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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 July 29, 2023

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 – 12,917,373 shares outstanding as of August 30, 2023.

Table of Contents

KIRKLAND’S, INC.

TABLE OF CONTENTS

|  | Page
PART I | FINANCIAL INFORMATION | 3
Item 1. | Financial Statements | 3
| Condensed Consolidated Balance Sheets (Unaudited) as of July 29, 2023, January 28, 2023 and July 30, 2022 | 3
| Condensed Consolidated Statements of Operations (Unaudited) for the 13-week and 26-week periods ended July 29, 2023 and July 30, 2022 | 4
| Condensed Consolidated Statements of Shareholders’ (Deficit) Equity (Unaudited) for the 13-week and 26-week periods ended July 29, 2023 and July 30, 2022 | 5
| Condensed Consolidated Statements of Cash Flows (Unaudited) for the 26-week periods ended July 29, 2023 and July 30, 2022 | 6
| Notes to Condensed Consolidated Financial Statements (Unaudited) | 7
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 12
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 19
Item 4. | Controls and Procedures | 19
PART II | OTHER INFORMATION | 20
Item 1. | Legal Proceedings | 20
Item 1A. | Risk Factors | 20
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 20
Item 6. | Exhibits | 20
SIGNATURES |  | 21

2

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PART I - FINANC IAL INFORMATION

ITEM 1. FINANC IAL STATEMENTS

KIRKLAND’S, INC.

CONDENSED CONSOLIDATED BA LANCE SHEETS (UNAUDITED)

(in thousands, except share data)

|  | July 29, |  |  | January 28, |  |  | July 30, |
|  | 2023 |  |  | 2023 |  |  | 2022 |
ASSETS |  |  |  |  |  |  |  |  |
Current assets: |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 4,890 |  |  | $ | 5,171 |  |  | $ | 10,330 |
Inventories, net |  |  | 98,949 |  |  |  | 84,071 |  |  |  | 141,702 |
Prepaid expenses and other current assets |  |  | 5,697 |  |  |  | 5,089 |  |  |  | 7,273 |
Total current assets |  |  | 109,536 |  |  |  | 94,331 |  |  |  | 159,305 |
Property and equipment: |  |  |  |  |  |  |  |  |
Equipment |  |  | 19,593 |  |  |  | 19,614 |  |  |  | 19,953 |
Furniture and fixtures |  |  | 65,632 |  |  |  | 66,906 |  |  |  | 68,653 |
Leasehold improvements |  |  | 102,068 |  |  |  | 103,525 |  |  |  | 106,109 |
Computer software and hardware |  |  | 82,517 |  |  |  | 81,685 |  |  |  | 78,886 |
Projects in progress |  |  | 1,276 |  |  |  | 743 |  |  |  | 3,835 |
Property and equipment, gross |  |  | 271,086 |  |  |  | 272,473 |  |  |  | 277,436 |
Accumulated depreciation |  |  | (237,208 | ) |  |  | (233,797 | ) |  |  | (231,502 | )
Property and equipment, net |  |  | 33,878 |  |  |  | 38,676 |  |  |  | 45,934 |
Operating lease right-of-use assets |  |  | 133,352 |  |  |  | 134,525 |  |  |  | 140,310 |
Other assets |  |  | 6,818 |  |  |  | 6,714 |  |  |  | 7,891 |
Total assets |  | $ | 283,584 |  |  | $ | 274,246 |  |  | $ | 353,440 |
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY |  |  |  |  |  |  |  |  |
Current liabilities: |  |  |  |  |  |  |  |  |
Accounts payable |  | $ | 56,483 |  |  | $ | 43,739 |  |  | $ | 61,569 |
Accrued expenses |  |  | 26,432 |  |  |  | 26,069 |  |  |  | 27,636 |
Operating lease liabilities |  |  | 40,249 |  |  |  | 41,499 |  |  |  | 40,801 |
Total current liabilities |  |  | 123,164 |  |  |  | 111,307 |  |  |  | 130,006 |
Operating lease liabilities |  |  | 111,746 |  |  |  | 114,613 |  |  |  | 123,426 |
Revolving line of credit |  |  | 46,000 |  |  |  | 15,000 |  |  |  | 55,000 |
Other liabilities |  |  | 3,834 |  |  |  | 3,553 |  |  |  | 4,897 |
Total liabilities |  |  | 284,744 |  |  |  | 244,473 |  |  |  | 313,329 |
Shareholders’ (deficit) equity: |  |  |  |  |  |  |  |  |
Preferred stock, no par value, 10,000,000 shares authorized; no shares issued or outstanding at July 29, 2023, January 28, 2023, and July 30, 2022, respectively |  |  | — |  |  |  | — |  |  |  | — |
Common stock, no par value; 100,000,000 shares authorized; 12,917,373; 12,754,368; and 12,754,368 shares issued and outstanding at July 29, 2023, January 28, 2023, and July 30, 2022, respectively |  |  | 175,988 |  |  |  | 175,450 |  |  |  | 174,654 |
Accumulated deficit |  |  | (177,148 | ) |  |  | (145,677 | ) |  |  | (134,543 | )
Total shareholders’ (deficit) equity |  |  | (1,160 | ) |  |  | 29,773 |  |  |  | 40,111 |
Total liabilities and shareholders’ (deficit) equity |  | $ | 283,584 |  |  | $ | 274,246 |  |  | $ | 353,440 |

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

3

Table of Contents

KIRKLAND’S, INC.

CONDENSED CONSOLIDATED STATEME NTS OF OPERATIONS (UNAUDITED)

(in thousands, except per share data)

|  | 13-Week Period Ended |  |  | 26-Week Period Ended |
|  | July 29, |  |  | July 30, |  |  | July 29, |  |  | July 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Net sales |  | $ | 89,504 |  |  | $ | 102,101 |  |  | $ | 186,379 |  |  | $ | 205,386 |
Cost of sales |  |  | 72,065 |  |  |  | 83,576 |  |  |  | 143,069 |  |  |  | 158,569 |
Gross profit |  |  | 17,439 |  |  |  | 18,525 |  |  |  | 43,310 |  |  |  | 46,817 |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |
Compensation and benefits |  |  | 19,217 |  |  |  | 21,507 |  |  |  | 39,256 |  |  |  | 42,399 |
Other operating expenses |  |  | 14,090 |  |  |  | 16,994 |  |  |  | 28,828 |  |  |  | 33,792 |
Depreciation (exclusive of depreciation included in cost of sales) |  |  | 1,222 |  |  |  | 1,596 |  |  |  | 2,428 |  |  |  | 3,293 |
Asset impairment |  |  | 1,001 |  |  |  | 228 |  |  |  | 1,226 |  |  |  | 228 |
Total operating expenses |  |  | 35,530 |  |  |  | 40,325 |  |  |  | 71,738 |  |  |  | 79,712 |
Operating loss |  |  | (18,091 | ) |  |  | (21,800 | ) |  |  | (28,428 | ) |  |  | (32,895 | )
Interest expense |  |  | 750 |  |  |  | 366 |  |  |  | 1,252 |  |  |  | 522 |
Other income |  |  | (127 | ) |  |  | (83 | ) |  |  | (219 | ) |  |  | (155 | )
Loss before income taxes |  |  | (18,714 | ) |  |  | (22,083 | ) |  |  | (29,461 | ) |  |  | (33,262 | )
Income tax expense |  |  | 650 |  |  |  | 3,622 |  |  |  | 2,010 |  |  |  | 298 |
Net loss |  | $ | (19,364 | ) |  | $ | (25,705 | ) |  | $ | (31,471 | ) |  | $ | (33,560 | )
Loss per share: |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | (1.51 | ) |  | $ | (2.02 | ) |  | $ | (2.46 | ) |  | $ | (2.65 | )
Diluted |  | $ | (1.51 | ) |  | $ | (2.02 | ) |  | $ | (2.46 | ) |  | $ | (2.65 | )
Weighted average shares outstanding: |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | 12,857 |  |  |  | 12,740 |  |  |  | 12,817 |  |  |  | 12,653 |
Diluted |  |  | 12,857 |  |  |  | 12,740 |  |  |  | 12,817 |  |  |  | 12,653 |

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

4

Table of Contents

KIRKLAND’S, INC.

CONDENSED CONSOLIDATED STATEMENTS O F SHAREHOLDERS’ (DEFICIT) EQUITY (UNAUDITED)

(in thousands, except share data)

|  | Common Stock |  |  |  |  |  | Total Shareholders’ |
|  | Shares |  |  | Amount |  |  | Accumulated 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 | )

|  | Common Stock |  |  |  |  |  | Total Shareholders’ |
|  | Shares |  |  | Amount |  |  | Accumulated Deficit |  |  | (Deficit) Equity |
Balance at January 29, 2022 |  |  | 12,631,347 |  |  | $ | 175,856 |  |  | $ | (94,730 | ) |  | $ | 81,126 |
Exercise of stock options |  |  | 2,705 |  |  |  | 16 |  |  |  | — |  |  |  | 16 |
Restricted stock issued |  |  | 797,849 |  |  |  | — |  |  |  | — |  |  |  | — |
Net share settlement of stock options and restricted stock units |  |  | (224,320 | ) |  |  | (2,375 | ) |  |  | — |  |  |  | (2,375 | )
Stock-based compensation expense |  |  | — |  |  |  | 548 |  |  |  | — |  |  |  | 548 |
Repurchase and retirement of common stock |  |  | (479,966 | ) |  |  | — |  |  |  | (6,253 | ) |  |  | (6,253 | )
Net loss |  |  | — |  |  |  | — |  |  |  | (7,855 | ) |  |  | (7,855 | )
Balance at April 30, 2022 |  |  | 12,727,615 |  |  |  | 174,045 |  |  |  | (108,838 | ) |  |  | 65,207 |
Restricted stock issued |  |  | 28,574 |  |  |  | — |  |  |  | — |  |  |  | — |
Net share settlement of restricted stock units |  |  | (1,821 | ) |  |  | (8 | ) |  |  | — |  |  |  | (8 | )
Stock-based compensation expense |  |  | — |  |  |  | 617 |  |  |  | — |  |  |  | 617 |
Net loss |  |  | — |  |  |  | — |  |  |  | (25,705 | ) |  |  | (25,705 | )
Balance at July 30, 2022 |  |  | 12,754,368 |  |  | $ | 174,654 |  |  | $ | (134,543 | ) |  | $ | 40,111 |

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

5

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KIRKLAND’S, INC.

CONDENSED CONSOLIDATED STATEME NTS OF CASH FLOWS (UNAUDITED)

(in thousands)

|  | 26-Week Period Ended |
|  | July 29, |  |  | July 30, |
|  | 2023 |  |  | 2022 |
Cash flows from operating activities: |  |  |  |  |  |
Net loss |  | $ | (31,471 | ) |  | $ | (33,560 | )
Adjustments to reconcile net loss to net cash used in operating activities: |  |  |  |  |  |
Depreciation of property and equipment |  |  | 6,349 |  |  |  | 8,837 |
Amortization of debt issue costs |  |  | 50 |  |  |  | 46 |
Asset impairment |  |  | 1,226 |  |  |  | 228 |
(Gain) loss on disposal of property and equipment |  |  | (18 | ) |  |  | 183 |
Stock-based compensation expense |  |  | 614 |  |  |  | 1,165 |
Changes in assets and liabilities: |  |  |  |  |  |
Inventories, net |  |  | (14,878 | ) |  |  | (27,673 | )
Prepaid expenses and other current assets |  |  | (713 | ) |  |  | 3,489 |
Accounts payable |  |  | 12,529 |  |  |  | (1,165 | )
Accrued expenses |  |  | (1,174 | ) |  |  | (1,264 | )
Income taxes payable (refundable) |  |  | 1,642 |  |  |  | (2,136 | )
Operating lease assets and liabilities |  |  | (2,976 | ) |  |  | (3,840 | )
Other assets and liabilities |  |  | 291 |  |  |  | (377 | )
Net cash used in operating activities |  |  | (28,529 | ) |  |  | (56,067 | )
Cash flows from investing activities: |  |  |  |  |  |
Proceeds from sale of property and equipment |  |  | 74 |  |  |  | 33 |
Capital expenditures |  |  | (2,294 | ) |  |  | (5,019 | )
Net cash used in investing activities |  |  | (2,220 | ) |  |  | (4,986 | )
Cash flows from financing activities: |  |  |  |  |  |
Borrowings on revolving line of credit |  |  | 36,000 |  |  |  | 55,000 |
Repayments on revolving line of credit |  |  | (5,000 | ) |  |  | — |
Debt issuance costs |  |  | (456 | ) |  |  | — |
Cash used in net share settlement of stock options and restricted stock units |  |  | (76 | ) |  |  | (2,383 | )
Proceeds received from employee stock option exercises |  |  | — |  |  |  | 16 |
Repurchase and retirement of common stock |  |  | — |  |  |  | (6,253 | )
Net cash provided by financing activities |  |  | 30,468 |  |  |  | 46,380 |
Cash and cash equivalents: |  |  |  |  |  |
Net decrease |  |  | (281 | ) |  |  | (14,673 | )
Beginning of the period |  |  | 5,171 |  |  |  | 25,003 |
End of the period |  | $ | 4,890 |  |  | $ | 10,330 |
Supplemental schedule of non-cash activities: |  |  |  |  |  |
Non-cash accruals for purchases of property and equipment |  | $ | 914 |  |  | $ | 1,502 |

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

6

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KIRKLAND’S, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Description of Business and Basis of Presentation

Nature of Business — Kirkland’s, Inc. (the “Company”, “we”, “our” or “us”) is a specialty retailer of home décor and furnishings in the United States operating 340 stores in 35 states as of July 29, 2023, as well as an e-commerce website, www.kirklands.com, under the Kirkland’s Home brand.

Principles of consolidation — The condensed consolidated financial statements of the Company include the accounts of Kirkland’s, Inc. and its wholly-owned subsidiaries, Kirkland’s Stores, Inc., Kirkland’s DC, Inc., and Kirkland’s Texas, LLC. Significant intercompany accounts and transactions have been eliminated.

Basis of presentation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and are presented in accordance with the requirements of Form 10-Q and pursuant to the reporting and disclosure rules and regulations of the United States Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments, including normal recurring accruals, considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the audited financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC on April 4, 2023.

Seasonality — The results of the Company’s operations for the 13-week and 26-week periods ended July 29, 2023 are not indicative of the results to be expected for any other interim period or for the entire fiscal year due to seasonality factors.

Fiscal year — The Company’s fiscal year ends on the Saturday closest to January 31, resulting in years of either 52 or 53 weeks. Accordingly, fiscal 2023 represents the 53 weeks ending on February 3, 2024 and fiscal 2022 represents the 52 weeks ended on January 28, 2023.

Use of estimates — The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from the estimates and assumptions used. It should be understood that accounting measurements at interim dates inherently involve greater reliance on estimates than those at fiscal year-end.

Changes in estimates are recognized in the period when new information becomes available to management. Areas where the nature of the estimate makes it reasonably possible that actual results could materially differ from amounts estimated include, but are not limited to, impairment assessments on long-lived assets, inventory reserves, self-insurance reserves and deferred tax asset valuation allowances.

Note 2 –Revenue Recognition

Net sales — Net sales includes the sale of merchandise, net of returns, shipping revenue, gift card breakage revenue and revenue earned from our private label credit card program and excludes sales taxes.

Sales returns reserve — The Company reduces net sales and estimates a liability for sales returns based on historical return trends, and the Company believes that its estimate for sales returns is a reasonably accurate reflection of future returns associated with past sales. However, as with any estimate, refund activity may vary from estimated amounts. The Company had a liability of approximately $1.3 million, $1.5 million and $1.4 million reserved for sales returns at July 29, 2023, January 28, 2023 and July 30, 2022, respectively, included in accrued expenses on the condensed consolidated balance sheets. The related sales return reserve products recovery asset included in prepaid expenses and other current assets on the condensed consolidated balance sheets was approximately $636,000, $705,000 and $742,000 at July 29, 2023, January 28, 2023, and July 30, 2022, respectively.

Deferred e-commerce revenue —The Company recognizes revenue at the time of sale of merchandise to customers in its stores. E-commerce revenue is recorded at the estimated time of delivery to the customer. If the Company receives payment before completion of its customer obligations, the revenue is deferred until the customer takes possession of the merchandise and the sale is complete. Deferred revenue related to e-commerce orders that have been shipped but not estimated to be received by customers included in accrued expenses on the condensed consolidated balance sheets was approximately $1.5 million, $0.7 million and $1.2 million at July 29, 2023, January 28, 2023 and July 30, 2022, respectively. The related contract assets, reflected in inventories, net on the condensed consolidated

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balance sheets, totaled approximately $757,000, $359,000 and $656,000 at July 29, 2023, January 28, 2023 and July 30, 2022, respectively.

Gift cards — Gift card sales are recognized as revenue when tendered for payment. While the Company honors all gift cards presented for payment, the Company determines the likelihood of redemption to be remote for certain gift card balances due to long periods of inactivity. The Company uses the redemption recognition method to account for breakage for unused gift card amounts where breakage is recognized as gift cards are redeemed for the purchase of goods based upon a historical breakage rate. In these circumstances, to the extent the Company determines there is no requirement for remitting unredeemed card balances to government agencies under unclaimed property laws, such amounts are recognized in the condensed consolidated statements of operations as a component of net sales.

The table below sets forth selected gift card liability information (in thousands) for the periods indicated:

|  | July 29, 2023 |  |  | January 28, 2023 |  |  | July 30, 2022 |
Gift card liability, net of estimated breakage (included in accrued expenses) |  | $ | 12,027 |  |  | $ | 14,077 |  |  | $ | 13,981 |

The table below sets forth selected gift card breakage and redemption information (in thousands) for the periods indicated:

| 13-Week Period Ended |  |  | 26-Week Period Ended |
| July 29, 2023 |  |  | July 30, 2022 |  |  | July 29, 2023 |  |  | July 30, 2022 |
Gift card breakage revenue (included in net sales) | $ | 304 |  |  | $ | 191 |  |  | $ | 1,335 |  |  | $ | 393 |
Gift card redemptions recognized in the current period related to amounts included in the gift card contract liability balance as of the prior period |  | 1,348 |  |  |  | 1,572 |  |  |  | 2,785 |  |  |  | 3,157 |

Customer loyalty program — The Company has a loyalty program called the K-club that allows members to receive points based on qualifying purchases that are converted into certificates that may be redeemed on future purchases. This customer option is a material right and, accordingly, represents a separate performance obligation to the customer. The related loyalty program deferred revenue included in accrued expenses on the condensed consolidated balance sheets was approximately $1.0 million, $1.2 million and $1.0 million at July 29, 2023, January 28, 2023 and July 30, 2022, respectively.

Note 3 – Income Taxes

For the 13-week periods ended July 29, 2023 and July 30, 2022, the Company recorded an income tax expense of approximately $650,000, or (3.5)% of the loss before income taxes compared to an expense of approximately $3.6 million, or (16.4)% of the loss before income taxes, respectively. For the 26-week periods ended July 29, 2023 and July 30, 2022, the Company recorded an income tax expense of approximately $2.0 million, or (6.8)% of the loss before income taxes compared to an expense of approximately $298,000, or (0.9)% of the loss before income taxes, respectively. The change in income taxes for the 13-week and 26-week periods ended July 29, 2023, compared to the prior year period, was primarily due to valuation allowance adjustments and state income taxes.

The Company recognizes deferred tax assets and liabilities using estimated future tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities, including net operating loss carry forwards. Management assesses the realizability of deferred tax assets and records a valuation allowance if it is more likely than not that all or a portion of the deferred tax assets will not be realized. The Company considers the probability of future taxable income and our historical profitability, among other factors, in assessing the amount of the valuation allowance. Adjustments could be required in the future if the Company estimates that the amount of deferred tax assets to be realized is more than the net amount recorded. Any change in the valuation allowance could have the effect of increasing or decreasing the income tax provision in the statement of operations based on the nature of the deferred tax asset deemed realizable in the period in which such determination is made. As of July 29, 2023 and July 30, 2022, the Company recorded a full valuation allowance against deferred tax assets.

Note 4 – Loss Per Share

Basic loss per share is computed by dividing net loss by the weighted average number of shares outstanding during each period presented. Diluted loss per share is computed by dividing net loss by the weighted average number of shares outstanding plus the dilutive effect of stock equivalents outstanding during the applicable periods using the treasury stock method. Diluted loss per share reflects the potential dilution that could occur if options to purchase stock were exercised into common stock and if outstanding grants of restricted stock were vested. Stock options and restricted stock units that were not included in the computation of diluted loss per share, because

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to do so would have been antidilutive, were approximately 793,000 shares and 471,000 shares for the 13-week periods ended July 29, 2023 and July 30, 2022, respectively, and 697,000 shares and 630,000 shares for the 26-week periods ended July 29, 2023 and July 30, 2022, respectively.

Note 5 – Fair Value Measurements

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

The carrying amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of their short maturities. The revolving line of credit approximates fair value due to the one, three or six-month interest terms. The Company also has a non-depleting collateral trust with the Company’s workers’ compensation and general liability insurance provider named as beneficiary. The assets in this trust are invested in financial instruments that would fall within Level 1 of the fair value hierarchy, and they are included in other assets on the consolidated balance sheets.

The Company measures certain assets at fair value on a non-recurring basis, including the evaluation of long-lived assets for impairment using Company-specific assumptions, including forecasts of projected financial information that would fall within Level 3 of the fair value hierarchy. The Company uses market participant rents (Level 2 input) to calculate the fair value of right-of-use assets and discounted future cash flows of the asset or asset group using a discount rate that approximates the cost of capital of a market participant (Level 2 input) to quantify fair value for other long-lived assets.

Note 6 – Commitments and Contingencies

The Company was named as a defendant in a putative class action filed in April 2017 in the United States District Court for the Western District of Pennsylvania, Gennock v. Kirkland’s, Inc. The complaint alleged that the Company, in violation of federal law, published more than the last five digits of a credit or debit card number on customers’ receipts and sought statutory and punitive damages and attorneys’ fees and costs. On October 21, 2019, the District Court dismissed the matter and ruled that the Plaintiffs did not have standing based on the Third Circuit’s recent decision in Kamal v. J. Crew Group, Inc., 918 F.3d 102 (3d. Cir. 2019). Following the dismissal in federal court, on October 25, 2019, the plaintiffs filed a Praecipe to Transfer the case to Pennsylvania state court, and on August 20, 2020, the court ruled that the plaintiffs have standing. The Company appealed that ruling, and on April 27, 2022, the Superior Court of Pennsylvania granted the Company’s petition for permission to appeal. On May 16, 2023, the Superior Court of Pennsylvania ruled that plaintiffs lacked standing under Pennsylvania law and dismissed plaintiffs’ complaint. The Company continues to believe that the case is without merit and will continue to vigorously defend itself in the event the Pennsylvania Supreme Court takes the case on appeal. The matter is covered by insurance, and the Company does not believe that the case will have a material adverse effect on its consolidated financial condition, operating results or cash flows.

The Company was named as a defendant in a putative class action filed in May 2018 in the Superior Court of California, Miles v. Kirkland’s Stores, Inc. The case has been removed to United States District Court for the Central District of California. The complaint alleges, on behalf of Miles and all other hourly Kirkland’s employees in California, various wage and hour violations and seeks unpaid wages, statutory and civil penalties, monetary damages and injunctive relief. Kirkland’s denies the material allegations in the complaint and believes that its employment policies are generally compliant with California law. On March 22, 2022, the District Court denied the plaintiff’s motion to certify in its entirety, and on May 26, 2022, the Ninth Circuit granted the plaintiff’s petition for permission to appeal. The Court has stayed the entire case pending the appeal. The Company continues to believe the case is without merit and intends to vigorously defend itself against the allegations.

The Company was named as a defendant in a putative class action filed in August 2022 in the United States District Court for the Southern District of New York, Sicard v. Kirkland’s Stores, Inc. The complaint alleges, on behalf of Sicard and all other hourly store employees based in New York, that Kirkland’s violated New York Labor Law Section 191 by failing to pay him and the putative class members their wages within seven calendar days after the end of the week in which those wages were earned, rather paying wages on a bi-weekly basis. Plaintiff claims the putative class is entitled to recover from the Company the amount of their untimely paid wages as liquidated damages, reasonable attorneys’ fees and costs. The Company believes the case is without merit and intends to vigorously defend itself against the allegations.

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The Company is also party to other pending legal proceedings and claims that arise in the normal course of business. Although the outcome of such proceedings and claims cannot be determined with certainty, the Company’s management is of the opinion that it is unlikely that such proceedings and any claims in excess of insurance coverage will have a material effect on its consolidated financial condition, operating results or cash flows.

Note 7 – Stock-Based Compensation

The Company maintains equity incentive plans under which it may grant non-qualified stock options, incentive stock options, restricted stock, restricted stock units, or stock appreciation rights to employees, non-employee directors and consultants. Compensation expense is recognized on a straight-line basis over the vesting periods of each grant. There have been no material changes in the assumptions used to compute compensation expense during the current year. The table below sets forth selected stock-based compensation information (in thousands, except share amounts) for the periods indicated:

|  | 13-Week Period Ended |  |  | 26-Week Period Ended |
|  | July 29, 2023 |  |  | July 30, 2022 |  |  | July 29, 2023 |  |  | July 30, 2022 |
Stock-based compensation expense (included in compensation and benefits on the condensed consolidated statements of operations) |  | $ | 124 |  |  | $ | 617 |  |  | $ | 614 |  |  | $ | 1,165 |
Restricted stock units granted |  |  | 72,660 |  |  |  | 119,400 |  |  |  | 374,440 |  |  |  | 359,800 |
Stock options granted |  |  | — |  |  |  | — |  |  |  | 237,675 |  |  |  | — |

During the 26-week period ended July 30, 2022, the Company also granted performance-based restricted stock units (“PSUs”) that are subject to the achievement of specified performance goals over a specified performance period. The performance metrics for the PSUs were earnings before interest, taxes, depreciation and amortization (“EBITDA”) compared to target EBITDA and also included a relative shareholder return modifier. No shares were issued and no expense was recorded with respect to the PSUs granted in fiscal 2022, as the EBITDA performance condition was not probable of being achieved.

Note 8 – Share Repurchase Plan

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 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 plan does not require the Company to repurchase any specific number of shares, and the Company may terminate the repurchase plan at any time. As of July 29, 2023, the Company had approximately $26.3 million remaining under the current share repurchase plan. The table below sets forth selected share repurchase plan information (in thousands, except share amounts) for the periods indicated:

|  | 13-Week Period Ended |  |  | 26-Week Period Ended |
|  | July 29, |  |  | July 30, |  |  | July 29, |  |  | July 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Shares repurchased and retired |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 479,966 |
Share repurchase cost |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 6,253 |

Note 9 – Senior Credit Facility

On March 31, 2023, the Company entered into a Third Amended and Restated Credit Agreement (the “2023 Credit Agreement”) with Bank of America, N.A., as administrative agent and collateral agent, and lender. The 2023 Credit Agreement amended the previous Second Amended and Restated Credit Agreement (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. Advances under the 2023 Credit Agreement bear interest at an annual rate equal to the Secured Overnight Financing Rate (“SOFR”) plus a margin ranging from 200 to 250 basis points with no SOFR floor. Upon the demonstration that the Company’s 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 150 to 200 basis points. Advances under the 2019 Credit Agreement bore interest at an annual rate equal to SOFR, or the London Interbank Offered Rate (“LIBOR”) through December 16, 2022, plus a margin ranging from 125 to 175 basis points with no SOFR or LIBOR floor. 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

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unused portion is 37.5 basis points per annum. Under the 2019 Credit Agreement, the fee on the unused portion was 25 basis points per annum.

Borrowings under the Credit Agreements are subject to certain conditions, and the Credit Agreements 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 certain events under the Employee Retirement Income Security Act of 1974 (“ERISA”). Upon any such event of default, the principal amount of any unpaid loans and all other obligations under the Credit Agreements may be declared immediately due and payable. The maximum availability under the Credit Agreements is limited by a borrowing base formula, which consists of a percentage of eligible inventory and eligible credit card receivables, less reserves.

The Company is subject to a Second Amended and Restated Security Agreement (the “Security Agreement”) with Bank of America, N.A. Pursuant to the Security Agreement, the Company 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 the Company’s assets to secure the payment and performance of the obligations under the Credit Agreements.

As of July 29, 2023, the Company was in compliance with the covenants in the 2023 Credit Agreement. Under the 2023 Credit Agreement, there were $46.0 million in outstanding borrowings and no letters of credit outstanding with approximately $26.1 million available for borrowing as of July 29, 2023.

N ote 10 – Impairment

The Company evaluates the recoverability of the carrying amounts of long-lived assets when events or changes in circumstances dictate that their carrying values may not be recoverable. This review includes the evaluation of individual under-performing retail stores and the assessment of the recoverability of the carrying value of the assets related to the stores. Future cash flows are projected for the remaining lease life. If the estimated future cash flows are less than the carrying value of the assets, the Company records an impairment charge equal to the difference between the assets’ fair value and carrying value. The fair value is estimated using a discounted cash flow approach, considering such factors as future sales levels, gross margins, changes in rent and other expenses as well as the overall operating environment specific to that store. The amount of the impairment charge is allocated proportionately to all assets in the asset group with no asset written down below its individual fair value.

The table below sets forth impairment information (in thousands, except store counts) for the periods indicated:

|  | 13-Week Period Ended |  |  | 26-Week Period Ended |
|  | July 29, 2023 |  |  | July 30, 2022 |  |  | July 29, 2023 |  |  | July 30, 2022 |
Impairment of leasehold improvements, fixtures and equipment at stores |  | $ | 184 |  |  | $ | 228 |  |  | $ | 327 |  |  | $ | 228 |
Impairment of other long-lived assets(1) |  |  | 817 |  |  |  | — |  |  |  | 899 |  |  |  | — |
Total impairment |  | $ | 1,001 |  |  | $ | 228 |  |  | $ | 1,226 |  |  | $ | 228 |
Number of stores with leasehold improvements, fixtures and equipment impairment |  |  | 1 |  |  |  | 2 |  |  |  | 3 |  |  |  | 2 |

(1)
Other long-lived asset impairment includes the write-off of software costs and cloud computing implementation costs.

N ote 11 – Subsequent Event

Subsequent to July 29, 2023, the Company borrowed an additional $9.0 million under the 2023 Credit Agreement.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL 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 July 29, 2023 and July 30, 2022. For a comparison of our results of operations for the 52-week periods ended January 28, 2023 and January 29, 2022, 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 28, 2023, filed with the SEC on April 4, 2023 (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.

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, 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 July 29, 2023, we operated a total of 340 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.

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

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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 our store closings during the periods indicated:

|  | 13-Week Period Ended |  |  | 26-Week Period Ended |
|  | July 29, 2023 |  |  | July 30, 2022 |  |  | July 29, 2023 |  |  | July 30, 2022 |
Permanent store closures |  |  | 3 |  |  |  | 4 |  |  |  | 6 |  |  |  | 5 |
Decrease in store units |  |  | (0.9 | )% |  |  | (1.1 | )% |  |  | (1.7 | )% |  |  | (1.4 | )%

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

|  | July 29, 2023 |  |  | July 30, 2022 |
Number of stores |  |  | 340 |  |  |  | 356 |
Square footage |  |  | 2,748,355 |  |  |  | 2,852,601 |
Average square footage per store |  |  | 8,083 |  |  |  | 8,013 |

13-Week Period Ended July 29, 2023 Compared to the 13-Week Period Ended July 30, 2022

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 |  |  |  |  |  |  |
|  | July 29, 2023 |  |  | July 30, 2022 |  |  | Change |
|  | $ |  |  | % |  |  | $ |  |  | % |  |  | $ |  |  | % |
Net sales |  | $ | 89,504 |  |  |  | 100.0 | % |  | $ | 102,101 |  |  |  | 100.0 | % |  | $ | (12,597 | ) |  |  | (12.3 | )%
Cost of sales |  |  | 72,065 |  |  |  | 80.5 |  |  |  | 83,576 |  |  |  | 81.9 |  |  |  | (11,511 | ) |  |  | (13.8 | )
Gross profit |  |  | 17,439 |  |  |  | 19.5 |  |  |  | 18,525 |  |  |  | 18.1 |  |  |  | (1,086 | ) |  |  | (5.9 | )
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Compensation and benefits |  |  | 19,217 |  |  |  | 21.5 |  |  |  | 21,507 |  |  |  | 21.1 |  |  |  | (2,290 | ) |  |  | (10.6 | )
Other operating expenses |  |  | 14,090 |  |  |  | 15.7 |  |  |  | 16,994 |  |  |  | 16.7 |  |  |  | (2,904 | ) |  |  | (17.1 | )
Depreciation (exclusive of depreciation included in cost of sales) |  |  | 1,222 |  |  |  | 1.4 |  |  |  | 1,596 |  |  |  | 1.5 |  |  |  | (374 | ) |  |  | (23.4 | )
Asset impairment |  |  | 1,001 |  |  |  | 1.1 |  |  |  | 228 |  |  |  | 0.2 |  |  |  | 773 |  |  |  | 339.0 |
Total operating expenses |  |  | 35,530 |  |  |  | 39.7 |  |  |  | 40,325 |  |  |  | 39.5 |  |  |  | (4,795 | ) |  |  | (11.9 | )
Operating loss |  |  | (18,091 | ) |  |  | (20.2 | ) |  |  | (21,800 | ) |  |  | (21.4 | ) |  |  | 3,709 |  |  |  | (17.0 | )
Interest expense |  |  | 750 |  |  | 0.8 |  |  |  | 366 |  |  |  | 0.3 |  |  |  | 384 |  |  |  | 104.9 |
Other income |  |  | (127 | ) |  |  | (0.1 | ) |  |  | (83 | ) |  |  | (0.1 | ) |  |  | (44 | ) |  |  | 53.0 |
Loss before income taxes |  |  | (18,714 | ) |  |  | (20.9 | ) |  |  | (22,083 | ) |  |  | (21.6 | ) |  |  | 3,369 |  |  |  | (15.3 | )
Income tax expense |  |  | 650 |  |  |  | 0.7 |  |  |  | 3,622 |  |  |  | 3.6 |  |  |  | (2,972 | ) |  |  | (82.1 | )
Net loss |  | $ | (19,364 | ) |  |  | (21.6 | )% |  | $ | (25,705 | ) |  |  | (25.2 | )% |  | $ | 6,341 |  |  |  | (24.7 | )%

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Net sales. Net sales decreased 12.3% to $89.5 million for the first 13 weeks of fiscal 2023 compared to $102.1 million for the prior year period, which includes a 4.5% decline in store count. Comparable sales, including e-commerce sales, decreased 9.7%, or $9.6 million, for the second 13 weeks of fiscal 2023 compared to the prior year period. For the second 13 weeks of fiscal 2023, e-commerce comparable sales decreased 16.6% compared to the prior year period. The decrease in comparable sales was driven by lower traffic, which was partially offset by higher conversion rates, and a decrease in average ticket. Merchandise categories performing below prior period levels include outdoor, furniture and wall décor, while holiday and decorative accessories performed above prior period levels.

Gross profit. Gross profit as a percentage of net sales increased 140 basis points from 18.1% in the second 13 weeks of fiscal 2022 to 19.5% in the second 13 weeks of fiscal 2023. The overall increase in gross profit margin was due to favorable merchandise margin, outbound freight costs and depreciation, partially offset by unfavorable store occupancy costs and distribution center costs. Merchandise margin increased approximately 320 basis points from 48.0% in the second 13 weeks of fiscal 2022 to 51.2% in the second 13 weeks of fiscal 2023, mainly due to lower inbound freight rates and lower inventory levels. Outbound freight costs, including both store and e-commerce shipping expenses, decreased approximately 70 basis points to 8.0% of net sales because of fewer routes due to the lower inventory levels and lower e-commerce shipping expenses resulting from the sales decline. Depreciation of store and distribution center assets decreased approximately 60 basis points to 2.1% of net sales in the second 13 weeks of fiscal 2023 due to certain assets becoming fully depreciated. Store occupancy costs increased approximately 200 basis points to 15.5% of net sales due to the sales deleverage on these fixed costs. Distribution center costs increased approximately 110 basis points to 6.1% of net sales due to sales deleverage and high levels of cost capitalization in inventory in the prior year period.

Compensation and benefits. Compensation and benefits as a percentage of net sales increased approximately 40 basis points from 21.1% in the second 13 weeks of fiscal 2022 to 21.5% in the second 13 weeks of fiscal 2023 primarily due to sales deleverage of store payroll costs, partially offset by lower stock compensation expense due to forfeitures.

Other operating expenses. Other operating expenses as a percentage of net sales decreased approximately 100 basis points from 16.7% in the second 13 weeks of fiscal 2022 to 16.1% in the second 13 weeks of fiscal 2023. The decrease as a percentage of net sales was primarily related to a reduction in advertising expenses, partially offset by sales deleverage.

Income tax expense. We recorded income tax expense of approximately $650,000 or (3.5)% of the loss before income taxes, during the second 13 weeks of fiscal 2023, compared to an income tax expense of approximately $3.6 million or (16.4)% of the loss before income taxes, during the prior year period. The change in the tax rate for the second 13 weeks of fiscal 2023 compared to the prior period was primarily due to valuation allowance adjustments and state income taxes.

Net loss and loss per share. We reported net loss of $19.4 million, or a loss of $1.51 per diluted share, for the second 13 weeks of fiscal 2023 as compared to net loss of $25.7 million, or a loss of $2.02 per diluted share, for the second 13 weeks of fiscal 2022.

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26-Week Period Ended July 29, 2023 Compared to the 26-Week Period Ended July 30, 2022

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 |  |  |  |  |  |  |
|  | July 29, 2023 |  |  | July 30, 2022 |  |  | Change |
|  | $ |  |  | % |  |  | $ |  |  | % |  |  | $ |  |  | % |
Net sales |  | $ | 186,379 |  |  |  | 100.0 | % |  | $ | 205,386 |  |  |  | 100.0 | % |  | $ | (19,007 | ) |  |  | (9.3 | )%
Cost of sales |  |  | 143,069 |  |  |  | 76.8 |  |  |  | 158,569 |  |  |  | 77.2 |  |  |  | (15,500 | ) |  |  | (9.8 | )
Gross profit |  |  | 43,310 |  |  |  | 23.2 |  |  |  | 46,817 |  |  |  | 22.8 |  |  |  | (3,507 | ) |  |  | (7.5 | )
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Compensation and benefits |  |  | 39,256 |  |  |  | 21.1 |  |  |  | 42,399 |  |  |  | 20.6 |  |  |  | (3,143 | ) |  |  | (7.4 | )
Other operating expenses |  |  | 28,828 |  |  |  | 15.5 |  |  |  | 33,792 |  |  |  | 16.5 |  |  |  | (4,964 | ) |  |  | (14.7 | )
Depreciation (exclusive of depreciation included in cost of sales) |  |  | 2,428 |  |  |  | 1.3 |  |  |  | 3,293 |  |  |  | 1.6 |  |  |  | (865 | ) |  |  | (26.3 | )
Asset impairment |  |  | 1,226 |  |  |  | 0.6 |  |  |  | 228 |  |  |  | 0.1 |  |  |  | 998 |  |  |  | 437.7 |
Total operating expenses |  |  | 71,738 |  |  |  | 38.5 |  |  |  | 79,712 |  |  |  | 38.8 |  |  |  | (7,974 | ) |  |  | (10.0 | )
Operating loss |  |  | (28,428 | ) |  |  | (15.3 | ) |  |  | (32,895 | ) |  |  | (16.0 | ) |  |  | 4,467 |  |  |  | (13.6 | )
Interest expense |  |  | 1,252 |  |  |  | 0.6 |  |  |  | 522 |  |  |  | 0.3 |  |  |  | 730 |  |  |  | 139.8 |
Other income |  |  | (219 | ) |  |  | (0.1 | ) |  |  | (155 | ) |  |  | (0.1 | ) |  |  | (64 | ) |  |  | 41.3 |
Loss before income taxes |  |  | (29,461 | ) |  |  | (15.8 | ) |  |  | (33,262 | ) |  |  | (16.2 | ) |  |  | 3,801 |  |  |  | (11.4 | )
Income tax expense |  |  | 2,010 |  |  |  | 1.1 |  |  |  | 298 |  |  |  | 0.1 |  |  |  | 1,712 |  |  |  | 574.5 |
Net loss |  | $ | (31,471 | ) |  |  | (16.9 | )% |  | $ | (33,560 | ) |  |  | (16.3 | )% |  | $ | 2,089 |  |  |  | (6.2 | )%

Net sales. Net sales decreased 9.3% to $186.4 million for the first 26 weeks of fiscal 2023 compared to $205.4 million for the prior year period, which includes a 4.5% decline in store count. Comparable sales, including e-commerce sales, decreased 7.0%, or $14.0 million for the first 26 weeks of fiscal 2023 compared to the prior year period. For the first 26 weeks of fiscal 2023, e-commerce comparable sales decreased 11.6%. The decrease in comparable sales is primarily due to a decrease in traffic in stores and online, partially offset by an increase in conversion. Most merchandise categories performed below prior period levels with the exception of holiday, which performed above prior period levels.

Gross profit. Gross profit as a percentage of net sales increased 40 basis points from 22.8% in the first 26 weeks of fiscal 2022 to 23.2% in the first 26 weeks of fiscal 2023. The overall increase in gross profit margin was due to favorable merchandise margin and depreciation, partially offset by unfavorable store occupancy costs, distribution center costs and store outbound freight costs. Merchandise margin increased approximately 250 basis points from 51.6% in the first 26 weeks of fiscal 2022 to 54.1% in the first 26 weeks of fiscal 2023 mainly due to lower inbound freight costs and lower inventory levels. Depreciation of store and distribution center assets decreased approximately 60 basis points to 2.1% of net sales in the second 26 weeks of fiscal 2023 due to certain assets becoming fully depreciated. Store occupancy costs increased approximately 150 basis points to 15.1% of net sales due to the sales deleverage on these fixed costs. Distribution center costs increased approximately 110 basis points to 5.9% of net sales due to sales deleverage and high levels of cost capitalization in inventory in the prior year period. Outbound freight costs, including both store and e-commerce shipping expenses, increased approximately 10 basis points to 7.8% of net sales.

Compensation and benefits. Compensation and benefits as a percentage of net sales increased approximately 50 basis points from 20.6% in the first 26 weeks of fiscal 2022 to 21.1% in the first 26 weeks of fiscal 2023 primarily due to the deleverage of store and corporate payroll expenses, partially offset by lower stock compensation expense due to forfeitures.

Other operating expenses. Other operating expenses as a percentage of net sales decreased approximately 100 basis points from 16.5% in the first 26 weeks of fiscal 2022 to 15.6% for the first 26 weeks of fiscal 2023. The decrease as a percentage of net sales was primarily related to a reduction in advertising expenses, partially offset by sales deleverage.

Income tax expense. We recorded income tax expense of approximately $2.0 million, or (6.8)% of the loss before income taxes, during the first 26 weeks of fiscal 2023 compared to income tax expense of $298,000, or (0.9)% of the loss before income taxes, during the prior year period. The change in the tax rate for the first 26 weeks of fiscal 2023 compared to the prior period was primarily due to valuation allowance adjustments and state income taxes.

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Net loss and loss per share. We reported net loss of $31.5 million, or a loss of $2.46 per diluted share, for the first 26 weeks of fiscal 2023 as compared to a net loss of $33.6 million, or a loss of $2.65 per diluted share, for the first 26 weeks of fiscal 2022.

Non-GAAP Financial Measures

To supplement our unaudited consolidated condensed financial statements presented in accordance with 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. 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 financial measures, in evaluating the Company’s operational performance.

The Company defines EBITDA as net loss before interest and the provision for income tax, which is equivalent to operating loss, adjusted for depreciation, adjusted EBITDA as EBITDA with non-GAAP adjustments and adjusted operating loss as operating loss with 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 the Company’s results as reported under GAAP. The Company’s non-GAAP adjustments remove asset impairment and stock-based compensation expense, due to the non-cash nature of these expenses, and remove severance charges and lease termination costs, as those expenses can fluctuate based on the needs of the business and do not represent a normal, recurring operating expense.

The following table shows a reconciliation of operating loss to EBITDA and adjusted EBITDA (in thousands) for the 13-week and 26-week periods ended July 29, 2023 and July 30, 2022:

|  | 13-Week Period Ended |  |  | 26-Week Period Ended |
|  | July 29, 2023 |  |  | July 30, 2022 |  |  | July 29, 2023 |  |  | July 30, 2022 |
Operating loss |  | $ | (18,091 | ) |  | $ | (21,800 | ) |  | $ | (28,428 | ) |  | $ | (32,895 | )
Depreciation |  |  | 3,092 |  |  |  | 4,338 |  |  |  | 6,349 |  |  |  | 8,837 |
EBITDA |  |  | (14,999 | ) |  |  | (17,462 | ) |  |  | (22,079 | ) |  |  | (24,058 | )
Non-GAAP adjustments: |  |  |  |  |  |  |  |  |  |  |  |
Closed store and lease termination costs in cost of sales(1) |  |  | — |  |  |  | (162 | ) |  |  | — |  |  |  | 46 |
Asset impairment(2) |  |  | 1,001 |  |  |  | 228 |  |  |  | 1,226 |  |  |  | 228 |
Stock-based compensation expense(3) |  |  | 124 |  |  |  | 617 |  |  |  | 614 |  |  |  | 1,165 |
Severance charges(4) |  |  | 378 |  |  |  | 366 |  |  |  | 907 |  |  |  | 379 |
Total adjustments in operating expenses |  |  | 1,503 |  |  |  | 1,211 |  |  |  | 2,747 |  |  |  | 1,772 |
Total non-GAAP adjustments |  |  | 1,503 |  |  |  | 1,049 |  |  |  | 2,747 |  |  |  | 1,818 |
Adjusted EBITDA |  |  | (13,496 | ) |  |  | (16,413 | ) |  |  | (19,332 | ) |  |  | (22,240 | )
Depreciation |  |  | 3,092 |  |  |  | 4,338 |  |  |  | 6,349 |  |  |  | 8,837 |
Adjusted operating loss |  | $ | (16,588 | ) |  | $ | (20,751 | ) |  | $ | (25,681 | ) |  | $ | (31,077 | )

(1)
Costs associated with asset disposals, closed stores and lease termination costs and any gains on lease terminations.
(2)
Asset impairment charges are related to property and equipment, software costs and cloud computing implementation costs.
(3)
Stock-based compensation expense includes amounts amortized to expense related to equity incentive plans.
(4)
Severance charges include expenses related to severance agreements and permanent store closure compensation costs.

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 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 $28.5 million and $56.1 million during the first 26 weeks of fiscal 2023 and the first 26 weeks of fiscal 2022, 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

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to the prior year period was mainly due to changes in working capital including decreased inventory levels, as we were over stocked in the prior fiscal year, and an increase in accounts payable.

Cash flows from investing activities. Net cash used in investing activities for the first 26 weeks of fiscal 2023 consisted primarily of $2.3 million in capital expenditures as compared to $5.0 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 |
|  | July 29, 2023 |  |  | July 30, 2022 |
Technology and omni-channel projects |  | $ | 1,263 |  |  | $ | 2,448 |
Existing stores |  |  | 943 |  |  |  | 1,632 |
Distribution center and supply chain enhancements |  |  | 38 |  |  |  | 656 |
Corporate |  |  | 37 |  |  |  | 75 |
New and relocated stores |  |  | 13 |  |  |  | 208 |
Total capital expenditures |  | $ | 2,294 |  |  | $ | 5,019 |

The capital expenditures in the current and prior year period related primarily to technology and omni-channel projects, the maintenance of existing stores and distribution center and supply chain enhancements.

Cash flows from financing activities. During the first 26 weeks of fiscal 2023, net cash provided by financing activities was $30.5 million, as we borrowed $36.0 million under our revolving credit facility, which was partially offset by repayments of $5.0 million. During the first 26 weeks of fiscal 2022, net cash provided by financing activities was approximately $46.4 million as we borrowed $55.0 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 and $2.4 million of cash used in the net share settlement of equity incentive awards.

Senior credit facility. 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. Advances under the 2023 Credit Agreement bear interest at an annual rate equal to SOFR plus a margin ranging from 200 to 250 basis points with no SOFR floor. Upon the demonstration that the Company’s 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 150 to 200 basis points. Advances under the 2019 Credit Agreement bore interest at an annual rate equal to SOFR, or LIBOR through December 16, 2022, plus a margin ranging from 125 to 175 basis points with no SOFR or LIBOR floor. 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. Under the 2019 Credit Agreement, the fee on the unused portion was 25 basis points per annum.

Borrowings under the Credit Agreements are subject to certain conditions, and the Credit Agreements 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 certain events under ERISA. Upon any such event of default, the principal amount of any unpaid loans and all other obligations under the Credit Agreements may be declared immediately due and payable. The maximum availability under the Credit Agreements is limited by a borrowing base formula, which consists of a percentage of eligible inventory and eligible credit card receivables, less reserves.

We are subject to a Security Agreement with Bank of America, N.A. 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 Agreements.

As of July 29, 2023, we were in compliance with the covenants in the 2023 Credit Agreement. Under the 2023 Credit Agreement, there were approximately $46.0 million of outstanding borrowings and no letters of credit outstanding with approximately $26.1 million available for borrowing as of July 29, 2023. Subsequent to July 29, 2023, we borrowed an additional $9.0 million under the 2023 Credit Agreement.

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As of July 29, 2023, our balance of cash and cash equivalents was approximately $4.9 million. We believe that the combination of our cash balances, cash flow from operations and availability under our 2023 Credit Agreement will be sufficient to fund our planned capital expenditures and working capital requirements for at least the next twelve months.

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. As of July 29, 2023, we had approximately $26.3 million remaining under the current share repurchase plan.

The table below sets forth selected share repurchase plan information (in thousands, except share amounts) for the periods indicated:

|  | 13-Week Period Ended |  |  | 26-Week Period Ended |
|  | July 29, 2023 |  |  | July 30, 2022 |  |  | July 29, 2023 |  |  | July 30, 2022 |
Shares repurchased and retired |  |  | — |  |  |  | — |  |  |  | — |  |  |  | 479,966 |
Share repurchase cost |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 6,253 |

C ritical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies or estimates during the 26-week period ended July 29, 2023. 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.

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ITEM 3. QUANTITATIVE AND QUALITATI VE DISCLOSURES ABOUT MARKET RISK

We are exposed to interest rate changes, primarily as a result of borrowings under our Credit Agreements, as discussed in “Note 9 — Senior Credit Facility,” in the notes to the condensed consolidated financial statements, which bear interest based on variable rates. As of July 29, 2023, we had $46.0 million in outstanding borrowings under our 2023 Credit Agreement. As of July 30, 2022, we had $55.0 million in outstanding borrowings under our 2019 Credit Agreement. Subsequent to July 29, 2023, we borrowed an additional $9.0 million under our 2023 Credit Agreement. A one percent increase or decrease in the interest rate on borrowings under our revolving credit facility 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 July 29, 2023.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. Both our Interim 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 Interim Chief Executive Officer and Chief Financial Officer, have concluded that, as of July 29, 2023, 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.

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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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. RI SK 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 EQUI TY SECURITIES AND USE OF PROCEEDS

Issuer Repurchases of Equity Securities

On January 6, 2022, we announced that our Board of Directors authorized share repurchase plans providing for the purchase in the aggregate of up to $30 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 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 we may terminate the repurchase plans at any time. There were no shares of common stock repurchased by the Company during the 26-week period ended July 29, 2023. As of July 29, 2023, the Company had approximately $26.3 million remaining under the current share repurchase plan.

ITEM 6. EXHIBITS

(a)
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)

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SIGNA TURES

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 6, 2023 |  | /s/ Ann E. Joyce
|  | Ann E. Joyce Interim Chief Executive Officer and Director
Date: September 6, 2023 |  | /s/ W. Michael Madden
|  | W. Michael Madden Executive Vice President, Chief Financial Officer

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