$12.3~~$22.5 million for the first ~~nine months~~26 weeks of fiscal ~~2017.~~2018. Cash flows from operating activities depend heavily on operating performance and changes in working capital. The change in the amount of cash from operations as compared to the ~~prior-year~~prior year period was primarily due to ~~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.

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Cash flows from investing activities. Net cash used in investing activities for the first ~~nine months~~26 weeks of fiscal ~~2018~~2019 consisted of ~~$25.0~~$8.5 million in capital expenditures as compared to ~~$23.6~~$18.3 million in capital expenditures for the ~~prior-year~~prior year period. The table below sets forth capital expenditures by category (in thousands) for the periods indicated:

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	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 in~~and information technology ~~systems, investments in our existing stores, hardware lease buyouts and improvements to our supply-chain.~~system investments. Capital expenditures in the ~~prior-year~~prior year period related primarily to the opening of 26sixteen new stores during the period, ~~improvements to our supply chain and~~ information technology ~~systems, and~~system 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 months~~26 weeks of fiscal ~~2018 and~~2019 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, partially~~slightly 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 ~~November~~August 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 ~~November~~August 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:

~~As of November 3, 2018, we had approximately $9.0 million remaining under our new stock repurchase plan.~~

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	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 ~~have~~had 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 ~~November~~August 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.

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

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

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

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

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

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.

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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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Both our 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 ~~November~~August 3, ~~2018~~2019 our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Change in internal controls over financial reporting. 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.

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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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.

ITEM 1A. RISK FACTORS

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

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

Issuer Repurchases of Equity Securities

Shares of common stock repurchased by the Company during the ~~third quarter of fiscal 2018,~~13 weeks ended ~~November~~August 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

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ITEM 6. EXHIBITS


(a)	Exhibits.



Exhibit No.		Description of Document
10.1+*		~~Employment Agreement, effective September 21, 2018, by and between Steve C. Woodward and Kirkland’s, Inc. (Exhibit 10.1 to our Current Report on Form 8-K dated September 24, 2018).~~
10.2+*		~~Amendment No. 1 to Employment Agreement, effective September 21, 2018, by and between Mike Cairnes and Kirkland’s, Inc. (Exhibit 10.2 to our Current Report on Form 8-K dated September 24, 2018).~~
10.3+*		~~Form of Restricted Stock Unit Agreement (Exhibit 10.3 to our Current Report on Form 8-K dated September 24, 2018).~~
31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2		Certification of the ~~Interim~~ Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a)
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350
32.2		Certification of the ~~Interim~~ Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
101		Interactive Data File (Quarterly Report on Form 10-Q, for the quarter ended ~~November~~August 3, ~~2018,~~2019, furnished in XBRL (eXtensible Business Reporting Language))

* Incorporated by reference.

+ Management contract of compensatory plan or arrangement.

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SIGNATURES

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



	KIRKLAND’S, INC.
Date: ~~December 6, 2018~~September 5, 2019	/s/ Steve C. Woodward
	Steve C. Woodward Chief Executive Officer
Date: ~~December 6, 2018~~September 5, 2019	/s/ Nicole A. Strain
	Nicole A. Strain ~~Interim~~ Chief Financial Officer

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	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