Quarterly Report for Quarter Ending August 3, 2024 (Form 10-Q)

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended August 3, 2024

or

☐	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.

(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 ☒ 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 ☒ 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 definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer		☐	Accelerated filer		☐
Non-accelerated filer		☒	Smaller reporting company		☒
			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 ☒

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 - 13,111,638shares outstanding as of August 29, 2024.

KIRKLAND'S, INC.

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION	3
Item 1.	Financial Statements	3
	Condensed Consolidated Balance Sheets (Unaudited) as of August 3, 2024, February 3, 2024, and July 29, 2023	3
	Condensed Consolidated Statements of Operations (Unaudited) for the 13-week and 26-week periods ended August 3, 2024 and July 29, 2023	4
	Condensed Consolidated Statements of Shareholders' (Deficit) Equity (Unaudited) for the 13-week and 26-week periods ended August 3, 2024 and July 29, 2023	5
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the 26-week periods ended August 3, 2024 and July 29, 2023	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	21
PART II	OTHER INFORMATION	22
Item 1.	Legal Proceedings	22
Item 1A.	Risk Factors	22
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	22
Item 5.	Other Information	22
Item 6.	Exhibits	22
SIGNATURES		23

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KIRKLAND'S, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share data)

		August 3,			February 3,			July 29,
		2024			2024			2023
ASSETS
Current assets:
Cash and cash equivalents		$	4,461			$	3,805			$	4,890
Inventories, net			92,760				74,090				98,949
Prepaid expenses and other current assets			8,216				7,614				5,697
Total current assets			105,437				85,509				109,536
Property and equipment:
Equipment			19,067				19,144				19,593
Furniture and fixtures			62,847				63,823				65,632
Leasehold improvements			99,616				100,393				102,068
Computer software and hardware			78,610				78,580				82,517
Projects in progress			371				647				1,276
Property and equipment, gross			260,511				262,587				271,086
Accumulated depreciation			(235,057	)			(232,882	)			(237,208	)
Property and equipment, net			25,454				29,705				33,878
Operating lease right-of-use assets			128,046				126,725				133,352
Other assets			7,282				8,634				6,818
Total assets		$	266,219			$	250,573			$	283,584
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable		$	59,967			$	46,010			$	56,483
Accrued expenses			20,956				23,163				26,432
Operating lease liabilities			38,602				40,018				40,249
Total current liabilities			119,525				109,191				123,164
Operating lease liabilities			100,565				99,772				111,746
Long-term debt, net			61,396				34,000				46,000
Other liabilities			4,438				4,486				3,834
Total liabilities			285,924				247,449				284,744
Shareholders' (deficit) equity:
Preferred stock, nopar value, 10,000,000shares authorized; noshares issued or outstanding at August 3, 2024, February 3, 2024, and July 29, 2023, respectively			-				-				-
Common stock, nopar value; 100,000,000shares authorized; 13,111,638; 12,926,022; and 12,917,373, shares issued and outstanding at August 3, 2024, February 3, 2024, and July 29, 2023, respectively			177,057				176,552				175,988
Accumulated deficit			(196,762	)			(173,428	)			(177,148	)
Total shareholders' (deficit) equity			(19,705	)			3,124				(1,160	)
Total liabilities and shareholders' (deficit) equity		$	266,219			$	250,573			$	283,584

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

KIRKLAND'S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)

		13-Week Period Ended			26-Week Period Ended
		August 3,			July 29,			August 3,			July 29,
		2024			2023			2024			2023
Net sales		$	86,289			$	89,504			$	178,042			$	186,379
Cost of sales			68,629				72,065				133,314				143,069
Gross profit			17,660				17,439				44,728				43,310
Operating expenses:
Compensation and benefits			18,653				19,217				37,939				39,256
Other operating expenses			11,384				14,090				25,702				28,828
Depreciation (exclusive of depreciation included in cost of sales)			925				1,222				1,886				2,428
Asset impairment			20				1,001				31				1,226
Total operating expenses			30,982				35,530				65,558				71,738
Operating loss			(13,322	)			(18,091	)			(20,830	)			(28,428	)
Interest expense			1,420				750				2,547				1,252
Other income			(120	)			(127	)			(236	)			(219	)
Loss before income taxes			(14,622	)			(18,714	)			(23,141	)			(29,461	)
Income tax (benefit) expense			(118	)			650				193				2,010
Net loss		$	(14,504	)		$	(19,364	)		$	(23,334	)		$	(31,471	)
Loss per share:
Basic		$	(1.11	)		$	(1.51	)		$	(1.79	)		$	(2.46	)
Diluted		$	(1.11	)		$	(1.51	)		$	(1.79	)		$	(2.46	)
Weighted average shares outstanding:
Basic			13,074				12,857				13,019				12,817
Diluted			13,074				12,857				13,019				12,817

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

KIRKLAND'S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY (UNAUDITED)

(in thousands, except share data)

		Common Stock			Accumulated			Total Shareholders'
		Shares			Amount			Deficit			(Deficit) Equity
Balance at February 3, 2024			12,926,022			$	176,552			$	(173,428	)		$	3,124
Restricted stock issued			134,597				-				-				-
Net share settlement of restricted stock units			(21,641	)			(51	)			-				(51	)
Stock-based compensation expense			-				292				-				292
Net loss			-				-				(8,830	)			(8,830	)
Balance at May 4, 2024			13,038,978				176,793				(182,258	)			(5,465	)
Restricted stock issued			72,660				-				-				-
Stock-based compensation expense			-				264				-				264
Net loss			-				-				(14,504	)			(14,504	)
Balance at August 3, 2024			13,111,638			$	177,057			$	(196,762	)		$	(19,705	)

		Common Stock			Accumulated			Total Shareholders'
		Shares			Amount			Deficit			(Deficit) Equity
Balance at January 28, 2023			12,754,368			$	175,450			$	(145,677	)		$	29,773
Restricted stock issued			86,824				-				-				-
Net share settlement of restricted stock units			(28,294	)			(76	)			-				(76	)
Stock-based compensation expense			-				490				-				490
Net loss			-				-				(12,107	)			(12,107	)
Balance at April 29, 2023			12,812,898				175,864				(157,784	)			18,080
Restricted stock issued			104,475				-				-				-
Stock-based compensation expense			-				124				-				124
Net loss			-				-				(19,364	)			(19,364	)
Balance at July 29, 2023			12,917,373			$	175,988			$	(177,148	)		$	(1,160	)

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

KIRKLAND'S, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

		26-Week Period Ended
		August 3,			July 29,
		2024			2023
Cash flows from operating activities:
Net loss		$	(23,334	)		$	(31,471	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property and equipment			5,137				6,349
Amortization of debt issue costs			256				50
Asset impairment			31				1,226
Gain on disposal of property and equipment			(7	)			(18	)
Stock-based compensation expense			556				614
Changes in assets and liabilities:
Inventories, net			(18,670	)			(14,878	)
Prepaid expenses and other current assets			(613	)			(608	)
Accounts payable			14,514				12,529
Accrued expenses			(2,207	)			363
Operating lease assets and liabilities			(1,990	)			(2,976	)
Other assets and liabilities			(61	)			291
Net cash used in operating activities			(26,388	)			(28,529	)
Cash flows from investing activities:
Proceeds from sale of property and equipment			17				74
Capital expenditures			(1,193	)			(2,294	)
Net cash used in investing activities			(1,176	)			(2,220	)
Cash flows from financing activities:
Borrowings on revolving line of credit			22,800				36,000
Repayments on revolving line of credit			(4,100	)			(5,000	)
Borrowings on term loan			10,000				-
Debt issuance costs			(429	)			(456	)
Cash used in net share settlement of stock options and restricted stock units			(51	)			(76	)
Net cash provided by financing activities			28,220				30,468
Cash and cash equivalents:
Net increase (decrease)			656				(281	)
Beginning of the period			3,805				5,171
End of the period		$	4,461			$	4,890
Supplemental schedule of non-cash activities:
Non-cash accruals for purchases of property and equipment		$	227			$	914
Non-cash accruals for debt issuance costs			830				-

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

KIRKLAND'S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis is intended to provide the reader with information that will assist in understanding the significant factors affecting our consolidated operating results, financial condition, liquidity, and capital resources during the 13-week and 26-week periods ended August 3, 2024 and July 29, 2023. For a comparison of our results of operations for the 53-week period ended February 3, 2024 and the 52-week period ended January 28, 2023, see "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended February 3, 2024, filed with the SEC on March 29, 2024 (the "Annual Report"). The following discussion should be read with our consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

Cautionary Statement Regarding Forward-Looking Statements

Except for historical information contained herein, certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements that are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements deal with potential future circumstances and developments and are, accordingly, forward-looking in nature. You are cautioned that such forward-looking statements, which may be identified by words such as "anticipate," "believe," "expect," "estimate," "intend," "plan," "seek," "may," "could," "strategy," and similar expressions, involve known and unknown risks and uncertainties, many of which are outside of the Company's control, which may cause our actual results to differ materially from forecasted results. Those risks and uncertainties include, among other things, risks associated with the Company's liquidity including cash flows from operations and the amount of borrowings under the secured revolving credit facility and term loan, the Company's ability to successfully implement cost savings and other strategic initiatives intended to improve operating results and liquidity positions, the Company's actual and anticipated progress towards its short-term and long-term objectives including its brand strategy, the risk of natural disasters, pandemic outbreaks (such as COVID-19), global political events, war and terrorism could impact the Company's revenues, inventory and supply chain, the continuing consumer impact of inflation and countermeasures, including raising interest rates, the effectiveness of the Company's marketing campaigns, risks related to changes in U.S. policy related to imported merchandise, particularly with regard to the impact of tariffs on goods imported from China and strategies undertaken to mitigate such impact, the Company's ability to retain its senior management team, continued volatility in the price of the Company's common stock, the competitive environment in the home décor industry in general and in our specific market areas, inflation, fluctuations in cost and availability of inventory, increased transportation costs and potential interruptions in supply chain, distribution systems and delivery network, including our e-commerce systems and channels, the ability to control employment and other operating costs, availability of suitable retail locations and other growth opportunities, disruptions in information technology systems including the potential for security breaches of our information or our customers' information, seasonal fluctuations in consumer spending, and economic conditions in general. Those and other risks are more fully described in our filings with the Securities and Exchange Commission, including the Company's Annual Report and subsequent reports. Forward-looking statements included in this Quarterly Report on Form 10-Q are made as of the date hereof. Any changes in assumptions or factors on which such statements are based could produce materially different results. Except as required by law, we disclaim any obligation to update any such factors or to publicly announce results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.

Overview

We are a specialty retailer of home décor and furnishings in the United States. As of August 3, 2024, we operated a total of 325 stores in 35 states, as well as an e-commerce website, www.kirklands.com, under the Kirkland's Home brand. We provide our customers with an engaging shopping experience characterized by a curated, affordable selection of home décor and furnishings along with inspirational design ideas. This combination of quality and stylish merchandise, value pricing and a stimulating in-store and online environment provides our customers with a unique brand experience.

Challenging Macroeconomic Conditions

The macroeconomic environment in which we operate remains uncertain as a result of numerous factors, including inflationary pressures, higher interest rates, declines in consumer spending behavior and aggressive promotional activity. These negative macroeconomic factors have impacted our business, results of operations, cash flows and liquidity levels over the last several fiscal quarters. They have also made it difficult to execute our strategic initiatives, including our financial turnaround strategy. See "Liquidity and Capital Resources" for additional information regarding our plans to mitigate these factors.

For additional information regarding risks related to macroeconomics, liquidity and strategy and strategy execution, see "Item 1A. Risk Factors" in our Annual Report.

Key Financial Measures

Net sales and gross profit are the most significant drivers of our operating performance. Net sales consists of all merchandise sales to customers, net of returns, shipping revenue associated with e-commerce sales, gift card breakage revenue, revenue earned from our private label credit card program and excludes sales taxes. Gross profit is the difference between net sales and cost of sales. Cost of sales has five distinct components: merchandise costs (including product costs, inbound freight expenses, inventory shrink and damages), store occupancy costs, outbound freight costs (including both store and e-commerce shipping expenses), central distribution costs and depreciation of store and distribution center assets. Merchandise and outbound freight costs are variable, while occupancy and central distribution costs are largely fixed. Accordingly, gross profit expressed as a percentage of net sales can be influenced by many factors including overall sales performance.

We use comparable sales to measure sales increases and decreases from stores that have been open for at least 13 full fiscal months, including our online sales. We remove closed stores from our comparable sales calculation the day after the stores close. Relocated stores remain in our comparable sales calculation. E-commerce sales, including shipping revenue, are included in comparable sales. Increases in comparable sales are an important factor in maintaining or increasing our profitability.

Operating expenses, including the costs of operating our stores and corporate headquarters, are also an important component of our operating performance. Compensation and benefits comprise the majority of our operating expenses. Operating expenses contain fixed and variable costs, and managing the operating expense ratio (operating expenses expressed as a percentage of net sales) is an important focus of management as we seek to increase our overall profitability. Operating expenses include cash costs as well as non-cash costs, such as depreciation and amortization associated with omni-channel technology, corporate property and equipment, and impairment of long-lived assets. Because many operating expenses are fixed costs, and because operating costs tend to rise over time, increases in comparable sales typically are necessary to prevent meaningful increases in the operating expense ratio. Operating expenses can also include certain costs that are of a one-time or non-recurring nature. While these costs must be considered to fully understand our operating performance, we typically identify such costs separately where significant in the consolidated statements of operations so that we can evaluate comparable expense data across different periods.

Stores

The following table summarizes store information during the periods indicated:

		13-Week Period Ended			26-Week Period Ended
		August 3, 2024			July 29, 2023			August 3, 2024			July 29, 2023
New store openings			-				-				1				-
Permanent store closures			4				3				6				6
Decrease in store units			(1.2	)%			(0.9	)%			(1.5	)%			(1.7	)%

The following table summarizes our open stores and square footage under lease as of the dates indicated:

		August 3, 2024			July 29, 2023
Number of stores			325				340
Square footage			2,635,551				2,748,355
Average square footage per store			8,109				8,083

13-Week Period Ended August 3, 2024 Compared to the 13-Week Period Ended July 29, 2023

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

		13-Week Period Ended
		August 3, 2024			July 29, 2023			Change
		$			%			$			%			$			%
Net sales		$	86,289				100.0	%		$	89,504				100.0	%		$	(3,215	)			(3.6	)%
Cost of sales			68,629				79.5				72,065				80.5				(3,436	)			(4.8	)
Gross profit			17,660				20.5				17,439				19.5				221				1.3
Operating expenses:
Compensation and benefits			18,653				21.6				19,217				21.5				(564	)			(2.9	)
Other operating expenses			11,384				13.2				14,090				15.7				(2,706	)			(19.2	)
Depreciation (exclusive of depreciation included in cost of sales)			925				1.1				1,222				1.4				(297	)			(24.3	)
Asset impairment			20				-				1,001				1.1				(981	)			(98.0	)
Total operating expenses			30,982				35.9				35,530				39.7				(4,548	)			(12.8	)
Operating loss			(13,322	)			(15.4	)			(18,091	)			(20.2	)			4,769				(26.4	)
Interest expense			1,420				1.6				750				0.8				670				89.3
Other income			(120	)			(0.1	)			(127	)			(0.1	)			7				(5.5	)
Loss before income taxes			(14,622	)			(16.9	)			(18,714	)			(20.9	)			4,092				(21.9	)
Income tax (benefit) expense			(118	)			(0.1	)			650				0.7				(768	)			(118.2	)
Net loss		$	(14,504	)			(16.8	)%		$	(19,364	)			(21.6	)%		$	4,860				(25.1	)%

Net sales.Net sales decreased 3.6% to $86.3 million for the second 13 weeks of fiscal 2024 compared to $89.5 million for the prior year period. Comparable sales decreased 1.7%, or $1.4 million, for the second 13 weeks of fiscal 2024 compared to the prior year period. For the second 13 weeks of fiscal 2024, e-commerce comparable sales decreased 10.6% compared to the prior year period, and store comparable sales increased 1.8% compared to the prior year period. The decrease in comparable sales was driven by a decrease in consolidated average ticket and a decline in online traffic, which was partially offset by higher store traffic and conversion. Merchandise categories performing below prior period levels include furniture, mirrors, ornamental wall décor, art, and lamps while gift, floral and holiday performed above prior period levels.

Gross profit.Gross profit as a percentage of net sales increased 100 basis points from 19.5% in the second 13 weeks of fiscal 2023 to 20.5% in the second 13 weeks of fiscal 2024. The overall increase in gross profit margin was due to favorable merchandise margin, outbound freight costs and depreciation expense, partially offset by unfavorable store occupancy costs. Merchandise margin increased approximately 90 basis points from 51.2% in the second 13 weeks of fiscal 2023 to 52.1% in the second 13 weeks of fiscal 2024, largely due to favorable shrink and damages. Outbound freight costs, including both store and e-commerce shipping expenses, decreased approximately 80 basis points to 7.2% of net sales due to the decline in shipping expense related to the decrease in e-commerce sales, improved management of store routes and rate reductions. Depreciation of store and distribution center assets decreased approximately 30 basis points to 1.8% of net sales in the second 13 weeks of fiscal 2024, due to certain assets becoming fully depreciated. Store occupancy costs increased approximately 100 basis points to 16.5% of net sales due to the sales deleverage on these fixed costs. Distribution center costs remained flat at 6.1% of net sales.

Compensation and benefits.Compensation and benefits as a percentage of net sales increased approximately 10 basis points from 21.5% in the second 13 weeks of fiscal 2023 to 21.6% in the second 13 weeks of fiscal 2024, primarily due to sales deleverage of store payroll costs, partially offset by reductions in corporate compensation and benefits costs.

Other operating expenses. Other operating expenses as a percentage of net sales decreased approximately 250 basis points from 15.7% in the second 13 weeks of fiscal 2023 to 13.2% in the second 13 weeks of fiscal 2024. The decrease as a percentage of net sales was primarily related to reduced advertising costs. In addition, we received a state tax refund due to a recent change in state tax law that offset operating expenses in the quarter.

Income tax (benefit) expense.We recorded an income tax benefit of approximately $118,000, or 0.8% of the loss before income taxes, during the second 13 weeks of fiscal 2024, compared to an income tax expense of approximately $650,000, or (3.5)% of the loss

before income taxes, during the prior year period. The change in the tax rate for the second 13 weeks of fiscal 2024 compared to the prior period was primarily due to changes in valuation allowance adjustments and state income taxes.

Net loss and loss per share.We reported net loss of $14.5 million, or a loss of $1.11 per diluted share, for the second 13 weeks of fiscal 2024 as compared to net loss of $19.4 million, or a loss of $1.51 per diluted share, for the second 13 weeks of fiscal 2023.

26-Week Period Ended August 3, 2024 Compared to the 26-Week Period Ended July 29, 2023

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

		26-Week Period Ended
		August 3, 2024			July 29, 2023			Change
		$			%			$			%			$			%
Net sales		$	178,042				100.0	%		$	186,379				100.0	%		$	(8,337	)			(4.5	)%
Cost of sales			133,314				74.9				143,069				76.8				(9,755	)			(6.8	)
Gross profit			44,728				25.1				43,310				23.2				1,418				3.3
Operating expenses:
Compensation and benefits			37,939				21.3				39,256				21.1				(1,317	)			(3.4	)
Other operating expenses			25,702				14.4				28,828				15.5				(3,126	)			(10.8	)
Depreciation (exclusive of depreciation included in cost of sales)			1,886				1.1				2,428				1.3				(542	)			(22.3	)
Asset impairment			31				-				1,226				0.6				(1,195	)			(97.5	)
Total operating expenses			65,558				36.8				71,738				38.5				(6,180	)			(8.6	)
Operating loss			(20,830	)			(11.7	)			(28,428	)			(15.3	)			7,598				(26.7	)
Interest expense			2,547				1.4				1,252				0.6				1,295				103.4
Other income			(236	)			(0.1	)			(219	)			(0.1	)			(17	)			7.8
Loss before income taxes			(23,141	)			(13.0	)			(29,461	)			(15.8	)			6,320				(21.5	)
Income tax expense			193				0.1				2,010				1.1				(1,817	)			(90.4	)
Net loss		$	(23,334	)			(13.1	)%		$	(31,471	)			(16.9	)%		$	8,137				(25.9	)%

Net sales.Net sales decreased 4.5% to $178.0 million for the first 26 weeks of fiscal 2024 compared to $186.4 million for the prior year period. Comparable sales decreased 2.6%, or $4.7 million, for the first 26 weeks of fiscal 2024 compared to the prior year period. For the first 26 weeks of fiscal 2024, e-commerce comparable sales decreased 15.1% compared to the prior year period, and store comparable sales increased 2.3% compared to the prior year period. The decrease in comparable sales was driven by a decrease in consolidated average ticket and a decline in online traffic, which was partially offset by higher store traffic and conversion. Merchandise categories performing below prior period levels include furniture, mirrors, ornamental wall décor, textiles, outdoor and housewares, while gift, floral, holiday and decorative accessories performed above prior period levels.

Gross profit.Gross profit as a percentage of net sales increased 190 basis points from 23.2% in the first 26 weeks of fiscal 2023 to 25.1% in the first 26 weeks of fiscal 2024. The overall increase in gross profit margin was due to favorable outbound freight costs, merchandise margin, distribution center costs and depreciation, partially offset by unfavorable store occupancy costs. Outbound freight costs, including both store and e-commerce shipping expenses, decreased approximately 120 basis points to 6.6% of net sales due to the decline in shipping expense related to the decrease in e-commerce sales, improved management of store routes and rate reductions. Merchandise margin increased approximately 80 basis points from 54.1% in the first 26 weeks of fiscal 2023 to 54.9% in the first 26 weeks of fiscal 2024, mainly due to a higher initial product markup and favorable shrink and damages. Distribution center costs decreased approximately 30 basis points to 5.6% of net sales due to increased efficiency and a smooth inventory flow which led to lower compensation and benefits costs and lower fixed costs due to the closure of one e-commerce fulfillment location in the prior year period. Depreciation of store and distribution center assets decreased approximately 30 basis points to 1.8% of net sales in the first 26 weeks of fiscal 2024, due to certain assets becoming fully depreciated. Store occupancy costs increased approximately 70 basis points to 15.8% of net sales due to the sales deleverage on these fixed costs.

Compensation and benefits.Compensation and benefits as a percentage of net sales increased approximately 20 basis points from 21.1% in the first 26 weeks of fiscal 2023 to 21.3% in the first 26 weeks of fiscal 2024, primarily due to sales deleverage of higher store payroll costs, partially offset by reductions in corporate compensation costs.

Other operating expenses. Other operating expenses as a percentage of net sales decreased approximately 110 basis points from 15.5% in the first 26 weeks of fiscal 2023 to 14.4% in the first 26 weeks of fiscal 2024. The decrease as a percentage of net sales was primarily due to reduced advertising costs, partially offset by increased consulting costs for strategic advisory services. In addition, we received a state tax refund due to a recent change in state tax law that offset operating expenses.

Income tax expense.We recorded income tax expense of approximately $193,000, or (0.8)% of the loss before income taxes, during the first 26 weeks of fiscal 2024, compared to an income tax expense of approximately $2.0 million, or (6.8)% of the loss before income taxes, during the prior year period. The change in the tax rate for the first 26 weeks of fiscal 2024 compared to the prior period was primarily due to changes in valuation allowance adjustments and state income taxes.

Net loss and loss per share.We reported net loss of $23.3 million, or a loss of $1.79 per diluted share, for the first 26 weeks of fiscal 2024 as compared to net loss of $31.5 million, or a loss of $2.46 per diluted share, for the first 26 weeks of fiscal 2023.

Non-GAAP Financial Measures

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

We define EBITDA as net loss before interest and the provision for income tax, which is equivalent to operating loss, adjusted for depreciation and asset impairment, adjusted EBITDA as EBITDA with non-GAAP adjustments and adjusted operating loss as adjusted EBITDA including depreciation.

Non-GAAP financial measures are intended to provide additional information only and do not have any standard meanings prescribed by GAAP. Use of these terms may differ from similar measures reported by other companies. Each non-GAAP financial measure has its limitations as an analytical tool, and you should not consider them in isolation or as a substitute for analysis of the Company's results as reported under GAAP. The Company's non-GAAP adjustments remove stock-based compensation expense, due to the non-cash nature of this expense, and remove severance, as it fluctuates based on the needs of the business and does not represent a normal, recurring operating expense.

The following table shows a reconciliation of operating loss to EBITDA, adjusted EBITDA and adjusted operating loss (in thousands) for the periods indicated:

		13-Week Period Ended			26-Week Period Ended
		August 3, 2024			July 29, 2023			August 3, 2024			July 29, 2023
Operating loss		$	(13,322	)		$	(18,091	)		$	(20,830	)		$	(28,428	)
Depreciation			2,513				3,092				5,137				6,349
Asset impairment (1)			20				1,001				31				1,226
EBITDA			(10,789	)			(13,998	)			(15,662	)			(20,853	)
Non-GAAP adjustments to operating expenses:
Stock-based compensation expense(2)			264				124				556				614
Severance charges(3)			317				378				390				907
Total non-GAAP adjustments			581				502				946				1,521
Adjusted EBITDA			(10,208	)			(13,496	)			(14,716	)			(19,332	)
Depreciation			2,513				3,092				5,137				6,349
Adjusted operating loss		$	(12,721	)		$	(16,588	)		$	(19,853	)		$	(25,681	)

Liquidity and Capital Resources

Our principal capital requirements are for working capital and capital expenditures. Working capital consists mainly of merchandise inventories offset by accounts payable, which typically reach their peak by the early portion of the fourth quarter of each fiscal year. Capital expenditures primarily relate to existing store maintenance, refreshes and remodels, technology and omni-channel projects, and new or relocated stores. Historically, we have funded our working capital and capital expenditure requirements with internally generated cash and borrowings under our asset-based revolving credit facility.

In fiscal 2023, we entered into an additional asset-based term loan to provide additional liquidity, as internally generated cash and borrowings under our existing asset-based revolving credit facility did not provide enough liquidity to effectively execute our financial turnaround strategy in fiscal 2024. During the second quarter of fiscal 2024, we implemented expense reductions to streamline our cost structure and improve our liquidity profile. We believe these actions are necessary as part of improving our profitability and liquidity trajectory, while minimizing any disruption to our focus on our strategic initiatives and the overall customer experience. The cost-savings initiatives include a reduction in corporate overhead, store payroll, marketing and third-party technology expenses. In the second through fourth quarters of fiscal 2024, we expect to realize approximately $6 million of savings and estimate approximately $7 million in ongoing annual pre-tax savings from these initiatives. In addition, we retained an investment banking firm specializing in consumer-facing companies to serve as our financial advisor in the pursuit and evaluation of potential strategic opportunities to support us and our initiatives. We have not set a deadline or definitive timetable for the completion of the strategic alternatives review process, and there can be no assurance that this process will result in any particular outcome. We do not intend to comment further regarding the review of strategic alternatives until we determine disclosure is necessary or advisable.

We believe that the combination of our cash balances, cash flow from operations, availability under our 2023 Credit Agreement and our Term Loan and the aforementioned expense reductions will be sufficient to fund our projected operating requirements for one year following the date these financial statements are issued. However, we cannot provide any assurance that our plans will be successful, and if we encounter unforeseen circumstances that place further constraints on our capital resources, we will be required to take various additional measures to conserve liquidity. The accompanying unaudited condensed consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Accordingly, the accompanying consolidated financial statements do not include any adjustments or charges that might be necessary should we be unable to continue as a going concern, such as charges related to impairment of our assets, the recoverability and classification of assets or the amounts and classification of liabilities or other similar adjustments.

Cash flows from operating activities.Net cash used in operating activities was approximately $26.4 million and $28.5 million during the first 26 weeks of fiscal 2024 and the first 26 weeks of fiscal 2023, respectively. Cash flows from operating activities depend heavily on operating performance and changes in working capital. The decrease in the amount of cash used in operations as compared to the prior year period was mainly due to improved operating results, partially offset by a decline in working capital.

Cash flows from investing activities.Net cash used in investing activities for the first 26 weeks of fiscal 2024 consisted primarily of $1.2 million in capital expenditures as compared to $2.3 million in capital expenditures for the prior year period. The table below sets forth capital expenditures by category (in thousands) for the periods indicated:

		26-Week Period Ended
		August 3, 2024			July 29, 2023
Existing stores		$	789			$	943
Technology and omni-channel projects			282				1,263
New and relocated stores			113				13
Corporate			7				37
Distribution center and supply chain enhancements			2				38
Total capital expenditures		$	1,193			$	2,294

The capital expenditures in the current and prior year period related primarily to the maintenance of existing stores and technology and omni-channel projects.

Cash flows from financing activities.During the first 26 weeks of fiscal 2024, net cash provided by financing activities was $28.2 million, as we borrowed $10.0 million under our term loan and borrowed a net $18.7 million under our revolving credit facility. During the first 26 weeks of fiscal 2023, net cash provided by financing activities was approximately $30.5 million, as we borrowed a net $31.0 million under our revolving credit facility.

Long-term debt. On March 31, 2023, we entered into the 2023 Credit Agreement with Bank of America, N.A., as administrative agent and collateral agent, and lender. The 2023 Credit Agreement amended the 2019 Credit Agreement from a $75.0 million senior secured revolving credit facility to a $90.0 million senior secured revolving credit facility. The 2023 Credit Agreement contains substantially similar terms and conditions as the 2019 Credit Agreement including a swingline availability of $10.0 million, a $25.0 million incremental accordion feature and extended its maturity date to March 2028. The fee paid to the lenders on the unused portion of the 2023 Credit Agreement is 25 basis points when usage is greater than 50% of the facility amount; otherwise, the fee on the unused portion is 37.5 basis points per annum.

On January 25, 2024, we entered into a First Amendment to the 2023 Credit Agreement that increased the advance rate and allowed us to enter into a new Term Loan agreement. Subsequent to January 25, 2024, advances under the 2023 Credit Agreement accrue interest at an annual rate equal to the Secured Overnight Financing Rate ("SOFR") plus a margin of 275 basis points with no SOFR floor. Upon the demonstration that our fixed charge coverage ratio is greater than 1.0 to 1.0 on a trailing twelve-month basis, the interest rate permanently decreases on the 2023 Credit Agreement to SOFR plus a margin of 225 basis points. Prior to January 25, 2024, advances under the 2023 Credit Agreement accrued interest at an annual rate equal to SOFR plus a margin ranging from 200 to 250 basis points with no SOFR floor.

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 2023 Credit Agreement.

On January 25, 2024, we entered into a $12.0 million "first-in, last-out" delayed-draw asset-based Term Loan with Gordon Brothers Group, via an affiliate entity, 1903P Loan Agent, LLC, as administrative agent and lender. The indebtedness under the Term Loan is subordinated in most respects to the 2023 Credit Agreement. The Term Loan will mature in March 2028, coterminous with the 2023 Credit Agreement. From closing until the first anniversary of the closing, the interest rate of the Term Loan will be one-month term SOFR, plus a margin of 9.50%. Following the first anniversary of the closing, the interest rate will increase to one-month term SOFR, plus a margin of 11.50%.

Borrowings under the 2023 Credit Agreement and the Term Loan are subject to certain conditions and contain customary events of default, including, without limitation, failure to make payments, a cross-default to certain other debt, breaches of covenants, breaches of representations and warranties, a change in control, certain monetary judgments and bankruptcy and ERISA events. Upon any such event of default, the principal amount of any unpaid loans and all other obligations under the 2023 Credit Agreement and the Term Loan may be declared immediately due and payable. The maximum availability under the 2023 Credit Agreement and the Term Loan is limited by a borrowing base formula, which consists of a percentage of eligible inventory and eligible credit card receivables, less reserves and an excess required availability covenant, which limits the borrowing base formula by the greater of 10% of the combined borrowing base formula or $8.0 million.

As of August 3, 2024, we were in compliance with the covenants in the 2023 Credit Agreement and the Term Loan. There were no letters of credit outstanding and approximately $52.7 million, $34.0 million and $46.0 million of outstanding borrowings under the 2023 Credit Agreement at August 3, 2024, February 3, 2024 and July 29, 2023, respectively. There were $10.0 million of outstanding borrowings under the Term Loan at August 3, 2024, and no borrowings under the Term Loan at February 3, 2024. As of August 3, 2024, we had approximately $7.9 million available for borrowing under the 2023 Credit Agreement and the Term Loan, after the minimum required excess availability covenant. Availability under our Credit Agreement and our Term Loan fluctuates largely based on eligible inventory levels, and as eligible inventory increases in the second and third fiscal quarters in support of the Company's back-half sales plan, our borrowing capacity increases correspondingly. Subsequent to August 3, 2024, we borrowed an additional $5.7 million under the 2023 Credit Agreement.

Share repurchase plan.On January 6, 2022, we announced that our Board of Directors authorized a share repurchase plan providing for the purchase in the aggregate of up to $30.0 million of our outstanding common stock. Repurchases of shares are made in accordance with applicable securities laws and may be made from time to time in the open market or by negotiated transactions. The amount and timing of repurchases are based on a variety of factors, including stock price, regulatory limitations and other market and economic factors. The share repurchase plans do not require us to repurchase any specific number of shares, and we may terminate the repurchase plans at any time. We did not repurchase any shares of common stock under our share repurchase plan during the first 26

weeks of fiscal 2024 or 2023. As of August 3, 2024, we had approximately $26.3 million remaining under the current share repurchase plan.

Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies or estimates during the 26-week period ended August 3, 2024. Refer to our Annual Report for a summary of our critical accounting policies and a discussion of the critical accounting estimates and assumptions impacting our consolidated financial statements.

New Accounting Pronouncements

See "Note 11 - New Accounting Pronouncements" in the condensed consolidated financial statements for accounting pronouncements not yet adopted.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to interest rate changes, primarily as a result of borrowings under our long-term debt agreements, as discussed in "Note 9 - Long-Term Debt," in the notes to the condensed consolidated financial statements, which bear interest based on variable rates. We had $52.7 million, $34.0 million, $46.0 million in outstanding borrowings under our 2023 Credit Agreement at August 3, 2024, February 3, 2024, and July 29, 2023, respectively. We had $10.0 million in outstanding borrowings under our Term Loan at August 3, 2024, and no borrowings under our Term Loan at February 3, 2024. Subsequent to August 3, 2024, we borrowed an additional $5.7 million under our 2023 Credit Agreement. A one percent increase or decrease in the interest rate on borrowings under our 2023 Credit Agreement or Term Loan at our recent borrowing levels would not have a material impact to our results of operations.

We manage cash and cash equivalents in various institutions at levels beyond federally insured limits per institution, and we may purchase investments not guaranteed by the Federal Deposit Insurance Company. Accordingly, there is a risk that we will not recover the full principal of our investments or that their liquidity may be diminished.

We were not engaged in any foreign exchange contracts, hedges, interest rate swaps, derivatives or other financial instruments as of August 3, 2024.

ITEM 4. CONTROLSAND PROCEDURES

Evaluation of disclosure controls and procedures. Both our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), after the evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended) was performed by management with the participation of our Chief Executive Officer and Chief Financial Officer, have concluded that, as of August 3, 2024, our disclosure controls and procedures were effective as of the end of the period covered by this report.

Change in internal controls over financial reporting. There have been no changes in internal control over financial reporting that have occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHERINFORMATION

ITEM 1. LEGALPROCEEDINGS

For a description of the Company's legal proceedings, refer to "Note 6 - Commitments and Contingencies," in the notes to the condensed consolidated financial statements.

ITEM 1A. RISK FACTORS

The risk factors described in Part I, "Item 1A. Risk Factors" in our Annual Report should be carefully considered together with the other information contained or incorporated by reference in this Quarterly Report on Form 10-Q and in our other filings with the SEC, in connection with evaluating the Company, our business, and the forward-looking statements contained in this Quarterly Report on Form 10-Q. There have been no material changes to our risk factors as previously disclosed in the Annual Report. The risks described in this report and in our Annual Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

Issuer Repurchases of Equity Securities

On January 6, 2022, the Company announced that its Board of Directors authorized a share repurchase plan providing for the purchase in the aggregate of up to $30.0 million of the Company's outstanding common stock. Repurchases of shares are made in accordance with applicable securities laws and may be made from time to time in the open market or negotiated transactions. The amount and timing of repurchases are based on a variety of factors, including stock price, regulator limitations and other market and economic factors. The share repurchase plans do not require us to repurchase any specific number of shares, and the Company may terminate the repurchase plans at any time. For the 26-week period ended August 3, 2024, the Company did not repurchase any shares of common stock under the share repurchase plan. As of August 3, 2024, the Company had approximately $26.3 million remaining under the current share repurchase plan.

ITEM 5. OTHER INFORMATION

None of our directors or officers adoptedor terminateda Rule 10b5-1 trading arrangement during the quarter ended August 3, 2024.

ITEM 6. EXHIBITS

Exhibit No.		Description of Document
31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
31.2		Certification of the 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 Chief Financial Officer Pursuant to 18 U.S.C. Section 1350
101.INS		Inline XBRL Instance Document
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)

SIGNATURES

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

		KIRKLAND'S, INC.
Date: September 5, 2024		/s/ Amy E. Sullivan
		Amy E. Sullivan President, Chief Executive Officer and Director
Date: September 5, 2024		/s/ W. Michael Madden
		W. Michael Madden Executive Vice President and Chief Financial Officer

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