KIRKLAND’S, INC MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)


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 periods ended April 30, 2022 and May 1, 2021. For a
comparison of our results of operations for the 52-week periods ended January
29, 2022 and January 30, 2021, 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 January 29, 2022, filed with the SEC on
March 25, 2022. This discussion should be read with our consolidated financial
statements and related notes included elsewhere in this Quarterly Report on
Form 10-Q.

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, 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 progress and
anticipated progress towards its short-term and long-term objectives including
its brand transformation strategy, the timing of normalized macroeconomic
conditions from the impacts of global geopolitical unrest and the COVID-19
pandemic on the Company's revenues, inventory and supply chain, 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, 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 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
on Form 10-K filed on March 25, 2022 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.

Insight

We are a specialty retailer of home furnishings in the United States. As of
April 30, 2022, we operated a total of 360 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 furnishings along with inspirational
design ideas. This combination of quality and stylish merchandise, value pricing
and a stimulating online and store experience allows our customers to furnish
their home at a great value.

 Macroeconomic Conditions

Economic disruption, inflation, uncertainty, volatility and the COVID-19
pandemic have affected the Company's business operations. We continue to closely
monitor the impact of these macroeconomic conditions on all facets of our
business, which includes the impact on our employees, customers, suppliers,
vendors, business partners and supply chain networks. While the duration and
extent of these conditions and their impact on the global economy remains
uncertain, we expect that our business operations and results of operations,
including our net sales, earnings and cash flows will continue to be materially
impacted.

There are numerous uncertainties surrounding macroeconomic conditions and their
impact on the economy and our business, as further described in "Item 1A. Risk
Factors" of our 2021 Annual Report on Form 10-K for the fiscal year ended
January 29, 2022, which makes it difficult to predict the impact on our
business, financial position, or results of operations in fiscal 2022 and
beyond. We cannot predict these uncertainties, or the corresponding impacts on
our business, at this time.

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 and excludes sales taxes. Gross profit is the difference between net
sales and cost of sales. Cost of sales has various distinct components,
including: landed product cost (including inbound freight), damages, inventory
shrinkage, store occupancy costs (including rent and depreciation

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of leasehold improvements and other property and equipment), outbound freight
costs to stores, e-commerce shipping expenses 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.

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.

Store Rationalization

Our store rationalization strategy includes refreshing mid and high-performing
stores and exiting or relocating low-performing stores to better locations. We
are prioritizing sustained improvement in overall profitability and developing a
future state plan for infrastructure that complements our omni-channel concept
and improves the customer experience. We anticipate additional store closures
and limited store openings as we execute our store rationalization strategy over
the next several years. We believe our ideal store count should be approximately
350 stores.

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

                                    13-Week Period Ended
                            April 30, 2022           May 1, 2021
New store openings                        -                     2
Permanent store closures                  1                     5
Store relocations                         -                     1
Decrease in store units                (0.3 )%               (0.8 )%



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

                                    April 30, 2022      May 1, 2021
Number of stores                                360              370
Square footage                            2,882,134        2,961,518
Average square footage per store              8,006            8,004




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13 week period ended April 30, 2022 Compared to the 13 week period ended May 1, 2021

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

                                                 13-Week Period Ended
                                      April 30, 2022               May 1, 2021                   Change
                                       $            %             $            %            $             %
Net sales                          $ 103,285       100.0 %    $ 123,569       100.0 %   $ (20,284 )        (16.4 )%
Cost of sales                         74,993        72.6         83,314        67.4        (8,321 )        (10.0 )
Gross profit                          28,292        27.4         40,255        32.6       (11,963 )        (29.7 )
Operating expenses:
Compensation and benefits             20,892        20.2         19,113        15.5         1,779            9.3
Other operating expenses              16,798        16.3         17,475        14.1          (677 )         (3.9 )
Depreciation (exclusive of
depreciation
included in cost of sales)             1,697         1.6          1,613         1.2            84            5.2
Total operating expenses              39,387        38.1         38,201        30.9         1,186            3.1
Operating (loss) income              (11,095 )     (10.7 )        2,054         1.7       (13,149 )       (640.2 )
Interest expense                         156         0.2             85         0.1            71           83.5
Other income                             (72 )      (0.1 )          (80 )      (0.1 )           8          (10.0 )
(Loss) income before income
taxes                                (11,179 )     (10.8 )        2,049         1.7       (13,228 )       (645.6 )
Income tax (benefit) expense          (3,324 )      (3.2 )          330         0.3        (3,654 )     (1,107.3 )
Net (loss) income                  $  (7,855 )      (7.6 )%   $   1,719         1.4 %   $  (9,574 )       (557.0 )%



Net sales. Net sales decreased 16.4% to $103.3 million for the first 13 weeks of
fiscal 2022 compared to $123.6 million for the prior year period driven by an
overall decrease in consumer discretionary spending and lower traffic and
conversion in stores and online. Comparable sales, including e-commerce sales,
decreased 15.8%, or $19.1 million, for the first 13 weeks of fiscal 2022
compared to the prior year period. Comparable sales, including e-commerce sales,
increased 75.3% in the prior year period mainly due to COVID-19 store closures
in the first 13 weeks of fiscal 2020. For the first 13 weeks of fiscal 2022,
e-commerce comparable sales decreased 23.6% compared to the prior year period
due to macroeconomic conditions impacting the home furnishing industry leading
to lower online traffic and conversion.

Gross profit. Gross profit as a percentage of net sales decreased 520 basis
points from 32.6% in the first 13 weeks of fiscal 2021 to 27.4% in the first 13
weeks of fiscal 2022. The overall decrease in gross profit margin was due to
unfavorable store occupancy costs, landed product margin, other cost of sales
including inventory damages and shrink, distribution center costs and outbound
freight costs, partially offset by favorable ecommerce shipping expenses. Store
occupancy and depreciation costs increased approximately 240 basis points as a
percentage of net sales due to the sales deleverage on these fixed costs. Landed
product margin decreased approximately 80 basis points from 57.4% in the first
13 weeks of fiscal 2021 to 56.6% in the first 13 weeks of fiscal 2022, mainly
due to lower discounting offsetting some of the expected incremental freight
costs. Other cost of sales increased approximately 130 basis points as a
percentage of net sales mainly due to increased damages with the increased
inventory levels. Distribution center costs increased approximately 50 basis
points as a percentage of net sales due to wage inflation and reduced
productivity from higher inventory levels and implementation of a new warehouse
management system. Outbound freight costs increased approximately 30 basis
points as a percentage of net sales due primarily to rate and fuel inflation.
Ecommerce shipping costs remained relatively flat at a 10 basis points decrease
as a percentage of net sales.

Compensation and benefits. Compensation and benefits as a percentage of net
sales increased approximately 470 basis points from 15.5% in the first 13 weeks
of fiscal 2021 to 20.2% in the first 13 weeks of fiscal 2022 primarily due to
the deleverage of store and corporate payroll expenses along with higher
employee benefits expenses.

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Other operating expenses. Other operating expenses as a percentage of net sales
increased approximately 220 basis points from 14.1% in the first 13 weeks of
fiscal 2021 to 16.3% in the first 13 weeks of fiscal 2022. The increase as a
percentage of net sales was primarily related to the decline in net sales, which
deleveraged advertising expenses and other fixed costs.

Income tax (benefit) expense. We recorded an income tax benefit of approximately
$3.3 million, or 29.7% of the loss before income taxes, during the first 13
weeks of fiscal 2022, compared to an income tax expense of approximately
$330,000 or 16.1% of income before income taxes, during the prior year period.
The change in income taxes for the 13-week period ended April 30, 2022, compared
to the prior year period, was primarily due the loss before income taxes and the
tax benefit related to stock compensation in the current year period.

Net (loss) income and (loss) earnings per share. We reported net loss of $7.9
million, or $0.63 per diluted share, for the first 13 weeks of fiscal 2022 as
compared to net income of $1.7 million, or $0.11 per diluted share, for the
first 13 weeks of fiscal 2021.

Non-GAAP Financial Measures

To supplement our unaudited consolidated condensed financial statements
presented in accordance with GAAP, we provide certain non-GAAP financial
measures, including EBITDA, adjusted EBITDA, adjusted operating (loss) income,
adjusted net (loss) income and adjusted diluted (loss) earnings per share. 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 income or loss before interest, provision for income
tax, and depreciation and amortization, adjusted EBITDA as EBITDA with non-GAAP
adjustments and adjusted operating (loss) income as operating (loss) income with
non-GAAP adjustments. We define adjusted net (loss) income and adjusted diluted
(loss) earnings per share by adjusting the applicable GAAP financial measures
for non-GAAP adjustments.

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 our results as
reported under GAAP.

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The following table shows a reconciliation of operating (loss) income to EBITDA,
adjusted EBITDA and adjusted operating (loss) income for the 13-week periods
ended April 30, 2022 and May 1, 2021 and a reconciliation of net (loss) income
and diluted (loss) earnings per share to adjusted net (loss) income and adjusted
diluted (loss) earnings per share for the 13-week periods ended April 30, 2022
and May 1, 2021:

                                                                   13-Week Period Ended
                                                             April 30, 2022       May 1, 2021
Operating (loss) income                                     $        (11,095 )   $       2,054
Depreciation and amortization                                          4,499             5,272
EBITDA                                                                (6,596 )           7,326
Non-GAAP adjustments:
Total adjustments in cost of sales(1)                                    208              (489 )
Asset impairment(2)                                                        -               310
Stock-based compensation expense(3)                                      548               232
Severance charges(4)                                                      13               280
Total adjustments in operating expenses                                  561               822
Total non-GAAP adjustments                                               769               333
Adjusted EBITDA                                                       (5,827 )           7,659
Depreciation and amortization                                          4,499             5,272
Adjusted operating (loss) income                            $        

(10,326) $2,387

Net (loss) income                                           $         (7,855 )   $       1,719
Non-GAAP adjustments, net of tax:
Total adjustments in cost of sales(1)                                    155              (368 )
Asset impairment(2)                                                        -               234
Stock-based compensation expense, including tax impact(3)               (261 )              72
Severance charges(4)                                                       9               211
Total adjustments in operating expenses                                 (252 )             517
Tax valuation allowance(5)                                               215               (74 )
Total non-GAAP adjustments, net of tax                                   118                75
Adjusted net (loss) income                                  $         

(7,737) $1,794

Diluted (loss) earnings per share                           $          (0.63 )   $        0.11
Adjusted diluted (loss) earnings per share                  $          

(0.62) $0.12

Diluted weighted average shares outstanding                           12,565            15,445
Adjusted diluted weighted average shares outstanding                  12,565            15,445



(1) Costs related to asset disposals, store closures and termination of leases

any charges and gains on termination of the lease.

(2) Asset impairment charges relate to property, plant and equipment.

(3) Stock-based compensation expense includes equity-related expense

incentive schemes.

(4) Severance pay includes charges related to severance agreements and

compensation costs related to the permanent closure of stores.

(5) To remove the impact of the change in our valuation allowance

    deferred tax assets.



Cash 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
technology and omni-channel projects, distribution center and supply chain
enhancements, new or relocated stores and existing store refreshes, remodels and
maintenance. Historically, we have funded our working capital and capital
expenditure requirements with internally generated cash and borrowings under our
revolving credit facility.

Cash flows from operating activities. Net cash used in operating activities was
approximately $43.6 million and $25.0 million during the first 13 weeks of
fiscal 2022 and the first 13 weeks of fiscal 2021, respectively. Cash flows from
operating activities depend heavily on operating performance, changes in working
capital and the timing and amount of payments for income taxes. The increase in
the amount of cash used in operations as compared to the prior year period was
mainly due to a decline in operating performance and working capital changes
including a decline in accounts payable and increased inventory levels.

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Cash flows from investing activities. Net cash used in investing activities for
the first 13 weeks of fiscal 2022 consisted mainly of $2.4 million in capital
expenditures as compared to $1.6 million in capital expenditures for the prior
year period. The table below sets forth capital expenditures by category (in
thousands) for the periods indicated:

                                                                13-Week 

Period ended

                                                         April 30, 2022         May 1, 2021
Technology and omni-channel projects                    $          1,301       $         569
Distribution center and supply chain enhancements                    585                 262
Existing stores                                                      472                 176
Corporate                                                             58                  33
New and relocated stores                                             (21 )               519
Total capital expenditures                              $          2,395       $       1,559


Capital expenditures in the current year period were primarily related to technology and omnichannel projects, distribution center and supply chain improvements, and renovations and maintenance of existing stores. Capital expenditures in the prior year period were primarily related to technology and omnichannel projects, as well as the opening of two new stores and one relocated store during the period.

Cash flows from financing activities. During the first 13 weeks of fiscal 2022,
net cash provided by financing activities was $26.4 million, as we borrowed
$35.0 million under our revolving credit facility, which was partially offset by
the repurchase and retirement of our common stock pursuant to our share
repurchase plan of $6.3 million. During the first 13 weeks of fiscal 2021, net
cash used in financing activities was approximately $1.6 million primarily
related to the repurchase and retirement of our common stock pursuant to our
share repurchase plan of $1.4 million.

Senior credit facility. On December 6, 2019, we entered into the Credit
Agreement with Bank of America, N.A. as administrative agent, collateral agent
and lender. The Credit Agreement contains a $75 million senior secured revolving
credit facility, a swingline availability of $10 million, a $25 million
incremental accordion feature and a maturity date of December 2024. Advances
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 lender on the unused portion of the credit facility is 25 basis
points per annum.

Borrowings under the Credit Agreement are subject to certain conditions,
contains 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 Credit Agreement 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 Second Amended and Restated Security Agreement ("Security
Agreement") with our lender. 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 April 30, 2022, we were in compliance with the covenants in the Credit
Agreement. Under the Credit Agreement, there were approximately $35.0 million of
outstanding borrowings and no letters of credit outstanding with approximately
$40.0 million available for borrowing as of April 30, 2022. Subsequent to April
30, 2022, we borrowed an additional $5.0 million under the Credit Agreement.

As of April 30, 2022, our balance of cash and cash equivalents was approximately
$5.4 million. We believe that the combination of our cash balances, cash flow
from operations and availability under our Credit Agreement will be sufficient
to fund our planned capital expenditures and working capital requirements
through the end of fiscal 2022 and over the next several fiscal years.

Share repurchase plan. On December 3, 2020, September 2, 2021 and 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 $20 million, $20
million and $30 million, respectively, 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. As of
April 30, 2022, we had approximately $26.3 million remaining under the current
share repurchase plan.

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The table below presents information on the selected share buyback plans (in thousands, except share amounts) for the periods indicated:

                                        13-Week Period Ended
                                  April 30, 2022       May 1, 2021
Shares repurchased and retired            479,966            47,350
Share repurchase cost            $          6,253     $       1,356



Significant Accounting Policies and Estimates

There were no material changes to our critical accounting policies during the first 13 weeks of fiscal 2022. See our annual report for a summary of our critical accounting policies.

New accounting statements

See Note 10 – New accounting standards in the condensed consolidated financial statements for accounting standards not yet adopted.

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