Kirklands, Inc.
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
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For the fiscal year ended
February 3, 2007
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
000-49885
Kirklands, Inc.
(Exact name of registrant as
specified in its charter)
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Tennessee
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62-1287151
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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805 North Parkway, Jackson,
Tennessee
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38305
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(Address of principal executive
offices)
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(Zip
Code)
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Registrants telephone number, including area code:
(731) 668-2444
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of Each Exchange on Which Registered
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Common Stock, no par value per
share
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
(None)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Note Checking the box above will not relieve any
registrant required to file reports pursuant to Section 13
or 15(d) of the Exchange Act from their obligations under those
Sections.
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one): Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of the common stock held by
non-affiliates of the registrant as of July 29, 2006, the
last business day of the registrants most recently
completed second fiscal quarter, was approximately $44,236,948
based on the last sale price of the common stock as reported by
The Nasdaq Stock Market. This calculation excludes
11,316,955 shares held by directors, executive officers and
one holder of more than 10% of the registrants common
stock.
As of April 6, 2007, there were 19,634,439 shares of
the registrants common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Annual
Meeting of Shareholders of Kirklands, Inc. to be held
June 4, 2007, are incorporated by reference into
Part III of this
Form 10-K.
TABLE OF
CONTENTS
FORM 10-K
1
FORWARD-LOOKING
STATEMENTS
This
Form 10-K
contains forward-looking statements within the meaning of the
federal securities laws and the Private Securities Litigation
Reform Act of 1995. These statements may be found throughout
this
Form 10-K,
particularly under the headings Business and
Managements Discussion and Analysis of Financial
Condition and Results of Operations, among others.
Forward-looking statements typically are identified by the use
of terms such as may, will,
should, expect, anticipate,
believe, estimate, intend
and similar words, although some forward-looking statements are
expressed differently. You should consider statements that
contain these words carefully because they describe our
expectations, plans, strategies and goals and our beliefs
concerning future business conditions, our results of
operations, financial position and our business outlook or state
other forward-looking information based on currently
available information. The factors listed below under the
heading Risk Factors and in the other sections of
this
Form 10-K
provide examples of risks, uncertainties and events that could
cause our actual results to differ materially from the
expectations expressed in our forward-looking statements.
The forward-looking statements made in this
Form 10-K
relate only to events as of the date on which the statements are
made. We undertake no obligation to update any forward-looking
statement to reflect events or circumstances after the date on
which the statement is made or to reflect the occurrence of
unanticipated events.
The terms Kirklands, we,
us, and our as used in this
Form 10-K
refer to Kirklands, Inc.
2
PART I
General
We are a leading specialty retailer of home décor in the
United States, operating 349 stores in 37 states as of
February 3, 2007. Our stores present a broad selection of
distinctive merchandise, including framed art, mirrors, wall
décor, candles, lamps, decorative accessories, accent
furniture, textiles, garden accessories and artificial floral
products. Our stores also offer an extensive assortment of
holiday merchandise as well as items carried throughout the year
suitable for giving as gifts. In addition, we use innovative
design and packaging to market home décor items as gifts.
We provide our predominantly female customers an engaging
shopping experience characterized by a diverse, ever-changing
merchandise selection at surprisingly attractive prices. Our
stores offer a unique combination of style and value that has
led to our emergence as a leader in home décor and has
enabled us to develop a strong customer franchise. As a result,
we have achieved substantial growth and have expanded our store
base into different regions of the country.
Our growth in recent years has consisted principally of new
store openings. We intend to continue opening new stores both in
existing markets and in new markets, including major
metropolitan markets, middle markets and selected smaller
communities. We believe there are currently more than 650
additional locations in the United States that could support a
Kirklands store. During the 53 weeks ended
February 3, 2007 (fiscal 2006), we opened 49
new stores and closed 47 stores. All but one of our fiscal 2006
new stores are located in off-mall venues, and all but four of
our closings stores were located in malls. We anticipate that
all of our new store openings during fiscal 2007 will be in
off-mall venues, while substantially all of our closings will be
stores located in mall venues. Our results to date in our
off-mall stores indicate that this venue provides the better
opportunity for growth in our store base.
Business
Strategy
Our goal is to be the leading specialty retailer of home
décor in each of our markets. We believe the following
elements of our business strategy differentiate us from our
competitors and position us for profitable growth:
Item-focused merchandising. While our stores
contain items covering a broad range of complementary product
categories, we emphasize traditional style, trend-right key
items within our targeted categories rather than merchandising
complete product classifications. Although we do not attempt to
be a fashion leader, our buyers work closely with our vendors to
identify and develop stylish merchandise reflecting the latest
trends and appealing to a broad base of customers. We
test-market products where appropriate and monitor individual
item sales, which enables us to identify and quickly reorder
best selling items in order to maximize sales. We constantly
evaluate market trends and merchandise sales data and work with
vendors to develop additional products to be sold in our stores,
frequently on an exclusive basis. In most cases, this exclusive
merchandise is the result of our buying teams experience
in interpreting market and merchandise trends in a way that
appeals to our customer.
Ever-changing merchandise mix. We believe our
ever-changing merchandise mix creates an exciting treasure
hunt environment, encouraging strong customer loyalty and
frequent return visits to our stores. The merchandise in our
stores is typically traditionally styled for broad market
appeal, yet it reflects an understanding of our customers
desire for newness. Our information systems permit close
tracking of individual item sales, enabling us to react quickly
to both fast-selling and slow-moving items. Accordingly, we
actively change our merchandise throughout the year in response
to market trends, sales results and changes in seasons. We also
strategically increase selling space devoted to gifts and
seasonal merchandise in advance of holidays.
Stimulating visual presentation. Our stores
have a distinctive, interior design look that helps
customers visualize the merchandise in their own homes and
inspires decorating and gift-giving ideas. Using multiple
merchandise arrangements to simulate home settings, we group
complementary merchandise creatively
3
throughout the store. We believe this cross-category
merchandising strategy encourages customers to browse for longer
periods of time, promoting add-on sales.
Strong value proposition. Our customers
regularly experience the satisfaction of paying noticeably less
for items similar or identical to those sold by other retail
stores or through other retail channels. This strategy of
providing a unique combination of style and value is an
important element in making Kirklands a destination store.
While we carry items in our stores that sell for several hundred
dollars, most items sell for under $50 and are perceived by our
customers as very affordable home décor and gifts. Our
longstanding relationships with vendors and our ability to place
and sell through large orders of a single item enhance our
ability to attain favorable product pricing from vendors.
Broad market appeal. Our stores operate
successfully across a wide spectrum of different regions and
market sizes. We operate stores in 37 states, and although
originally focused in the Southeast, approximately 47% of our
stores are now located outside that region. We operate
successfully in major metropolitan markets such as Houston,
Texas, and Atlanta, Georgia; middle markets such as Birmingham,
Alabama, and Buffalo, New York; and smaller markets such as
Appleton, Wisconsin, and Panama City, Florida. As of
February 3, 2007, we operated 181 off-mall stores, or 52%
of our store base . In recent years, we have expanded our
off-mall presence, including selected lifestyle and
power strip centers. The flexibility of our concept
enables us to select the most promising real estate
opportunities that meet requisite economic and demographic
criteria within our target markets where our customers live and
shop. All but one of our new store openings during fiscal 2006
were in off-mall venues, and our current growth plan is to
continue emphasizing off-mall stores and de-emphasizing mall
stores in the future.
Growth
Strategy
Our growth strategy is to open new stores in existing and new
markets. Over the past three years, we have expanded our store
base at an average annual rate of 7.8%, net of store closings.
During that same period, total square footage growth has
averaged 14%. New stores generally have been larger, off-mall
stores, while store closings mostly have consisted of smaller
mall stores. We anticipate that we will open substantially all
of our new stores in off-mall locations in major metropolitan
markets, middle markets and in selected smaller communities. In
the long-term we believe there are currently more than 650
additional locations in the United States that could support a
Kirklands store. In the near-term, we plan to grow
prudently with a focus on shifting the store base from the mall
to the off-mall locations. Assuming the continued availability
of adequate capital, we expect to open approximately 30 off-mall
stores and close approximately 40 mall stores during the
52 weeks ending February 2, 2008 (fiscal
2007).
Our store model produces strong store-level cash flow and
provides an attractive store-level return on investment. Of the
162 new stores opened during the past three fiscal years, 151 of
these are located in off-mall venues. Among the group of 151
off-mall stores, 103 have been open at least a full twelve
months, and their average first-year sales volume was
approximately $1,407,000. These stores typically generate a
positive store contribution in their first full year of
operation. Since fiscal 2003, when we began to focus our growth
on off-mall opportunities, we have experienced better sales and
store contribution from our off-mall new stores as compared to
mall stores.
We use store contribution, which consists of store gross profit
minus store operating expenses, as our primary measure of
operating profitability for a single store or group of stores.
Store contribution specifically excludes the allocation of
corporate overhead and distribution costs, and therefore should
not be considered comparable to operating income or other GAAP
profit measures that are appropriate for assessing overall
corporate financial performance. Store contribution also
excludes depreciation and amortization charges. We track these
non-cash charges for each store and for Kirklands as a
whole. However, we exclude these charges from store contribution
in order to more closely measure the cash flow produced by each
store in relation to the cash invested in that store in the form
of capital assets and inventory.
4
Merchandising
Merchandising strategy. Our merchandising
strategy is to (i) offer distinctive and often exclusive,
high quality home décor at affordable prices which
represent value to our customers, (ii) maintain a breadth
of productive product categories, (iii) provide a carefully
edited selection of key items within targeted categories, rather
than merchandising complete product classifications,
(iv) emphasize new and
fresh-to-market
merchandise by continually updating our merchandise mix and
(v) present merchandise in a visually appealing manner to
create an inviting atmosphere which inspires decorating and
gift-giving ideas.
Our information systems permit close tracking of individual item
sales, which enables us to react quickly to market trends and
best or slow sellers. This daily sales and gross margin
information helps us to maximize the productivity of successful
products and categories, and minimize the accumulation of
slow-moving inventory. Our core merchandise assortment is
consistent across the chain. We address regional differences in
home décor by tailoring inventories to geographic
considerations and store sales results in selected categories.
We continuously introduce new and often exclusive products to
our merchandise assortment in order to (i) maintain
customer interest due to the freshness of our product
selections, encouraging frequent return visits to our stores,
(ii) enhance our reputation as a leader in identifying or
developing high quality, fashionable products and
(iii) allow merchandise which has peaked in sales to be
quickly discontinued and replaced by new items. In addition, we
strategically increase selling space devoted to gifts and
holiday merchandise during the third and fourth quarters of the
calendar year. Our flexible store design and fixtures allow for
selling space changes as needed to capitalize on selling trends.
Our average store generally carries approximately 2,000-2,200
Stock Keeping Units (SKUs). We regularly monitor the
sell-through on each item, and therefore, the number and
make-up of
our active SKUs is continuously changing based on changes in
selling trends. New and different SKUs are introduced to our
stores constantly.
We purchase merchandise from approximately 275 vendors, and our
buying team works closely with vendors to differentiate
Kirklands merchandise from that of our competitors. For
products that are not manufactured specifically for
Kirklands, we may create custom packaging as a way to
differentiate our merchandise offering and reinforce our brand.
Exclusive or proprietary products distinguish us from our
competition, enhance the value of our merchandise and provide
opportunity to improve our net sales and gross margin. Our
strategy is to continue to grow our exclusive and proprietary
products within our merchandise mix.
Product assortment. Our major merchandise
categories include wall décor (framed art, mirrors, metal
and other wall ornaments), lamps, decorative accessories,
candles and related items, textiles, garden accessories, and
artificial floral products. Our stores also offer an extensive
assortment of holiday merchandise, as well as items carried
throughout the year suitable for giving as gifts. Consistent
with our item-focused strategy, a vital part of the product mix
is a variety of home décor and other assorted merchandise
that does not necessarily fit into a specific product category.
Decorative accessories consist of such varied products as
sconces, vases and clocks. Other merchandise includes
housewares, picture frames and miscellaneous items. Throughout
the year and especially for the fourth quarter of the calendar
year, our buying team uses its experience in home décor to
develop products that are equally appropriate for gift-giving.
5
The following table presents the percentage of fiscal 2006,
fiscal 2005 and fiscal 2004 net sales contributed by our
major merchandise categories:
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% of Net Sales
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Merchandise Category
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Fiscal 2006
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Fiscal 2005
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Fiscal 2004
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Wall Décor (including framed
art, mirrors, metal and other wall ornaments)
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29
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%
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29
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%
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27
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%
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Decorative Accessories
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12
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10
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9
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Candles
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11
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10
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8
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Lamps
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8
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10
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11
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Textiles
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8
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9
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7
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Accent Furniture
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8
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6
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4
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Holiday
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7
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8
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9
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Garden
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5
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6
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8
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Floral
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5
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4
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3
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Other (including housewares,
picture frames and other miscellaneous items)
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5
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4
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5
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Gifts
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2
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4
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9
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Total
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100
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%
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100
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%
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100
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%
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Value to customer. Through our distinctive
merchandising, together with carefully coordinated in-store
marketing, visual presentation and product packaging, we
continually strive to increase the perceived value of our
products to our customers. Our shoppers regularly experience the
satisfaction of paying noticeably less for items similar or
identical to those sold by other retail stores or through
catalogs. Our stores typically have two semi-annual clearance
events, one in January and one in July. We also run category and
other promotions periodically throughout the year. We believe
our value-oriented pricing strategy, coupled with an adherence
to high quality standards, is an important element in
establishing our distinct brand identity and solidifying our
connection with our customers.
Store
Operations
General. As of February 3, 2007, we
operated 349 stores in 37 states, with stores generally
operating seven days a week. In addition to corporate
management, four Regional Directors and approximately 27
District Team Leaders (who generally have responsibility for 12
to 13 stores within a geographic district) manage store
operations. A Store Team Leader and one to three Assistant Store
Team Leaders manage individual stores. The Store Team Leader is
responsible for the
day-to-day
operation of the store, including sales, guest service,
merchandise display, human resource functions and store
security. A typical store operates with an average of eight to
10 team members including a full-time stock person and a
combination of full and part-time team members, depending on the
volume of the store and the season. Additional part-time sales
associates are typically hired to assist with increased traffic
and sales volume in the fourth quarter of the calendar year.
Formats. We operate stores in both mall and
off-mall venues. As of February 3, 2007, we operated 168
stores in enclosed malls and 181 stores in a variety of off-mall
venues including lifestyle strip centers,
power strip centers, outlet centers and freestanding
locations. Off-mall stores tend to be larger than mall stores,
and have a lower occupancy cost per square foot. The average
size of our mall stores is approximately 4,700 square feet,
and the average size of our off-mall stores is approximately
5,900 square feet. The average size of the new stores we
opened in fiscal 2006 was approximately 6,800 square feet,
and we expect our fiscal 2007 new stores to be of similar size
or larger. In fiscal 2006, we developed and implemented a new
store design package which utilized new colors, surfaces,
fixtures, and product positioning. The new design is currently
being modified to reflect changes suggested by use.
Visual merchandising. Merchandise in both mall
and off-mall stores is generally displayed according to display
guidelines and directives given to each store from the Visual
Merchandising team with input from
6
Merchandising, Marketing, and Store Operations. This procedure
promotes uniform display standards throughout the chain. Using
multiple types of fixtures, we group complementary merchandise
creatively throughout the store, and also display certain
products strictly by category or product type.
Because of the nature of our merchandise and our focus on
identifying and developing best-selling items, we emphasize our
visual merchandising standards. Our dedicated team of visual
merchants provide support to our stores. The Visual
Merchandising team provides Store Team Leaders with recommended
directives such as photographs and diagrams and weekly placement
guides. Each Store Team Leader has flexibility to creatively
highlight those products that are expected to have the greatest
appeal to local shoppers. The Visual Merchandising team also
assists Regional Directors and District Team Leaders in opening
new stores. Effective and consistent visual merchandising
enhances a stores ability to reach its full sales
potential.
Personnel recruitment and training. We believe
our continued success is dependent in part on our ability to
attract, retain and motivate quality team members. In
particular, the success of our growth plan depends on our
ability to promote
and/or
recruit qualified District and Store Team Leaders and maintain
quality team members. A multi-week training program is provided
for new District Team Leaders and Store Team Leaders. Many Store
Team Leaders begin their Kirklands career as sales
associates, but complete a formal training program before taking
responsibility for a store. This training program includes five
to 10 days in a designated training store,
working directly with a qualified Training Store Team Leader.
District Team Leaders are primarily responsible for recruiting
new Store Team Leaders. Store Team Leaders are responsible for
the hiring and training of new sales associates, assisted where
appropriate by a Regional Human Resources Manager. We constantly
look for motivated and talented people to promote from within
Kirklands, in addition to recruiting outside
Kirklands.
Compensation and incentives. We compensate our
Regional Directors with a base salary, plus an annual
performance bonus based on store sales and expense control.
District and Store Team Leaders are compensated with a base
salary or on an hourly basis, plus a quarterly performance bonus
based on store sales and expense control. Sales associates are
compensated on an hourly basis. In addition, we periodically run
a variety of contests that reward associates for outstanding
achievement in sales and other corporate initiatives.
Real
Estate
Strategy. Our real estate strategy is to
identify retail properties that are convenient and attractive to
our target female customer. The flexibility and broad appeal of
our stores and our merchandise allow us to operate successfully
in major metropolitan markets such as Houston, Texas, Phoenix,
Arizona and Atlanta, Georgia, middle markets such as Birmingham,
Alabama, Nashville, Tennessee and Buffalo, New York, and smaller
markets such as Appleton, Wisconsin, and Panama City, Florida.
Site selection. Our current strategy is to
locate our stores in off-mall, power strip venues which are
destinations for large numbers of shoppers and which reinforce
our quality image and brand. To assess potential new locations,
we review financial and demographic criteria and infrastructure
for access. We also analyze the quality and relative location of
tenants and competitive factors, square footage availability,
frontage space and other relevant criteria to determine the
overall acceptability of a property and the optimal locations
within it.
Until recent years, we preferred to locate stores in regional or
super-regional malls with a history of high sales per square
foot and multiple national department stores as anchors.
Beginning in fiscal 2003, we began to explore more off-mall real
estate alternatives. We have experienced greater success in
these off-mall venues, which provide an economic advantage
through lower occupancy costs. We also believe that our target
shopper prefers the off-mall location for convenience in her
home décor shopping experience. Of our 349 stores as of
February 3, 2007, 181 were in a variety of off-mall venues
including lifestyle strip centers, power
centers and outlet centers. Off-mall stores tend to be slightly
larger than mall stores, and have lower occupancy cost per
square foot that is available for these stores. We currently
anticipate that all of the new stores opening in fiscal 2007
will be located in off-mall venues.
7
We believe we are a desirable tenant to developers because of
our long and successful operating history, sales productivity,
ability to attract customers and our strong position with
co-tenants in the home décor category. The following table
provides a history of our store openings and closings by venue
for the last five fiscal years.
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Fiscal
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Fiscal
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Fiscal
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Fiscal
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Fiscal
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2006
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2005
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2004
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2003
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2002
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Mall
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Stores open at beginning of period
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210
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241
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245
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231
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222
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Store openings
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1
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10
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25
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10
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Store closings
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(43
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)
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(31
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(14
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)
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(11
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)
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(1
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Stores open at end of period
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168
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210
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241
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245
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231
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Off-Mall(1)
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Stores open at beginning of period
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137
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79
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35
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18
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12
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Store openings
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48
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59
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44
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17
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6
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Store closings
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(4
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)
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(1
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open at end of period
|
|
|
181
|
|
|
|
137
|
|
|
|
79
|
|
|
|
35
|
|
|
|
18
|
|
Total(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open at beginning of period
|
|
|
347
|
|
|
|
320
|
|
|
|
280
|
|
|
|
249
|
|
|
|
234
|
|
Store openings
|
|
|
49
|
|
|
|
59
|
|
|
|
54
|
|
|
|
42
|
|
|
|
16
|
|
Store closings
|
|
|
(47
|
)
|
|
|
(32
|
)
|
|
|
(14
|
)
|
|
|
(11
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores open at end of period
|
|
|
349
|
|
|
|
347
|
|
|
|
320
|
|
|
|
280
|
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes our warehouse outlet store located in Jackson,
Tennessee. This store closed during fiscal 2004. |
Buying
and Inventory Management
Merchandise sourcing and product
development. Our merchandise team purchases
inventory on a centralized basis to take advantage of our
consolidated buying power and our technology to closely control
the merchandise mix in our stores. Our buying team selects all
of our products, negotiates with vendors and works closely with
our planning and allocation team to optimize store-level
merchandise quantity and mix by category, classification and
item. Non-exclusive merchandise may be boxed or packaged
exclusively for Kirklands utilizing Kirklands
proprietary brands.
We purchase merchandise from approximately 275 vendors.
Approximately 75% of our total purchases are from importers of
merchandise manufactured primarily in the Far East and India,
with the balance purchased from domestic manufacturers and
wholesalers. For our purchases of merchandise manufactured
abroad, we have historically bought from importers or
U.S.-based
representatives of foreign manufacturers rather than dealing
directly with foreign manufacturers. This process has enabled us
to maximize flexibility and minimize product liability and
credit risks. As we execute our growth strategy, we are
continually evaluating the best ways to source and differentiate
our merchandise while attaining our sales and gross margin
objectives. For certain categories and items, the strategic use
of domestic manufacturers and wholesalers enables us to reduce
the lead times between ordering products and offering them in
our stores.
Planning and allocation. Our merchandise
planning and allocation team works closely with our buying team,
field management and store personnel to meet the requirements of
individual stores for appropriate merchandise in sufficient
quantities. This team also manages inventory levels, allocates
merchandise to stores and replenishes inventory based upon
information generated by our information systems. Our inventory
control systems monitor current inventory levels at each store
and total company. We also continually monitor recent selling
history within each store by category, classification and item
to properly allocate further purchases to maximize sales and
gross margin.
8
Each of our stores is internally classified for merchandising
purposes based on certain criteria including store sales, size,
location and historical performance. Although all of our stores
carry similar merchandise, the variety and depth of products in
a given store may vary depending on the stores rank and
classification. Inventory purchases and allocation are also
tailored based on regional or demographic differences between
stores in selected categories.
Distribution
and Logistics
As we have grown over the last few years, we recognized the need
for a more comprehensive approach to the management of our
merchandise supply chain. This approach entails the thorough
evaluation of all parts of the supply chain, from merchandise
vendor to the store selling floor, and the development of
strategies that incorporate the needs and expertise of many
different parts of the Company including logistics,
merchandising, store operations, information technology, and
finance. To support our effort to build a modern, efficient
supply chain, during fiscal 2003 we reached agreement to lease a
new,
771,000-square-foot
distribution center in Jackson, Tennessee. This building was
built to our specifications and opened in May 2004.
The commencement of operations in the new distribution center
was accompanied by the implementation of a new warehouse
management system as well as investments in material handling
equipment designed to streamline the flow of goods within the
distribution center. In fiscal 2007 and beyond, our goal is to
achieve better labor productivity, better transportation
efficiency, leaner store-level inventories and reduced
store-level storage costs.
In addition to making improvements to our distribution center
operation, we have taken important steps to improve our
efficiency in transporting merchandise to stores. We currently
utilize third-party carriers to transport merchandise from our
Jackson distribution center to our stores. In the past, the
majority of our merchandise deliveries were handled by either
less-than-truckload
(LTL) carriers or full truckload deliveries to regional
pool points, with local delivery agents handling the
actual store delivery function. For approximately two-thirds of
our stores, we have introduced a third alternative, less
frequent full truckload deliveries. The optimal delivery method
for a given store depends on the stores sales volume,
square footage, geographic location and other factors.
An important part of our efforts to achieve efficiencies, cost
reductions and net sales growth is the continued identification
and implementation of improvements to our planning, logistical
and distribution infrastructure and our supply chain, including
merchandise ordering, transportation and receipt processing. We
also need to ensure that our distribution infrastructure and
supply chain keep pace with our anticipated growth and increased
number of stores. For the foreseeable future, we believe our
current distribution infrastructure is adequate to support our
operational needs.
Internet
We believe the Internet offers opportunities to complement our
brick-and-mortar
stores, increase sales and increase consumer brand awareness of
our products. We maintain a web site at www.kirklands.com, which
provides our customers with a resource to locate a store,
preview our merchandise, apply for a Kirklands credit
card, and purchase gift cards online. We currently do not sell
any merchandise through our web site. The information contained
or incorporated in our web site is not a part of this annual
report on
Form 10-K.
Information
Systems
Our store information systems include a server in each store
that runs our automated
point-of-sale
(POS) application on multiple POS registers. The
server provides Store Team Leaders with convenient access to
detailed sales and inventory information for the store. Our POS
registers provide a price
look-up
function (all merchandise is bar-coded), time and attendance,
and automated check, credit card, debit card and gift card
processing. Through nightly two-way electronic communication
with each store, we upload SKU-level sales, gross margin
information and payroll hours to our home office system and
download new merchandise pricing, price changes for existing
merchandise, purchase orders and system maintenance tasks to the
store server. Based upon the evaluation of information obtained
through daily polling, our planning and
9
allocation team implements merchandising decisions regarding
inventory levels, reorders, price changes and allocation of
merchandise to our stores.
The core of our home office information system is the integrated
GERS retail management software. This system integrates all
merchandising and financial applications, including category,
classification and SKU inventory tracking, purchase order
management, automated ticket making, general ledger, sales audit
and accounts payable.
We moved into our new distribution center during the second
quarter of 2004. Concurrent with this move, we implemented a new
warehouse management system (WMS) designed by High Jump
Software. The WMS was tailored to our specifications and
provides us with a fully automated solution for all operations
within the distribution center. We utilize a Lawson Software
package for our payroll and human resources functions.
Marketing
Our marketing efforts emphasize in-store signage, store and
window banners and displays and other techniques to attract
customers and provide an exciting shopping experience.
Historically, we have not engaged in extensive media advertising
because we believe that we have benefited from our strategic
locations in high-traffic shopping centers and valuable
word-of-mouth
advertising by our customers. We are actively evaluating ways to
enhance our marketing to customers through media inserts and
e-mail
communications. We utilize marketing efforts and other in-store
activity to promote specific events in our stores, including our
semi-annual clearance events.
As part of our effort to reach out to customers, in fiscal 2004,
we introduced our Kirklands private-label credit card.
This program is administered by a third-party, who bears the
credit risk associated with the card program without recourse to
us. As a cardholder, customers are automatically enrolled in a
loyalty program whereby they earn loyalty points for their
purchases. Customers attaining specified levels of loyalty
points are eligible for special discounts on future purchases.
We believe that customers using the card visit our stores,
purchase merchandise more frequently and spend more per visit
than our customers not using the card. As of February 3,
2007, there were approximately 374,000 Kirklands
private-label credit card holders.
Trademarks
All of our stores operate under the names
Kirklands, Kirklands Home,
Kirklands Home Outlet, and
Kirklands Outlet other than 4 stores, which
continue to operate under the name Briar Patch by
Kirklands. We acquired the Briar Patch stores in
1998. As these stores are remodeled or relocated, we intend to
change their name to the Kirklands Home.
We have registered several trademarks with the United States
Patent and Trademark Office on the Principal Register that are
used in connection with the Kirklands stores, including
KIRKLANDS®
logo design, THE KIRKLAND
COLLECTION®,
HOME COLLECTION BY
KIRKLANDS®,
KIRKLANDS
OUTLET®,
KIRKLANDS
HOME®,
as well as several trademark registrations for Kirklands
private label brand, the CEDAR CREEK
COLLECTION®.
In addition to the registrations, Kirklands also is the
common law owner of the trademark BRIAR
PATCHtm.
These marks have historically been very important components in
our merchandising and marketing strategy. We are not aware of
any claims of infringement or other challenges to our right to
use our marks in the United States.
Competition
The retail market for home décor is highly competitive.
Accordingly, we compete with a variety of specialty stores,
department stores, discount stores and catalog retailers that
carry merchandise in one or more categories also carried by our
stores. Our product offerings also compete with a variety of
national, regional and local retailers, including such specialty
retailers as Bed, Bath & Beyond, Cost Plus World
Market, Linens n Things, Michaels Stores, Pier
1 Imports and Williams-Sonoma. Department stores typically have
higher prices than our stores for similar merchandise. Specialty
retailers tend to have higher prices and a narrower assortment
of home décor products. Wholesale clubs may have lower
prices than our stores, but the
10
product assortment is generally more limited. We believe that
the principal competitive factors influencing our business are
merchandise quality and selection, price, customer service,
visual appeal of the merchandise and the store, and the
convenience of location.
The number of companies offering a selection of home décor
products that overlaps generally with our product assortment has
increased over the last 10 years. However, we believe that
our stores still occupy a distinct niche in the marketplace:
traditionally-styled merchandise, reflective of current market
trends, offered at a value price. We believe we compete
effectively with other retailers due to our experience in
identifying a broad collection of distinctive merchandise,
pricing it to be attractive to the target Kirklands
customer, presenting it in a visually appealing manner, and
providing a quality store experience.
In addition to competing for customers, we compete with other
retailers for suitable store locations and qualified management
personnel and sales associates. Many of our competitors are
larger and have substantially greater financial, marketing and
other resources than we do. See Risk Factors
We face an extremely competitive specialty retail business
market, and such competition could result in a reduction of our
prices, adversely impacting sales and gross margin and create a
loss of our market share.
Employees
We employed approximately 4,312 employees at April 2, 2007.
The number of employees fluctuates with seasonal needs. None of
our employees is covered by a collective bargaining agreement.
We believe our employee relations are good.
Availability
of SEC Reports
We file annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K
and other information with the SEC. Members of the public may
read and copy materials that we file with the SEC at the
SECs Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Members of the public may also
obtain information on the Public Reference Room by calling the
SEC at
1-800-SEC-0330.
The SEC also maintains an Internet web site that contains
reports, proxy and information statements and other information
regarding issuers, including Kirklands, that file
electronically with the SEC. The address of that site is
http://www.sec.gov. Our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K
and other information filed by us with the SEC are available,
without charge, on our Internet web site,
http://www.kirklands.com, as soon as reasonably practicable
after they are filed electronically with the SEC. Copies are
also available, without charge, by written request to:
Secretary, Kirklands, Inc., 805 North Parkway, Jackson, TN
38305.
Executive
Officers of Kirklands
The name, age as of April 2, 2007, and position of each of
our executive officers is as follows:
Robert E. Alderson, 60, has been a Director of
Kirklands since September 1986. He has served as Chief
Executive Officer since March 2006, President and Chief
Executive Officer of Kirklands from February 2006 to March
2006 and as President from November 1997 to May 2005 and Chief
Executive Officer from March 2001 to May 2005. He also served as
Chief Operating Officer of Kirklands from November 1997
through March 2001 and as Senior Vice President of
Kirklands upon joining in 1986 through November 1997. He
also served as Chief Administrative Officer of Kirklands
from 1986 to 1997. Prior to joining Kirklands,
Mr. Alderson was a senior partner at the law firm of
Menzies, Rainey, Kizer & Alderson.
Catherine A. David, 43, joined Kirklands as
President and Chief Operating Officer in March 2006. Prior to
joining Kirklands, from July 2004 to September 2005,
Ms. David was employed with Sears Holding Corporation
leaving as Senior Vice President and General Manager of Sears
Essentials, Sears Grand, and The Great Indoors. Prior to that,
she was President of the Burnes Group, formerly a division of
Newell-Rubbermaid. Ms. David also enjoyed a successful
13-year
career at Target Corporation, where she performed in a variety
of buying, merchandise planning and store operations roles
culminating in her leadership of Targets website strategy
and
e-commerce
business as Vice President and General Manager of target.direct.
11
W. Michael Madden, 37, has been Vice President and
Chief Financial Officer since May 2006. Prior to his appointment
as Chief Financial Officer, Mr. Madden served as Vice
President of Finance since May 2005. Prior to May 2005, he
served as Director of Finance since July 2000. Prior to joining
Kirklands, Mr. Madden served as Assistant Controller
with Trammell Crow Company and was with PricewaterhouseCoopers
LLP. At PricewaterhouseCoopers, LLP, he served in positions of
increasing responsibility over six years culminating as
Manager-Assurance and Business Advisory Services where he worked
with various clients, public and private, in the retail and
consumer products industries.
Sharyn Hejcl, 42, joined Kirklands as Vice
President and General Merchandise Manager in January, 2007.
Prior to joining Kirklands, from 2003 to 2007,
Ms. Hejcl was employed with Bed, Bath and Beyond leaving as
Divisional Merchandise Manager of the Home Décor and
Tabletop division. Prior to that, she was Director of
Replenishment & Forecasting for Jo-Ann Stores. She also
served as Divisional Merchandise Manager for Jo-Ann Stores. She
began her retail career at May Department Stores spending
13 years with increasing responsibilities in buying and
serving as a Market Representative in the Decorative Housewares
and Home Textile divisions.
No family relationships exist among any of the above-listed
officers, and there are no arrangements or understandings
between any of the above-listed officers and any other person
pursuant to which they serve as an officer. All officers are
elected to hold office for one year or until their successors
are elected and qualified.
Investing in our common stock involves risk. You should
carefully consider the following risks, as well as the other
information contained in this
10-K,
including our consolidated financial statements and the related
notes, before investing in our common stock.
Risks
Related to Our Business
If We
Are Unable to Profitably Open and Operate New Stores and
Maintain the Profitability of Our Existing Stores, We May Not Be
Able to Adequately Execute Our Growth Strategy Resulting in a
Decrease in Net Sales and Net Income.
One of our strategies is to open new stores by focusing on both
existing markets and by targeting new geographic markets. During
fiscal 2006, we opened 49 new stores, and our future operating
results will depend to a substantial extent upon our ability to
open and operate new stores successfully. We plan to open
approximately 30 new stores and close approximately 40 stores in
fiscal 2007. We also have an ongoing expansion, remodeling and
relocation program. We did not remodel any stores in fiscal
2006, but we may expand, remodel or relocate additional stores
during fiscal 2007.
There can be no assurance that we will be able to open, expand,
remodel and relocate stores at this rate, or at all. Our ability
to open new stores and to expand, remodel and relocate existing
stores depends on a number of factors, including our ability to:
|
|
|
|
|
obtain adequate capital resources for leasehold improvements,
fixtures and inventory on acceptable terms, or at all;
|
|
|
|
locate and obtain favorable store sites and negotiate acceptable
lease terms;
|
|
|
|
construct or refurbish store sites;
|
|
|
|
obtain and distribute adequate product supplies to our stores;
|
|
|
|
maintain adequate warehousing and distribution capability at
acceptable costs;
|
|
|
|
hire, train and retain skilled Store Team Leaders and
personnel; and
|
|
|
|
continue to upgrade our information and other operating systems
to control the anticipated growth and expanded operations.
|
12
The rate of our expansion will also depend on the availability
of adequate capital, which in turn will depend in large part on
cash flow generated by our business and the availability of
equity and debt capital. There can be no assurance that we will
have adequate cash flow generated by our business or that we
will be able to obtain equity or debt capital on acceptable
terms, or at all. Moreover, our senior credit facility contains
provisions that restrict the amount of debt we may incur in the
future. In addition, the cost of opening, expanding, remodeling
and relocating new or existing stores may increase in the future
compared to historical costs. The increased cost could be
material. If we are not successful in obtaining sufficient
capital, we may be unable to open additional stores or expand,
remodel and relocate existing stores as planned, which may
adversely affect our growth strategy resulting in a decrease in
net sales. As a result, there can be no assurances that we will
be able to achieve our current plans for the opening of new
stores and the expansion, remodeling or relocation of existing
stores.
There also can be no assurance that our existing stores will
maintain their current levels of net sales and store-level
profitability or that new stores will generate net sales levels
necessary to achieve store-level profitability. New stores that
we open in our existing markets may draw customers from our
existing stores and may have lower net sales growth relative to
stores opened in new markets. New stores also may face greater
competition and have lower anticipated net sales volumes
relative to previously opened stores during their comparable
years of operations. New stores opened in new markets, where we
are less familiar with the target customer and less well known,
may face different or additional risks and increased costs
compared to stores operated in existing markets. Also, stores
opened in off-mall locations may require greater marketing costs
in order to attract customer traffic. These factors, together
with increased pre-opening expenses at our new stores, may
reduce our average store contribution and operating margins. If
we are unable to profitably open and operate new stores and
maintain the profitability of our existing stores, our net
income could suffer.
The success of our growth plan will be dependent on our ability
to promote
and/or
recruit enough qualified regional directors, district team
leaders, store team leaders and sales associates to support the
expected growth in the number of our stores, and the time and
effort required to train and supervise a large number of new
store team leaders and associates may divert resources from our
existing stores and adversely affect our operating and financial
performance. Our operating expenses would also increase as a
result of any increase in the minimum wage or other factors that
would require increases in the compensation paid to our
employees.
A
Prolonged Economic Downturn Could Result in Reduced Net Sales
and Profitability.
Our net sales are also subject to a number of factors relating
to consumer spending, including general economic conditions
affecting disposable consumer income such as unemployment rates,
business conditions, interest rates, levels of consumer
confidence, energy prices, mortgage rates, the level of consumer
debt and taxation. A weak retail environment could impact
customer traffic in our stores and also adversely affect our net
sales. Purchases of home décor items may decline during
recessionary periods, and a prolonged recession may have a
material adverse effect on our business, financial condition and
results of operations. In addition, economic downturns during
the last quarter of our fiscal year could adversely affect us to
a greater extent than if such downturns occurred at other times
of the year.
Reduced
Consumer Spending in the Southeastern Part of the United States
Where a Majority of Our Stores Are Concentrated Could Reduce Our
Net Sales.
Approximately 53% of our stores are located in the southeastern
region of the United States. Consequently, economic conditions,
weather conditions, demographic and population changes and other
factors specific to this region may have a greater impact on our
results of operations than on the operations of our more
geographically diversified competitors. In addition, changes in
regional factors that reduce the appeal of our stores and
merchandise to local consumers could reduce our net sales.
13
We May
Not Be Able to Successfully Anticipate Consumer Trends and Our
Failure to Do So May Lead to Loss of Consumer Acceptance of Our
Products Resulting in Reduced Net Sales.
Our success depends on our ability to anticipate and respond to
changing merchandise trends and consumer demands in a timely
manner. If we fail to identify and respond to emerging trends,
consumer acceptance of the merchandise in our stores and our
image with our customers may be harmed, which could reduce
customer traffic in our stores and materially adversely affect
our net sales. Additionally, if we misjudge market trends, we
may significantly overstock unpopular products and be forced to
take significant inventory markdowns, which would have a
negative impact on our gross profit and cash flow. Conversely,
shortages of items that prove popular could reduce our net
sales. In addition, a major shift in consumer demand away from
home décor could also have a material adverse effect on our
business, results of operations and financial condition.
We
Depend on a Number of Vendors to Supply Our Merchandise, and Any
Delay in Merchandise Deliveries from Certain Vendors May Lead to
a Decline in Inventory Which Could Result in a Loss
of Net Sales.
We purchase our products from approximately 275 vendors with
which we have no long-term purchase commitments or exclusive
contracts. None of our vendors supplied more than 10% of our
merchandise purchases during fiscal 2006. Historically, we have
retained our vendors and we have generally not experienced
difficulty in obtaining desired merchandise from vendors on
acceptable terms. However, our arrangements with these vendors
do not guarantee the availability of merchandise, establish
guaranteed prices or provide for the continuation of particular
pricing practices. Our current vendors may not continue to sell
products to us on current terms or at all, and we may not be
able to establish relationships with new vendors to ensure
delivery of products in a timely manner or on terms acceptable
to us.
We may not be able to acquire desired merchandise in sufficient
quantities on terms acceptable to us in the future. Also, our
business would be adversely affected if there were delays in
product shipments to us due to freight difficulties, strikes or
other difficulties at our principal transport providers or
otherwise. We have from time to time experienced delays of this
nature. We are also dependent on vendors for assuring the
quality of merchandise supplied to us. Our inability to acquire
suitable merchandise in the future or the loss of one or more of
our vendors and our failure to replace any one or more of them
may harm our relationship with our customers resulting in a loss
of net sales.
We Are
Dependent on Foreign Imports for a Significant Portion of Our
Merchandise, and Any Changes in the Trading Relations and
Conditions Between the United States and the Relevant Foreign
Countries May Lead to a Decline in Inventory Resulting in a
Decline in Net Sales, or an Increase in the Cost of Sales
Resulting in Reduced Gross Profit.
Many of our vendors are importers of merchandise manufactured in
the Far East and India. Our vendors are subject to the risks
involved with relying on products manufactured abroad, and we
remain subject to those risks to the extent that their effects
are passed through to us by our vendors or cause disruptions in
supply. These risks include changes in import duties, quotas,
loss of most favored nation (MFN)
trading status with the United States for a particular foreign
country, work stoppages, delays in shipments, freight cost
increases, terrorism, war, economic uncertainties (including
inflation, foreign government regulations and political unrest)
and trade restrictions (including the United States imposing
antidumping or countervailing duty orders, safeguards, remedies
or compensation and retaliation due to illegal foreign trade
practices). If any of these or other factors were to cause a
disruption of trade from the countries in which the suppliers of
our vendors are located, our inventory levels may be reduced or
the cost of our products may increase.
We currently purchase a majority of our merchandise from
importers of goods manufactured in China. China has been granted
permanent normal trade relations by the United States effective
January 1, 2002, based on its entry into the World Trade
Organization (WTO), and now enjoys MFN trading
status. Chinas entry into the WTO potentially stabilizes
the trading relationship between it and the United States, but
the possibility of trade disputes concerning merchandise
currently imported from China continues to create risks. These
risks
14
could result in sanctions against China, and the imposition of
new duties on certain imports from China, including products
supplied to us. Any significant increase in duties or any other
increase in the cost of the products imported for us from China
could result in an increase in the cost of our products to our
customers which may correspondingly cause a decrease in net
sales or could cause a reduction in our gross profit.
Historically, instability in the political and economic
environments of the countries in which our vendors obtain our
products has not had a material adverse effect on our
operations. However, we cannot predict the effect that future
changes in economic or political conditions in such foreign
countries may have on our operations. Although we believe that
we could access alternative sources in the event of disruptions
or delays in supply due to economic, political or health
conditions in foreign countries on our vendors, such disruptions
or delays may adversely affect our results of operations unless
and until alternative supply arrangements could be made. In
addition, merchandise purchased from alternative sources may be
of lesser quality or more expensive than the merchandise we
currently purchase abroad.
Countries from which our vendors obtain these products may, from
time to time, impose new or adjust prevailing quotas or other
restrictions on exported products, and the United States may
impose new duties, quotas and other restrictions on imported
products. This could disrupt the supply of such products to us
and adversely affect our operations. The United States Congress
periodically considers other restrictions on the importation of
products obtained for us by vendors. The cost of such products
may increase for us if applicable duties are raised or import
quotas with respect to such products are imposed or made more
restrictive.
We are also subject to the risk that the manufacturers abroad
who ultimately manufacture our products may employ labor
practices that are not consistent with acceptable practices in
the United States. In any such event we could be hurt by
negative publicity with respect to those practices and, in some
cases, face liability for those practices.
Our
Success Is Highly Dependent on Our Planning and Control
Processes and Our Supply Chain, and Any Disruption in or Failure
to Continue to Improve These Processes May Result in a Loss of
Net Sales and Net Income.
An important part of our efforts to achieve efficiencies, cost
reductions and net sales growth is the continued identification
and implementation of improvements to our planning, logistical
and distribution infrastructure and our supply chain, including
merchandise ordering, transportation and receipt processing. We
also need to ensure that our distribution infrastructure and
supply chain keep pace with our anticipated growth and increased
number of stores. In particular, we may need to expand our
existing infrastructure to the extent we open new stores in
regions of the United States where we presently do not have
significant concentrations of stores. The cost of this enhanced
infrastructure could be significant. In addition, a significant
portion of the distribution to our stores is coordinated through
our distribution facility in Jackson, Tennessee. Any significant
disruption in the operations of this facility would have a
material adverse effect on our ability to maintain proper
inventory levels in our stores which could result in a loss of
net sales and net income.
We
Face an Extremely Competitive Specialty Retail Business Market,
and Such Competition Could Result in a Reduction of Our Prices
and a Loss of Our Market Share.
The retail market is highly competitive. We compete against a
diverse group of retailers, including specialty stores,
department stores, discount stores and catalog retailers, which
carry merchandise in one or more categories also carried by us.
Our product offerings also compete with a variety of national,
regional and local retailers, including such specialty retailers
as Bed, Bath & Beyond, Cost Plus World Market,
Linens n Things, Michaels Stores, Pier 1 Imports and
Pottery Barn. We also compete with these and other retailers for
suitable retail locations, suppliers, qualified employees and
management personnel. One or more of our competitors are present
in substantially all of the markets in which we have stores.
Many of our competitors are larger and have significantly
greater financial, marketing and other resources than we do.
This competition could result in the reduction of our prices and
a loss of our market share. Our net sales are also impacted by
store liquidations of our competitors. We believe that our
stores compete primarily on the basis of merchandise
15
quality and selection, price, visual appeal of the merchandise
and the store and convenience of location. There can be no
assurance that we will continue to be able to compete
successfully against existing or future competition. Our
expansion into the markets served by our competitors and the
entry of new competitors or expansion of existing competitors
into our markets may have a material adverse effect on our
market share and could result in a reduction in our prices in
order for us to remain competitive.
Our
Business Is Highly Seasonal and Our Fourth Quarter Contributes a
Disproportionate Amount of Our Net Sales, Net Income and Cash
Flow, and Any Factors Negatively Impacting Us During Our Fourth
Quarter Could Reduce Our Net Sales, Net Income and Cash Flow,
Leaving Us with Excess Inventory and Making It More Difficult
for Us to Finance Our Capital Requirements.
We have experienced, and expect to continue to experience,
substantial seasonal fluctuations in our net sales and operating
results, which are typical of many specialty retailers and
common to most retailers generally. Due to the importance of the
fall selling season, which includes Thanksgiving and Christmas,
the last quarter of our fiscal year has historically
contributed, and is expected to continue to contribute, a
disproportionate amount of our net sales, net income and cash
flow for the entire fiscal year. We expect this pattern to
continue during the current fiscal year and anticipate that in
subsequent fiscal years, the last quarter of our fiscal year
will continue to contribute disproportionately to our operating
results and cash flow. Any factors negatively affecting us
during the last quarter of our fiscal year, including
unfavorable economic or weather conditions, could have a
material adverse effect on our financial condition and results
of operations, reducing our cash flow, leaving us with excess
inventory and making it more difficult for us to finance our
capital requirements.
We May
Experience Significant Variations in Our Quarterly
Results.
Our quarterly results of operations may also fluctuate
significantly based upon such factors as the timing of new store
openings, pre-opening expenses associated with new stores, the
relative proportion of new stores to mature stores, net sales
contributed by new stores, increases or decreases in comparable
store net sales, adverse weather conditions, shifts in the
timing of holidays, the timing and level of markdowns, changes
in fuel and other shipping costs, changes in our product mix and
actions taken by our competitors.
The
Agreement Governing Our Debt Places Certain Reporting and
Consent Requirements on Us Which May Affect Our Ability to
Operate Our Business in Accordance with Our Business and Growth
Strategy.
Our senior credit facility contains a number of covenants
requiring us to report to our lender or to obtain our
lenders consent in connection with certain activities we
may wish to pursue in the operation of our business. These
requirements may affect our ability to operate our business and
consummate our business and growth strategy and may limit our
ability to take advantage of potential business opportunities as
they arise. These requirements affect our ability to, among
other things:
|
|
|
|
|
incur additional indebtedness;
|
|
|
|
create liens;
|
|
|
|
pay dividends or make other distributions;
|
|
|
|
make investments;
|
|
|
|
sell assets;
|
|
|
|
enter into transactions with affiliates;
|
|
|
|
repurchase capital stock; and
|
|
|
|
enter into certain mergers and consolidations.
|
The senior credit facility has one financial covenant. This
covenant requires us to maintain excess
availability, as defined in our credit agreement, of at
least $3 million. Any failure to comply with this or other
covenants would allow the lenders to accelerate repayment of
their debt, prohibit further borrowing
16
under the facility, declare an event of default, take possession
of their collateral or take other actions available to a secured
senior creditor.
If compliance with our debt obligations materially hinders our
ability to operate our business and adapt to changing industry
conditions, we may lose market share, our revenue may decline
and our operating results may suffer. This could have a material
adverse effect on the market value and marketability of our
common stock.
Our
Comparable Store Net Sales Fluctuate Due to a Variety of Factors
and May Not Be a Meaningful Indicator of Future
Performance.
Numerous factors affect our comparable store net sales results,
including among others, weather conditions, retail trends, the
retail sales environment, economic conditions, the impact of
competition and our ability to execute our business strategy
efficiently. Our comparable store net sales results have
experienced fluctuations in the past. In addition, we anticipate
that opening new stores in existing markets may result in
decreases in comparable store net sales for existing stores in
such markets. Past comparable store net sales results may not be
indicative of future results. Our comparable store net sales may
not increase from quarter to quarter and may decline. As a
result, the unpredictability of our comparable store net sales
may cause our revenues and operating results to vary quarter to
quarter, and an unanticipated decline in revenues or comparable
store net sales may cause the price of our common stock to
fluctuate significantly.
We Are
Highly Dependent on Customer Traffic in Malls and Shopping
Centers, and Any Reduction in the Overall Level of Traffic Could
Reduce Our Net Sales and Increase Our Sales and Marketing
Expenses.
We rely heavily on the ability of mall and shopping center
anchor tenants and other tenants to generate customer traffic in
the vicinity of our stores. Historically, we have not relied on
extensive media advertising and promotion in order to attract
customers to our stores. Our future operating results will also
depend on many other factors that are beyond our control,
including the overall level of traffic and general economic
conditions affecting consumer confidence and spending. Any
significant reduction in the overall level of traffic could
reduce our net sales.
Our
Hardware and Software Systems Are Vulnerable to Damage that
Could Harm Our Business.
We rely upon our existing information systems for operating and
monitoring all major aspects of our business, including sales,
warehousing, distribution, purchasing, inventory control,
merchandise planning and replenishment, as well as various
financial functions. These systems and our operations are
vulnerable to damage or interruption from:
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|
|
|
|
fire, flood and other natural disasters;
|
|
|
|
power loss, computer systems failures, internet and
telecommunications or data network failure, operator negligence,
improper operation by or supervision of employees, physical and
electronic loss of data or security breaches, misappropriation
and similar events; and
|
|
|
|
computer viruses.
|
Any disruption in the operation of our information systems, the
loss of employees knowledgeable about such systems or our
failure to continue to effectively modify such systems could
interrupt our operations or interfere with our ability to
monitor inventory, which could result in reduced net sales and
affect our operations and financial performance. We also need to
ensure that our systems are consistently adequate to handle our
anticipated store growth and are upgraded as necessary to meet
our needs. The cost of any such system upgrades or enhancements
would be significant.
17
We
Depend on Key Personnel, and if We Lose the Services of Any
Member of Our Senior Management Team, We May Not Be Able to Run
Our Business Effectively.
We have benefited substantially from the leadership and
performance of our senior management team. Our success will
depend on our ability to retain our current senior management
members and to attract and retain qualified personnel in the
future. Competition for senior management personnel is intense
and there can be no assurances that we will be able to retain
our personnel. The loss of a member of senior management would
require the remaining executive officers to divert immediate and
substantial attention to seeking a replacement.
Our
Charter and Bylaw Provisions and Certain Provisions of Tennessee
Law May Make It Difficult in Some Respects to Cause a Change in
Control of Kirklands and Replace Incumbent
Management.
Our charter authorizes the issuance of blank check
preferred stock with such designations, rights and preferences
as may be determined from time to time by our Board of
Directors. Accordingly, the Board of Directors is empowered,
without shareholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting or other rights that
could materially adversely affect the voting power or other
rights of the holders of our common stock. Holders of the common
stock do not have preemptive rights to subscribe for a pro rata
portion of any capital stock which may be issued by us. In the
event of issuance, such preferred stock could be utilized, under
certain circumstances, as a method of discouraging, delaying or
preventing a change in control of Kirklands. Although we
have no present intention to issue any new shares of preferred
stock, we may do so in the future.
Our charter and bylaws contain certain corporate governance
provisions that may make it more difficult to challenge
management, may deter and inhibit unsolicited changes in control
of Kirklands and may have the effect of depriving our
shareholders of an opportunity to receive a premium over the
prevailing market price of our common stock in the event of an
attempted hostile takeover. First, the charter provides for a
classified Board of Directors, with directors (after the
expiration of the terms of the initial classified board of
directors) serving three year terms from the year of their
respective elections and being subject to removal only for cause
and upon the vote of 80% of the voting power of all outstanding
capital stock entitled to vote (the Voting Power).
Second, our charter and bylaws do not generally permit
shareholders to call, or require that the Board of Directors
call, a special meeting of shareholders. The charter and bylaws
also limit the business permitted to be conducted at any such
special meeting. In addition, Tennessee law permits action to be
taken by the shareholders by written consent only if the action
is consented to by holders of the number of shares required to
authorize shareholder action and if all shareholders entitled to
vote are parties to the written consent. Third, the bylaws
establish an advance notice procedure for shareholders to
nominate candidates for election as directors or to bring other
business before meetings of the shareholders. Only those
shareholder nominees who are nominated in accordance with this
procedure are eligible for election as directors of
Kirklands, and only such shareholder proposals may be
considered at a meeting of shareholders as have been presented
to Kirklands in accordance with the procedure. Finally,
the charter provides that the amendment or repeal of any of the
foregoing provisions of the charter mentioned previously in this
paragraph requires the affirmative vote of at least 80% of the
Voting Power. In addition, the bylaws provide that the amendment
or repeal by shareholders of any bylaws made by our Board of
Directors requires the affirmative vote of at least 80% of the
Voting Power.
Furthermore, Kirklands is subject to certain provisions of
Tennessee law, including certain Tennessee corporate takeover
acts that are, or may be, applicable to us. These acts include
the Investor Protection Act, the Business Combination Act and
the Tennessee Greenmail Act, and these acts seek to limit the
parameters in which certain business combinations and share
exchanges occur. The charter, bylaws and Tennessee law
provisions may have an anti-takeover effect, including possibly
discouraging takeover attempts that might result in a premium
over the market price for our common stock.
18
The
Market Price for Our Common Stock Might Be Volatile and Could
Result in a Decline in the Value of Your
Investment.
The price at which our common stock trades may be volatile. The
market price of our common stock could be subject to significant
fluctuations in response to our operating results, general
trends and prospects for the retail industry, announcements by
our competitors, analyst recommendations, our ability to meet or
exceed analysts or investors expectations, the
condition of the financial markets and other factors. In
addition, the stock market in recent years has experienced
extreme price and volume fluctuations that often have been
unrelated or disproportionate to the operating performance of
companies. These fluctuations, as well as general economic and
market conditions, may adversely affect the market price of our
common stock notwithstanding our actual operating performance.
Concentration
of Ownership among Our Existing Directors, Executive Officers,
and Their Affiliates May Prevent New Investors from Influencing
Significant Corporate Decisions.
As of the date of this filing, our current directors, executive
officers and their affiliates, in the aggregate, beneficially
own approximately 57% of our outstanding common stock. As a
result, these shareholders are able to exercise a controlling
influence over matters requiring shareholder approval, including
the election of directors and approval of significant corporate
transactions, and will have significant control over our
management and policies. These shareholders may support
proposals and actions with which you may disagree or which are
not in your interests.
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|
Item 1B.
|
Unresolved
Staff Comments
|
None
We lease all of our store locations and expect to continue our
policy of leasing rather than owning. Our leases for mall stores
typically provide for
10-year
terms, many with the ability for us (or the landlord) to
terminate the lease at specified points during the term if net
sales at the leased premises do not reach a certain annual
level. Our leases for off-mall stores typically provide for
terms ranging from 5 to 10 years. Many of our leases
provide for payment of percentage rent (i.e., a percentage of
net sales in excess of a specified level) and the rate of
increase in key ancillary charges is generally capped.
As current leases expire, we believe we will be able either to
obtain lease renewals if desired for present store locations or
to obtain leases for equivalent or better locations in the same
general area. To date, we have not experienced unusual
difficulty in either renewing leases for existing locations or
securing leases for suitable locations for new stores. A
majority of our store leases contain provisions permitting the
landlord to terminate the lease upon a change in control of
Kirklands.
We own our corporate headquarters in Jackson, Tennessee, which
currently consists of approximately 40,000 square feet of
office space. We currently lease one central distribution
facility, consisting of 771,000 square feet, also located
in Jackson, Tennessee. This lease has a
15-year
initial term, with two five-year options.
19
The following table indicates the states where our stores are
located and the number of stores within each state as of
February 3, 2007:
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Alabama
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19
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|
Arizona
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|
|
9
|
|
Arkansas
|
|
|
6
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|
California
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|
|
8
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|
Colorado
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|
|
3
|
|
Connecticut
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|
|
2
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|
Delaware
|
|
|
1
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|
Florida
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|
|
50
|
|
Georgia
|
|
|
19
|
|
Illinois
|
|
|
7
|
|
Indiana
|
|
|
8
|
|
Iowa
|
|
|
2
|
|
Kansas
|
|
|
3
|
|
Kentucky
|
|
|
9
|
|
Louisiana
|
|
|
11
|
|
Maryland
|
|
|
5
|
|
Massachusetts
|
|
|
2
|
|
Michigan
|
|
|
5
|
|
Minnesota
|
|
|
4
|
|
Mississippi
|
|
|
10
|
|
Missouri
|
|
|
6
|
|
Nebraska
|
|
|
1
|
|
Nevada
|
|
|
3
|
|
New Jersey
|
|
|
3
|
|
New Mexico
|
|
|
1
|
|
New York
|
|
|
7
|
|
North Carolina
|
|
|
20
|
|
Ohio
|
|
|
10
|
|
Oklahoma
|
|
|
5
|
|
Pennsylvania
|
|
|
11
|
|
South Carolina
|
|
|
11
|
|
Tennessee
|
|
|
16
|
|
Texas
|
|
|
51
|
|
Utah
|
|
|
1
|
|
Virginia
|
|
|
14
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|
West Virginia
|
|
|
1
|
|
Wisconsin
|
|
|
5
|
|
|
|
|
|
|
Total
|
|
|
349
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|
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|
|
|
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|
|
Item 3.
|
Legal
Proceedings
|
We are involved in various routine legal proceedings incidental
to the conduct of our business. We believe any resulting
liability from existing legal proceedings, individually or in
the aggregate, will not have a material adverse effect on our
operations or financial condition.
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|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
We did not submit any matters to a vote of security holders
during the fourth quarter of fiscal 2006.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity and Related Shareholder
Matters
|
Our common stock is listed on The Nasdaq Stock Market under the
symbol KIRK. We commenced trading on The Nasdaq
Stock Market on July 11, 2002. On April 2, 2007, there
were approximately 100 holders of record, and approximately
1,600 beneficial owners, of our common stock. The following
table sets forth the high and low last sale prices of our common
stock for the periods indicated.
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|
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|
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
7.74
|
|
|
$
|
4.95
|
|
|
$
|
11.28
|
|
|
$
|
9.18
|
|
Second Quarter
|
|
$
|
6.88
|
|
|
$
|
5.05
|
|
|
$
|
9.42
|
|
|
$
|
8.17
|
|
Third Quarter
|
|
$
|
5.25
|
|
|
$
|
4.18
|
|
|
$
|
9.93
|
|
|
$
|
7.05
|
|
Fourth Quarter
|
|
$
|
5.64
|
|
|
$
|
4.40
|
|
|
$
|
7.22
|
|
|
$
|
5.73
|
|
Dividend
Policy
We intend to retain all future earnings to finance the continued
growth and development of our business, and do not, therefore,
anticipate paying any cash dividends on our common stock in the
foreseeable future. In addition, our senior credit facility
restricts the payment of cash dividends. There have been no
dividends declared on any class of our common stock during the
past two fiscal years. Future cash dividends, if any, will be
determined by our Board of Directors and will be based upon our
earnings, capital requirements, financial condition, debt
covenants and other factors deemed relevant by our Board of
Directors.
20
Stockholder
Return Performance Presentation
The graph that follows shall not be deemed to be incorporated by
reference into any filing made by Kirklands under the
Securities Act of 1933 or the Securities Exchange Act of 1934.
The following Shareholder Return Performance Graph compares the
cumulative return on our Common Stock for the period from
July 11, 2002 (the date our Common Stock commenced trading
on the Nasdaq National Market) to February 3, 2007 (the
date our 2006 fiscal year ended), with The Nasdaq Stock Market
(U.S.) Index and The Nasdaq Retail Trade Index. The comparison
assumes $100 was invested on July 11, 2002 in our Common
Stock and in each of the Indices and assumes reinvestment of
dividends.
COMPARISON
OF 54 MONTH CUMULATIVE TOTAL RETURN*
Among
Kirklands Inc., the NASDAQ Composite Index
And The NASDAQ Retail Trade Index
|
|
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|
*
|
$100 invested on 7/11/02 in stock
or on 6/30/02 in index-including reinvestment of
dividends. Fiscal Year ending January 31.
|
21
|
|
Item 6.
|
Selected
Financial Data
|
The selected Statement of Operations Data and
Balance Sheet Data have been derived from our
consolidated financial statements for the periods indicated. The
Store and Other Data for all periods presented below
have been derived from internal records of our operations. This
selected financial data should be read in conjunction with our
consolidated financial statements and related notes, and with
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this Annual Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 Weeks Ended
|
|
|
52 Weeks Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except per share data)
|
|
|
Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue(1)
|
|
$
|
446,828
|
|
|
$
|
415,092
|
|
|
$
|
394,429
|
|
|
$
|
369,158
|
|
|
$
|
341,504
|
|
Gross profit (excluding
depreciation and amortization)
|
|
|
140,359
|
|
|
|
125,470
|
|
|
|
126,791
|
|
|
|
127,313
|
|
|
|
122,497
|
|
Operating income (loss)
|
|
|
(678
|
)
|
|
|
205
|
|
|
|
11,481
|
|
|
|
30,169
|
|
|
|
32,722
|
|
Net income (loss)
|
|
|
(140
|
)
|
|
|
229
|
|
|
|
6,589
|
|
|
|
18,041
|
|
|
|
10,271
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
( 0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
0.34
|
|
|
$
|
0.95
|
|
|
$
|
0.73
|
|
Diluted
|
|
$
|
( 0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
0.34
|
|
|
$
|
0.92
|
|
|
$
|
0.70
|
|
Weighted average number of shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
19,433
|
|
|
|
19,318
|
|
|
|
19,231
|
|
|
|
19,048
|
|
|
|
13,979
|
|
Diluted
|
|
|
19,433
|
|
|
|
19,572
|
|
|
|
19,541
|
|
|
|
19,545
|
|
|
|
14,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 Weeks Ended
|
|
|
52 Weeks Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Store and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable store sales increase
(decrease)(2)
|
|
|
(6.6
|
)%
|
|
|
(6.9
|
)%
|
|
|
(5.0
|
)%
|
|
|
(0.2
|
)%
|
|
|
8.4
|
%
|
Number of stores at year end(3)
|
|
|
349
|
|
|
|
347
|
|
|
|
320
|
|
|
|
280
|
|
|
|
249
|
|
Average net sales per store (in
thousands)(3)(4)
|
|
$
|
1,272
|
|
|
$
|
1,266
|
|
|
$
|
1,322
|
|
|
$
|
1,423
|
|
|
$
|
1,417
|
|
Average net sales per square
foot(5)
|
|
$
|
247
|
|
|
$
|
267
|
|
|
$
|
286
|
|
|
$
|
311
|
|
|
$
|
313
|
|
Average square footage per store(5)
|
|
|
5,144
|
|
|
|
4,747
|
|
|
|
4,616
|
|
|
|
4,576
|
|
|
|
4,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
January 31,
|
|
|
February 1,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
151,466
|
|
|
$
|
146,584
|
|
|
$
|
130,137
|
|
|
$
|
116,814
|
|
|
$
|
87,814
|
|
Shareholders equity
|
|
$
|
67,982
|
|
|
$
|
66,408
|
|
|
|
65,120
|
|
|
|
58,072
|
|
|
|
38,100
|
|
|
|
|
(1) |
|
For the fiscal year ended February 3, 2007, total revenue
includes $3.6 million related to the initial adoption of
the Companys gift certificate and gift card breakage
policy. There was no revenue recognized on unredeemed gift
certificates or gift card balances prior to fiscal 2006 because
sufficient data was not available during those periods to
support an alternative position. |
|
(2) |
|
Fiscal 2006, fiscal 2005 and fiscal 2004 comparable store sales
were calculated by including new stores on the first day of the
month following the 13th full fiscal month of sales. We
exclude from comparable store sales calculations each store that
was expanded, remodeled or relocated during the applicable
period. |
22
|
|
|
|
|
Each expanded, remodeled or relocated store is returned to the
comparable store base after the first day of the month following
the 13th full fiscal month of sales after its opening in
the expanded, remodeled or relocated space. Fiscal 2003 and
fiscal 2002 comparable store sales were calculated by including
new stores after the store had been in operation for one full
fiscal year. We excluded from comparable store sales
calculations each store that was expanded, remodeled or
relocated during the applicable period. Each expanded, remodeled
or relocated store was returned to the comparable store base
after it has been excluded from the comparable store base for
one full fiscal year. Comparable store sales data for fiscal
2006 reflects sales through the
52-week
period ended January 27, 2007, excluding the extra week in
this years fiscal retail calendar. |
|
(3) |
|
Our store count excludes our warehouse outlet store located in
Jackson, Tennessee. This store closed during fiscal 2004. |
|
(4) |
|
Calculated using net sales of all stores open at both the
beginning and the end of the fiscal period. |
|
(5) |
|
Calculated using gross square footage of all stores open at both
the beginning and the end of the fiscal period. Gross square
footage includes the storage, receiving and office space that
generally occupies approximately 30% of total store space. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion should be read with our consolidated
financial statements and related notes included elsewhere in
this annual report on
Form 10-K.
A number of the matters and subject areas discussed in
Managements Discussion and Analysis of Financial
Condition and Results of Operations and
Business and elsewhere in this annual report on
Form 10-K
are not limited to historical or current facts and deal with
potential future circumstances and developments and are
accordingly forward-looking statements. You are
cautioned that such forward-looking statements, which may be
identified by words such as anticipate,
believe, expect, estimate,
intend, plan and similar expressions,
are only predictions and that actual events or results may
differ materially.
Our fiscal year is comprised of the 52 or
53-week
period ending on the Saturday closest to January 31.
Accordingly, fiscal 2006 represented 53 weeks ended on
February 3, 2007. Fiscal 2005 represented 52 weeks
ended on January 28, 2006. Fiscal 2004 represented
52 weeks ended on January 29, 2005.
Introduction
We are a leading specialty retailer of home décor in the
United States, operating 349 stores in 37 states as of
February 3, 2007. Our stores present a broad selection of
distinctive merchandise, including framed art, mirrors, wall
décor, candles, lamps, decorative accessories, accent
furniture, textiles, garden accessories and artificial floral
products. Our stores also offer an extensive assortment of
holiday merchandise, as well as items carried throughout the
year suitable for giving as gifts. For the fiscal year ended
February 3, 2007, we recorded total revenues of
$446.8 million, which included approximately
$3.6 million related to the initial recording of gift
certificate and gift card breakage.
Our stores offer a unique combination of style and value that
has led to our emergence as a leader in home décor and has
enabled us to develop a strong customer franchise. As a result,
we have achieved substantial growth and have expanded our store
base into different regions of the country. During the past nine
years, we have more than doubled our store base, principally
through new store openings. We intend to continue opening new
stores both in existing and new markets. We anticipate our
growth will include primarily off-mall locations in major
metropolitan markets, middle markets and selected smaller
communities. Over the long-term, we believe there are currently
more than 650 additional locations in the United States that
could support a Kirklands store. In the near-term, we plan
to grow prudently with a focus on shifting the store base from
the mall to the off-mall locations. For fiscal 2007, we plan on
opening approximately 30 new stores and estimate closing
approximately 40 stores in fiscal 2007.
23
Overview
of Key Financial Measures
Net sales and gross profit are the most significant drivers to
our operating performance. Net sales consists of all merchandise
sales to customers net of returns and exclusive of sales taxes.
Our net sales for fiscal 2006, including the extra week in the
retail calendar increased by 6.8% to $443.2 million from
$415.1 million in fiscal 2005, reflecting sales from the 49
new stores we opened in fiscal 2006 as well as sales increases
from the 59 stores we opened in fiscal 2005. Comparable store
sales declined 6.6% for fiscal 2006. We use comparable store
sales to measure our ability to achieve sales increases from
stores that have been open for at least 13 full fiscal months.
Increases in comparable store sales are an important factor in
maintaining or increasing the profitability of existing stores.
Gross profit is the difference between net sales and cost of
sales. Cost of sales has four distinct components: product cost
(including inbound freight), outbound freight cost, store
occupancy cost and central distribution cost. Product cost
comprises the majority of cost of sales, while central
distribution cost is the least significant of these four
elements. Product and freight cost are variable, while occupancy
and distribution costs are largely fixed. Accordingly, gross
margin (gross profit expressed as a percentage of net sales) can
be influenced by many factors including overall sales
performance. For fiscal 2006, gross profit increased 11.9% to
$140.4 million from $125.5 million for fiscal 2005.
This increase reflects the recognition of the $3.6 million
in gift certificate and gift card breakage revenue in fiscal
2006. After completing a review of our historical redemption
patterns during the fourth quarter of fiscal 2006, we recognized
$3.6 million of revenue and operating income related to
gift certificate and gift card breakage. There was no revenue
recognized on unredeemed gift certificates or gift card balances
prior to fiscal 2006 because sufficient data was not available
during those periods to support an alternative position. Gross
margin for fiscal 2006 increased to 31.4% of total revenue from
30.2% of total revenue for fiscal 2005, primarily due to the
recognition of the $3.6 million in gift certificate and
gift card breakage revenue in fiscal 2006 and a better occupancy
cost ratio due to the shift to off-mall locations.
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
maintain or increase our overall profitability. Operating
expenses include cash costs as well as non-cash costs such as
depreciation and amortization. Due to the significant fixed cost
component of operating expenses, as well as the tendency of many
operating costs to rise over time, increases in comparable store
sales are typically necessary in order 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
understand fully our operating performance, we typically
identify such costs separately where significant on the
consolidated statement of operations so that we can evaluate
comparable expense data across different periods.
A complete evaluation of our financial performance incorporates
not only operating results, but also an assessment of how
effectively we are deploying our capital. We believe that a high
return on capital is an indicator of a financially productive
business. Accordingly, we evaluate our earnings in relation to
inventories and total assets in order to determine if we are
achieving acceptable levels of return on our capital. Inventory
yield (gross profit divided by average inventories) and return
on assets (net income divided by total assets) are two of the
measures we use.
24
We use a number of key performance measures to evaluate our
financial performance, including the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net sales growth (1)
|
|
|
6.8
|
%
|
|
|
5.2
|
%
|
|
|
6.8
|
%
|
Comparable store sales growth
|
|
|
(6.6
|
)%
|
|
|
(6.9
|
)%
|
|
|
(5.0
|
)%
|
Average net sales per store (in
thousands)(2)
|
|
$
|
1,272
|
|
|
$
|
1,266
|
|
|
$
|
1,322
|
|
Average net sales per square
foot(3)
|
|
$
|
247
|
|
|
$
|
267
|
|
|
$
|
286
|
|
Gross profit as a percentage of
net sales
|
|
|
31.7
|
%
|
|
|
30.2
|
%
|
|
|
32.1
|
%
|
Compensation and benefits as a
percentage of net sales
|
|
|
17.5
|
%
|
|
|
17.0
|
%
|
|
|
16.8
|
%
|
Other operating expenses as a
percentage of net sales
|
|
|
10.1
|
%
|
|
|
9.5
|
%
|
|
|
9.3
|
%
|
Inventory yield(4)
|
|
|
275.0
|
%
|
|
|
249.4
|
%
|
|
|
279.8
|
%
|
Return on assets (ROA)(5)
|
|
|
(0.1
|
)%
|
|
|
0.2
|
%
|
|
|
5.1
|
%
|
|
|
|
(1) |
|
Fiscal 2006 results reflect a
53-week
retail calendar, while fiscal 2005 and fiscal 2004 reflects a
52-week
retail calendar. |
|
(2) |
|
Calculated using net sales of all stores open at both the
beginning and the end of the period indicated. |
|
(3) |
|
Calculated using the gross square footage of all stores open at
both the beginning and the end of the period. Gross square
footage includes the storage, receiving and office space that
generally occupies approximately 30% of total store space. |
|
(4) |
|
Inventory yield is defined as gross profit including gift
certificate and gift card breakage divided by average inventory
for each of the preceding four quarters. |
|
(5) |
|
Return on assets equals net income including gift certificate
and gift card breakage divided by total assets. |
Strategic
Areas of Emphasis
The downturn in our financial performance for the last three
fiscal years has primarily resulted from declining comparable
store sales and cumulative decreases in our merchandise margin.
Accordingly, a central area of emphasis for fiscal 2007 is
improving the productivity of our merchandise assortment. This
effort encompasses process improvement in identifying and
growing appealing merchandise, planning and product allocation,
enhancement of merchandising personnel and department structure,
and evaluation of competitive factors.
A major part of this effort is broadening the trends and style
within our assortment and therefore its appeal to a larger
customer base. During 2007, we are focused on providing a
merchandise mix that reflects an updated, trend-right style
combined with a key item focus with an emphasis on value.
An equally important area of emphasis is enhancing the store
experience by improving guest service. Given a competitive
retail environment, our in-store guest experience is a key
differentiator. Training and store-level incentives for
achievement of guest-service goals and metrics will be a focus
for us in fiscal 2007. We will measure our success in these
initiatives through monitoring key performance metrics including
comparable stores sales, conversion rate (transactions divided
by traffic count), average dollar transactions, employee
turnover rate, and mystery shop results.
The increase in our store base during fiscal 2006 reflected a
continued commitment to prudent growth. Capital expenditures for
fiscal 2006 were $19.5 million, of which $17.7 million
was related to leasehold improvements, equipment and fixtures
for new stores. The construction of new stores will continue to
be an important part of our strategy in fiscal 2007. We plan on
opening approximately 30 new stores and closing approximately 40
stores during the upcoming year. Our stores historically have
operated primarily in enclosed malls, but in fiscal 2004 we
opened 44 of our 54 new stores in a variety of off-mall venues
including lifestyle centers, power
centers and outlet centers. In fiscal 2005, all 59 of our new
stores were located in off-mall venues. In fiscal 2006 all but
one of our new stores were located in these off mall venues. At
25
February 3, 2007, we operated 181 of our 349 stores in
non-mall venues, and we anticipate that substantially all of our
new store openings in fiscal 2007 will be in off-mall venues.
Typically these off-mall stores have been able to achieve higher
sales volumes with lower total occupancy costs generating higher
store contribution than our mall stores.
The following table summarizes our stores and square footage
under lease in mall and off-mall locations as of
February 3, 2007 and January 28, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Mall
|
|
|
Off-Mall
|
|
|
Total
|
|
|
Mall
|
|
|
Off-Mall
|
|
|
Total
|
|
|
Number of Stores
|
|
|
168
|
|
|
|
181
|
|
|
|
349
|
|
|
|
210
|
|
|
|
137
|
|
|
|
347
|
|
Square footage
|
|
|
809,337
|
|
|
|
1,095,425
|
|
|
|
1,904,762
|
|
|
|
979,975
|
|
|
|
772,405
|
|
|
|
1,752,380
|
|
Average square footage per store
|
|
|
4,817
|
|
|
|
6,052
|
|
|
|
5,458
|
|
|
|
4,667
|
|
|
|
5,638
|
|
|
|
5,050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Fiscal Year Ended
|
|
|
For the Fiscal Year Ended
|
|
|
|
February 3, 2007
|
|
|
January 28, 2006
|
|
|
|
Mall
|
|
|
Off-Mall
|
|
|
Total
|
|
|
Mall
|
|
|
Off-Mall
|
|
|
Total
|
|
|
Average net sales per store (in
thousands)(1)
|
|
$
|
1,180
|
|
|
$
|
1,388
|
|
|
$
|
1,272
|
|
|
$
|
1,230
|
|
|
$
|
1,371
|
|
|
$
|
1,266
|
|
Average net sales per square
foot(1)(2)
|
|
$
|
250
|
|
|
$
|
245
|
|
|
$
|
247
|
|
|
$
|
259
|
|
|
$
|
289
|
|
|
$
|
267
|
|
|
|
|
(1) |
|
Calculated using net sales of all stores open at both the
beginning and the end of the period indicated. |
|
(2) |
|
The decrease in net sales per square foot from fiscal 2005 to
2006 was due primarily to the comparable store sales decrease
coupled with a higher average square footage per store in fiscal
2006. |
Another important area of emphasis will be improving the
effectiveness of our supply chain. We commenced operations in a
new distribution center in the second quarter of fiscal 2004.
This facility replaced the three buildings that previously
supported our central distribution effort. The commencement of
operations in the new distribution center was accompanied by the
implementation of a new warehouse management system as well as
investments in material handling equipment designed to
streamline the flow of goods within the distribution center. In
fiscal 2007 and beyond, our goal is to achieve better labor
productivity, better transportation efficiency, leaner
store-level inventories and reduced store-level storage costs.
Our objective is to finance all of our operating and investing
activities with cash provided by operations and borrowings under
our revolving credit line. Our cash balances increased to
$25.4 million at February 3, 2007 from
$15.0 million at January 28, 2006. We expect that
capital expenditures for fiscal 2007 will range from $17 to
$18 million, primarily to fund the leasehold improvements
of approximately 30 new stores and maintain our investments in
existing stores, our distribution center and information
technology infrastructure.
Critical
Accounting Policies and Estimates
The discussion and analysis of our financial condition and the
results of our operations are based upon our consolidated
financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United
States of America. The preparation of these financial statements
requires us to make estimates that affect the reported amounts
contained in the financial statements and related disclosures.
We base our estimates on historical experience and on various
other assumptions which are believed to be reasonable under the
circumstances. Actual results may differ from these estimates.
Our critical accounting policies are discussed in the notes to
our consolidated financial statements. Certain judgments and
estimates utilized in implementing these accounting policies are
likewise discussed in each of the notes to our consolidated
financial statements. The following discussion aggregates the
various critical accounting policies addressed throughout the
financial statements, the judgments and uncertainties affecting
the application of
26
these policies and the likelihood that materially different
amounts would be reported under varying conditions and
assumptions.
Cost of sales (excluding depreciation and amortization) and
inventory valuation Cost of sales includes all
costs of product purchased from vendors, including inbound
freight to the extent that it is not included in the vendor
pricing. Receiving costs, inspection costs, warehousing costs,
internal transfer costs, outbound freight, and all overhead
associated with our distribution facility and its network are
included in the cost of sales. Our cost of sales also includes
store occupancy costs. Our inventory is stated at the lower of
cost or market, net of reserves and allowances, with cost
determined using the average cost method with average cost
approximating current cost. We estimate the amount of shrinkage
that has occurred through theft or damage and adjust that to
actual at the time of our physical inventory counts which occur
throughout the fiscal year. We also evaluate the cost of our
inventory by category and class of merchandise in relation to
the estimated sales price. This evaluation is performed to
ensure that we do not carry inventory at a value in excess of
the amount we expect to realize upon the sale of the
merchandise. We believe we have the appropriate merchandise
valuation and pricing controls in place to minimize the risk
that our inventory values would be materially misstated.
Impairments In accordance with the provisions
of Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144), we evaluate the
recoverability of the carrying amounts of long-lived assets,
such as property and equipment, covered by this standard
whenever events or changes in circumstances dictate that the
carrying value may not be recoverable. As part of the
evaluation, we review performance at the store level to identify
any stores with current period cash flow losses that should be
considered for impairment. We compare the sum of the
undiscounted expected future cash flows with the carrying
amounts of the assets. If impairment is indicated by the above
evaluation, the amount by which the carrying amount of the
assets exceeds the fair value of the assets is recognized as an
impairment loss where fair value is estimated based on
discounted expected future cash flows. Cash flows for retail
assets are identified at the individual store level. Our
judgments regarding a stores ability to realize
undiscounted cash flows in excess of the carrying amounts of
store assets are affected by factors such as the ongoing
maintenance and improvements of the assets, changes in economic
conditions and changes in operating performance. As we assess
the ongoing expected cash flows and carrying amounts of our
long-lived assets, these factors could cause us to realize
material impairment charges.
Based on the estimated fair values of certain long-lived assets,
we have recorded impairment charges of $688,000, $164,000, and
$401,000 during fiscal 2006, fiscal 2005, and fiscal 2004,
respectively.
Depreciation Approximately 47% of our assets
at February 3, 2007, represent investments in property and
equipment. Determining appropriate depreciable lives requires
judgments and estimates.
|
|
|
|
|
We utilize the straight-line method of depreciation and a
variety of depreciable lives. Land is not depreciated. Buildings
are depreciated over 40 years. Furniture, fixtures and
equipment are generally depreciated over 5 years. Computer
software and equipment is depreciated over 3-5 years.
Leasehold improvements are amortized over the shorter of the
useful lives of the asset or the original non-cancelable lease
term. Our lease terms typically range from 5 to 10 years.
|
|
|
|
To the extent we replace or dispose of fixtures or equipment
prior to the end of its assigned depreciable life, we could
realize a loss or gain on the disposition. To the extent our
assets are used beyond their assigned depreciable life, no
depreciation expense is being realized. We reassess the
depreciable lives in an effort to reduce the risk of significant
losses or gains arising from either the disposition of our
assets or the utilization of assets with no depreciation charges.
|
Insurance reserves Workers
compensation, general liability and employee medical insurance
programs are partially self-insured. It is our policy to record
a self-insurance liability using estimates of claims incurred
but not yet reported or paid, based on historical claims
experience and trends. Actual results can vary from estimates
for many reasons, including, among others, inflation rates,
claim settlement patterns, litigation trends and legal
interpretations. We monitor our claims experience in light of
these factors and revise our estimates
27
of insurance reserves accordingly. The level of our insurance
reserves may increase or decrease as a result of these changing
circumstances or trends.
Income taxes We record income tax liabilities
utilizing known obligations and estimates of potential
obligations. A deferred tax asset or liability is recognized
whenever there are future tax effects from existing temporary
differences and operating loss and tax credit carryforwards. We
record a valuation allowance to reduce deferred tax assets to
the balance that is more likely than not to be realized. We must
make estimates and judgments on future taxable income,
considering feasible tax planning strategies and taking into
account existing facts and circumstances, to determine the
proper valuation allowance. When we determine that deferred tax
assets could be realized in greater or lesser amounts than
recorded, the asset balance and income statement reflects the
change in the period such determination is made. Due to changes
in facts and circumstances and the estimates and judgments that
are involved in determining the proper valuation allowance,
differences between actual future events and prior estimates and
judgments could result in adjustments to this valuation
allowance. We use an estimate of our annual effective tax rate
at each interim period based on the facts and circumstances
available at that time while the actual effective tax rate is
calculated at year-end.
Stock options and warrants As of
January 29, 2006, we adopted Statement of Financial
Accounting Standards No. 123 (revised 2004),
Share-Based Payment (SFAS 123(R))
which requires us to value and record, as compensation expense,
stock awards granted to employees under a fair value based
method. Prior to January 29, 2006, we accounted for stock
awards granted to employees under the recognition and
measurement principles of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Except for certain
options which were granted at an exercise price below the market
value of the Companys underlying common stock on the grant
date, no compensation expense was previously recognized for
stock options granted to employees prior to adopting
SFAS 123(R).
SFAS 123(R) applies to new awards and to awards modified,
repurchased or canceled after January 28, 2006 and to those
which were unvested at January 28, 2006. We have adopted
SFAS 123(R) utilizing the modified prospective transition
method which requires share-based compensation expense
recognized since January 28, 2006, to be based on the
following: a) grant date fair value estimated in accordance
with the original provisions of SFAS 123 for unvested
options granted prior to the adoption date; b) grant date
fair value estimated in accordance with the provisions of
SFAS 123(R) for options granted subsequent to the adoption
date; and c) the discount on shares purchased by employees
through our employee stock purchase plan post-adoption, which
represents the difference between the grant date fair value and
the employee purchase price. This compensation expense was
recorded in the statements of operations with a corresponding
credit to common stock for the
53-week
period ended February 3, 2007.
We use the Black-Scholes-Merton option pricing model which
requires the input of highly subjective assumptions. These
assumptions include estimating the length of time employees will
retain their stock options before exercising them
(expected term), the estimated volatility of our
common stock price over the expected term and the number of
options that will ultimately not complete their vesting
requirements (forfeitures). Changes in the
subjective assumptions can materially affect the estimate of
fair value of stock-based compensation and consequently, the
related amount recognized on the consolidated statements of
earnings.
28
Fiscal
2006 Compared to Fiscal 2005
Results of operations. The table below sets
forth selected results of our operations in dollars and
expressed as a percentage of total revenue for the periods
indicated (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006
|
|
|
Fiscal 2005
|
|
|
Change
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Net sales
|
|
$
|
443,248
|
|
|
|
99.2
|
%
|
|
$
|
415,092
|
|
|
|
100.0
|
%
|
|
$
|
28,156
|
|
|
|
6.8
|
%
|
Gift certificate and gift card
breakage revenue
|
|
|
3,580
|
|
|
|
0.8
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
3,580
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
446,828
|
|
|
|
100.0
|
%
|
|
|
415,092
|
|
|
|
100.0
|
%
|
|
|
31,736
|
|
|
|
7.6
|
%
|
Cost of sales
|
|
|
306,469
|
|
|
|
68.6
|
%
|
|
|
289,622
|
|
|
|
69.8
|
%
|
|
|
16,847
|
|
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
140,359
|
|
|
|
31.4
|
%
|
|
|
125,470
|
|
|
|
30.2
|
%
|
|
|
14,889
|
|
|
|
11.9
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
77,465
|
|
|
|
17.3
|
%
|
|
|
70,459
|
|
|
|
17.0
|
%
|
|
|
7,006
|
|
|
|
9.9
|
%
|
Other operating expenses
|
|
|
44,800
|
|
|
|
10.0
|
%
|
|
|
39,487
|
|
|
|
9.5
|
%
|
|
|
5,313
|
|
|
|
13.5
|
%
|
Impairment charge
|
|
|
688
|
|
|
|
0.2
|
%
|
|
|
164
|
|
|
|
0.0
|
%
|
|
|
524
|
|
|
|
319.5
|
%
|
Depreciation and amortization
|
|
|
18,084
|
|
|
|
4.0
|
%
|
|
|
15,155
|
|
|
|
3.7
|
%
|
|
|
2,929
|
|
|
|
19.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(678
|
)
|
|
|
(0.2
|
)%
|
|
|
205
|
|
|
|
0.0
|
%
|
|
|
(883
|
)
|
|
|
(430.7
|
)%
|
Interest (income) expense, net
|
|
|
(14
|
)
|
|
|
(0.0
|
)%
|
|
|
58
|
|
|
|
0.0
|
%
|
|
|
(72
|
)
|
|
|
(124.1
|
)%
|
Other income, net
|
|
|
(507
|
)
|
|
|
(0.1
|
)%
|
|
|
(288
|
)
|
|
|
(0.1
|
)%
|
|
|
(219
|
)
|
|
|
76.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(157
|
)
|
|
|
(0.0
|
)%
|
|
|
435
|
|
|
|
0.1
|
%
|
|
|
(592
|
)
|
|
|
(136.1
|
)%
|
Income tax provision (benefit)
|
|
|
(17
|
)
|
|
|
(0.0
|
)%
|
|
|
206
|
|
|
|
0.0
|
%
|
|
|
(223
|
)
|
|
|
(108.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(140
|
)
|
|
|
(0.0
|
)%
|
|
$
|
229
|
|
|
|
0.1
|
%
|
|
$
|
(369
|
)
|
|
|
(161.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales. Net sales, increased by 6.8% to
$443.2 million for fiscal 2006 from $415.1 million for
fiscal 2005. The net sales increase in fiscal 2006 resulted
primarily from the opening of new stores. We opened 49 new
stores in fiscal 2006 and 59 new stores in fiscal 2005, and we
closed 47 stores in fiscal 2006 and 32 stores in fiscal 2005.
Our net sales also benefited from sales increases from expanded,
remodeled or relocated stores, which are excluded from our
comparable store base. The impact of these collective changes in
the store base was offset by a decline of 6.6% in comparable
store sales for fiscal 2006. During fiscal 2005, comparable
store sales decreased 6.9%. Comparable store sales in our mall
store locations were down 8.7% for the year, while comparable
store sales for our off-mall store locations were down 2.9%. The
comparable store sales decline resulted from several factors,
including a difficult sales environment in the home décor
retail sector and weak customer traffic trends. The overall
traffic declines led to lower transaction volumes. Customer
conversion remained consistent with prior year. The lower
transaction volumes were partially offset by a higher average
dollar transaction, driven by increases in our average retail
selling price. Key categories that outperformed the prior year
included alternative wall décor, furniture, mirrors, floral
and candles. These increases were offset by declines in lamps,
art, textiles, garden and novelty. The growth in the store base
along with sales from expanded, remodeled or relocated stores,
and the additional retail week in fiscal 2006 accounted for an
increase in net sales of $42.9 million over the prior year.
This increase was partially offset by the negative comparable
store sales performance, which accounted for a
$14.7 million decrease in net sales from the prior year
including the additional retail week in fiscal 2006.
Gift certificate and gift card breakage
revenue. Revenues from our gift certificates and
gift cards are recognized when tendered for payment and included
in Net sales. While we will continue to honor all
gift certificates and gift cards presented for payment, we
determine the likelihood of redemption to be remote for certain
gift certificates and gift card balances due to, among other
things, long periods of inactivity. In fiscal 2006 the Company
began using the Redemption Recognition Method to account
for breakage for unused gift card and gift certificate amounts
where breakage is recognized as gift certificates or gift cards
are redeemed for the purchase of goods based upon a historical
breakage rate. In these circumstances, to the extent we
29
determine there is no requirement for remitting certificate or
card balances to government agencies under unclaimed property
laws, gift certificate and gift card balances are recognized in
the consolidated statement of operations as a component of
revenue. After completing a review of its historical redemption
patterns during the fourth quarter of fiscal 2006, we recognized
$3.6 million of revenue and operating income related to
gift certificate and gift card breakage. There was no revenue
recognized on unredeemed gift certificates or gift card balances
prior to fiscal 2006 because sufficient data was not available
during those periods to support an alternative position.
Gross profit. Gross profit increased
$14.9 million, or 11.9%, to $140.4 million for fiscal
2006 from $125.5 million for fiscal 2005. Gross profit
expressed as a percentage of total revenue increased to 31.4%
for fiscal 2006, from 30.2% for fiscal 2005. The increase in
gross profit as a percentage of total revenue was primarily
driven by the recognition of gift certificate and gift card
breakage revenue. Product cost of sales increased slightly
during fiscal 2006 as a percentage of total revenue compared to
the prior period primarily due to higher levels of promotional
activity during the first half of the year. Store occupancy
costs decreased slightly as a percentage of total revenue, as
the shift of the store base off-mall resulted in a decline in
rents per square foot leading to sales leverage. Freight
expenses decreased as a percentage of total revenue despite
rising fuel costs as we realized savings throughout the year due
to the implementation of changes in our store delivery methods.
Central distribution costs were unchanged as a percentage of net
sales for the year.
Compensation and benefits. Compensation and
benefits, including both store and corporate personnel, was
$77.5 million, or 17.3% of total revenue, for fiscal 2006
as compared to $70.5 million, or 17.0% for fiscal 2005. The
increase in the compensation and benefits ratio was primarily
due to the negative comparable store sales performance. At the
store level, payroll costs increased as a percentage of total
revenue versus the prior year due to the comparable store sales
decline and our inability to reduce hours enough to offset the
impact. At the corporate level, we incurred a pre-tax expense of
approximately $400,000 related to the first quarter termination
of our former Chief Executive Officer. During the second quarter
of fiscal 2006, we incurred a pre-tax expense of approximately
$728,000 related to the post-retirement benefit agreement with
our current Chief Executive Officer. We also incurred a pre-tax
expense of approximately $741,000 related to our implementation
of SFAS 123(R), the new accounting pronouncement concerning
stock-based compensation. The Company also recognized
approximately $191,000 in pre-tax stock compensation expense
related to a restricted stock grant during the 53 week
period ended February 3, 2007. Excluding the impact of
these factors, corporate compensation and benefits declined as a
percentage of sales due to tight management of corporate
salaries and reduced hiring activity.
Other operating expenses. Other operating
expenses, including both store and corporate costs, were
$44.8 million, or 10.0% of total revenue, for fiscal 2006
as compared to $39.5 million, or 9.5% of total revenue, for
fiscal 2005. The increase in these operating expenses as a
percentage of net sales was primarily the result of the negative
comparable store sales performance and the lack of a positive
leveraging effect on the fixed components of store and corporate
operating expenses. Store-level operating expenses increased
slightly as a percentage of total revenue due to higher utility
costs related to our larger off-mall stores and increases in
insurance expense. These increases were partly offset by a
decrease in spending on advertising and promotion.
Corporate-level operating expenses decreased slightly as a
percentage of total revenues compared to prior year. This
decline reflected reductions in both professional fees as well
as relocation expenses related to new hire activity.
Impairment charge. During the third quarter of
fiscal 2006, we incurred a charge related to the impairment of
fixed assets of certain underperforming stores in the pre-tax
amount of approximately $688,000, or $0.02 per share.
Depreciation and amortization. Depreciation
and amortization expense was $18.1 million, or 4.0% of net
sales, for fiscal 2006 as compared to $15.2 million, or
3.7% of net sales, for fiscal 2005. The increase in depreciation
and amortization was the result of the negative comparable store
sales performance, along with the growth of the store base.
Additionally, lease terms for many of our recent off-mall store
openings have been shorter than the historical lease term for a
mall store, resulting in higher amortization expense on the
associated leasehold improvements for these stores.
30
Interest expense, net. Interest expense was
flat as a percentage of sales due to similar average revolver
borrowings compared to the prior year period.
Other income, net. Other income was higher
than the prior year primarily due to the receipt of insurance
proceeds of approximately $284,000 related to property damage
caused by Hurricane Katrina.
Income provision (benefit). Income tax benefit
was 10.8% of the loss before income taxes for fiscal 2006 as
compared to a provision of 47.4% of income before income taxes
for the prior year period. The tax rate for fiscal 2006 reflects
the impact of permanent differences associated with stock
compensation expense recorded under SFAS 123(R) as certain
of the stock options outstanding are not structured to result in
deductions on our income tax return.
Net income (loss). As a result of the
foregoing, we reported a net loss of $140,000, or $(0.01) per
diluted share for fiscal 2006 compared to $229,000, or
$0.01 per diluted share for fiscal 2005.
Fiscal
2005 Compared to Fiscal 2004
Results of operations. The table below sets
forth selected results of our operations in dollars and
expressed as a percentage of net sales for the periods indicated
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005
|
|
|
Fiscal 2004
|
|
|
Change
|
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
$
|
|
|
%
|
|
|
Net sales
|
|
$
|
415,092
|
|
|
|
100.0
|
%
|
|
$
|
394,429
|
|
|
|
100.0
|
%
|
|
$
|
20,663
|
|
|
|
5.2
|
%
|
Cost of sales
|
|
|
289,622
|
|
|
|
69.8
|
%
|
|
|
267,638
|
|
|
|
67.9
|
%
|
|
|
21,984
|
|
|
|
8.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
125,470
|
|
|
|
30.2
|
%
|
|
|
126,791
|
|
|
|
32.1
|
%
|
|
|
(1,321
|
)
|
|
|
(1.0
|
)%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
70,459
|
|
|
|
17.0
|
%
|
|
|
66,180
|
|
|
|
16.8
|
%
|
|
|
4,279
|
|
|
|
6.5
|
%
|
Other operating expenses
|
|
|
39,487
|
|
|
|
9.5
|
%
|
|
|
36,866
|
|
|
|
9.3
|
%
|
|
|
2,619
|
|
|
|
7.1
|
%
|
Depreciation and amortization
|
|
|
15,319
|
|
|
|
3.7
|
%
|
|
|
12,055
|
|
|
|
3.1
|
%
|
|
|
3,264
|
|
|
|
27.1
|
%
|
Non-cash stock compensation charge
|
|
|
|
|
|
|
0.0
|
%
|
|
|
209
|
|
|
|
0.1
|
%
|
|
|
(209
|
)
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
205
|
|
|
|
0.1
|
%
|
|
|
11,481
|
|
|
|
2.9
|
%
|
|
|
(11,274
|
)
|
|
|
(98.2
|
)%
|
Interest expense, net
|
|
|
58
|
|
|
|
0.0
|
%
|
|
|
827
|
|
|
|
0.2
|
%
|
|
|
(767
|
)
|
|
|
(92.7
|
)%
|
Other income, net
|
|
|
(288
|
)
|
|
|
(0.1
|
)%
|
|
|
(233
|
)
|
|
|
(0.1
|
)%
|
|
|
(55
|
)
|
|
|
23.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
435
|
|
|
|
0.1
|
%
|
|
|
10,887
|
|
|
|
2.8
|
%
|
|
|
(10,452
|
)
|
|
|
(96.0
|
)%
|
Income tax provision
|
|
|
206
|
|
|
|
0.1
|
%
|
|
|
4,298
|
|
|
|
1.1
|
%
|
|
|
4,082
|
|
|
|
(95.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
229
|
|
|
|
0.1
|
%
|
|
$
|
6,589
|
|
|
|
1.7
|
%
|
|
$
|
(6,360
|
)
|
|
|
(96.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales. Net sales increased by 5.2% to
$415.1 million for fiscal 2005 from $394.4 million for
fiscal 2004. The net sales increase in fiscal 2005 resulted
primarily from the opening of new stores. We opened 59 new
stores in fiscal 2005 and 54 new stores in fiscal 2004, and
we closed 32 stores in fiscal 2005 and 14 stores in
fiscal 2004. Our net sales also benefited from sales increases
from expanded, remodeled or relocated stores, which are excluded
from our comparable store base. The impact of these changes in
the store base was offset by a decline of 6.9% in comparable
store sales for fiscal 2005. During fiscal 2004, comparable
store sales decreased 5.0%. Comparable store sales in our mall
store locations were down 8.5% for the year, while comparable
store sales for our off-mall store locations were down 0.6%.
Lower customer traffic was the primary reason for the decrease
in comparable store sales. We attributed the traffic declines to
a combination of the challenging competitive environment in the
home décor sector as well as our inability to present a
compelling merchandise assortment to our customer base. Declines
in customer traffic were most evident in our mall stores, as
malls generally have been attracting fewer of our core female
customers. Key categories that outperformed the prior year
included candles, furniture, alternative wall décor,
mirrors and textiles. These increases were offset by declines in
art, lamps, garden, gift/novelty and seasonal. The growth in the
store base along with sales from expanded, remodeled or
relocated stores accounted for an increase of $44.2 million
over
31
the prior year. This increase was partially offset by the
negative comparable store sales performance, which accounted for
a $23.5 million decrease from the prior year. The
comparable store sales performance was characterized by a higher
average dollar transaction offset by lower transaction volumes.
Gross profit. Gross profit decreased
$1.3 million, or 1.0%, to $125.5 million for fiscal
2005 from $126.8 million for fiscal 2004. Gross profit
expressed as a percentage of net sales decreased to 30.2% for
fiscal 2005, from 32.1% for fiscal 2004. The decrease in gross
profit as a percentage of net sales resulted from higher product
cost of sales. Product cost of sales increased during fiscal
2005 as a percentage of sales, as we took significant markdowns
in an attempt to improve sales. Store occupancy costs increased
slightly as a percentage of sales as the comparable store sales
decline negatively affected the occupancy ratio, offsetting the
benefits we began to achieve from our shift to more off-mall
real estate, the occupancy rates for which tend to be lower than
those for enclosed mall properties. Freight expenses decreased
as a percentage of sales, despite rising fuel costs, as we
realized savings throughout the year due to the implementation
of changes in our store delivery methods. Central distribution
costs were unchanged as a percentage of net sales for the year.
Compensation and benefits. Compensation and
benefits, including both store and corporate personnel, was
$70.5 million, or 17.0% of net sales, for fiscal 2005 as
compared to $66.2 million, or 16.8% for fiscal 2004. The
increase in the compensation and benefits ratio was primarily
due to the negative comparable store sales performance. At the
store level, we were able to leverage payroll costs slightly
versus the prior year by employing tight payroll management in a
difficult sales environment. This improvement was offset by
higher payroll costs at the corporate level due to key additions
to the management team that occurred during fiscal 2004 and
fiscal 2005. Additionally, employee benefits costs increased
slightly as a percentage of sales due to higher costs of health
care claims.
Other operating expenses. Other operating
expenses, including both store and corporate costs, were
$39.5 million, or 9.5% of net sales, for fiscal 2005 as
compared to $36.9 million, or 9.3% of net sales, for fiscal
2004. The increase in these operating expenses as a percentage
of net sales was primarily the result of the negative comparable
store sales performance and the lack of a positive leveraging
effect on the relatively fixed components of store and corporate
operating expenses. Store-level operating expenses increased
slightly as a percentage of sales due to greater spending on
advertising and promotion as well as increases in expenses
associated with the increased penetration of our private-label
credit card loyalty program. Additionally, utilities costs
increased during the year due to rising energy costs and our
implementation of a wide-area network during the second quarter
of fiscal 2004. These increases were partially offset by
decreases in storage and related equipment rental costs due to
improved distribution efficiencies. Corporate-level operating
expenses were slightly lower as a percentage of sales as
compared to the prior year. This decline was due to reductions
in professional fees associated with Sarbanes-Oxley compliance
efforts and decreases in travel and corporate-level insurance
costs.
Depreciation and amortization. Depreciation
and amortization expense was $15.3 million, or 3.7% of net
sales, for fiscal 2005 as compared to $12.1 million, or
3.1% of net sales, for fiscal 2004. The increase in depreciation
and amortization was the result of the negative comparable store
sales performance, along with the growth of the store base.
Additionally, lease terms for many of our recent off-mall store
openings have been shorter than the historical lease term for a
mall store, resulting in higher amortization expense on the
associated leasehold improvements for these stores.
Non-cash stock compensation charge. During
fiscal 2004, we incurred non-cash stock compensation charges
related to stock options granted to certain employees in
November 2001. The charge related to these stock option
arrangements amounted to $0.2 million, or 0.1% of net
sales, for fiscal 2004. See Note 7 to our consolidated
financial statements. This charge was taken ratably over the
vesting period of the November 2001 options. These options were
fully vested as of January 29, 2005, therefore there was no
charge in fiscal 2005 and there will be no additional charge
related to these options in future periods.
Interest expense, net. Net interest expense
was $58,000, or 0.0% of net sales, for fiscal 2005 as compared
to $0.8 million, or 0.2% of net sales, for fiscal 2004.
During the prior year, we refinanced our bank line of credit and
incurred a one-time early termination charge and write-off of
issue costs totaling $364,000. Additionally, our revolver
borrowings were below prior year levels throughout the year.
32
Income taxes. Income tax provision was
$0.2 million, or 47.4% of income before income taxes, for
fiscal 2005 compared to $4.3 million, or 39.5% of income
before income taxes, for fiscal 2004. Due to the lower levels of
pre-tax income during fiscal 2005, the impact of permanent
differences between accounting principles generally accepted in
the United States of America and tax treatment resulted in a
negative effect on the overall tax rate.
Net income. As a result of the foregoing, net
income was $229,000, or $0.01 per diluted share for fiscal
2005 compared to $6.6 million, or $0.34 per diluted
share for fiscal 2004.
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 end of the third quarter of
each fiscal year. Capital expenditures primarily relate to new
store openings; existing store expansions, remodels or
relocations; and purchases of equipment or information
technology assets for our stores, distribution facilities or
corporate headquarters. Historically, we have funded our working
capital and capital expenditure requirements with internally
generated cash and borrowings under our credit facility.
Cash flows from operating activities. Net cash
provided by operating activities was $29.5 million,
$20.2 million and $30.3 million for fiscal 2006,
fiscal 2005 and fiscal 2004, respectively. Net cash provided by
operating activities depends heavily on operating performance,
changes in working capital and the timing and amount of payments
for income taxes. During fiscal 2006, net cash provided by
operating activities increased primarily due to a reduction in
overall inventory levels at year end when compared with
inventory level increases at the end of fiscal 2005. Inventory
levels decreased 9% over the prior year as we carefully managed
our
open-to-buy
dollars throughout fiscal 2006 in response to a difficult sales
environment. Operating cash flow for fiscal 2005 decreased
compared to fiscal 2004 due to reduced earnings performance.
Cash flows from investing activities. Net cash
used in investing activities was $19.4 million,
$23.5 million and $30.0 million for fiscal 2006,
fiscal 2005 and fiscal 2004, respectively. These amounts
consisted primarily of capital expenditures offset slightly by
proceeds received from the sale of certain assets as well as the
repayment of a shareholder loan. These capital expenditures
primarily included investments in new store leasehold
improvements; existing store remodels; information technology
assets for stores, the distribution center, and the corporate
headquarters; and materials handling and related equipment for
our new distribution facility, which was occupied in the second
quarter of fiscal 2004. New store leasehold improvements
comprises the large majority of our capital expenditures. During
fiscal 2006, we opened 49 new stores. We expect that capital
expenditures for fiscal 2007 will range from $17 to
$18 million, primarily to fund the leasehold improvements
of approximately 30 new stores, the maintenance of our
investments in stores, information technology, and the
distribution center, and our establishment of a satellite office
in Nashville, Tennessee. We also expect that capital
expenditures, including leasehold improvements, furniture and
fixtures, and equipment for our fiscal 2007 new stores will
average approximately $380,000 to $410,000 per store. We
anticipate that we will continue to receive landlord allowances,
which help to reduce our cash invested in leasehold
improvements. These allowances are reflected as a component of
cash flows from operating activities within our consolidated
statement of cash flows.
Cash flows from financing activities. Net cash
provided by financing activities was $0.4 million,
$0.3 million and $0.2 million for fiscal 2006, fiscal
2005 and fiscal 2004, respectively. Cash flows from financing
activities for fiscal 2006 were primarily comprised of
borrowings and repayments under our revolving credit facility.
The facility was drawn to a peak of $13.2 million and paid
down to zero by the end of the fiscal year. During fiscal 2005
and fiscal 2004, cash flows from financing activities also
primarily related to bank revolver activity. We borrowed to a
peak of $11.9 million and $18.7 million and paid down
to zero by the end of the year for fiscal 2005 and fiscal 2004,
respectively. Cash flows from financing activities also include
cash received for exercises of employee stock options, as well
as cash paid for issue costs on indebtedness.
33
Revolving credit facility. Effective
October 4, 2004, we entered into a five-year senior secured
revolving credit facility with a revolving loan limit of up to
$45 million. The revolving credit facility bears interest
at a floating rate equal to the
60-day LIBOR
rate (5.34% at February 3, 2007) plus 1.25% to 1.50%
(depending on the amount of excess availability under the
borrowing base). Additionally, we pay a fee to the bank equal to
a rate of 0.2% per annum on the unused portion of the revolving
line of credit. Borrowings under the facility are collateralized
by substantially all of our assets and guaranteed by our
subsidiaries. The maximum availability under the credit facility
is limited by a borrowing base formula, which consists of a
percentage of eligible inventory less reserves. The facility
also contains provisions that could result in changes to the
presented terms or the acceleration of maturity. Circumstances
that could lead to such changes or acceleration include a
material adverse change in the business or an event of default
under the credit agreement. The facility has one financial
covenant that requires the Company to maintain excess
availability under the borrowing base, as defined in the credit
agreement, of $3 million at all times. The facility matures
in October 2009. As of February 3, 2007, we were in
compliance with the covenants in the facility and there were no
outstanding borrowings under the credit facility.
At February 3, 2007, our balance of cash and cash
equivalents was $25.4 million and the borrowing
availability under our facility was $19.5 million (net of
the $3 million availability block as described above). We
believe that these sources of cash, together with cash provided
by our operations, will be adequate to carry out our fiscal 2007
plans in full and fund our planned capital expenditures and
working capital requirements for at least the next twelve months.
Contractual obligations. The following table
identifies payment obligations for the periods indicated under
our current contractual arrangements. The amounts set forth
below reflect contractual obligations as of February 3,
2007. The timing
and/or the
amount of the payments may be changed in accordance with the
terms of the contracts or new contractual obligations may be
added.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
Contractual Obligations
|
|
Total
|
|
|
Less than 1 Year
|
|
|
2-3 Years
|
|
|
4-5 Years
|
|
|
More than 5 Years
|
|
|
|
(Dollars in millions)
|
|
|
Operating lease obligations(1)
|
|
$
|
321.8
|
|
|
$
|
60.8
|
|
|
$
|
98.1
|
|
|
$
|
67.4
|
|
|
$
|
95.5
|
|
Purchase obligations(2)
|
|
$
|
47.3
|
|
|
$
|
47.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
369.1
|
|
|
$
|
108.1
|
|
|
$
|
98.1
|
|
|
$
|
67.4
|
|
|
$
|
95.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating leases consist of future minimum rental payments
required under non-cancelable operating leases and does not
include future minimum sublease rentals. The amounts included
above primarily consist of operating leases for our store
locations and distribution facilities, but also include
operating leases for certain equipment and vehicles. |
|
(2) |
|
Purchase obligations consist entirely of open purchase orders of
merchandise inventory as of February 3, 2007. |
Effective May 30, 2006, the Company entered into a letter
agreement with its Chief Executive Officer, providing for
certain compensatory and health benefits which take effect when
he no longer works for the Company. This agreement resulted in a
charge of approximately $419,000, net of tax, or $0.02 per
share, during the
53-week
period ended February 3, 2007. This charge has been
included as a component of compensation and benefits within the
consolidated statements of operations.
Off-Balance
Sheet Arrangements
None
Seasonality
and Quarterly Results
We have historically experienced and expect to continue to
experience substantial seasonal fluctuations in our net sales
and operating income. We believe this is the general pattern
typical of our segment of the retail
34
industry and, as a result, expect that this pattern will
continue in the future. Our quarterly results of operations may
also fluctuate significantly as a result of a variety of other
factors, including the timing of new store openings, net sales
contributed by new stores, shifts in the timing of certain
holidays and competition. Consequently, comparisons between
quarters are not necessarily meaningful and the results for any
quarter are not necessarily indicative of future results.
Our strongest sales period is the fourth quarter of our fiscal
year when we generally realize a disproportionate amount of our
net sales and a substantial majority of our operating and net
income. In anticipation of the increased sales activity during
the fourth quarter of our fiscal year, we purchase large amounts
of inventory and hire temporary staffing help for our stores.
Our operating performance could suffer if net sales were below
seasonal norms during the fourth quarter of our fiscal year.
The following table sets forth certain unaudited financial and
operating data for Kirklands in each fiscal quarter during
fiscal 2006 and fiscal 2005. The unaudited quarterly information
includes all normal recurring adjustments that we consider
necessary for a fair statement of the information shown. Fiscal
2006 results reflect a
53-week
retail calendar, while fiscal 2005 reflects a
52-week
retail calendar.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 Quarter Ended
|
|
|
|
April 30,
|
|
|
July 29,
|
|
|
October 28,
|
|
|
February 3,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
Total revenue(1)
|
|
$
|
92,605
|
|
|
$
|
90,958
|
|
|
$
|
95,802
|
|
|
$
|
167,463
|
|
Gross profit(2)
|
|
|
27,842
|
|
|
|
21,876
|
|
|
|
28,808
|
|
|
|
61,833
|
|
Operating income (loss)(3)
|
|
|
(5,288
|
)
|
|
|
(10,042
|
)
|
|
|
(5,028
|
)
|
|
|
19,680
|
|
Net income (loss)
|
|
|
(3,025
|
)
|
|
|
(5,574
|
)
|
|
|
(2,933
|
)
|
|
|
11,392
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.16
|
)
|
|
|
(0.29
|
)
|
|
|
(0.15
|
)
|
|
|
0.59
|
|
Diluted
|
|
|
(0.16
|
)
|
|
|
(0.29
|
)
|
|
|
(0.15
|
)
|
|
|
0.58
|
|
Stores open at end of period
|
|
|
338
|
|
|
|
342
|
|
|
|
356
|
|
|
|
349
|
|
Comparable store net sales
increase (decrease)
|
|
|
(5.1
|
)%
|
|
|
(9.0
|
)%
|
|
|
(6.7
|
)%
|
|
|
(6.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005 Quarter Ended
|
|
|
|
April 30,
|
|
|
July 30,
|
|
|
October 29,
|
|
|
January 28,
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
Total revenue(1)
|
|
$
|
84,715
|
|
|
$
|
86,768
|
|
|
$
|
90,200
|
|
|
$
|
153,409
|
|
Gross profit(2)
|
|
|
26,735
|
|
|
|
19,572
|
|
|
|
25,684
|
|
|
|
53,479
|
|
Operating income (loss)(3)
|
|
|
(2,849
|
)
|
|
|
(9,438
|
)
|
|
|
(4,073
|
)
|
|
|
16,565
|
|
Net income (loss)
|
|
|
(1,656
|
)
|
|
|
(5,689
|
)
|
|
|
(2,479
|
)
|
|
|
10,053
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.09
|
)
|
|
|
(0.29
|
)
|
|
|
(0.13
|
)
|
|
|
0.52
|
|
Diluted
|
|
|
(0.09
|
)
|
|
|
(0.29
|
)
|
|
|
(0.13
|
)
|
|
|
0.51
|
|
Stores open at end of period
|
|
|
312
|
|
|
|
313
|
|
|
|
334
|
|
|
|
347
|
|
Comparable store sales increase
(decrease)
|
|
|
(10.4
|
)%
|
|
|
(10.2
|
)%
|
|
|
(3.4
|
)%
|
|
|
(5.0
|
)%
|
|
|
|
(1) |
|
For the fiscal year ended February 3, 2007, total revenue
includes revenue recognized on unredeemed gift certificates and
gift cards of $3.6 million. There was no revenue recognized
on unredeemed gift certificates or gift card balances prior to
fiscal 2006. |
|
(2) |
|
During the second quarter of fiscal 2005 and 2006, we
experienced an increased level of markdown activity which
resulted in a lower gross profit when compared to first and
third quarter of each fiscal year. |
|
(3) |
|
During the fourth quarter of fiscal 2006 the Company recorded a
change in estimate of $1.4 million related to breakage of
discount certificates issued to its private label credit card
customers, which has been recorded as an increase in other
operating expenses, resulting in an increase in net loss of
$0.04 per diluted share. |
35
Inflation
We do not believe that our operating results have been
materially affected by inflation during the preceding three
fiscal years. There can be no assurance, however, that our
operating results will not be adversely affected by inflation in
the future.
Recent
Accounting Pronouncements
In February 2006, the FASB Emerging Issues Task Force
(EITF) issued a proposed EITF
No. 06-3,
How Sales Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross Versus Net Presentation), (EITF
No. 06-3).
The EITF reached a tentative consensus that a company should
disclose its accounting policy (i.e., gross or net presentation)
regarding presentation of taxes within the scope of EITF
No. 06-3.
If taxes included in gross revenues are significant, a company
should disclose the amount of such taxes for each period for
which a statement of operations is presented. The consensus
would be effective for the first annual or interim reporting
period beginning after December 15, 2006. The disclosures
are required for annual and interim financial statements for
each period for which an income statement is presented. The
Company does not expect that adoption of this pronouncement will
have a significant impact on its consolidated financial
statements.
In July 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48), which will require companies to
assess each income tax position taken using a two step process.
A determination is first made as to whether it is more likely
than not that the position will be sustained, based upon the
technical merits, upon examination by the taxing authorities. If
the tax position is expected to meet the more likely than not
criteria, the benefit recorded for the tax position equals the
largest amount that is greater than 50% likely to be realized
upon ultimate settlement of the respective tax position. The
interpretation applies to income tax expense as well as any
related interest and penalty expense.
FIN 48 requires that changes in tax positions recorded in a
companys financial statements at the adoption of this
interpretation be recorded as an adjustment to the opening
balance of retained earnings for the period of adoption.
FIN 48 will generally be effective for public companies for
the first fiscal year beginning after December 15, 2006.
The Company anticipates adopting the provisions of this
interpretation during the first quarter of fiscal 2007. The
Company is currently evaluating the potential impact that the
adoption of this interpretation will have on its financial
position and results of operations.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years. The Company does not expect the adoption of
SFAS No. 157 to have a material effect on its
financial statements.
In September 2006, the U.S. Securities and Exchange
Commission staff issued Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(SAB No. 108). SAB No. 108
eliminates the diversity of practice surrounding how public
companies quantify misstatements in prior year financial
statements. Staff Accounting Bulletin No. 108 requires
quantification of misstatements in prior year financial
statements based on the effects of the misstatements on the
companys financial statements and the related financial
statement disclosures during the period a misstatement is
corrected. SAB No. 108 is effective for fiscal years
ending after November 15, 2006. The adoption of
SAB No. 108 did not have a material effect on our
financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
Market risks related to our operations result primarily from
changes in short-term London Interbank Offered Rates, or LIBOR,
as our senior credit facility utilizes short-term LIBOR rates
and/or
contracts. The
36
base interest rate used in our senior credit facility is the
60-day
LIBOR, however, from time to time, we may enter into one or more
LIBOR contracts. These LIBOR contracts vary in length and
interest rate, such that adverse changes in short-term interest
rates could affect our overall borrowing rate when contracts are
renewed.
As of February 3, 2007, we had no outstanding borrowings
under our revolving credit facility. All amounts borrowed
throughout the year under our revolving credit facility were
entered into for other than trading purposes.
We were not engaged in any foreign exchange contracts, hedges,
interest rate swaps, derivatives or other financial instruments
with significant market risk as of February 3, 2007.
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
The financial statements and schedules are listed under
Item 15(a) and filed as part of this annual report on
Form 10-K.
The supplementary financial data is set forth under Item 7
of this annual report on
Form 10-K.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We have established and maintain disclosure controls and
procedures that are designed to ensure that information required
to be disclosed by us in the reports that we file or submit
under the Securities Exchange Act of 1934, as amended (the
Exchange Act) is recorded, processed, summarized,
and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms, and that such
information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding
required disclosure. We carried out an evaluation, under the
supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period
covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective as of the date
of such evaluation.
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as defined
in Exchange Act
Rule 13a-15(f).
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we carried out an evaluation of the
effectiveness of our internal control over financial reporting
as of February 3, 2007 based on the Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Based on this evaluation, our management
concluded that our internal control over financial reporting was
effective as of February 3, 2007.
Changes
in Internal Control Over Financial Reporting
There have been no changes in internal controls over financial
reporting identified in connection with the foregoing evaluation
that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
37
PART III
|
|
Item 10.
|
Directors,
Executive Officers, and Corporate Governance
|
Information concerning directors, appearing under the caption
Board of Directors in our Proxy Statement (the
Proxy Statement) to be filed with the SEC in
connection with our Annual Meeting of Shareholders scheduled to
be held on June 4, 2007, information concerning executive
officers, appearing under the caption Item 1.
Business Executive Officers of Kirklands
in Part I of this annual report on
Form 10-K,
and information under the caption Other
Matters Section 16(a) Beneficial Ownership
Reporting Compliance in the Proxy Statement are
incorporated herein by reference in response to this
Item 10.
The Board of Directors has adopted a Code of Business Conduct
and Ethics applicable to our directors, officers and employees,
including our Chief Executive Officer, our President and Chief
Operating Officer, and Chief Financial Officer, which has been
posted on the Investor Relations section of our web
site. We intend to satisfy the amendment and waiver disclosure
requirements under applicable securities regulations by posting
any amendments of, or waivers to, the Code of Business Conduct
and Ethics on our web site.
Information concerning the Audit Committee of the Board of
Directors, appearing under the caption Information About
the Board of Directors Audit Committee in the
Proxy Statement is incorporated herein by reference in response
to this Item 10.
|
|
Item 11.
|
Executive
Compensation
|
The information contained in the sections titled Executive
Compensation and Information About the Board of
Directors Board of Directors Compensation in
the Proxy Statement is incorporated herein by reference in
response to this Item 11.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
|
The information contained in the section titled Security
Ownership of Kirklands Ownership of Management
and Certain Beneficial Owners in the Proxy Statement, with
respect to security ownership of certain beneficial owners and
management, is incorporated herein by reference in response to
this Item 12.
Equity
Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c)
|
|
|
|
|
|
|
|
|
|
Number of securities
|
|
|
|
(a)
|
|
|
(b)
|
|
|
remaining available for
|
|
|
|
Number of securities to
|
|
|
Weighted-average
|
|
|
future issuance under
|
|
|
|
be issued upon exercise
|
|
|
exercise price of
|
|
|
equity compensation plans
|
|
|
|
of outstanding options,
|
|
|
Outstanding options,
|
|
|
(excluding securities
|
|
Plan category
|
|
warrants and rights
|
|
|
warrants and rights
|
|
|
reflected in column (a))
|
|
|
Equity compensation plans approved
by security holders
|
|
|
951,139
|
|
|
$
|
7.88
|
|
|
|
1,857,280
|
|
Equity compensation plans not
approved by security holders
|
|
|
NA
|
|
|
|
NA
|
|
|
|
NA
|
|
Total
|
|
|
951,139
|
|
|
$
|
7.88
|
|
|
|
1,857,280
|
|
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information contained in the section titled Related
Party Transactions in the Proxy Statement is incorporated
herein by reference in response to this Item 13.
The information contained in the section titled
Information About the Board of Directors
Independence in the Proxy Statement is incorporated herein
by reference in response to this Item 13.
38
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information contained in the section titled Other
Matters Audit Fees in the Proxy Statement is
incorporated herein by reference in response to this
Item 14.
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statements, Schedules and Reports on
Form 8-K
|
(a) 1. Financial Statements
The financial statements and schedules set forth below are filed
on the indicated pages as part of this annual report on
Form 10-K.
2. Schedules
None.
39
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
The Board of Directors and Shareholders of Kirklands, Inc.
We have audited the accompanying consolidated balance sheet of
Kirklands, Inc. as of February 3, 2007, and the
related consolidated statements of operations,
shareholders equity, and cash flows for the year
(53 weeks) then ended. These financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Companys internal control over financial
reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Kirklands, Inc. at February 3,
2007, and the consolidated results of its operations and its
cash flows for the year (53 weeks) then ended in conformity
with U.S. generally accepted accounting principles.
/s/ Ernst & Young LLP
Memphis, Tennessee
May 2, 2007
To the Board of Directors and Shareholders of Kirklands,
Inc.:
In our opinion, the consolidated balance sheet as of
January 28, 2006 and the related consolidated statements of
income, shareholders equity and cash flows for each of two
years in the period ended January 28, 2006 present fairly,
in all material respects, the financial position of
Kirklands, Inc. and its subsidiaries at January 28,
2006, and the results of their operations and their cash flows
for each of the two years in the period ended January 28,
2006, in conformity with accounting principles generally
accepted in the United States of America. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our
audits of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Memphis, Tennessee
April 10, 2006
40
KIRKLANDS,
INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
February 3, 2007
|
|
|
January 28, 2006
|
|
|
|
(In thousands, except share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
25,358
|
|
|
$
|
14,968
|
|
Inventories, net
|
|
|
44,790
|
|
|
|
49,180
|
|
Prepaid expenses and other current
assets
|
|
|
5,399
|
|
|
|
6,829
|
|
Deferred income taxes
|
|
|
2,673
|
|
|
|
1,854
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
78,220
|
|
|
|
72,831
|
|
Property and equipment, net
|
|
|
71,314
|
|
|
|
72,091
|
|
Other assets
|
|
|
1,932
|
|
|
|
1,662
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
151,466
|
|
|
$
|
146,584
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
20,572
|
|
|
$
|
24,231
|
|
Income taxes payable
|
|
|
996
|
|
|
|
824
|
|
Accrued expenses
|
|
|
25,796
|
|
|
|
23,210
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
47,364
|
|
|
|
48,265
|
|
Deferred income taxes
|
|
|
1,713
|
|
|
|
1,750
|
|
Deferred rent
|
|
|
31,693
|
|
|
|
28,521
|
|
Other liabilities
|
|
|
2,714
|
|
|
|
1,640
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
83,484
|
|
|
|
80,176
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 8)
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, no par value,
10,000,000 shares authorized; no shares issued or
outstanding at February 3, 2007, and January 28, 2006
|
|
|
|
|
|
|
|
|
Common stock, no par value,
100,000,000 shares authorized; 19,627,065 and
19,343,643 shares issued and outstanding at
February 3, 2007, and January 28, 2006, respectively
|
|
|
140,761
|
|
|
|
139,047
|
|
Accumulated deficit
|
|
|
(72,779
|
)
|
|
|
(72,639
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
67,982
|
|
|
|
66,408
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
151,466
|
|
|
$
|
146,584
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial
statements.
41
KIRKLANDS,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(53 Weeks)
|
|
|
(52 Weeks)
|
|
|
(52 Weeks)
|
|
|
|
(In thousands, except per share data)
|
|
|
Net sales
|
|
$
|
443,248
|
|
|
$
|
415,092
|
|
|
$
|
394,429
|
|
Gift certificate and gift card
breakage revenue
|
|
|
3,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
446,828
|
|
|
|
415,092
|
|
|
|
394,429
|
|
Cost of sales (exclusive of
depreciation and amortization as shown below)
|
|
|
306,469
|
|
|
|
289,622
|
|
|
|
267,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
140,359
|
|
|
|
125,470
|
|
|
|
126,791
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
|
|
77,465
|
|
|
|
70,459
|
|
|
|
66,389
|
|
Other operating expenses
|
|
|
44,800
|
|
|
|
39,487
|
|
|
|
36,866
|
|
Impairment charge
|
|
|
688
|
|
|
|
164
|
|
|
|
401
|
|
Depreciation and amortization
|
|
|
18,084
|
|
|
|
15,155
|
|
|
|
11,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
141,037
|
|
|
|
125,265
|
|
|
|
115,310
|
|
Operating income (loss)
|
|
|
(678
|
)
|
|
|
205
|
|
|
|
11,481
|
|
Interest expense
|
|
|
278
|
|
|
|
242
|
|
|
|
923
|
|
Interest income
|
|
|
(292
|
)
|
|
|
(184
|
)
|
|
|
(96
|
)
|
Other income, net
|
|
|
(507
|
)
|
|
|
(288
|
)
|
|
|
(233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(157
|
)
|
|
|
435
|
|
|
|
10,887
|
|
Income tax provision (benefit)
|
|
|
(17
|
)
|
|
|
206
|
|
|
|
4,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(140
|
)
|
|
$
|
229
|
|
|
$
|
6,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
0.01
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares for basic
earnings per share
|
|
|
19,433
|
|
|
|
19,318
|
|
|
|
19,231
|
|
Effect of dilutive stock
equivalents
|
|
|
|
|
|
|
254
|
|
|
|
310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average shares
for diluted earnings per share
|
|
|
19,433
|
|
|
|
19,572
|
|
|
|
19,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
42
KIRKLANDS,
INC.
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Loan to
|
|
|
Accumulated
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shareholder
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
(In thousands, except share data)
|
|
|
Balance at January 31, 2004
|
|
|
19,166,022
|
|
|
$
|
138,149
|
|
|
$
|
(620
|
)
|
|
$
|
(79,457
|
)
|
|
$
|
58,072
|
|
Exercise of stock options and
employee stock purchases
|
|
|
98,390
|
|
|
|
349
|
|
|
|
|
|
|
|
|
|
|
|
349
|
|
Tax benefit from exercise of stock
options
|
|
|
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
109
|
|
Net interest paid on shareholder
loan
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
1
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,589
|
|
|
|
6,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 29, 2005
|
|
|
19,264,412
|
|
|
$
|
138,607
|
|
|
$
|
(619
|
)
|
|
$
|
(72,868
|
)
|
|
$
|
65,120
|
|
Exercise of stock options and
employee stock purchases
|
|
|
79,231
|
|
|
|
412
|
|
|
|
|
|
|
|
|
|
|
|
412
|
|
Tax benefit from exercise of stock
options
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
Repayment of shareholder loan
|
|
|
|
|
|
|
|
|
|
|
619
|
|
|
|
|
|
|
|
619
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
229
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 28, 2006
|
|
|
19,343,643
|
|
|
$
|
139,047
|
|
|
$
|
|
|
|
$
|
(72,639
|
)
|
|
$
|
66,408
|
|
Exercise of stock options and
employee stock purchases
|
|
|
133,422
|
|
|
|
781
|
|
|
|
|
|
|
|
|
|
|
|
781
|
|
Tax benefit from exercise of stock
options
|
|
|
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Restricted stock issued
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash stock compensation
|
|
|
|
|
|
|
932
|
|
|
|
|
|
|
|
|
|
|
|
932
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(140
|
)
|
|
|
(140
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 3, 2007
|
|
|
19,627,065
|
|
|
$
|
140,761
|
|
|
$
|
|
|
|
$
|
(72,779
|
)
|
|
$
|
67,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
43
KIRKLANDS,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(53 Weeks)
|
|
|
(52 Weeks)
|
|
|
(52 Weeks)
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(140
|
)
|
|
$
|
229
|
|
|
$
|
6,589
|
|
Adjustments to reconcile net
income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property and
equipment
|
|
|
18,084
|
|
|
|
15,155
|
|
|
|
11,654
|
|
Amortization of tenant allowance
|
|
|
(6,753
|
)
|
|
|
(4,114
|
)
|
|
|
(2,447
|
)
|
Write-off of unamortized debt
issue costs
|
|
|
|
|
|
|
|
|
|
|
139
|
|
Amortization of debt issue costs
|
|
|
20
|
|
|
|
20
|
|
|
|
147
|
|
Impairment charge
|
|
|
688
|
|
|
|
164
|
|
|
|
401
|
|
Non-cash stock compensation charge
|
|
|
932
|
|
|
|
|
|
|
|
209
|
|
Loss on disposal of property and
equipment
|
|
|
1,449
|
|
|
|
693
|
|
|
|
192
|
|
Deferred income taxes
|
|
|
(856
|
)
|
|
|
(1,215
|
)
|
|
|
3,450
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories, net
|
|
|
4,390
|
|
|
|
(12,107
|
)
|
|
|
4,501
|
|
Prepaid expenses and other current
assets
|
|
|
1,430
|
|
|
|
(551
|
)
|
|
|
1,292
|
|
Other noncurrent assets
|
|
|
(290
|
)
|
|
|
(205
|
)
|
|
|
|
|
Accounts payable
|
|
|
(3,659
|
)
|
|
|
2,032
|
|
|
|
2,204
|
|
Income taxes payable
|
|
|
173
|
|
|
|
2,976
|
|
|
|
(8,502
|
)
|
Accrued expenses and other
noncurrent liabilities
|
|
|
14,015
|
|
|
|
17,094
|
|
|
|
10,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
29,483
|
|
|
|
20,171
|
|
|
|
30,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholder loan repayments
|
|
|
|
|
|
|
619
|
|
|
|
1
|
|
Proceeds from sale of property and
equipment
|
|
|
61
|
|
|
|
33
|
|
|
|
4
|
|
Capital expenditures
|
|
|
(19,505
|
)
|
|
|
(24,116
|
)
|
|
|
(30,025
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(19,444
|
)
|
|
|
(23,464
|
)
|
|
|
(30,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on revolving line of
credit
|
|
|
182,435
|
|
|
|
196,796
|
|
|
|
80,283
|
|
Repayments on revolving line of
credit
|
|
|
(182,435
|
)
|
|
|
(196,796
|
)
|
|
|
(80,283
|
)
|
Exercise of stock options and
employee stock purchases
|
|
|
351
|
|
|
|
361
|
|
|
|
259
|
|
Debt issue costs
|
|
|
|
|
|
|
(12
|
)
|
|
|
(89
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
351
|
|
|
|
349
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease)
|
|
$
|
10,390
|
|
|
$
|
(2,944
|
)
|
|
$
|
489
|
|
Beginning of the year
|
|
|
14,968
|
|
|
|
17,912
|
|
|
|
17,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of the year
|
|
$
|
25,358
|
|
|
$
|
14,968
|
|
|
$
|
17,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
238
|
|
|
$
|
221
|
|
|
$
|
405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid (refunded)
|
|
$
|
664
|
|
|
$
|
(1,556
|
)
|
|
$
|
9,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
44
KIRKLANDS,
INC.
Note 1
Description of Business and Significant Accounting
Policies
Kirklands, Inc. (the Company) is a leading
specialty retailer of home décor with 349 stores in
37 states as of February 3, 2007. The consolidated
financial statements of the Company include the accounts of
Kirklands, Inc. and its wholly-owned subsidiaries
Kirklands Stores, Inc. and Kirklands.com, Inc. Significant
intercompany accounts and transactions have been eliminated.
Fiscal year The Companys fiscal year is
comprised of the 52 or
53-week
period ending on the Saturday closest to January 31.
Accordingly, fiscal 2006 represented 53 weeks ended on
February 3, 2007; fiscal 2005 represented 52 weeks
ended on January 28, 2006; and fiscal 2004 represented
52 weeks ended on January 29, 2005.
Cash equivalents Cash and cash equivalents
consist of cash on deposit in banks and investments with
maturities of 90 days or less at the date of purchase.
Cost of sales and inventory valuation Cost
of sales includes all costs of product purchased from vendors,
including inbound freight to the extent that it is not included
in the vendor pricing. Receiving costs, inspection costs,
warehousing costs, internal transfer costs, outbound freight,
and all overhead associated with our distribution facility and
its network are included in cost of sales. Our cost of sales
also includes store occupancy costs. Our inventory is stated at
the lower of cost or market, net of reserves and allowances,
with cost determined using the average cost method with average
cost approximating current cost. We estimate the amount of
shrinkage that has occurred through theft or damage and adjust
that to actual at the time of our physical inventory counts
which occur throughout the fiscal year. We also evaluate the
cost of our inventory by category and class of merchandise in
relation to the estimated sales price. This evaluation is
performed to ensure that we do not carry inventory at a value in
excess of the amount we expect to realize upon the sale of the
merchandise.
Vendor allowances We receive various payments
and allowances from our vendors, including rebates and other
credits. The amounts received are subject to the terms of vendor
agreements, which generally do not state an expiration date, but
are subject to ongoing negotiations that may be impacted in the
future based on changes in market conditions and changes in the
profitability, quality, or sell-through of the related
merchandise. For all such vendor allowances, the Company applies
the guidance pursuant to the Emerging Issues Task Force Issue
No. 02-16,
Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor (EITF
02-16),
by recording the vendor funds as a reduction of inventories that
are recognized as a reduction to cost of sales as the
inventories are sold. The Companys vendor funding
arrangements generally do not provide for any reimbursement
arrangements that are for specific, incremental, identifiable
costs that are permitted under EITF
02-16 for
the funding to be recorded as a reduction to advertising or
other operating, selling, general and administrative expenses.
Prepaid expenses and other current assets
Prepaid expenses and other current assets consist primarily of
prepaid rent, prepaid insurance and receivables from landlords
for tenant allowances. Tenant allowance receivables were
$635,000 and $2,754,000 at February 3, 2007, and
January 28, 2006, respectively.
Property and equipment Property and equipment
are stated at cost. Depreciation is computed on a straight-line
basis over the estimated useful lives of the respective assets.
Furniture, fixtures and equipment are generally depreciated over
5 years. Buildings are depreciated over 40 years.
Leasehold improvements are amortized over the shorter of the
useful life of the asset or the expected lease term ranging from
five to 10 years. Maintenance and repairs are expensed as
incurred and improvements are capitalized. Gains or losses on
the disposition of fixed assets are recorded upon disposal.
Impairment of long-lived assets In
accordance with the provisions of Statement of Financial
Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets
(SFAS 144), we evaluate the recoverability of
the carrying amounts of long-lived assets, such as property and
equipment,
45
KIRKLANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
covered by this standard whenever events or changes in
circumstances dictate that the carrying value may not be
recoverable. As part of the evaluation, we review performance at
the store level to identify any stores with current period cash
flow losses that should be considered for impairment. We compare
the sum of the undiscounted expected future cash flows with the
carrying amounts of the assets. If impairment is indicated by
the above evaluation, the amount by which the carrying amount of
the assets exceeds the fair value of the assets is recognized as
an impairment loss where fair value is estimated based on
discounted expected future cash flows. Cash flows for retail
assets are identified at the individual store level. Our
judgments regarding a stores ability to realize
undiscounted cash flows in excess of the carrying amounts of
store assets are affected by factors such as the ongoing
maintenance and improvements of the assets, changes in economic
conditions and changes in operating performance. As we assess
the ongoing expected cash flows and carrying amounts of its
long-lived assets, these factors could cause the Company to
realize material impairment charges.
The Company recorded an impairment of $688,000, and $164,000
during fiscal 2006, and fiscal 2005, respectively, which
represents the impairment of the leasehold improvements,
furniture and fixtures, and equipment of stores. As of
February 3, 2007, and January 28, 2006 these stores
had a remaining carrying value of long-lived assets totaling
$647,000 and $364,000, respectively.
Goodwill The Company accounts for its
goodwill in accordance with SFAS No. 142, Goodwill
and Other Intangible Assets. Accordingly,
goodwill is not amortized but reviewed for impairment on an
annual basis during each fourth quarter or more frequently when
events and circumstances indicate that an impairment may have
occurred. No impairment losses were recorded in the three years
ended February 3, 2007.
Insurance reserves Workers
compensation, general liability and employee medical insurance
programs are partially self-insured. It is our policy to record
a self-insurance liability using estimates of claims incurred
but not yet reported or paid, based on historical claims
experience and trends. Actual results can vary from estimates
for many reasons, including, among others, inflation rates,
claim settlement patterns, litigation trends and legal
interpretations. We monitor our claims experience in light of
these factors and revise our estimates of insurance reserves
accordingly. The level of our insurance reserves may increase or
decrease as a result of these changing circumstances or trends.
Customer loyalty program During fiscal 2004,
the Company established a private-label credit card program for
its customers. The card program is operated and managed by a
third-party bank that assumes all credit risk with no recourse
to the Company. All cardholders are automatically enrolled in a
loyalty program whereby cardholders earn loyalty points in
return for making purchases in the Companys stores.
Attaining specified loyalty point levels results in the issuance
of discount certificates to the cardholder. The Company accrues
for the expected liability associated with the discount
certificates issued as well as the accumulated points that have
not yet resulted in the issuance of a certificate adjusted for
expected redemption rates. This accrual is included within
accrued expenses on the consolidated balance sheet and the
changes to the accrual are included within other operating
expenses on the consolidated statements of operations. During
fiscal 2006, the Company recorded a change of estimate of
$1.4 million ($864,000 after tax), or $0.04 per diluted
share, related to the anticipated breakage of discount
certificates issued to its private label credit card customers.
Deferred rent Many of the Companys
operating leases contain predetermined fixed escalations of
minimum rentals during the initial term. Additionally, the
Company may not pay rent during the construction period for its
new stores. For these leases, the Company recognizes the related
rental expense on a straight-line basis over the life of the
lease commencing with the date of entry to the leased space, and
records the difference between amounts charged to operations and
amounts paid as a liability. The cumulative net excess of
recorded rent expense over lease payments totaled
$8.1 million, of which $1.3 million was reflected as a
current liability in accrued expenses and $6.8 million was
reflected as a long-term liability in deferred rent in the
consolidated balance sheet as of February 3, 2007. As of
January 28, 2006, $1.0 million was reflected as a
current liability in accrued expenses and $6.5 million was
reflected as a long-term liability in deferred rent in the
consolidated balance sheet.
46
KIRKLANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company also receives incentives from landlords in the form
of construction allowances. These construction allowances are
recorded as deferred rent and amortized as a reduction to rent
expense over the lease term. As of February 3, 2007, the
unamortized amount of construction allowances totaled $30.9, of
which $6.0 million was reflected as a current liability in
accrued expenses and $24.9 million was reflected as a
long-term liability in deferred rent in the consolidated balance
sheet as of February 3, 2007. As of January 28, 2006,
$5.5 million was reflected as a current liability in
accrued expenses and $22.0 was reflected as a long-term
liability in deferred rent in the consolidated balance sheet.
Revenue recognition The Company recognizes
revenue at the time of sale of merchandise to customers. Net
sales include the sale of merchandise, net of returns and
exclusive of sales taxes. Revenues from our gift certificates
and gift cards are recognized as revenue when tendered for
payment. While we will continue to honor all gift certificates
and gift cards presented for payment, the Company determines the
likelihood of redemption to be remote for certain gift
certificates and gift card balances due to, among other things,
long periods of inactivity. In fiscal 2006, the Company began
using the Redemption Recognition Method to account for
breakage for unused gift card and gift certificate amounts where
breakage is recognized as gift certificates or 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 certificate or
card balances to government agencies under unclaimed property
laws, gift certificate and gift card balances are recognized in
the consolidated statement of operations as revenue. After
completing a review of its historical redemption patterns, the
Company recognized $3.6 million of revenue and operating
income ($2.2 million after tax), or $0.11 per diluted
share, related to gift certificate and gift card breakage during
fiscal 2006. There was no revenue recognized on unredeemed gift
certificates or gift card balances during the fiscal years ended
January 28, 2006 or January 29, 2005 because
sufficient data was not available during those periods to
support an alternative position.
Compensation and benefits Compensation and
benefits includes all store and corporate office salaries and
wages and incentive pay as well as employee health benefits,
401(k) plan benefits, social security and unemployment taxes.
Stock options and warrants As of
January 29, 2006, we adopted Statement of Financial
Accounting Standards No. 123 (revised 2004),
Share-Based Payment (SFAS 123(R))
which requires us to value and record, as compensation expense,
stock awards granted to employees under a fair value based
method. Prior to January 29, 2006, we accounted for stock
awards granted to employees under the recognition and
measurement principles of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Except for certain
options which were granted at an exercise price below the market
value of the Companys underlying common stock on the grant
date, no compensation expense was previously recognized for
stock options granted to employees prior to adopting
SFAS 123(R).
SFAS 123(R) applies to new awards and to awards modified,
repurchased or canceled after January 28, 2006 and to those
which are unvested at January 28, 2006. We have adopted
SFAS 123(R) utilizing the modified prospective transition
method which requires share-based compensation expense
recognized since January 28, 2006, to be based on the
following: a) grant date fair value estimated in accordance
with the original provisions of SFAS 123 for unvested
options granted prior to the adoption date; b) grant date
fair value estimated in accordance with the provisions of
SFAS 123(R) for options granted subsequent to the adoption
date; and c) the discount on shares purchased by employees
through our employee stock purchase plan post-adoption, which
represents the difference between the purchase date fair value
and the employee purchase price. This compensation expense was
recorded in the statements of operations with a corresponding
credit to common stock for the
53-week
periods ended February 3, 2007.
Other operating expenses Other operating
expenses consist of such items as insurance, advertising,
property taxes, supplies, losses on disposal of assets and
various other store and corporate expenses.
47
KIRKLANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Preopening expenses Preopening expenses,
which consist primarily of payroll and occupancy costs, are
expensed as incurred.
Advertising expenses Advertising costs are
expensed in the period in which the advertising first takes
place. Advertising expense was $4,296,000, $4,978,000, and
$4,192,000 for fiscal years 2006, 2005 and 2004, respectively.
Other income Other income consists of sales
tax rebates of $213,000, $183,000, and $170,000 for fiscal years
2006, 2005 and 2004, respectively, and other miscellaneous
income of $293,000, $105,000, and $64,000 for fiscal years 2006,
2005 and 2004, respectively.
Income taxes We record income tax liabilities
utilizing known obligations and estimates of potential
obligations. A deferred tax asset or liability is recognized
whenever there are future tax effects from existing temporary
differences and operating loss and tax credit carryforwards. We
record a valuation allowance to reduce deferred tax assets to
the balance that is more likely than not to be realized. We must
make estimates and judgments on future taxable income,
considering feasible tax planning strategies and taking into
account existing facts and circumstances, to determine the
proper valuation allowance. When we determine that deferred tax
assets could be realized in greater or lesser amounts than
recorded, the asset balance and income statement reflects the
change in the period such determination is made. Due to changes
in facts and circumstances and the estimates and judgments that
are involved in determining the proper valuation allowance,
differences between actual future events and prior estimates and
judgments could result in adjustments to this valuation
allowance.
Use of estimates The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of certain assets and liabilities and disclosure of
contingencies at the date of the financial statements and the
related reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Fair value of financial instruments
SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, requires disclosure of the fair
values of most on and off balance sheet financial instruments
for which it is practicable to estimate that value. The Company
has financial instruments, including cash and cash equivalents,
accounts receivable, other current assets and accounts payable.
The carrying amounts of these financial instruments approximate
fair value because of their short maturities.
Earnings per share Basic earnings per share
is computed by dividing net income or loss by the weighted
average number of shares outstanding during each period
presented, which excludes non-vested restricted stock. Diluted
earnings per share is computed by dividing net income or 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. The diluted
loss per share amount for fiscal 2006 has been calculated using
the same denominator as used in the basic loss per share
calculation as the inclusion of dilutive securities in the
denominator would have been anti-dilutive. Stock options that
were not included in the diluted earnings per share computation
because they would have been ant-dilutive were approximately
667,000 shares at January 28, 2006, and
177,000 shares at January 29, 2005.
Comprehensive income Comprehensive income
does not differ from the consolidated net income (loss)
presented in the consolidated statements of operations.
Operating segments An operating segment is
defined as a component of an enterprise that engages in business
activities from which it may earn revenues and incur expenses
and about which separate financial information is regularly
evaluated by the chief operating decision maker in deciding how
to allocate resources. Due to the similar economic
characteristics of the Companys mall and off-mall stores,
and the similar nature of the Companys products, type of
customer, and method used to distribute the Companys
products, the Company operates as one business segment and does
not disclose separate segment information.
48
KIRKLANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Recent accounting pronouncements In June
2006, the FASB Emerging Issues Task Force (EITF)
issued EITF
No. 06-3,
How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That
Is, Gross versus Net Presentation), (EITF
No. 06-3).
The EITF reached a consensus that a company should disclose its
accounting policy (i.e., gross or net presentation) regarding
presentation of taxes within the scope of EITF
No. 06-3.
If taxes included in gross revenues are significant, a company
should disclose the amount of such taxes for each period for
which a statement of operations is presented. The consensus
would be effective for the first annual or interim reporting
period beginning after December 15, 2006. The disclosures
are required for annual and interim financial statements for
each period for which an income statement is presented. The
Company does not expect that adoption of this pronouncement will
have a significant impact on its consolidated financial
statements.
In June 2006, the Financial Accounting Standards Board
(FASB) issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48), which will require companies to
assess each income tax position taken using a two step process.
A determination is first made as to whether it is more likely
than not that the position will be sustained, based upon the
technical merits, upon examination by the taxing authorities. If
the tax position is expected to meet the more likely than not
criteria, the benefit recorded for the tax position equals the
largest amount that is greater than 50% likely to be realized
upon ultimate settlement of the respective tax position. The
interpretation applies to income tax expense as well as any
related interest and penalty expense.
FIN 48 requires that changes in tax positions recorded in a
companys financial statements at the adoption of this
interpretation be recorded as an adjustment to the opening
balance of retained earnings for the period of adoption.
FIN 48 will generally be effective for public companies for
the first fiscal year beginning after December 15, 2006.
The Company anticipates adopting the provisions of this
interpretation during the first quarter of fiscal 2007. The
Company is currently evaluating the potential impact that the
adoption of this interpretation will have on its financial
position and results of operations.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements (SFAS No. 157).
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal
years. The Company does not expect the adoption of
SFAS No. 157 to have a material effect on its
financial statements.
In September 2006, the U.S. Securities and Exchange
Commission staff issued Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(SAB No. 108). SAB No. 108
eliminates the diversity of practice surrounding how public
companies quantify misstatements in prior year financial
statements. Staff Accounting Bulletin No. 108 requires
quantification of misstatements in prior year financial
statements based on the effects of the misstatements on the
companys financial statements and the related financial
statement disclosures during the period a misstatement is
corrected. SAB No. 108 is effective for fiscal years
ending after November 15, 2006. The adoption of
SAB No. 108 did not have a material effect on our
financial statements.
Reclassifications Certain prior year amounts
have been reclassified to conform to current year
classifications.
49
KIRKLANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note 2
Property and Equipment
Property and equipment is comprised of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
Land
|
|
$
|
402
|
|
|
$
|
402
|
|
Buildings
|
|
|
3,481
|
|
|
|
3,481
|
|
Equipment
|
|
|
33,407
|
|
|
|
32,789
|
|
Furniture and fixtures
|
|
|
47,912
|
|
|
|
45,877
|
|
Leasehold improvements
|
|
|
60,155
|
|
|
|
54,174
|
|
Projects in progress
|
|
|
399
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,756
|
|
|
|
137,221
|
|
Less: accumulated depreciation
|
|
|
74,442
|
|
|
|
65,130
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
71,314
|
|
|
$
|
72,091
|
|
|
|
|
|
|
|
|
|
|
Note 3
Accrued Expenses
Accrued expenses are comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
Salaries and wages
|
|
$
|
3,641
|
|
|
$
|
2,428
|
|
Gift certificates and store credits
|
|
|
6,735
|
|
|
|
8,587
|
|
Self-insurance
|
|
|
771
|
|
|
|
492
|
|
Sales taxes
|
|
|
2,668
|
|
|
|
2,003
|
|
Deferred rent
|
|
|
7,269
|
|
|
|
6,493
|
|
Other
|
|
|
4,712
|
|
|
|
3,207
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,796
|
|
|
$
|
23,210
|
|
|
|
|
|
|
|
|
|
|
Note 4
Income Taxes
The provision (benefit) for income taxes consists of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 Weeks
|
|
|
|
|
|
|
Ended
|
|
|
52 Weeks Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
784
|
|
|
$
|
1,110
|
|
|
$
|
730
|
|
State
|
|
|
55
|
|
|
|
311
|
|
|
|
118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
839
|
|
|
$
|
1,421
|
|
|
$
|
848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(756
|
)
|
|
$
|
(927
|
)
|
|
$
|
2,847
|
|
State
|
|
|
(100
|
)
|
|
|
(288
|
)
|
|
|
603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(856
|
)
|
|
|
(1,215
|
)
|
|
|
3,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(17
|
)
|
|
$
|
206
|
|
|
$
|
4,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
KIRKLANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Significant components of the Companys deferred tax assets
(liabilities) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
|
2007
|
|
|
2006
|
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventory valuation methods
|
|
$
|
333
|
|
|
$
|
467
|
|
Prepaid assets
|
|
|
(285
|
)
|
|
|
(315
|
)
|
Accruals
|
|
|
2,625
|
|
|
|
1,702
|
|
|
|
|
|
|
|
|
|
|
Total current deferred tax assets
|
|
|
2,673
|
|
|
|
1,854
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax assets:
|
|
|
|
|
|
|
|
|
Deferred rent and other
|
|
|
3,845
|
|
|
|
3,048
|
|
Net operating loss and credit
carryforwards
|
|
|
101
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
Total noncurrent deferred tax
assets
|
|
|
3,946
|
|
|
|
3,198
|
|
Noncurrent deferred tax
liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(5,659
|
)
|
|
|
(4,948
|
)
|
|
|
|
|
|
|
|
|
|
Net noncurrent deferred tax asset
(liability)
|
|
$
|
(1,713
|
)
|
|
$
|
(1,750
|
)
|
|
|
|
|
|
|
|
|
|
A reconciliation of the provision for income taxes to the amount
computed by applying the federal statutory tax rate of 35.0% to
income before income taxes for the periods indicated below,
respectively, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 Weeks
|
|
|
|
|
|
|
Ended
|
|
|
52 Weeks Ended
|
|
|
|
February 3,
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Federal tax at statutory federal
income tax rate
|
|
$
|
(55
|
)
|
|
$
|
152
|
|
|
$
|
3,811
|
|
State income taxes, net of federal
benefit
|
|
|
28
|
|
|
|
15
|
|
|
|
468
|
|
Other permanent differences
|
|
|
10
|
|
|
|
39
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(17
|
)
|
|
$
|
206
|
|
|
$
|
4,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had an aggregate of $1.1 million and
$2.2 million in net operating loss carryforwards in certain
states at February 3, 2007 and January 28, 2006,
respectively. These carryforwards will expire, if unused in 2014
through 2018. A valuation allowance is provided when it is more
likely than not that some portion of the deferred tax assets
will not be realized. Due to the likelihood of full utilization
of the remaining state net operating loss carryforwards, no
valuation allowance has been provided as of February 3,
2007 and January 28, 2006.
Note 5
Senior Credit Facility
Effective October 4, 2004, we entered into a five-year
senior secured revolving credit facility with a revolving loan
limit of up to $45 million. The revolving credit facility
bears interest at a floating rate equal to the
60-day LIBOR
rate (5.34% at February 3, 2007) plus 1.25% to 1.50%
(depending on the amount of excess availability under the
borrowing base). Additionally, we pay a fee to the bank equal to
a rate of 0.2% per annum on the unused portion of the
revolving line of credit. Borrowings under the facility are
collateralized by substantially all of our assets and guaranteed
by our subsidiaries. The maximum availability under the credit
facility is limited by a borrowing base formula, which consists
of a percentage of eligible inventory less reserves. The
facility also contains provisions that could result in changes
to the presented terms or the acceleration of maturity.
Circumstances that could lead to such changes or acceleration
include a material adverse change in the business or an event of
default under the credit agreement. The facility has one
financial
51
KIRKLANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
covenant that requires the Company to maintain excess
availability under the borrowing base, as defined in the credit
agreement, of $3 million at all times. The facility matures
in October 2009. As of February 3, 2007, we were in
compliance with the covenants in the facility and there were no
outstanding borrowings under the credit facility, with
approximately $19.5 million in borrowing availability (net
of the $3 million availability block as described above).
The Company used the proceeds from this new credit facility to
repay existing indebtedness, consisting of amounts outstanding
under the Companys previous $45 million secured
revolving credit facility dated May 22, 2002, which was
thereupon terminated. As a result of this early termination,
during the third quarter of fiscal 2004, the Company incurred a
pre-tax charge of $364,000 consisting of a prepayment penalty of
$225,000 and a write-off of unamortized debt issue costs of
$139,000.
Note 6
Long-Term Leases
The Company leases retail store facilities, warehouse facilities
and certain equipment under operating leases with terms ranging
up to 15 years and expiring at various dates through 2019.
Most of the retail store lease agreements include renewal
options and provide for minimum rentals and contingent rentals
based on sales performance in excess of specified minimums. Rent
expense under operating leases was $35,205,000, $32,905,000, and
$31,349,000 in fiscal years 2006, 2005, and 2004, respectively.
Contingent rental expense was $155,000, $381,000, and $564,000,
for fiscal years 2006, 2005 and 2004, respectively.
Future minimum lease payments under all operating leases with
initial terms of one year or more are as follows: $60,784,000 in
2007; $53,899,000 in 2008; $44,204,000 in 2009; $36,919,000 in
2010; $30,522,000 in 2011 and $95,463,000 thereafter.
Note 7
Employee Benefit Plans
As of January 29, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (SFAS 123(R))
which requires the Company to value and record, as compensation
expense, stock awards granted to employees under a fair value
based method. Prior to January 29, 2006, the Company
accounted for stock awards granted to employees under the
recognition and measurement principles of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Except for certain
options which were granted at an exercise price below the market
value of the Companys underlying common stock on the grant
date, no compensation expense was previously recognized for
stock options granted to employees prior to adopting
SFAS 123(R).
SFAS 123(R) applies to new awards and to awards modified,
repurchased or canceled on or after January 28, 2006 and to
those which were unvested at January 28, 2006. The Company
has adopted SFAS 123(R) utilizing the modified prospective
transition method which requires share-based compensation
expense recognized after January 28, 2006, to be based on
the following: a) grant date fair value estimated in
accordance with the original provisions of SFAS 123 for
unvested options granted prior to the adoption date;
b) grant date fair value estimated in accordance with the
provisions of SFAS 123(R) for options granted subsequent to
the adoption date; and c) the discount on shares purchased
by employees through the Companys employee stock purchase
plan post-adoption, which represents the difference between the
purchase date fair value and the employee purchase price. This
compensation expense was recorded in the statement of operations
with a corresponding credit to common stock for the 53 week
period ended February 3, 2007.
As the Company adopted SFAS 123(R) under the modified
prospective transition method, results from prior periods have
not been restated. The following table illustrates the effect on
net income (loss) and earnings (loss) per share if the Company
had applied the fair value recognition provisions of
Statement 123 in
52
KIRKLANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fiscal 2005 and 2004. For purposes of this pro forma disclosure,
the value of the options has been estimated using the
Black-Scholes option pricing model for all option grants.
|
|
|
|
|
|
|
|
|
|
|
52-Week
|
|
|
|
Period Ended
|
|
|
|
January 28,
|
|
|
January 29,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net income, as reported
|
|
$
|
229
|
|
|
$
|
6,589
|
|
Add: Share-based compensation
cost, net of taxes, included in reported net income
|
|
|
|
|
|
|
209
|
|
Deduct: Total pro-forma
share-based compensation expense, net of taxes, determined under
SFAS 123 for all awards
|
|
|
(844
|
)
|
|
|
(648
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$
|
(615
|
)
|
|
$
|
6,150
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
0.01
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma
|
|
$
|
(0.03
|
)
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$
|
0.01
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma
|
|
$
|
(0.03
|
)
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option pricing model based upon
the following assumptions: expected volatility ranging from
37.4% to 39.1% for fiscal 2005 and 41.9% to 47.3% for fiscal
2004; risk-free interest rates ranging from 3.5% to 4.3% in
fiscal 2005, and 3.4% to 3.9% in fiscal 2004; expected lives of
5 years; and no expected dividend payments.
Under SFAS 123(R), forfeitures are estimated at the time of
valuation and reduce expense ratably over the vesting period.
This estimate is adjusted periodically based on the extent to
which actual forfeitures differ, or are expected to differ, from
the previous estimate. Under SFAS 123, the Company elected
to account for forfeitures when awards were actually forfeited,
at which time all previous pro forma expense was reversed to
reduce pro forma expense for that period. The Companys
forfeiture estimate has a minimal effect on expense as the
majority of the share based awards vest quarterly
For the 53 week period ended February 3, 2007, the
adoption of SFAS 123(R)s fair value method resulted
in additional stock compensation expense (included as a
component of compensation and benefits on the statement of
operations) related to stock options and the employee stock
purchase plan than if the Company had continued to account for
share-based compensation under APB 25. This additional
stock compensation increased pre-tax loss by approximately
$741,000 for the 53 week period ended February 3,
2007. The additional stock compensation increased net loss by
approximately $562,000, or $0.03 per diluted share for the
53 week period ended February 3, 2007. The Company
also recognized approximately $191,000 in pre-tax stock
compensation expense related to a restricted stock grant during
the 53 week period ended February 3, 2007. The impact
of adopting SFAS 123(R) on future results will depend on,
among other things, levels of share-based payments granted in
the future, actual forfeiture rates and the timing of option
exercises.
The fair value of each option is recorded as compensation
expense on a straight-line basis between the grant date for the
award and each vesting date. The Company has estimated the fair
value of all stock option awards as of the date of the grant by
applying the Black-Scholes multiple-option pricing valuation
model. The application of this valuation model involves
assumptions that are judgmental and highly sensitive in the
determination of compensation expense. The weighted average for
key assumptions used in determining the
53
KIRKLANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fair value of options granted in the 53 week period ended
February 3, 2007 and a summary of the methodology applied
to develop each assumption are as follows:
|
|
|
|
|
Expected price volatility
|
|
|
0.43
|
|
Risk-free interest rate
|
|
|
5.0
|
%
|
Expected life
|
|
|
5.9
|
years
|
Forfeiture rate
|
|
|
5
|
%
|
Dividend yield
|
|
|
0
|
%
|
Expected Price Volatility This is a measure
of the amount by which the stock price has fluctuated or is
expected to fluctuate. The Company uses actual historical
changes in the market value of its stock to calculate the
volatility assumption as it is managements belief that
this is the best indicator of future volatility. The Company
calculates daily market value changes to the date of grant over
a past period beginning one year following the Companys
initial public offering date. An increase in the expected
volatility will increase compensation expense.
Risk-Free Interest Rate This is the
U.S. Treasury rate for the week of the grant having a term
equal to the expected life of the option. An increase in the
risk-free interest rate will increase compensation expense.
Expected Lives This is the period of time
over which the options granted are expected to remain
outstanding. The Company uses the simplified method
found in the Securities and Exchange Commissions Staff
Accounting Bulletin No. 107 to estimate the expected
life of stock option grants. Options granted have a maximum term
of ten years. An increase in the expected life will increase
compensation expense.
Forfeiture Rate This is the estimated
percentage of options granted that are expected to be forfeited
or canceled before becoming fully vested. This estimate is based
on historical experience of similar grants. An increase in the
forfeiture rate will decrease compensation expense.
Dividend Yield The Company has not made any
dividend payments nor does it have plans to pay dividends in the
foreseeable future. An increase in the dividend yield will
decrease compensation expense.
Stock options On June 12, 1996, the
Company adopted the 1996 Executive Incentive and
Non-Qualified Stock Option Plan (the 1996
Plan), which provides employees and officers with
opportunities to purchase shares of the Companys
common stock. The 1996 Plan authorized the grant of incentive
and
non-qualified
stock options and required that the exercise price of incentive
stock options be at least 100% of the fair market value of
the stock at the date of the grant. As of February 3, 2007,
options to purchase 211,556 shares of common stock were
outstanding under the 1996 Plan at exercise prices ranging from
$1.29 to $1.73. Options issued to employees under the 1996 Plan
have maximum contractual terms of 10 years and vest ratably
over 3 years. No additional options may be granted under
the 1996 Plan.
In July 2002, the Company adopted the Kirklands, Inc. 2002
Equity Incentive Plan (the 2002 Plan). The 2002 Plan
provides for the award of restricted stock, restricted stock
units, incentive stock options, non-qualified stock options and
stock appreciation rights with respect to shares of common stock
to employees, directors, consultants and other individuals who
perform services for the Company. The 2002 Plan is authorized to
provide awards for up to a maximum of 2,500,000 shares of
common stock. Options issued to employees under the 2002 Plan
have maximum contractual terms of 10 years and generally
vest ratably over 3 years. Options issued to non-employee
directors vest immediately on the date of the grant. As of
February 3, 2007, options to purchase 739,583 shares
of common stock were outstanding under the 2002 Plan at exercise
prices ranging from $5.34 to $18.55 per share.
54
KIRKLANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about employee stock
options outstanding and exercisable at February 3, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
Options Exercisable
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Weighted Average
|
|
|
Number
|
|
|
Weighted Average
|
|
Range of Exercise Prices
|
|
of Shares
|
|
|
Life (In Years)
|
|
|
Exercise Price
|
|
|
of Shares
|
|
|
Exercise Price
|
|
|
$1.29
|
|
|
182,737
|
|
|
|
4.8
|
|
|
$
|
1.29
|
|
|
|
182,737
|
|
|
$
|
1.29
|
|
$1.73
|
|
|
28,819
|
|
|
|
0.4
|
|
|
$
|
1.73
|
|
|
|
28,819
|
|
|
$
|
1.73
|
|
$5.34 - $10.90
|
|
|
597,083
|
|
|
|
8.8
|
|
|
$
|
8.38
|
|
|
|
245,397
|
|
|
$
|
9.80
|
|
$11.05 - $18.55
|
|
|
142,500
|
|
|
|
6.9
|
|
|
$
|
15.47
|
|
|
|
134,165
|
|
|
$
|
15.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
951,139
|
|
|
|
7.5
|
|
|
$
|
7.88
|
|
|
|
591,118
|
|
|
$
|
8.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At February 3, 2007, the aggregate intrinsic value of all
outstanding in-the-money options was $815,000 with a weighted
average remaining contractual term of 4.5 years, and a weighted
average exercise price of $1.35. All in-the-money options are
currently exercisable. Shares reserved for future option grants
approximated 1.5 million at February 3, 2007. The weighted
average grant date fair value of options granted during the 53
week period ended February 3, 2007 was $3.09 and $2.98 for
fiscal 2005. As of February 3, 2007, unrecognized stock
compensation expense related to the unvested portion of our
stock options and restricted stock grant was approximately
$984,000 and $898,000, respectively, which is expected to be
recognized over a weighted average period of 1.5 years and
4.1 years respectively.
Transactions under the Companys stock option plans in each
of the periods indicated are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Balance at February 1, 2004
|
|
|
601,243
|
|
|
$
|
5.91
|
|
Options granted
|
|
|
145,000
|
|
|
$
|
9.90
|
|
Options exercised
|
|
|
(82,763
|
)
|
|
$
|
1.44
|
|
Options forfeited
|
|
|
(25,625
|
)
|
|
$
|
9.85
|
|
|
|
|
|
|
|
|
|
|
Balance at January 29, 2005
|
|
|
637,855
|
|
|
$
|
7.24
|
|
Options granted
|
|
|
560,000
|
|
|
$
|
10.01
|
|
Options exercised
|
|
|
(40,340
|
)
|
|
$
|
1.39
|
|
Options forfeited
|
|
|
(41,320
|
)
|
|
$
|
15.12
|
|
|
|
|
|
|
|
|
|
|
Balance at January 28, 2006
|
|
|
1,116,195
|
|
|
$
|
8.55
|
|
Options granted
|
|
|
380,000
|
|
|
$
|
6.37
|
|
Options exercised
|
|
|
(78,369
|
)
|
|
$
|
1.30
|
|
Options forfeited
|
|
|
(466,687
|
)
|
|
$
|
9.35
|
|
|
|
|
|
|
|
|
|
|
Balance at February 3, 2007
|
|
|
951,139
|
|
|
$
|
7.88
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable As
of:
|
|
|
|
|
|
|
|
|
February 3, 2007
|
|
|
591,118
|
|
|
$
|
8.13
|
|
|
|
|
|
|
|
|
|
|
January 28, 2006
|
|
|
510,356
|
|
|
$
|
6.85
|
|
|
|
|
|
|
|
|
|
|
January 29, 2005
|
|
|
460,345
|
|
|
$
|
5.22
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock During the first quarter of
fiscal 2006, the Company granted 150,000 shares of
restricted stock to its President and Chief Operating Officer.
The value of this grant was measured at the
55
KIRKLANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
market value of the Companys common stock on the service
inception date. The award will fully vest after five years of
continuous employment with the Company. Half of the restricted
stock grant is subject to accelerated vesting if a
pre-established performance target is met after issuance. Since
achieving this performance condition is not yet probable as of
February 3, 2007, the Company recognizes compensation
expense related to this award ratably over the five-year vesting
period. The Company also issued a restricted stock unit (RSU)
grant of 100,000 shares of common stock to its President
and Chief Operating Officer during the same period. The entire
RSU grant will vest only when a pre-determined performance
condition is met by the Company. Since achieving this
performance condition is not yet probable as of February 3,
2007, no compensation expense has been recognized to date
related to the RSU grant.
On November 27, 2001, the Company granted options to
purchase 505,841 shares of common stock to certain
employees at an exercise price of $1.29 per share. The
estimated fair value of the Companys common stock was
greater than the exercise price of the stock options on the date
of grant. Accordingly, the Company has recognized compensation
expense in accordance with the vesting provisions of the grant
of approximately $209,000 for fiscal 2004. No expense was
recorded related to this grant in fiscal years 2006 and 2005 due
to the options becoming fully vested prior to the beginning of
fiscal year 2005.
Employee Stock Purchase Plan In July 2002,
the Company adopted an Employee Stock Purchase Plan
(ESPP). Under the ESPP, full-time employees who have
completed twelve consecutive months of service are allowed to
purchase shares of the Companys common stock, subject to
certain limitations, through payroll deduction, at 85% of the
fair market value. The Companys ESPP is authorized to
issue up to 500,000 shares of common stock. During fiscal
2006, fiscal 2005, and fiscal 2004, there were 55,315, 41,294,
and 21,175 shares of common stock, respectively, issued to
participants under the ESPP.
401(k) Savings Plan The Company maintains a
defined contribution 401(k) employee benefit plan, which covers
all employees meeting certain age and service requirements. Up
to 6% of the employees compensation may be matched at the
Companys discretion. This discretionary percentage was 50%
of an employees contribution subject to Plan maximums. The
Companys matching contributions were approximately
$261,000, $284,000, and $283,000 in fiscal 2006, 2005 and 2004,
respectively. The Company has the option to make additional
contributions to the Plan on behalf of covered employees;
however, no such contributions were made in fiscal 2006, 2005 or
2004.
Deferred Compensation Plan Effective
March 1, 2005, the Company adopted The Executive
Non-Qualified Excess Plan (the Deferred Compensation
Plan). The Deferred Compensation Plan is available for
certain employees whose benefits under the 401(k) Savings Plan
are limited due to provisions of the Internal Revenue Code. The
Companys matching contribution was approximately $60,000
and $57,000 in fiscal years 2006 and 2005, respectively.
Post-employment benefits Effective
May 30, 2006, the Company entered into a letter agreement
with its Chief Executive Officer, providing for certain
compensatory and health benefits which take effect when he no
longer works for the Company. This agreement resulted in a
charge of approximately $419,000, net of tax, or $0.02 per
share, during the
53-week
period ended February 3, 2007. This charge has been
included as a component of compensation and benefits within the
consolidated statements of operations.
Note 8
Commitments and Contingencies
Financial instruments that potentially subject the Company to
concentration of risk are primarily cash and cash equivalents.
The Company places its cash and cash equivalents in insured
depository institutions and limits the amount of credit exposure
to any one institution within the covenant restrictions imposed
by the Companys debt agreements.
The Company is party to pending legal proceedings and claims.
Although the outcome of such proceedings and claims cannot be
determined with certainty, the Companys management is of
the opinion that it is remote that these proceedings and claims
will have a material effect on the financial condition,
operating results or cash flows of the Company.
56
3. Exhibits: (see (b) below)
(b) Exhibits.
The following is a list of exhibits filed as part of this annual
report on
Form 10-K.
For exhibits incorporated by reference, the location of the
exhibit in the Companys previous filing is indicated in
parentheses.
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
3
|
.1*
|
|
|
|
Amended and Restated Charter of
Kirklands, Inc. (Exhibit 3.1 to our Annual Report on
Form 10-K
for the year ended February 1, 2003) (the 2002
Form 10-K)
|
|
3
|
.2*
|
|
|
|
Amended and Restated Bylaws of
Kirklands, Inc. (Exhibit 3.2 to our Current Report on
Form 8-K
dated March 31, 2006)
|
|
4
|
.1*
|
|
|
|
Form of Specimen Stock Certificate
(Exhibit 4.1 to Amendment No. 1 to our registration
statement on
Form S-1
filed on June 5, 2002, Registration
No. 333-86746
(Amendment No. 1 to 2002
Form S-1))
|
|
10
|
.1*
|
|
|
|
Loan and Security Agreement, dated
as of October 4, 2004, by and among Kirklands, Inc.,
Kirklands Stores, Inc. and kirklands.com, inc., Fleet
Retail Group, Inc., as Agent, and the Financial Institutions
Party Thereto From Time to Time as Lenders (Exhibit 10.1 to
our Current Report on
Form 8-K
dated October 8, 2004)
|
|
10
|
.2*
|
|
|
|
Amended and Restated Registration
Rights Agreement dated as of April 15, 2002, by and among
Kirkland Holdings L.L.C., Kirklands, Inc., SSM Venture
Partners, L.P., Joseph R. Hyde III, Johnston C.
Adams, Jr., John H. Pontius, CT/Kirkland Equity Partners,
L.P., R-H Capital Partners, L.P., TCW/Kirkland Equity Partners,
L.P., Capital Resource Lenders II, L.P., Allied Capital
Corporation, The Marlborough Capital Investment Fund, L.P.,
Capital Trust Investments, Ltd., Global Private Equity II
Limited Partnership, Advent Direct Investment Program Limited
Partnership, Advent Partners Limited Partnership, Carl Kirkland,
Robert E. Kirkland, Robert E. Alderson, The Amy Katherine
Alderson Trust, The Allison Leigh Alderson Trust, The Carl T.
Kirkland Grantor Retained Annuity
Trust 2001-1
and Steven Collins (Exhibit 10.2 to Amendment No. 1 to
2002
Form S-1)
|
|
10
|
.3+*
|
|
|
|
Employment Agreement by and
between Kirklands and Robert E. Alderson dated
June 1, 2002, (Exhibit No. 10.6 to Amendment
No. 1 to 2002
Form S-1)
|
|
10
|
.4+*
|
|
|
|
Amendment to Employment Agreement
by and between Kirklands, Inc. and Robert E. Alderson
dated March 31, 2004 (Exhibit 10.2 to our Quarterly
Report on
Form 10-Q
for the quarter ended May 1, 2004)
|
|
10
|
.5+*
|
|
|
|
1996 Executive Incentive and
Non-Qualified Stock Option Plan, as amended through
April 17, 2002 (Exhibit 10.10 to our registration
statement on
Form S-1
filed on April 23, 2002, Registration
No. 333-86746
(the 2002
Form S-1))
|
|
10
|
.5+*
|
|
|
|
2002 Equity Incentive Plan
(Exhibit 10.11 to Amendment No. 1 to 2002
Form S-1)
|
|
10
|
.6*
|
|
|
|
Employee Stock Purchase Plan
(Exhibit 10.12 to Amendment No. 4 to our registration
statement on
Form S-1
filed on July 10, 2002, Registration
No. 333-86746)
|
|
10
|
.7*
|
|
|
|
Sublease Agreement by and between
Southwind Properties and Kirklands dated March 5,
2001 (Exhibit 10.16 to the 2002
Form S-1)
|
|
10
|
.8*
|
|
|
|
Sublease Agreement by and between
Phoenician Properties and Kirklands dated February 1,
2002, (Exhibit 10.17 to Amendment No. 1 to the 2002
Form S-1)
|
|
10
|
.9+*
|
|
|
|
Form of Non-Qualified Stock Option
Award Agreement for Director Grants (Exhibit 10.1 to our
Quarterly Report on
Form 10-Q
for the quarter ended October 30, 2004 (October 2004
Form 10-Q))
|
|
10
|
.10+*
|
|
|
|
Form of Incentive Stock Option
Agreement (Exhibit 10.2 to the October 2004
Form 10-Q)
|
|
10
|
.11+*
|
|
|
|
Executive Non-Qualified Excess
Plan (Exhibit 10.19 to our Annual Report on
Form 10-K
for the year ended January 29, 2005)
|
|
10
|
.12+*
|
|
|
|
Employment Agreement by and
between Kirklands and Jack Lewis dated June 1, 2005
(Exhibit No. 10.20 to our Quarterly Report on
Form 10-Q
for the quarter ended April 30, 2005 (the April 2005
Form 10-Q)
|
|
10
|
.13+*
|
|
|
|
Compensation Policy for
Independent Directors dated July 16, 2002
(Exhibit No. 10.21 to the April 2005
Form 10-Q)
|
57
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description
|
|
|
10
|
.14+*
|
|
|
|
First Amendment to
Kirklands, Inc. 2002 Equity Incentive Plan effective
March 17, 2006 (Exhibit 99.2 to our Current Report on
Form 8-K
dated March 22, 2006 (the March 22, 2006
Form 8-K))
|
|
10
|
.15+*
|
|
|
|
Letter Agreement by and between
Kirklands and Cathy David dated March 20, 2006
(Exhibit 99.3 to the March 22, 2006
Form 8-K)
|
|
10
|
.16+*
|
|
|
|
Restrictive Covenant Agreement by
and between Kirklands and Cathy David dated March 20,
2006 (Exhibit 99.4 to the March 22, 2006
Form 8-K)
|
|
10
|
.17+*
|
|
|
|
Restrictive Stock Agreement by and
between Kirklands and Cathy David dated March 22,
2006 (Exhibit 99.5 to the March 22, 2006
Form 8-K)
|
|
10
|
.18+*
|
|
|
|
Restricted Stock Unit Agreement by
and between Kirklands and Cathy David dated March 22,
2006 (Exhibit 99.6 to the March 2006
Form 8-K)
|
|
10
|
.19+*
|
|
|
|
Release and Non-Disparagement
Agreement by and between Kirklands and Jack Lewis dated
February 17, 2006 (Exhibit 10.27 to our Annual Report
on
Form 10-K
for the year ended January 28, 2006)
|
|
10
|
.20+*
|
|
|
|
Severance Rights Agreement by and
between Kirklands and Robert E. Alderson dated
May 30, 2006 (Exhibit 10.1 to our Quarterly Report on
Form 10-Q
for the quarter ended July 29, 2006)
|
|
10
|
.21*
|
|
|
|
Office Lease Agreement dated
March 1, 2007 by and between Kirklands and Two Rivers
Corporate Centre, L.P. (Exhibit 10.1 to our Current Report
on
Form 8-K
dated March 1, 2007)
|
|
21
|
.1*
|
|
|
|
Subsidiaries of Kirklands
(Exhibit 21 to the 2002
Form S-1)
|
|
23
|
.1
|
|
|
|
Consent of Ernst & Young
LLP
|
|
23
|
.2
|
|
|
|
Consent of PricewaterhouseCoopers
LLP
|
|
31
|
.1
|
|
|
|
Certification of the President and
Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31
|
.2
|
|
|
|
Certification of the Executive
Vice President and Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32
|
.1
|
|
|
|
Certification of the President and
Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
|
|
32
|
.2
|
|
|
|
Certification of the Executive
Vice President and Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
* |
|
Incorporated by reference. |
|
+ |
|
Management contract or compensatory plan or arrangement. |
58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Kirklands, Inc.
|
|
|
|
By:
|
/s/ Robert
E. Alderson
|
Robert E. Alderson
Chief Executive Officer
Date: May 2, 2007
Pursuant to the requirements of the Securities and Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the registrant in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Robert
E. Alderson
Robert
E. Alderson
|
|
Chief Executive Officer and
Director (Principal Executive Officer)
|
|
May 2, 2007
|
|
|
|
|
|
/s/ W.
Michael
Madden
W.
Michael Madden
|
|
Vice President, Chief Financial
Officer and Director (Principal Financial Officer)
|
|
May 2, 2007
|
|
|
|
|
|
/s/ Carl
Kirkland
Carl
Kirkland
|
|
Director
|
|
May 2, 2007
|
|
|
|
|
|
/s/ Steven
J. Collins
Steven
J. Collins
|
|
Director
|
|
May 2, 2007
|
|
|
|
|
|
/s/ David
M. Mussafer
David
M. Mussafer
|
|
Director
|
|
May 2, 2007
|
|
|
|
|
|
/s/ Gabriel
Gomez
Gabriel
Gomez
|
|
Director
|
|
May 2, 2007
|
|
|
|
|
|
/s/ R.
Wilson
Orr, III
R.
Wilson Orr, III
|
|
Director
|
|
May 2, 2007
|
|
|
|
|
|
/s/ Ralph
T. Parks
Ralph
T. Parks
|
|
Director
|
|
May 2, 2007
|
|
|
|
|
|
/s/ Murray
M. Spain
Murray
M. Spain
|
|
Director
|
|
May 2, 2007
|
59
KIRKLANDS,
INC.
INDEX OF
EXHIBITS FILED WITH THIS ANNUAL REPORT ON
10-K
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
23
|
.1
|
|
Consent of Ernst & Young
LLP.
|
|
23
|
.2
|
|
Consent of PricewaterhouseCoopers
LLP.
|
|
31
|
.1
|
|
Certification of the Chief
Executive Officer Pursuant to
Rule 13a-14(a)
or
Rule 15d-14(a)
|
|
31
|
.2
|
|
Certification of the Vice
President and 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 Vice
President and Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350
|