Kirkland's Reports Second Quarter 2020 Results

Rhea-AI Summary

Kirkland's, Inc. (NASDAQ: KIRK) reported its financial results for the 13 and 26-week periods ending August 1, 2020. The company achieved adjusted profitability for the first time in a decade, driven by improved merchandise assortment and increased brand awareness. CEO Woody Woodward highlighted significant sales and margin trends, alongside strategic initiatives aimed at enhancing product quality, omni-channel capabilities, and customer experience. The company aims to stabilize gross margins and improve profitability while maintaining liquidity and eliminating debt by the end of fiscal 2020.

Positive

• Achieved adjusted profitability for the first time in a decade.
• E-commerce sales nearly doubled year-over-year.
• Implemented cost reductions totaling approximately $45 million in annualized operating expenses.
• Strategic initiatives focused on enhancing product assortment and omni-channel capabilities.

Negative

• None.

NASHVILLE, Tenn., Sept. 3, 2020 /PRNewswire/ -- Kirkland's, Inc. (NASDAQ: KIRK) today reported financial results for the 13 and 26-week periods ended August 1, 2020.

"Positive trends and our dramatically improved business model enabled us to reach second quarter profitability on an adjusted basis for the first time in a decade. The hard work we have put in over the last several quarters continues to pay off with our elevated merchandise assortment and increased brand awareness driving the positive sales and margin trends through the quarter. With the accelerated infrastructure improvements, continued margin expansion and a commitment to maintaining a much leaner cost structure, we are experiencing tremendous leverage in the business. Reaching profitability on an adjusted basis during this period and driving the margin improvement and comparable sales to the extent we have is a significant and well-earned accomplishment," noted Woody Woodward, Chief Executive Officer.

"Our business is experiencing tailwinds from the favorable dynamics within the home segment and fewer store-based competitors than a year ago, but we are also seeing momentum created by our own merchandising, brand, omni-channel, infrastructure and cost reduction initiatives.  We are far from finished on our journey to build Kirkland's into a stronger brand with a clear design point of view at an attainable price point, and we are focused on continuing to make the right decisions for the long-term benefit of Kirkland's and our shareholders."

Strategic Priorities and Financial Goals

Kirkland's key strategic initiatives include:

• Accelerating product development to reinforce quality and relevancy and building upon the tabletop and select furniture assortments we added in 2019;
• Improving omni-channel via website enhancements, more focused marketing spend, an expanded online assortment, and an in-store experience that is aligned with our omni-channel capabilities;
• Improving the customer experience with a re-launch of our loyalty program, extended credit options and broadened delivery options; and
• Utilizing our leaner infrastructure to be more nimble in our response to changes in consumer preference and buying behaviors.

Kirkland's financial goals for the next two to three years include:

• Improving comparable sales performance, driven by e-commerce growth, merchandising, brick-and-mortar store productivity and closure of underperforming stores. The COVID-19 pandemic has changed the way the customer shops, and within the quarter, e-commerce sales, as a percent of our total sales, almost doubled from a year ago. We expect e-commerce to continue to grow as a percent of our total business, but also intend to focus on improving the contribution of our remaining store base as they are an integral part of our omni-channel strategy.
• Stabilizing gross margin by continuing with our current discipline of limited promotional offers, expanding direct sourcing, improving supply chain efficiency and reducing occupancy costs. With two new e-commerce distribution hubs operating by the third quarter to replace our existing e-commerce distribution center and direct sourcing expected to increase from approximately 20% of purchases in 2020 to 40% to 50% over the next two to three years, we have a goal to improve our gross profit margin to a low to mid-30% range.
• Improving profitability by leveraging the leaner infrastructure with comparable sales growth. We believe our ideal store count should be in the range of 300 to 350 stores. With nearly one-third of our store leases up for renewal within the next 12 months, we believe there will be additional opportunities for more favorable rent terms. With approximately $45 million in annualized operating expenses eliminated from the business, we have a goal of reaching EBITDA as a percent of annual total sales in the high-single-digit range and a goal of reaching operating income as a percent of annual total sales in the mid-single-digit range within two to three years.
• Maintaining adequate liquidity and generating free cash flow while continuing to invest in key strategic initiatives of the business. Our goal is to continue to build cash throughout fiscal 2020 and end the year with no debt. Within our two to three-year timeframe, we also expect to generate increasing free cash flow.

The key strategic initiatives and financial goals are based on current information as of September 3, 2020, and are dependent on, among other things, consumer preferences, economic conditions and our own successful execution of these initiatives. The information on which these initiatives and financial goals is based is subject to change, and investors are cautioned that the Company may update the initiatives and goals, or any portion thereof, at any time for any reason.

Investor Conference Call and Web Simulcast

Kirkland's will hold its earnings call for the second quarter later today at 9:00 a.m. ET. Participating on the call will be Steve Woodward, Chief Executive Officer and Nicole Strain, Chief Financial Officer. The number to call for the interactive teleconference is (412) 542-4163. A replay of the conference call will be available through Thursday, September 10, 2020 by dialing (412) 317-0088 and entering the confirmation number 10147185.

A live webcast of Kirkland's quarterly conference call will be available online on the Company's Investor Relations Page on September 3, 2020, beginning at 9:00 a.m. ET. The online replay will follow shortly after the call and continue for one year.

About Kirkland's, Inc.

Kirkland's, Inc. is a specialty retailer of home décor in the United States, currently operating 384 stores in 35 states as well as an e-commerce enabled website, www.kirklands.com. The Company's stores present a curated selection of distinctive merchandise, including holiday décor, furniture, wall décor, art, textiles, mirrors, fragrances, lamps and other home decorating items. The Company's stores offer an extensive assortment of holiday merchandise during seasonal periods. The Company provides its customers an engaging shopping experience characterized by casual, comfortable merchandise with a southern feel and a modern flair at a discernible value. This combination of quality and stylish merchandise, value pricing and a stimulating online and store experience has led the Company to develop a loyal customer base. More information can be found at www.kirklands.com.

Forward-Looking Statements 

Except for historical information contained herein, the statements in this release, including all statements related to future initiatives, financial goals and expectations regarding any future period, are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to the finalization of the Company's quarterly financial and accounting procedures. Forward-looking statements involve known and unknown risks and uncertainties, which may cause Kirkland's actual results to differ materially from forecasted results. Those risks and uncertainties include, among other things, risks associated with the Company's progress and anticipated progress towards its long-term objective and the success of its plans in response to the novel coronavirus ("COVID-19"), the spread of COVID-19 and its impact on the Company's revenues and supply chain, risks associated with COVID-19 and the governments responses to it, the impact of store closures in 2020, 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 Kirkland's specific market areas, inflation, fluctuations in cost and availability of products, interruptions in supply chain and distribution systems, 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 Kirkland's or its customers' information, seasonal fluctuations in consumer spending, and economic conditions in general. Those and other risks are more fully described in Kirkland's filings with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K filed on April 10, 2020 and subsequent reports. Forward-looking statements included in this release are made as of the date of this release. Any changes in assumptions or factors on which such statements are based could produce materially different results. Kirkland's disclaims 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.

KIRKLAND'S, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
		13-Week Period Ended
		August 1,				August 3,
		2020				2019
Net sales		$	124,722			$	119,885
Cost of sales			89,002				93,312
Gross profit			35,720				26,573
Operating expenses:
Compensation and benefits			20,236				27,162
Other operating expenses			13,594				16,656
Depreciation (exclusive of depreciation included in cost of sales)			1,569				1,736
Asset impairment			5,666				1,981
Total operating expenses			41,065				47,535
Operating loss			(5,345)				(20,962)
Other expense (income), net			103				(158)
Loss before income taxes			(5,448)				(20,804)
Income tax expense (benefit)			3,915				(3,684)
Net loss		$	(9,363)			$	(17,120)
Loss per share:
Basic		$	(0.66)			$	(1.21)
Diluted		$	(0.66)			$	(1.21)
Weighted average shares outstanding:
Basic			14,123				14,110
Diluted			14,123				14,110

 

KIRKLAND'S, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
		26-Week Period Ended
		August 1,				August 3,
		2020				2019
Net sales		$	201,969			$	249,533
Cost of sales			156,013				186,741
Gross profit			45,956				62,792
Operating expenses:
Compensation and benefits			38,814				54,218
Other operating expenses			28,161				34,790
Depreciation (exclusive of depreciation included in cost of sales)			3,070				3,575
Asset impairment			8,850				3,859
Total operating expenses			78,895				96,442
Operating loss			(32,939)				(33,650)
Other expense (income), net			203				(416)
Loss before income taxes			(33,142)				(33,234)
Income tax benefit			(16,341)				(7,193)
Net loss		$	(16,801)			$	(26,041)
Loss per share:
Basic		$	(1.20)			$	(1.83)
Diluted		$	(1.20)			$	(1.83)
Weighted average shares outstanding:
Basic			14,057				14,241
Diluted			14,057				14,241

 

KIRKLAND'S, INC.
UNAUDITED CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
		August 1,				February 1,				August 3,
		2020				2020				2019
ASSETS
Current assets:
Cash and cash equivalents		$	27,565			$	30,132			$	14,650
Inventories, net			77,078				94,674				108,233
Income taxes receivable			6,162				243				465
Prepaid expenses and other current assets			8,467				6,462				8,197
Total current assets			119,272				131,511				131,545
Property and equipment, net			72,676				82,863				102,566
Operating lease right-of-use assets			165,393				200,067				219,648
Deferred income taxes			—				1,525				9,010
Other assets			5,925				6,476				6,229
Total assets		$	363,266			$	422,442			$	468,998
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	36,890			$	59,513			$	60,537
Accrued expenses			29,056				28,773				24,646
Operating lease liabilities			49,034				53,154				53,561
Total current liabilities			114,980				141,440				138,744
Operating lease liabilities			180,180				195,736				218,700
Other liabilities			7,294				8,311				9,148
Total liabilities			302,454				345,487				366,592
Net shareholders' equity			60,812				76,955				102,406
Total liabilities and shareholders' equity		$	363,266			$	422,442			$	468,998

 

KIRKLAND'S, INC.
UNAUDITED CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
		26 Weeks Ended
		August 1,				August 3,
		2020				2019
Cash flows from operating activities:
Net loss		$	(16,801)			$	(26,041)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation of property and equipment			11,986				14,295
Amortization of debt issue costs			48				27
Asset impairment			8,850				3,859
Cumulative effect of change in accounting principle			—				(331)
(Gain) loss on disposal of property and equipment			(28)				139
Stock-based compensation expense			636				1,291
Deferred income taxes			1,525				(7,307)
Changes in assets and liabilities:
Inventories, net			17,596				(23,799)
Prepaid expenses and other current assets			(2,005)				2,116
Accounts payable			(21,608)				19,438
Accounts payable to related party vendor			—				(8,166)
Accrued expenses			315				(2,428)
Income taxes receivable			(5,951)				(959)
Operating lease assets and liabilities			8,683				(4,295)
Other assets and liabilities			(414)				635
Net cash provided by (used in) operating activities			2,832				(31,526)
Cash flows from investing activities:
Proceeds from sale of property and equipment			154				—
Capital expenditures			(5,560)				(8,457)
Net cash used in investing activities			(5,406)				(8,457)
Cash flows from financing activities:
Borrowings on revolving line of credit			40,000				—
Repayments on revolving line of credit			(40,000)				—
Refinancing costs			(15)				—
Cash used in net share settlement of restricted stock			(13)				(44)
Employee stock purchases			35				145
Repurchase and retirement of common stock			—				(3,414)
Net cash provided by (used in) financing activities			7				(3,313)
Cash and cash equivalents:
Net decrease			(2,567)				(43,296)
Beginning of the period			30,132				57,946
End of the period		$	27,565			$	14,650
Supplemental schedule of non-cash activities:
Non-cash accruals for purchases of property and equipment		$	838			$	2,367
Operating lease assets and liabilities recognized upon adoption of ASC 842			—				295,240

Non-GAAP Financial Measures

To supplement our unaudited consolidated condensed financial statements presented in accordance with generally accepted accounting principles ("GAAP"), this earnings release and the related earnings conference call contain certain non-GAAP financial measures, including EBITDA, adjusted EBITDA, adjusted income (loss) and adjusted diluted income (loss) per share. These measures are not in accordance with, and are not intended as alternatives to, GAAP. The Company uses these non-GAAP financial measures internally in analyzing our financial results and believes that they provide useful information to analysts and investors, as a supplement to GAAP measures, in evaluating our operational performance.

The Company defines EBITDA as net income or loss before interest, provision for income tax, and depreciation and amortization and adjusted EBITDA as EBITDA with non-GAAP adjustments. The Company defines adjusted net income (loss) and adjusted diluted income (loss) per share by adjusting the applicable GAAP measure for non-GAAP adjustments.

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

The following table shows a reconciliation of operating loss to EBITDA and adjusted EBITDA for the 13 weeks and 26 weeks ended August 1, 2020 and August 3, 2019 and a reconciliation of net loss and diluted loss per share to adjusted net income (loss) and adjusted diluted income (loss) per share for the 13 weeks and 26 weeks ended August 1, 2020 and August 3, 2019:

KIRKLAND'S, INC.
UNAUDITED NON-GAAP MEASURE RECONCILIATION
(In thousands, except per share data)
		13-Week Period Ended								26-Week Period Ended
		August 1, 2020				August 3, 2019				August 1, 2020				August 3, 2019
Operating loss		$	(5,345)			$	(20,962)			$	(32,939)			$	(33,650)
Depreciation and amortization			5,933				7,051				11,986				14,295
EBITDA			588				(13,911)				(20,953)				(19,355)
Non-GAAP adjustments:
Closed store and lease termination costs in cost of sales(1)			95				—				58				—
Asset impairment(2)			5,666				1,981				8,850				3,859
Stock-based compensation expense(3)			329				731				636				1,291
Severance charges(4)			85				410				880				787
Other costs included in operating expenses(5)			—				119				134				119
Total adjustments in operating expenses			6,080				3,241				10,500				6,056
Total non-GAAP adjustments			6,175				3,241				10,558				6,056
Adjusted EBITDA		$	6,763			$	(10,670)			$	(10,395)			$	(13,299)
Net loss		$	(9,363)			$	(17,120)			$	(16,801)			$	(26,041)
Non-GAAP adjustments, net of tax:
Closed store and lease termination costs in cost of sales(1)			73				—				45				—
Asset impairment(2)			4,378				1,628				6,805				2,978
Stock-based compensation expense, including tax impact(3)			391				1,040				886				1,443
Severance charges(4)			71				336				677				607
Other costs included in operating expenses(5)			—				91				103				91
Total adjustments in operating expenses			4,840				3,095				8,471				5,119
Tax valuation allowance(6)			3,274				—				5,470				—
CARES Act - net operating loss carry back(7)			1,490				—				(14,596)				—
Total non-GAAP adjustments, net of tax			9,677				3,095				(610)				5,119
Adjusted net income (loss)		$	314			$	(14,025)			$	(17,411)			$	(20,922)
Diluted loss per share		$	(0.66)			$	(1.21)			$	(1.20)			$	(1.83)
Adjusted diluted income (loss) per share		$	0.02			$	(0.99)			$	(1.24)			$	(1.47)
Diluted weighted average shares outstanding			14,123				14,110				14,057				14,241
Adjusted diluted weighted average shares outstanding			14,741				14,110				14,057				14,241

(1)	Costs associated with closed stores and lease termination costs, including amounts paid to third-parties for rent reduction negotiations, lease termination fees paid to landlords for store closings and gain on lease terminations.
(2)	Impairment charges include both right-of-use asset and property and equipment impairment charges.
(3)	Stock-based compensation expense includes amounts expensed related to equity incentive plans.
(4)	Severance charges include expenses related to severance agreements. This also includes permanent store closure compensation costs.
(5)	Other costs include corporate lease negotiation fees associated with rent reduction in fiscal 2020 and write-offs of excess and obsolete supplies in fiscal 2019.
(6)	The tax valuation allowance is the change in the Company's valuation allowance against deferred tax assets. The Company did not have a valuation allowance against deferred tax assets in the prior year periods.
(7)	The Company recorded an income tax expense (benefit) related to the carry back of fiscal 2019 and estimated fiscal 2020 federal net operating losses to prior periods included in the CARES Act in fiscal 2020.

 

Contact:	Kirkland's	Kirkland's
	Nicole Strain	Investor Relations
	(615) 872-4800	IR@Kirklands.com
		(615) 872-4898

 

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SOURCE Kirkland's, Inc.

FAQ

What were Kirkland's financial results for Q2 2020?

Kirkland's reported adjusted profitability for the first time in a decade, with improved sales and margin trends.

How did Kirkland's e-commerce performance change in 2020?

E-commerce sales as a percentage of total sales nearly doubled compared to the previous year.

What are Kirkland's financial goals for the next two to three years?

Goals include improving comparable sales, stabilizing gross margins, and generating increasing free cash flow.

When is Kirkland's Q2 earnings call?

Kirkland's earnings call for Q2 was held on September 3, 2020, at 9:00 a.m. ET.

What strategic initiatives is Kirkland's focusing on?

Kirkland's initiatives include enhancing product development, improving omni-channel capabilities, and customer experience.